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DEVELOPMENT-LAOS: Massive Dam Project Could Backfire

Emad Mekay

WASHINGTON, Apr 5 2005 (IPS) - A new dam funded by the World Bank and the Asian Development Bank (ADB) and hailed as a windfall for Laos may end up doing more harm than good to one of the world’s poorest nations and its vulnerable farmers, several independent development groups say.

The World Bank, whose approval often signals a green light for other public and commercial banks to get involved, formally approved funding for the 1.25-billion-dollar Nam Theun 2 hydroelectric dam project on Apr. 1 after 12 years of studies and deliberations.

The ADB said Monday that it will give Laos, Asia’s poorest nation, a total of 120 million dollars in loans and political risk guarantees. The European Investment Bank (EIB) will make a funding decision shortly.

The involvement of the World Bank, the ADB and the EIB catalyses significant amounts of long-term U.S. dollar debt from commercial lenders to support the power sectors of Thailand and Laos.

The project is run by the Nam Theun 2 Power Company Limited (NTPC), which is owned by a consortium comprising EDF International of France (35 percent), the government of Laos (25 percent), the Electricity Generating Public Company Ltd of Thailand (25 percent), and the Italian-Thai Development Public Company Ltd (15 percent).

Many analysts, however, have assailed the banks’ support and say it shows that international financial institutions, spearheaded by the Washington-based World Bank, are ignoring their own policy guidelines and paying little regard to indigenous people, the environment or the long-term welfare of the poor nation.

“I think this project is the poster child of the kind of projects that the Bank should not approve. It is poorly prepared. It’s in the wrong place. It’s for the wrong reasons,” said David F. Hales, a lawyer and sustainable development expert at the Washington-based Worldwatch Institute.

“This is exactly the kind of project proposal that the safeguard procedures of the World Bank and the Asian Development Bank are designed to prevent,” he said. “The risk of further impoverishment of the people, of corruption and mismanagement, and of financial failure of the project is just too high.”

Hales, who chaired the World Bank’s U.S. public workshop on Nam Theun 2 in September 2004, also warned that now that Nam Theun has been approved, it opens the door for similarly dubious initiatives.

“The World Bank will have written a brand new definition of ‘blank cheque’,” he said.

The World Bank is providing up to 270 million dollars in loans and risk guarantees for the project, due to be completed in 2009. At 1,070 megawatts, it would divert 93 percent of the Nam Theun River’s flow into the adjacent Xe Bang Fai River basin, generating power for Thailand’s electrical grid.

It would also submerge nearly 40 percent of the Nakai Plateau beneath a 450-square-kilometre reservoir.

Many say this will drastically alter the character of two important rivers, displace thousands of desperately poor residents, and disrupt the livelihoods of tens of thousands more, among the other transformations typical of such hydropower projects.

The public lenders respond that Nam Theun 2 is the biggest single infrastructure project ever undertaken in Laos, and is expected to earn the country up to 150 million dollars a year in taxes, royalties, and dividends.

The World Bank says those revenues will boost spending on basic health and education by as much as 30 percent in the project’s first year of operation, and that part of the money will help fight poverty and protect the environment.

Backers also claim that the project will generate about 4,000 job opportunities in this country of 5.8 million people during the construction period.

But those promises have not eased the concerns of independent development groups, many of which have monitored similar huge water projects in other developing nations.

In March, more than 150 non-governmental organisations from 42 countries sent a letter to World Bank President James Wolfensohn calling on him not to support the dam and detailing a number of their concerns.

Last month, dozens of local villagers protested the new project. The Berkeley-based International Rivers Network warns that the Nam Theun 2 dam would displace more than 6,000 villagers and affect the livelihoods of another 100,000 people living downstream along Xe Bang Fai, another large Mekong tributary.

The group says that feasible plans for compensating affected communities still do not exist.

Among the many other complaints hanging over the project is that it would create an “intractable debt burden” for Laotians in years to come.

“It is projects like Nam Theun 2 that eventually need debt forgiveness because they are not economically viable and they don’t generate the wealth needed to repay the loans,” said Patricia Adams, executive director of Probe International, a Canadian group..

She pointed to the fact that just last week, on Mar. 28, Japan announced it was canceling debt owed by Laos for construction of the Nam Ngum dam, the country’s largest hydro export scheme built in the 1970s.

“The experience is that big dams lead to bad debt,” agreed Gráinne Ryder, a hydro expert and Probe International’s policy director.

Opponents say that large dams financed by the multilateral development banks, including the World Bank, have traditionally proven to be money pits, and that costs have been unrecoverable from ratepayers.

In Washington, Treasury Department officials have also raised questions about the World Bank’s capacity to ensure that the project’s revenues are spent on poverty reduction, given the Lao government’s record of financial mismanagement.

Another problem with such projects in general is that electricity output is often less than projected and not very reliable because hydro reservoirs are extremely vulnerable to drought. The environmental impacts of large dams have led to major agricultural and fisheries productivity losses.

“By supporting Nam Theun 2, the World Bank has shown it will repeat the same mistakes until it is shut down once and for all,” said Ryder.

The financial backers of the project respond that they are aware of all these risks and say they have mechanisms in place to manage them.

These include multi-donor technical assistance to help the government improve its oversight through audits and public expenditure surveys.

“We recognise there are risks involved and we have studied these very carefully with the government and other development partners,” said ADB President Haruhiko Kuroda in a statement on Monday.

“This project will improve the living standards of one of the poorest countries in the region. That is why we are involved. We feel that the risks can be managed and that these will be better managed by our involvement,” he said.