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THE CHIEF investor's withdrawal from Nam Thuen 2 in Laos casts doubt on the future of hydroelectric mega-projects.

The abrupt withdrawal of Electricite de France (EDF) as chief investor in the Nam Thuen 2 hydroelectricity project in Laos last week marked a watershed in the history of such projects in this region. Occurring just hours prior to the contract-signing ceremony between the international investors and the Thai buyer in Vientiane, the withdrawal casts serious doubt on the future of the hydropower industry and its economic promises. Nam Thuen 2 is symbolic as the largest dam planned on the Mekong tributaries and the first to comply with the World Bank's new mechanism of giving political-risk guarantees to private investors to boost their confidence in unstable countries like Laos by ensuring them a return on their investment should it run into difficulties.

The current uncertainty surrounding Nam Thuen 2 is instructive in many ways. The Nam Thuen 2 is to Laos what the Three Gorges project is to China. While the Three Gorges is China's most ambitious, contentious and costly dam, Nam Thuen 2, though much smaller in size, is still the largest, most controversial and expensive infrastructure project ever planned in Laos. The dam's projected cost of US$1.1 billion (about Bt46 billion) is well over half Laos' GDP of $1.8 billion.

While the Three Gorges is due for completion soon, construction of Nam Thuen 2 has not even started. This is because Three Gorges is financed by the Chinese government, which is accountable to no one, while Laos needed the involvement of a multilateral public institution like World Bank, which is subject to public scrutiny under a normal democratic process.

It is no secret that the World Bank staff favours the project but has refrained from making an official commitment over the past decade because of constant pressure from Thai and international environmental groups. This lack of commitment, according to a source in the Thai energy sector, is a major reason for the withdrawal of the EDF, which held a 35-per-cent share of the project.

The question is why, if Nam Thuen 2 is such a good investment that will bring a solid economic return as well as revenue to alleviate the poverty of Laos, it needs guarantees from the World Bank in the first place. It is clear from the start that without the political-risk guarantee and other financial support from a public institution like the World Bank, no Western commercial bank or export credit agency would risk putting its money into such a huge project in a politically unstable country like Laos.

Studies from several international institutions indicate that hydropower projects are no longer viable in economic terms. One reason is that the construction of hydroelectric dams all over the world suffers badly from cost overruns. The World Bank-funded World Commission on Dams, for example, estimated that cost overrun for an average dam project was 56 per cent higher than initial estimated costs. In the Mekong basin, the Pak Mool Dam was estimated at Bt3.8 billion. Actual costs turned out to be Bt6.6 billion.

The problems of hydropower projects have been increasingly exposed, and public subsidies in the form of risk guarantees have come under heavy scrutiny. These are major deterrents to future private investment in hydropower in the region.

After the withdrawal announcement from EDF last week, the Electricity Generating Authority of Thailand (Egat), a state enterprise, is now talking about the possibility of taking over the EDF share through one of its subsidiaries: Electricity Generating Plc or Ratchaburi Electricity Generating Co.

The pattern of last-ditch public investment in controversial dam projects may also apply to Egat-promoted Salween dams on the Thai-Burmese border. Egat may have to invest in the dams because it is unlikely that the World Bank will support the project — partly on Burmese soil — due to US sanctions on that country. As a result, few private firms will take the risk of investing in the projects.

The question now comes back to taxpayers in Thailand. Do we want a state enterprise of ours to spend money on financially risky and unsustainable projects like the Nam Thuen 2 and the Salween dams?

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