The financial close of the Nam Theun 2 hydropower project in Laos earlier this year marked a new phase in the history of this small, landlocked country. This major new plant is designed to kickstart development, but can it deliver on its promises?

Siân Green

In the forested mountains of Laos, a new hydropower plant is taking shape that could change the economic fundamentals of this small Asian nation. The Nam Theun 2 project – being developed at a cost of $1.25 billion – will produce electricity predominantly for export to Thailand, bringing a new source of income for the Lao government.

The Nam Theun 2 vision first began in the 1970s and is described as an example of how the Lao government is working with the private sector and multilateral organizations to generate revenue that will help to boost the development of Laos on a social, economic and environmental level.

Figure 1. Some 6000 villagers will be resettled along the shores of the new reservoir
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With a population of just 5.6 million and a per capita GDP of $361, Laos is one of the poorest countries in the region. Around three-quarters of the population lives in rural areas as subsistence farmers, and its mineral resource base, which includes tin, precious stones, iron ore and gold, are relatively undeveloped.

Laos has one of the highest per capita inflows of aid in the developing world. Its low population density does not lend itself to the development of labour intensive industries. The agricultural sector (timber and coffee), and a large hydropower potential (23 000 MW) are seen as key to development.

A key rationale behind Nam Theun 2, is, therefore, that the revenues from the project will be used to serve the long-term development of the country. Nam Theun 2 is at the centre of Laos’ National Programme for Growth and Poverty Eradication and will help the country reduce its dependence on Official Development Assistance.

A BOOT model

Nam Theun 2 will generate annual revenues of $80 million for the Lao government in the form of taxes, royalty charges and dividends over the life of the project’s 25-year concession period. At the end of the concession, the project will be transferred to the government. Nam Theun 2 will be the largest single source of foreign income to Laos as well as its largest single contributor to GDP, according to its sponsors.

Nam Theun 2 is being developed by the Nam Theun 2 Power Company Ltd. (NTPC), a Franco-Lao-Thai partnership with multilateral support. The purpose of NTPC is to develop, finance, build and operate Nam Theun 2 under a government concession. Its shareholders are:

  • EDF International (EDFI), a subsidiary of Electricite de France – 35 per cent
  • Lao Holding State Enterprise (LHSE), a state-owned company through which the government’s Nam Theun 2 revenues will pass – 25 per cent
  • Electricity Generating Public Company Ltd. (EGCO), a Thai IPP – 25 per cent
  • Italian-Thai Development Public Company Ltd. (ITD), a Thai infrastructure construction company – 15 per cent.

As well as being a project shareholder, EDF also holds the Head Construction Contract (HCC), which it will fulfil through its subsidiary Centre d’Ingénierie Hydraulique (CIH). The HCC calls for the construction of the plant on a fixed-price, turnkey basis, and as head contractor, EDF is managing three civil work subcontracts and two electromechanical subcontracts.

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Although EDF is a major partner in this project, the company was the cause of a major setback in July 2003 when, just prior to the signing of the Nam Theun 2 Power Purchase Agreement (PPA), EDF announced that it would be withdrawing from the project. The French utility, facing pressures in its home market, said that it needed to focus on its European operations. The move, however, placed the project in jeopardy as finding a partner to replace EDF’s 35 per cent share would be hard. However, just a few months after making that decision, EDF relented and the PPA was signed in Vientiane in November 2003. The majority of the electrical energy from the 1070 MW power plant will be exported to Thailand.

Under a PPA between NTPC and EGAT, Thailand’s largest power generator, NTPC will make available 995 MW of generating capacity and sell 5636 GWh/year of energy to EGAT at an agreed tariff on a take-or-pay basis. The remaining output of the plant – 300 GWh/year – will be sold to Electricité du Laos (EDL) under a separate PPA. Energy delivery is due to start in late 2009.

Financial fundamentals

The signing of the PPAs was fundamental to the economics of the project and in March 2004, NTPC launched the financing for Nam Theun 2. Project financing consists of a combination of equity from the shareholders (30 per cent) and international loans (70 per cent). Half of the international loans are sourced in US dollars from several international development and commercial financiers including the Agence Française de Développement (AFD), the Nordic Investment Bank, Proparco, and Thai-Exim. In addition, the Asian Development Bank (ADB), MIGA, the World Bank’s International Development Agency and a number of export credit agencies, are providing risk guarantees to a group of nine international commercial banks. A group of seven Thai commercial banks complete the other half of the debt financing in Thai Baht.

Financial close was reached in June 2005, making it the largest ever foreign investment into Laos, the largest ever private sector cross-border power project financing, the largest ever private sector hydroelectric project financing and the largest internationally financed IPP in Southeast Asia since the 1997 financial crisis.

Nam Theun 2 is a landmark infrastructure project for Laos, but like all major dam projects, it is controversial. Critics of the project believe that its impacts will outweigh the positive economic benefits.

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The Nam Theun 2 project involves the construction of a 39 m high, 437 m long dam across the Nam Theun 2 river in the Nakai Plateau area of central Laos. The dam will create a 450 km2 reservoir with a capacity of 3.9 billion m3. It is a trans-basin scheme, with turbined water released into the Xe Bang Fai river.

The project watershed is mostly covered with pristine primary forest and comprises part of the Nakai-Nam Theun National Biodiversity Conservation Area (NBCA). This 4000 km2 area is recognised as being of outstanding significance in terms of its biodiversity, but is currently under threat from illegal logging, poaching and biodiversity trading, and slash and burn cultivation. The Nam Theun 2 project will trigger the long-term protection of this area by direct funding from NTPC – $6.5 million during the construction period and $1 million/year during the 25 years of operation.

Alleviating poverty?

The project will cause the inundation of 40 per cent of the Nakai Plateau, an area of wetlands, forest and agricultural land. The presence of the reservoir will impact animal habitats and biodiversity in an area where several species are already under threat. Biomass degradation will have a negative effect on water quality in the first few years. The Nakai Plateau is sparsely populated, but 6000 people will be evicted and resettled. A further 100 000 people depend on the Xe Bang Fai river for their livelihoods, and will be affected by the impact on fisheries, says environmental and human rights group International Rivers Network (IRN).

Villagers affected by the creation of the reservoir will be resettled onto the southern shores of the reservoir. Each family will be provided with land, equipment and training, as well as infrastructure such as irrigation, domestic water, schools and electricity, and a long term health programme. Villagers will have a choice of livelihood options, including agriculture, commercial forestry, reservoir fisheries, livestock husbandry, handicraft and other small-scale commercial activities.

Figure 2. The $1.25 billion project will generate power for export to Thailand
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The aim of the resettlement project is to give villagers a higher standard of living in terms of health and income. Over $20 million has been budgeted for resettlement, equivalent to $19 000 per household. NTPC forecasts that annual household incomes of the resettled families will rise from their present levels of $461 to $800 by year four of resettlement (equivalent to the current poverty line in Laos), and will reach $1200 in year seven.

However, IRN argues that the resettlement project is likely to fail. It proposed that the soil in the resettlement area is unsuitable for crop farming and will need high levels of fertilizer, and there will be insufficient land for grazing livestock.

IRN believes that the project will do little to improve the livelihoods of those directly affected by the dam. It points to other hydropower projects in Laos, which, it says, have negatively affected tens of thousands of Laotians. It also believes that the ADB has failed in its duty to adequately monitor projects once completed.

The critics have also cast doubts over the capacity of the project to boost development in Laos, mainly due to the weak governance environment in the country and the fact that revenues from the project will be mixed with other public resources. IRN says that there are no safeguards in place to monitor the usage and effectiveness of government revenue from the project.

Managing change

The Nam Theun 2 project has been designed to meet the ten World Bank guidelines on environmental and social issues. The commitments of the various parties to social and environmental safeguards are part of the Concession Agreement and are legally binding. Social and environmental safeguards account for ten per cent of total project costs. Non-compliance penalties will be imposed as far as social safeguards are concerned, with monitoring carried out by NTPC’s lenders and the Lao government.

Three safeguard documents have been drawn up to meet the Lao government’s and financial institutions’ requirements: an environmental assessment and management plan, a plan to manage social impacts, and a watershed management plan. These documents are based on ten years of study and preparation and aim to ensure the mitigation of biophysical impacts and implementation of biodiversity conservation measures, as well as the mitigation or offset of environmental impacts. In addition, there has been public participation and consultation under the supervision of an independent ADB-financed non-governmental organization and World Bank advisor, a process that will continue throughout project implementation. A detailed grievance procedure is in place for resettled villagers.