Perspective from the Mekong Region: New Financiers and Familiar Problems

Carl Middleton, International Rivers
Thursday, May 1, 2008

The Mekong region is enjoying a period of stability and rapid economic growth not experienced for centuries. As a result, the region demands increasing quantities of electricity, and exploiting its hydropower potential is high on the agenda. In contrast to the recent past, it is project developers and financiers from Asia rather than the West that are spearheading this hydropower drive. Yet, in a region where millions of people depend on the natural resources that rivers provide, many proposed dams pose risks for the environment, communities, project developers, and host governments.

This chapter outlines the current trends and main actors in hydropower development throughout the Mekong Region. It identifies the need for better planning practices and internationally recognized standards of best practice in the power sector. This will minimize project investment risks, and make certain that development in the Mekong Region is sustainable and equitable.

The Mekong region's electricity hunger

As economies in the region continue to expand, demand for electricity is growing, especially in Thailand and Vietnam, although the extent of this growth is contested. Thailand's government estimates that electricity demand will approximately double  by 2021. In Vietnam, the government predicts that demand will quadruple by 2015. Burma, Cambodia and Laos have more modest demand growth predictions, though all governments have committed to urgently develop electricity infrastructure to support economic growth.

Thailand, which has already developed much of its hydropower potential and faces stiff opposition to further projects at home, plans to import at least 14,000 MW of electricity from Burma, Laos and Yunnan Province over the coming 15 years. Vietnam plans to develop almost all of its viable hydropower over the next 20 years, and to import hydroelectricity from Cambodia, China, and Laos. Responding to this demand, the governments of Burma, Cambodia and Laos are keen to develop their hydropower potential for electricity export and domestic consumption.

Hydropower development in the Mekong region has been hotly contested - where political space permits - by affected communities, academics, and civil society organizations.  Critics are concerned that plans for dam construction are moving forward without genuine consultation with local communities and other stakeholders, and without strong planning processes at the national and regional level. Civil society groups have questioned Thailand and Vietnam's power development plans, which heavily promote the development of new large-scale electricity generation plants. They claim that future electricity demands are overestimated, and that the role energy efficiency measures, renewable energy, and decentralized energy options could play are downplayed. They argue that existing plans mostly serve the interests of the state-owned electricity utilities, energy companies, and the construction industry, rather than the needs of the region's electricity consumers, and are calling for reform of the power planning process.

The region's new hydropower proponents

Over the past five decades, Western governments, backed by multilateral development banks, corporations, and the United Nations, have promoted and financed major hydropower schemes in the Mekong region. Yet, many of these hydropower projects, such as the Pak Mun Dam in Thailand and the Theun-Hinboun Dam in Laos, have left affected communities worse off. The Asian Development Bank and World Bank have never supported a hydropower project in Cambodia or in Burma, which is presently subject to a moratorium on multilateral development bank support.

Asia's economic revival after the 1997 financial crisis and China's reemergence on the global stage have ushered in a new generation of hydropower developers, mainly from Thailand, Vietnam, China, and Malaysia. In a complex interplay of political support, development aid, and entrepreneurial spirit, these new proponents have led the push for widespread hydropower exploitation, often backed by export credit agencies and commercial financiers from their own countries. The new developers are able to move quickly, and have picked up many projects that were abandoned by Western corporations during the Asian financial crisis.

The new hydro companies and their backers are fast displacing the Western corporations and multilateral development banks that previously dominated the region. The Mekong governments increasingly view the social and environmental policies associated with Western aid as burdensome, time-consuming and costly. They have warmly welcomed the new hydropower actors and their alternative sources of finance.

Thailand projects its power

As Thailand's demand for power has grown and the Thai public's resistance to new large domestic power plants strengthened, the Electricity Generating Authority of Thailand (EGAT) has increasingly favored importing power from neighboring countries, where the hydropower potential is huge and community opposition is largely stifled.

In Laos, Thai investors have already joined Western corporations in two major projects, namely the 210 MW Theun-Hinboun and 150 MW Houay Ho hydropower schemes. Both of these projects, which export electricity to Thailand and have been operating for almost a decade, have had serious impacts on local communities which remain largely unresolved. Two Thai companies are also major shareholders in the US$1.45 billion Nam Theun 2 hydropower project, which is financed by shareholder equity and loans from Thai and Western banks, export credit agencies, and multilateral development banks.

The construction of the 615 MW Nam Ngum 2 hydropower project, which broke ground in 2006, marks an important transition in that it is being developed and financed largely by Thai actors. Its shareholders are primarily Thai companies, such as Ch. Karnchang and Ratchaburi. Thai commercial banks are the main financiers of the US$832 million project, and EdL obtained its equity through a bond issue worth 1.5 billion Thai baht that was guaranteed by Thailand's Export-Import Bank.

Nam Ngum 2 has already violated Laos' 2005 National Policy on the Environmental and Social Sustainability of the Hydropower Sector that was promoted by the World Bank. The objective of the policy is to ensure that all hydropower projects in Laos meet minimum environmental and social standards. But key project documents, including the Environmental Impact Assessment, have not been disclosed, despite the fact that construction is well underway.  In January 2008, ADB consultants also identified serious shortcomings in Nam Ngum 2‘s resettlement program.   

In Burma, Thai companies have actively sought joint-ventures with Chinese partners to develop controversial hydropower dams on the Salween River. EGAT has partnered with Sinohydro Corporation and MDX has partnered with Gezhouba Water and Power Group Co. Ltd to develop the proposed Hat Gyi and Tasang dams respectively. Thai companies benefit from partnering with Chinese companies, in part because of the Chinese government's close ties with Burma's military junta. A separate chapter in this report describes the concerns of Burmese and international civil society regarding these projects.

Thai energy companies are now conducting feasibility studies throughout the region, especially in Laos where they are evaluating more than 10 hydropower schemes,  including two controversial projects on the Mekong River's mainstream. Several Thai energy companies have recently identified investing in regional energy projects as a core part of their business strategies. Thailand's construction industry is also increasingly looking towards foreign markets. Backing these companies, Thailand's commercial banks and Export-Import Bank have indicated their willingness to support regional projects.

China competes for contracts in Laos

Major Chinese state-owned enterprises, such as China Southern Power Grid and Sinohydro Corporation, figure prominently amongst the Mekong region's new wave of hydropower developers. Projects developed to date have often been backed by China Export-Import Bank.

The first China Exim-backed project in Laos was the Nam Mang 3 Dam, commissioned in 2004 and constructed by China International Water and Electric Corporation. The project negatively affected an estimated 15,000 people, including 2,700 people that had to be resettled from the reservoir area. Nam Mang 3 became embroiled in controversy when, in 2002, the project was the scene of the first villager-led protest against a dam in Laos. Some 40 Hmong men armed with sticks and guns, infuriated that they might be evicted from their lands without information about where they would be relocated, halted dam construction for five days.  

Competing with other project developers from Thailand, Vietnam, Russia, Malaysia, Japan and Korea, amongst others, Chinese companies have managed to carve out a large slice of Laos' hydropower pie. Chinese companies are presently involved in two hydropower projects that are under construction, the Xeset 2 and Nam Lik 1-2 dams, and have secured Memoranda of Understandings to conduct feasibility studies on at least ten more projects. Sinohydro Corporation has spearheaded this push, signing five MoUs, including for a 1,100 MW cascade on the Nam Ou River that could potentially impact 50,000 people and inundate part of Phou Dendin National Biodiversity Conservation Area, and the controversial Pak Lay Dam proposed on the Mekong River mainstream.

Cambodia: partnering with China

Cambodia is on the threshold of an extensive domestic hydropower development program, backed mainly by Chinese developers and financiers. In Cambodia, the cost of electricity is amongst the highest in the world and electricity infrastructure remains rudimentary, a result of decades of fighting and political turmoil.

Until recently, Cambodia has struggled to attract investment for major hydropower development. Western bilateral donors and the multilateral development banks have been reluctant to provide support, in part over concerns about environmental and social impacts. Over the past several years, however, China's political and economic ties with Cambodia have strengthened and the Chinese government has indicated high-level support for Cambodia's hydropower plans.

In April 2006, the Chinese Government announced a US$ 600 million aid package to Cambodia, almost half of which covered the cost of Cambodia's first large dam, the Kamchay Project. China Exim Bank provided a concessionary loan to Sinohydro Corporation for developing the project.

Now under construction, the dam is located in Bokor National Park and will flood 20 square kilometers of protected forest. The forest is the habitat of 31 mammal species of which 10, including Asian elephants, leopard cats, and tigers, are endangered. This area is also an important source of revenue from non-timber forest products for local residents.  In March 2008, the Cambodia Daily reported that the river's water quality had seriously deteriorated due to construction activities at the dam and the release of sewage from the workers' camp. This decimated the local tourist industry at the rapids downstream and affected those that take drinking water from the river.

Chinese companies are currently conducting feasibility studies on three other large hydropower projects in Cambodia's Cardamom mountain region, large swathes of which are designated as protected areas.  The Stung Cheay Areng Dam, under study by China Southern Power Grid Company (CSG), has raised particular concern. Its reservoir would flood nine villages with a population of 1,500 mainly indigenous people and extend into the Central Cardamom Protected Forest, inundating the habitat of 31 endangered fauna species and, the world's most important breeding site for the endangered Siamese Crocodile.  

CSG is also currently studying the Sambor Dam on the Mekong Mainstream in Kratie Province. The environmental consequences of this dam on the river's fisheries would be severe.

Civil society groups in Cambodia have questioned the approval process of these projects, which has been conducted behind closed doors and without meaningful participation of local communities and other concerned stakeholders.

Vietnam: racing to meet power demand

Rapid economic growth in Vietnam has resulted in a massive increase in demand for power that the state-owned utility, Electricity of Vietnam (EVN), has struggled to meet. EVN estimates that it will have to invest US$45 billion over the next ten years in new electricity generation capacity alone. This has necessitated a radical reform of Vietnam's electricity industry. Since 2004, EVN has undergone a process of partial privatization. The utility hopes to earn more than US$700 million by selling shares in many of its power plants.

Large hydropower plants in Vietnam have often caused serious social upheaval and high environmental costs. Examples include the Hoa Bin, Son La, and Yali Falls dams. Vietnam passed a Law on Environmental Protection in 2005, but it has been poorly implemented to date.

The growth in Vietnam's domestic financial markets and the increasing availability of private capital has enabled the government to steer Western donor support from its electricity sector towards less contentious sectors such as education and health. Vietnam has instead welcomed foreign assistance for its dam projects from donors whose aid does not come with rigorous social and environmental conditionalities. In January 2008, the Indian Export-Import Bank provided a concessional loan of US$45 million to Vietnam for the 200 MW Nam Chien Hydropower Plant, complementing the US$156 million provided for the project mostly by Vietnamese banks.  

To secure its electricity supply, Vietnam has also looked to its neighbors. The Viet Nam-Laos Joint Stock Electricity Investment and Development Company began construction of the 250 MW Xekaman 3 hydropower project in Southern Laos in 2006.  Financing for the project, which will export electricity to Vietnam, was largely provided by Vietnamese financial institutions. As with the Thai-backed Nam Ngum 2 Dam, the project's environmental documents have not been publicly disclosed in violation of Laos' National Hydropower Policy. The company is presently studying four more hydropower projects in the Xekong and Xekamen basins. These projects threaten the livelihoods of tens of thousands of people in Laos as well as those downstream along the Srepok River in Cambodia.

A subsidiary of EVN is currently preparing a feasibility study for a dam in Cambodia on the Lower Sesan River, most likely to export power to Vietnam. The dam would further compound the impacts from dam construction upstream in Vietnam on communities living along the Sesan River. To date these impacts have neither been mitigated nor compensated for.

International standards for international projects

The Mekong region's rush towards hydropower development remains fraught with pitfalls for project developers, financiers, host governments, and most of all, for affected communities. Serious questions have been raised about the commitment of new hydropower proponents to social and environment standards. Furthermore, there are concerns about these new actors' lack of public accountability, despite the fact that many proposed projects threaten the health of the region's river ecosystems and the well-being of communities that depend upon them.

While Western donors, financiers, and multilateral development banks claim to have strong environmental and social policies as well as commitments to public participation, in reality these measures have often proven inadequate to mitigate the risks of large dams. Yet, there is little evidence that the new wave of project financiers are striving to meet even these social and environmental standards.

None of the commercial banks in Vietnam and Thailand have adopted the Equator Principles. In China, the Equator Principles are only just beginning to gain momentum as the State Environmental Protection Administration has embraced them as part of its green credit policy. Amongst the new export credit agencies active in the Mekong region, only China Exim Bank is known to have an environmental policy, although it lacks detail and there is little evidence of its rigorous implementation on the ground.

Similarly, hydropower companies from Thailand, Vietnam, and China, Russia and Malaysia, for example, have yet to commit to international best practice standards. Very few have developed and published Corporate Social Responsibility policies. Those companies that have, such as Thailand's EGCO and Ratchaburi, have adopted a very narrow interpretation of CSR that provides only limited support for affected communities (and apparently, only for those in Thailand).

To genuinely mainstream environmental and social issues throughout the companies' decision-making process, CSR frameworks must reflect international best practice standards - such as the recommendations of the World Commission on Dams and the UN Norms on the Responsibility of Transnational Corporations - and become embedded in the institutional culture of financiers and companies. Because large projects are often funded by several institutions from different countries, it makes sense for financiers to adopt the same internationally acknowledged environmental policies.

Where a comprehensive and participatory assessment of all options has concluded that a hydropower project is the best option to meet water and energy needs, all parties involved should commit to implementing international best practice standards. An atmosphere that encourages a race to the top, not the bottom, needs to be fostered. As actors from China, Thailand and Vietnam become increasingly influential in the Mekong region and step onto the global stage, they should accept their international responsibilities and adhere to international standards when developing and financing large infrastructure projects. 

More information: 

This article appeared in the Report: "New Financiers and the Environment: Ten Perspectives on How Financial Institutions Can Protect the Environment," published by International Rivers (May 2008)