Letter to World Bank Executive Director Regarding Nam Theun 2 Concerns

Wednesday, July 30, 1997

Jan Piercy
Executive Director
World Bank
1818 H St., NW
Washington, D.C.

Dear Ms. Piercy,

Thank you for meeting with some of us on June 27 to discuss the proposed Nam Theun 2 Dam project in Lao PDR. As requested, we are writing to report the results of the June 30th meeting between representatives of International Rivers, Environmental Defense Fund, Bank Information Center, Friends of the Earth, the Center for International Environmental Law and the National Wildlife Federation -- collectively representing over four million members and supporters -- and approximately 20 World Bank, IFC and Louis Berger consultant firm staff involved in work on Nam Theun 2.

Unfortunately, the June 30th Bank-NGO meeting demonstrated that, even after nearly a decade of Bank involvement in the project, Bank and IFC staff were still unable to reply satisfactorily to many of the concerns raised about the substantial economic, social, and environmental problems likely to be associated with Nam Theun 2.

The issues we focused on included the lack of meaningful consultation with project-affected people, including indigenous populations; the seriously deficient "public participation? process; the high social and environmental costs of the project and the likelihood that proposed mitigation measures will be unsuccessful; the lack of a mechanism under the proposed enclave guarantee to ensure compliance with Bank policies; and the marginal economic benefit and high economic risks of the project to the Lao government and people. Our concern that the project carries a high risk of proving a substantial economic burden to Laos has since been considerably strengthened by an initial analysis of the recently released Louis Berger Nam Theun 2 Economic Impact Study.

NGOs also noted to Bank staff at the June 30 meeting that the probability of Nam Theun 2 failing to achieve its projected benefits was unusually large given the likely synergy between the high failure rate of Bank projects in Laos, the high failure rate of enclave guarantee projects, and the poor record of forced resettlement and of large dam projects worldwide. These concerns and the Bank's continued inability to answer them lead us to believe that Nam Theun 2 will likely be yet another failed, environmentally and socially damaging, economically unwise World Bank dam. We, therefore, believe it would be irresponsible for the Bank to provide further endorsement of the project by moving it into the appraisal stage at this time. Given the project's high cost and high economic risks and the lack of investor interest in large hydropower projects worldwide, we also consider it highly unlikely that the dam can be built without World Bank backing. We thus urge you to oppose Bank appraisal of Nam Theun 2 at this stage.

Lack Of Appropriate Consultation

NGOs noted at the June 30 meeting that the "public participation process" requested by the Bank and implemented by the Government of Laos (GoL) and the project developer, the Nam Theun Electricity Consortium (NTEC), has been highly unsatisfactory. One important issue is the difficulty of meaningful and open debate in a country such as Laos with no domestic NGOs or free press. While a number of foreign NGOs are currently allowed to operate in Laos, the political context in which they work does not allow them to make substantial criticism of the proposed project without potentially endangering the status of their programs and staff.

In late 1996 and early 1997, after a series of unsatisfactory "consultation sessions" with officials from the Bank and other international agencies, NGOs working in Laos informed the Bank orally and in writing about the basic requirements for a meaningful consultation process. One NGO representative at the meeting with experience of working in Laos stated that Lao-based international NGO staff felt that their suggestions had not been satisfactorily implemented and that many felt extremely frustrated by the "participation' process.

For example, many NGOs working in Laos did not even attend the first "participation" workshop since the organizers failed to provide the relevant documentation to them in a timely fashion. NGOs found that subsequent workshops, although formally under the auspices of the GoL Science, Technology and Environment Organization (STENO), were dominated by strongly pro-dam consultants and representatives of the developers. Externally hired workshop facilitators prevented or cut short discussion of broader issues relevant to the project such as the financial risks to the Lao government, alternatives to the three proposed hydropower configurations, the importance of competitive bidding for the construction phase of NT2, and the structure of the Nam Theun 2 development package. Since criticism of Nam Theun 2 is currently equated with criticism of GoL, NGOs felt extremely constrained in the comments they could make. Overall the workshops gave many participants the impression of being a manipulated public relations exercise rather than a truly meaningful participatory process.

An even more fundamental problem with the participation process is the lack of genuine consultation with the local people directly affected by the project. Indeed the World Bank appears to regard the international NGOs as proxies for local people in the "participation" process, an utterly inappropriate role for the NGOS. Reports from the Nam Theun area suggest that "consultation" has consisted largely of telling local people that the dam will be built and that they will benefit from it. There does not appear to have been any attempt to include affected people in the decision-making process or to establish structures through which they could be included.

The Bank staff response to NGO comments on the participation process consisted of admitting that the structural problems noted by the NGOs existed and emphasizing that they saw participation as a "process" and that they had taken a "step in the right direction". NGOs stated that a huge project such as Nam Theun 2, with such a high political profile, was a highly inappropriate vehicle to use for the improvement of participation practices and that, indeed, by being so firmly "outsider-driven" it was actually hindering the development of participation in decision making in Laos. NGOs also stated that they did not believe there had been significant improvement in the process of giving local people a say in the decision-making process.

Since the June 30 meeting, NGOs have obtained a complete draft of the Louis Berger Economic Impact Study which describes a 'public forum" held in a town downstream from the dam site. The meeting was attended by World Bank staff, senior NTEC representatives and Louis Berger consultants, as well as Resettlement Committee (RC), Provincial and District representatives. The Louis Berger report states that:

"several fluent Lao speakers complained that the RC representative failed to translate negative comments or concerns made by local citizens about the dam project. Likewise a very senior NTEC representative attending the meeting complained that local citizens were receiving misinformation about the dam's probable impacts" (Annex 3, p.9).

It is also significant that the most important Lao agency proposed to work with the Bank on environmental and social mitigation measures is the military owned and operated BPKP which has been intensively logging the area to be flooded by the dam since 1993. Louis Berger notes that BPKP is largely outside of the control of the central government and is without "fiduciary accountability" and that "BPKP's commercial interests will continue to lie in the direction of maintaining higher logging quotas than are commensurate with a sustainable harvesting regime, and of opening access to previously untouched areas, like the [watershed area slated for conservation]." Louis Berger also notes the conflicts of interest between BPKP's commercial interests and its prospective role in mitigating the impacts of the dam, "in particular its participation in the [Resettlement Committee] while planning simultaneously to bid on [Resettlement Committee) contracts" for road-building, housing and related infrastructure (Vol. 1 pp.22-23).

Resettlement documents for Nam Theun 2 recognize that the numerous different ethnic groups to be directly affected by the project should be defined as indigenous peoples according to World Bank criteria (e.g. Draft Resettlement Action Plan, p.E-6). World Bank Operational Directive 4.20 on indigenous peoples states that:

"The Bank's policy is that the strategy for addressing the issues pertaining to indigenous peoples must be based on the informed participation of the indigenous peoples themselves." (original emphasis) (para 8) and

"For an investment project that affects indigenous peoples, the borrower should prepare
an indigenous peoples development plan..." (para 13)

The "prerequisites of a successful development plan for indigenous peoples" include

". . . full consideration of the options preferred by the indigenous people affected by the
project." (para 14(a)) and

"Mechanisms... for participation by indigenous people in decision making throughout
project planning, implementation and evaluation." (para 15(d))

Clearly, during the stages of preparation for Nam Theun 2, the most basic requirements for informed participation in decision making have not yet been met. Furthermore, it is difficult to see how this project could, at any point in the near future, be in compliance with Bank policies on the need for genuine and informed participation on the part of indigenous peoples.

High Failure Rate for World Bank Lao Projects and Enclave Guarantees

NGOs stated at the meeting with Bank staff that they believed there was a high risk that Nam Theun 2 would fail to produce its intended benefits for a number of synergistic reasons. Since this project is so large compared to the size of the Lao economy -- according to Louis Berger, Nam Theun 2 represents "a total investment about three-quarters as large as annual GDP" -- its failure would have serious consequences for the country's economy,

In the case of Nam Theun 2, the normal risk of project failure is heightened by the poor performance of Bank projects in Laos as well as by the failure of enclave guarantee projects in general. According to the Bank's 1996 Country Assistance Strategy, four of the seven completed projects in Laos which have received an OED rating have been rated "unsatisfactory". This 43% success rate compares to 72% for the Bank as a whole and 63% for Africa. The CAS goes on to note

'"the troubling conclusion... that there appears to be no relation between the intensity of supervision and any improvement in project ratings, due largely to the severity of the two systemic, underlying causes - the shortage of qualified staff and the lack of timely availability of counterpart funds . . . ' (p.11)

The high failure rate of projects with enclave guarantees is alarmingly similar to that of Bank projects in Laos and synergistically increases the risk of failure for Nam Theun 2. According to 'Enclave Guarantees: World Bank Support for Private Projects and Role of IBRD Guarantees in IDA-only Countries', an IBRD document distributed to the Executive Directors on October 25, 1996, 6 out of 13 enclave projects in IDA-only countries were rated unsatisfactory in their completion or audit reports. This document notes that "the failure or success of some of these projects was caused by large fluctuations in market demand or in export prices, resulting in substantially higher or lower revenues than projected."

This finding is extremely relevant for Nam Theun 2 given its dependence on demand for imported electricity in Thailand and on the willingness of the Thai electricity utility EGAT to pay a sufficient price for power from the dam. The economic slowdown in Thailand and associated downgrading of electricity demand projects, the on-going liberalization of the Thai power sector, the growth of natural gas as a generating source, and the recent fall in the value of the baht, all greatly increase the risk that electricity prices and demand in Thailand will be insufficient to guarantee the price necessary for Nam Theun 2 to generate its projected return. Annex I of this letter contains information from the Louis Berger report which details some of the concerns about the economic viability of NamTheun 2. The Louis Berger report strengthens our belief that for many years the Lao government has been extremely poorly advised by the World Bank and NTEC on the economic benefits of Nam Theun 2.

At the meeting with Bank staff, NGOs noted that the proposed structure of the IBRD guarantee and GoL counter-guarantee is analogous to the GoL giving the Bank its personal credit card, to be used as a guarantee of "good behavior' -- if GoL behaves in a way which could be considered a breach of its agreement with the Bank, the Bank can then withdraw the amount of the guarantee from GoL's account. The GoL, however, has no similar leverage over EGAT, and is in fact in an extremely weak position given Thailand's great economic and political strength relative to that of Laos and EGAT's position as the sole buyer of Nam Theun 2 electricity,

Bank staff response to the concerns expressed about the high risk that Nam Theun 2 would fail in its objectives was to state that they would attempt to ensure that it would not fail. They gave few concrete suggestions as to how this would be achieved. On the issue of GoL having little power to force EGAT to maintain the price it pays for Nam Theun electricity, Bank staff stated that EGAT would be bound to the terms of the Power Purchasing Agreement (PPA) when it is finally signed. The Louis Berger report notes, however, that Power Purchase Agreements "frequently are re-negotiated as market conditions change" (Vol. 1, p. 33). Louis Berger also notes that the most likely direction for renegotiation of the price is downward (Annex 1, p. 14).

Weak Institutional Capacity in Lao PDR

Another important issue which has been highlighted by numerous observers is the GoL's lack of institutional capacity to manage large and complex projects such as Nam Theun 2. The 1996 Country Assistance Strategy for Lao PDR, for example, notes a "severe lack of capacity within implementing agencies, which is the greatest single risk facing the implementation of our portfolio." The CAS also notes that this lack of capacity continues despite "significant amounts" of technical assistance from the donor community, and that "the thinness of local capacity suggests that Lao institutions have not reaped sustainable benefits from such assistance" (p. 13).

The dangers of moving ahead with such a large project in a small country with major institutional constraints are increased by the fact that the resources of the Lao authorities are already stretched thin in their work on several other smaller hydropower projects under construction in Laos and with the planning process for numerous others. Many problems have already arisen with social and environmental mitigation measures at other dams under construction including two medium-sized ADB-supported projects, Nam Theun-Hinboun and Nam Leuk (the ADB has recently suspended construction at Nam Leuk due to the failure of the contractor to comply with mitigation measures). It should also be noted that worldwide, even in countries with far stronger institutional capacities than Laos, the record of mitigating the impacts of dams has been extremely poor,

We disagree with the position expressed by Bank staff and consultants that this dam offers the best means of protecting the ecosystems of the Nakai Plateau. It should be remembered that conservation of the Nakai Plateau was being considered for grant funding from both the Global Environment Facility and the Dutch government until it became clear that the Bank was seriously considering backing Nam Theun 2 and the consequent flooding of around 40 per cent of the Plateau. The dam has thus acted as a barrier to grant funding for conservation of the Nakai Plateau.

Lack of Leverage for the Enforcement of Bank Environmental and Social Policies

NGOs pointed out at the June 30 Bank-NGO meeting that the '"troubling conclusion" noted in the CAS of the lack of a "relation between the intensity of supervision and any improvement in project ratings" is magnified in the case of the proposed guarantee for Nam Theun 2, because the Bank, once it issues a guarantee, will have no clear leverage over the implementation of mitigation measures necessary to conform with Bank policies. This contrasts with normal loans where disbursements can be halted if promised mitigation measures are not carried out. With the case of Nam Theun 2, the guarantee cannot be halted or given in stages, so that there can be, in effect, no project-level conditionality.

Bank staff admitted this lack of leverage and indicated that, even after several years of
Consideration and study, they have not yet found a definitive solution. Ideas they put
forward during the meeting included applying conditionality through a possible IDA loan for social and environmental mitigation on the dam, or through the threat of cancellation or reduction of future non-Nam Theun 2 IDA lending. According to Bank staff, however, there would be no method for putting such conditionally into a legally binding form. It would merely be couched as an "understanding" with GoL.

These proposed measures would appear to have little impact or leverage on project developers if they were found in violation of bank policies. If the assumption is made that IDA funds provide assistance to the poor, then the people who face impoverishment through resettlement or through the environmental destruction associated with dam construction are likely to be penalized for a second time as IDA mitigation and other funds are cut off to "punish" the errant contractors.

The limited capacity of local and national institutions to implement the necessary social and environmental mitigation measures is noted in Louis Berger's Economic Impact Study:

... other than the [Resettlement Committee), public sector institutions appear not to have begun the process of planning to manage the project's impacts. The health impacts in terms of increases in malaria, schistosomiasis, and AIDS, could be significant, for example, but the Ministry of Health apparently has undertaken no contingency planning or budgeting, nor has it studied the health impacts of hydropower projects at other sites. Institutional responsibility for the construction of ancillary infrastructure, health clinics and schools is hazy and overlapping... and again, there appears as yet to have been no contingency planning or budgeting.

"More fundamental, the amounts that are under discussion for inclusion in budgets for environmental and social mitigation and protection are of an order of magnitude larger than the budget that provincial authorities and relevant GoL ministries are used to spending, calling into question their institutional capacity to manage the responsibilities that might fall to them." (p.21).

The limited capacity of the Lao government to deal with the complicated financial and contractual negotiations surrounding Nam Theun 2 is another issue of concern, especially given that the foreign companies involved will clearly want to off-load as many risks as possible onto the Lao government.

It is noteworthy in this regard that the development consortium expressed to Louis Berger that ?the project as currently configured" does not ensure them an adequate rate of return and that they therefore expect that the Lao Government will "accommodate them in this regard" - which would obviously reduce the prospective economic return to Laos (Louis Berger, p.44).

Bank support for Nam Theun 2 would likely include a significant IFC component. The following quote from a 1994 IFC publication reinforces our position that Bank support would be unwise at this time:

"IFC's experience suggests that, especially when considering the first projects to be offered for private financing, governments should avoid projects which might be inherently risky. For example, projects which are very large, or use relatively untried technology, or involve difficult environmental issues will be more difficult to finance than others, It may be better to leave them until private participation has been demonstrated in other, easier-to-finance projects." (G. Bond and L. Carter, 'Financing Private Infrastructure Projects: Emerging Trends from IFC's Experience', World Bank Discussion Paper No. 23, 1994, p. 14)

In summary, we conclude that the Nam Theun 2 Dam carries social, environmental, and economic risks of a scale that makes the project unsuitable for World Bank support at this time. This conclusion has been reached after years of monitoring World Bank involvement in the proposed project, an evaluation of the results of the June 30th Bank-NGO meeting, and a detailed and careful analysis of existing documentation, as well as other interactions and correspondence with Bank staff, Lao Government officials, and NGOs working in Laos and Thailand. The development consortium's publicly stated position that it will build the dam only if the World Bank provides support, and the small likelihood that other developers will find the dam an economically viable proposition without substantial public sector subsidies, serve to reinforce our concerns about further World Bank involvement in the project.

We look forward to hearing from you on any discussions you may have with Bank staff and management on this matter.

Yours sincerely,

Patrick McCully Bruce Rich, Stephanie Fried International Rivers Environmental Defense Fund

On behalf of:

Dana Clark Andrea Durbin Center for International Environmental Law Friends of the Earth

Richard Forrest
National Wildlife Federation

James D. Woffensohn, President, World Bank 522-3031 Jannik Lindbaek, Executive Vice President, IFC 974-4359 Jean-Daniel Gerber, ED Switzerland Group, 477 91 1 0 Leonard Good, ED Canada Group, 477 4155
Luc Hubloue, ED Belgium Group, 522 3453
Jannes Hutagalung, ED Indonesia/Lao PDR Group, 477 4116 Ruth Jacoby, ED Sweden Group, 477 6818
Marc-Antoino Autheman, ED France, 623-4951 Young-Hoi Lee, ED Korea/Australia Group, 477 2007 Atsuo Nishihara, ED Japan, 522 1581
Gus O'Donnell, ED UK, 623 4965
Chris Austin, Assistant to UK ED, 623 4965 Franco Passacantando, ED Italy Group, 477 3735 Helmut Schaffer, ED Germany, 477 7849
Pieter Stiek, ED NL Group, 522 1572
David McDowell, Director General, IUCN
Laurel Neme, US Treasury, 622.1228
Mark Rentschler, Assistant Director for Sustainable Development, US Treasury, 622,1228
William Schuerch, Deputy Assistant Secretary, U.S.Treasury, 622-2536 Richard Bissell, World Bank Inspection Panel, 522-0916 Michael Colby, Ph.D., Environmental Policy/Planning Advisor, USAID, 647.3517
Tim Wirth, Undersecretary of State for Global Affairs, 647 0753 Rafe Pomerantz, Acting Assistant Secretary of State for Oceans and International
Environmental Affairs,647,0217
Katy McGinty, Chair, Council on Environmental Quality, 456-271 0

Annex I

NGOs have only just been able to obtain the complete draft of the Louis Berger Economic Impact study but a preliminary analysis shows that it contains a substantial amount of material which questions the viability of the project while, at the same time, remaining unrealistically optimistic on numerous important project parameters.

The Power Purchasing Agreement between the project consortium and the Electricity Generating Authority of Thailand expired in 1996. The Louis Berger Economic Impact Study notes that "the new tariff can be expected to be lower than the previous agreement? -- yet Louis Berger's "base case" economic scenario for Nam Theun 2 appears to assume that the price will be the same as the previous agreement. A sensitivity analysis in the Louis Berger study, however, shows that a more realistic power price based on marginal generating costs in Thailand would reduce the project's rate-of-return to the Government of Laos (GoL) from 14% in the "base case" scenario, to only 9,6%,

Another illustration of the study's unrealistically optimistic assumptions is that its "base case" scenario assumes a Thai inflation rate of 3% per year, with a worst case scenario of an inflation rate of 4% per year, According to an official Thai forecast released on July 13, however, inflation in 1997 will exceed 6%. Louis Berger note that the project has a "relatively strong sensitivity to inflation" - their analysis shows that the project's rate-of-return drops from 14% with 3% inflation to just 12.5% with 4% inflation.

Despite the systematic optimism of Louis Berger's economic analysis, the study still concludes that the average annual net cash flow to the Lao PDR would be only $38 million (p.37) - several times smaller than that claimed in previous project documents. The 1995 IBRD document on enclave guarantees, for example, claims that GoL would receive a "cash inflow of about $3 billion over the 25 year concession period". This equals an average annual benefit of $120 million.