New Players Push Development Banks Aside in the Mekong

Carl Middleton, International Rivers
Saturday, June 16, 2007

The Mekong region has seen its share of "hydro-prospectors" set up stakes with the hopes of tapping the great river for hydroelectric dams. Over the years, the basin has been invaded by foreign agencies such as the US Bureau of Reclamation and Army Corps of Engineers (who proposed turning the Mekong into a series of reservoirs), UNDP (which said in 1995 that "the naturally flowing Mekong is destructive... if not dammed, the Mekong flows wasted to the sea"), French utilities, and of course big development banks such as the World Bank.

Now, a new set of actors are developing, funding and building large dams. Energy and construction companies from Vietnam, China, Thailand, Japan and Malaysia are scouring the region for attractive investment opportunities. Armed with the support of private banks from their own countries (now flush with cash following Asia's economic revival) and the promise of government guarantees through their export-import banks, these dam-builders have become Asia's new hydro torchbearers.

The new hydro companies and their backers are fast displacing the western corporations and multilateral banks that previously dominated the region's hydro scene. The decade-long approval process of the Nam Theun 2 project, concluded in 2005, has left the Lao Government and regional investors largely uninterested in seeking support from the Asian Development Bank and World Bank for other hydropower schemes. They view the banks' safeguard policies as burdensome, time-consuming and costly. And now, with the arrival of a new set of private companies, alternative sources of finance, and regional government players keen to support the development of the region's hydropower sector, multilateral bank support is also unnecessary. Even Western hydropower consulting companies are increasingly struggling to find new contracts, as domestic hydropower companies have become more experienced and able to implement projects themselves.

To meet the Mekong region's escalating power demand, massive exploitation of hydropower resources is high on the political agenda of all Mekong country governments, but wider geopolitical factors are also at play. The governments of Thailand and China especially are increasingly keen to project their influence throughout the Mekong Region through a combination of grants, loans, and export credits, in order to gain access to increasingly scarce natural resources, support the expansion of their commercial enterprises for financial gains, and increase their political clout on both the regional and global stage.

Thailand flexes its power
As Thailand's economy and demand for power has grown, so has the eagerness of its state-owned utility, the Electricity Generating Authority of Thailand (EGAT), to import electricity from proposed hydropower schemes in neighboring countries - namely Laos, China's Yunnan Province and Burma. Thai power companies are important investors in many of these regional projects, typically backed by Thai commercial banks and Thailand's export credit agency, the Thai Exim Bank. For example, a consortium of Thai companies together with Electricité du Laos own the US$832 million Nam Ngum 2 project now under construction in Laos. Thai commercial banks are the main financiers of the project. Electricité du Laos obtained its equity for the project through a bonds issue guaranteed by the Thai Export-Import Bank.

While the Thai Exim Bank is an increasingly keen supporter of large infrastructure projects in the region, it does not have an environmental policy and its activities are generally unaccountable to civil society. Furthermore, buoyed by the release of Thailand's new power development plan in June 2007, Thai commercial banks are also willing financiers of major energy projects, but none have yet signed up to the Equator Principles, a set of voluntary environmental and social standards that have been adopted by 51 private banks around the world.

China moves down the Mekong
In addition to the Thai Exim Bank, the China Export Import Bank, China's official export credit agency, is also becoming an important player in the Mekong region, as are a number of China's major State Owned Enterprises, often with the Bank's financial backing. China Exim is closely aligned with the strategic overseas interests of China's government, on whose behalf it may offer concessional loans and export credits, especially in implementing China's "Going Out" policy. For example, in Laos, the majority of funds for the US$135 million Xeset 2 dam project now under construction was provided by China Exim in the form of export credits to Electricité du Laos, the project's operator. China Exim's environment policy, prepared in November 2004 but only publicly released in May 2007, contains only basic provisions. Overall, the Bank's operations remain unaccountable to the general public - a policy made more indefensible because of its support for numerous controversial projects worldwide, such as the Merowe Dam on the Nile in Northern Sudan.

Cambodia: Partnering with China
Cambodia is on the threshold of committing to an extensive domestic hydropower development program, financed with the support of the Chinese government and facilitated through the technical expertise of Chinese construction companies. Until recently the Cambodian government has struggled to attract investment to its planned major hydropower projects. Cambodia's traditional donors (the ADB, the World Bank and Western bilateral donors) have been reluctant to support the development of large hydropower schemes because of concerns over environmental and social impacts - many of the potential project sites are located within or close to protected areas - and questions over economic feasibility.

Over the past several years, however, as China's political and economic ties with Cambodia have strengthened, the Chinese government has indicated its willingness to support Cambodia's ambitious yet controversial hydropower development strategy. To date, deals have been reached on two major hydroelectric projects and numerous others are being studied. In justifying its hydropower program, the Cambodian government claims it is trying to balance the need for environmental and social protections against the need for electricity to support its economic development. Civil society groups in Cambodia, however, have expressed concern over the loss of Cambodia's natural heritage and questioned the approval process of these projects, which has been conducted behind closed doors without the meaningful participation of local communities and other concerned stakeholders.

Vietnam: Racing to meet power demands
Rapid economic growth in Vietnam has resulted in the demand for power growing at a rate of 13-15% per year. To meet this demand, the state-owned utility, Electricity of Vietnam (EVN), plans to develop up to 17,000 MW of new hydropower through 2025, which represents approximately one-quarter of its estimated required expansion in generation capacity.

In addition to developing its domestic hydropower resources, Vietnam is keen to ensure that electricity from Laos' hydropower resources is piped into its transmission grids. Recently, the Vietnamese government arranged significant financial support for Vietnamese companies investing in the 250 MW Sekaman 3 hydropower scheme, a major export project now under construction in Southern Laos.

In order to finance the new generation capacity, EVN estimates it will have to invest US$45 billion over the next ten years alone. This has placed great financial pressures on EVN, necessitating a radical change in Vietnam's electricity industry. To match the rate of investment required, beginning in 2004 EVN has undergone a process of partial privatization. The utility hopes to earn more than $700 million by 2010 by selling shares in many of its power plants. EVN has also issued bonds on the domestic market over the past two years, and in 2008 plans to issue its first overseas dollar bond issue. The growth in the domestic financial markets and availability of private capital in Vietnam has meant that the Vietnamese government is increasingly shying away from public sector involvement in its electricity sector. The government would prefer to seek multilateral and bilateral aid support for softer sectors, and to use private capital to finance controversial dam projects.

What will become of the development banks?
Although they're no longer the only game in town, the ADB and the World Bank have not given up supporting the Mekong Region's power sector. Both continue to finance a number of major transmission line projects, including regional interconnection lines that fall under the ADB's Mekong Power Grid, although the plan itself appears increasingly unrealistic and likely to be rejected by the Mekong countries themselves in its full form. The Banks are also working hard to resume lending to hydropower projects. The ADB, for example, hopes to loan to Vietnam just under $200 million for the development of Song Bung 4 hydropower project in 2007, and loans for two additional dams a few years later. Both banks are also busy touting the latest fashionable water development paradigm, known as Integrated Water Resources Management, to justify water infrastructure development throughout the region, as well as marketing their dubious "model" hydropower project, the Nam Theun 2.

A new challenge for civil society
The arrival of these powerful new actors raise significant challenges for civil society groups working to ensure the sustainable and equitable development of the Mekong basin, and raises serious questions over whether social and environment standards will slip even further. Whereas the development banks must at least pay lip service to their safeguard policies, the new commercial banks and export credit agencies that are now involved in financing hydropower projects are not bound to such standards and are also not obliged to develop projects through processes open to public scrutiny.

In the current context of weak power planning processes and poor enforcement of national laws, the result could be catastrophic for those dependent on the Mekong Basin's rivers for their livelihoods. Yet, as China, Thailand and Vietnam become increasingly influential in the Mekong region and step onto the global stage, they must also accept their international responsibilities and adhere to international standards when developing and financing large infrastructure projects. The region's ever strengthening civil society will play a critical role in ensuring these responsibilities are taken seriously.

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For more information on this topic please read International Rivers, World Rivers Review, Vol 22, No 2. Published in June 2007. Click here to see the full publication.