Nam Theun II Hydropower Project

Nam Theun II or NT2 is a hydropower project under construction on the Nam Theun river in Laos, with commissioning planned for 2009. The scheme will divert water from the Nam Theun, a tributary of the Mekong River, to the Xe Bang Fai river, with an electricity generating capacity of 1070 megawatts from a 350 metre difference in elevation between the reservoir and the power plant.

It is the largest hydropower project in the history of Laos and is expected to export power to Thailand as well as fulfill domestic demands. At the time of signing in 2005, NT2 was the largest ever foreign investment in Laos, the world’s largest private sector cross-border power project financing, the largest private sector hydroelectric project financing, and one of the largest internationally-financed independent power producer (IPP) projects in Southeast Asia. The dam also marks the return by the World Bank to funding large-scale infrastructure, after a decade-long hiatus.

According to the government of Laos, "the project is an essential part of the country's development framework and the Project's implementation is likely to be the first real possibility for (Laos) to reduce gradually its dependence on Official Development Assistance." [ [http://www.poweringprogress.org/nt2/background.htm Lao National Committee for Energy] ]

The project will have significant environmental and social impacts, and comprehensive measures have been designed to mitigate these. According to a group of social and environmental experts who advise on the project, these measures could become a global model. Although Newsweek magazine recently referred to it as a "kinder and gentler dam", [ [http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/LAOPRDEXTN/0,,contentMDK:21480018~menuPK:293702~pagePK:2865066~piPK:2865079~theSitePK:293684,00.html World Bank September 2007] ] the project remains controversial. [ [http://www.worldwatch.org/node/5168/print International Rivers, “Model” Dam Encounters Similar Problems As Previous Projects] ]

History and current status

The Nam Theun 2 project was identified in the 1980s and a concession was awarded in 1993. It was subjected to a long anti-dam campaign. The project was frozen after the 1997 Asian financial crisis, but preparation resumed in 1999. In October 2002 a concession contract between the Nam Theun 2 Power Company (NTPC) and the government of Laos was signed, followed by the signing of power purchase contracts between NTPC on the one hand and EGAT and the Laotian state-owned power company Eléctricité du Laos [http://www.edl-laos.com/index.html] on the other hand in November 2003. Financial closing was reached in June 2005. The Nam Theun river diversion occurred in March 2006 and construction is now well advanced. The project sponsors expect the dam to be completed in mid-2008 and the reservoir impounding to be completed in December 2008. [ [http://www.namtheun2.com/NT%20Progress%20as%20of%20March%202007-%20Final%20version.pdf NT2 Update March 2007] ]

Technical features

NT2 will enable Laos to use 995 MW of electricity-generating capacity to export electrical energy to the Electricity Generating Authority of Thailand (EGAT). The hydroelectric project will also use 75 MW of capacity to supply electricity for domestic use in Laos.

The project includes the development, construction, and operation of a trans-basin diversion power plant that would use water from the Nam Theun River releasing the water into the Xe Bang Fai River. The proposed project site is located in the Khammouane and Bolikhamxay provinces in central Laos, about 250 kilometers east of Vientiane. It would stretch from the Nakai Plateau to the lower Xe Bang Fai River confluence with the Mekong.

The main features of the project include:

* a 39 meter high gravity dam on the Nam Theun river;
* a 450 square kilometer reservoir;
* a pressure shaft, pressure tunnel and powerhouse;
* an 8 million cubic meter artificial regulating pond and a 27km artificial downstream channel leading into the Xe Bang Fai river;
* a 130 kilometer long, double-circuit 500-kilovolt transmission line to the Thai grid; and
* a 70 kilometer long, single-circuit 115-kV transmission line to Lao’s domestic grid.

Institutional arrangements

The Project is structured as a build-own-operate-transfer (BOOT) project. It has a concession period of 31 years, of which the operating period is 25 years. At the end of the concession period, the project facilities will be transferred to the government free of charge.

The project is developed by a private company, the Nam Theun 2 Power Company Limited (NTPC), which is owned by a consortium comprising:

* Electricité de France International (EdFI) of France (35%), a wholly owned subsidiary of the state-owned French power company EdF;
* Electricity Generating Public Company (EGCO) of Thailand (25%), a leading owner and operator of independent power plants in Thailand that itself is owned by the state-owned Thai power company EGAT (25.4%) and the Hong Kong-based privately owned international CLP Group (22.4%);
* Italian Thai Development Public Company Limited (ITD) of Thailand (15%), the largest publicly listed infrastructure construction company in Thailand; and
* Government of Laos (25%), represented by Lao Holding State Enterprise (LHSE).

Coincidentally, governments and government-owned enterprises own a majority of NTPC. This situation is atypical for an Independent Power Project (IPP) where normally the power generating company is privately owned. Laos is a People's Democratic Republic with a one-party system under the Lao People's Revolutionary Party (LPRP). It is one of the few communist states in the world.

The government has multiple roles related to NT2, some of which are conflicting: It partially owns NTPC and thus has an interest in the financial profitability of the project; it is supposed to monitor compliance with environmental and social safeguards under the concession contract; and it buys some of the electricity generated from the project through the state-owned power company EDL.

Some of the owners of NTPC are also contractors engaged in the construction of the dam. For example, EdF International is the head contractor for the entire project under a turnkey contract. It has engaged various sub-contractors for specific parts of the project.

Financial aspects

Project costs and financing

Construction costs were initially estimated at US$1,250 million plus US$331.5 million for contingencies. More recently construction costs have been given as US$ 1,450 million.

The project base cost is funded through US$330m of equity and US$920m of debt. It is financed through equity, loans and guarantees from 26 financial institutions, including
* four multilateral banks (the World Bank Group, the Asian Development Bank, the European Investment Bank and the Nordic Investment Bank),
* three Export Credit Agencies (Coface of France, EKN of Sweden and GIEK of Norway),
* three bilateral financing agencies (Agence Française de Développement,PROPARCO and the Export-Import Bank of Thailand),
* nine international commercial banks providing finance in hard currencies (grouped together in a "lead arrangers group" including BNP Paribas, Crédit Agricole Indosuez, ANZ from Australia, Société Générale, Fortis Bank and Bank of Tokyo Mitsubishi), and
* seven Thai commercial banks providing finance in Thai Baht.

All financing in hard currencies is guaranteed through political risk insurance provided by the above-mentioned three export credit agencies, the ADB (US$ 50m), the International Development Association (IDA) of the World Bank Group (US$ 50m) and MIGA (US$ 91m). Specifically, the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group has provided a US$86 million guarantee to Fortis Bank of Belgium against the risks of expropriation, breach of contract, war and civil disturbance, and transfer inconvertibility in both Laos and Thailand. [ [http://www.miga.org/projects/index_sv.cfm?pid=610 MIGA NT2] ] According to MIGA, its guarantee "was key to lowering the project’s risk profile, which in turn enabled the government and developers to attract commercial financing at better rates and gave the investor the assurance needed to go ahead with the deal".

The Asian Development Bank (ADB) supports the project through a US$20m loan to the government to help purchase its equity in NTPC, a US$50m private sector loan directly to NTPC, and a US$50m political risk guarantee to NTPC. [ [http://www.adb.org/Projects/Namtheun2/NT2-infosheet.pdf ADB Fact Sheet] ]

If project costs increase the owners of NPTC and the Banks would have to bear theses costs in proportion to their initial contributions. The banks would contribute in the form of stand-by credits.

The government's initial equity contribution of $83m (25%) was largely funded by donors, including a $20 million grant from the International Development Association, which is part of the World Bank Group, the ADB (US$ 20m), France, and the EIB.

Increase in government revenue and contribution to poverty alleviation

According to the government "the Project is an essential part of the country's development framework and the Project's implementation is likely to be the first real possibility for (Laos) to reduce gradually its dependence on Official Development Assistance." In the same vein, the then Managing Director of the World Bank, Shengman Zhang, said in 2003 "We see Nam Theun 2 not as a project per se, but as a vehicle through which to make a considerable progress in the effort of poverty reduction." [ [http://www.poweringprogress.org/nt2/background.htm Lao National Committee for Energy] ]

Revenue for the government will accrue in three forms:

* dividends,
* taxes; and
* royalties, i.e. concession fees.

Government revenue is estimated at US$1.9bn to US$2bn in nominal terms over 25 years. It has been estimated that at a 10% discount rate the net present value of the revenues will be six times higher than the net present value from the debt service, if all government equity was funded through concessionary lending. Revenues are expected to increase progressively from approximately US$ 10 million in 2009 to US$ 110 to 150 million per year at the end of the concession period. Thereafter all revenues accruing to the project will be for the benefit of the government.

The Power Purchase Agreement (PPA) between EGAT and NTPC has been designed as to stabilize the cash flow despite hydrological variation and consequently variation in power output. Revenues will be partially in US$ and partially in Thai Baht. Power demand from Thailand is expected to be strong. In December, Thailand and Laos signed an agreement increasing the total power to be supplied by Laos to Thailand from all sources in 2015 from 5,000 MW to 7,000 MW. [ [http://www.poweringprogress.org/updates/news/press/2007/Thailand%20Ups%20Demand%20for%20Lao%20Energy.htm Thailand Ups Demand for Lao Energy] ]

The World Bank works with the Lao government to improve public financial management practices and increase transparency in order to increase the likelihood that revenues will be used to benefit the poor, including through investment in health and education. The Government has agreed with the World Bank to implement a Poverty Reduction Fund that is being initially sourced from International Development Association funds, and then from the Government's taxes, royalties and dividend revenues once the project commences operation. Special administrative units are being established to deal with the effective management and allocation of the financial resources gained from the Project. [ [http://www.poweringprogress.org/nt2/background.htm Lao National Committee for Energy] ]

In 2007 Laos was ranked on the Corruption Perception Index by Transparency International 168 out of 179 countries assessed, making it one of the most corrupt countries on the index.

Environmental and social impacts

Environmental and social impacts of the project include downstream impacts, impacts on biodiversity, resettlement and reservoir sedimentation. More details can be found in the [http://www.adb.org/Documents/Environment/LAO/lao-nam-theun2.pdf summary of the 2004 Environmental and Social Impact Assessment] .

According to data in the World Bank publication "Good dams, bad dams", the ratio of area flooded and people resettled per MW of installed electricity generating capacity (flooded area of 41 hectare per MW and 5 people resettled per MW) is neither very high, nor very low, compared to 48 other large dams analyzed. [ [http://siteresources.worldbank.org/LACEXT/Resources/258553-1123250606139/Good_and_Bad_Dams_WP16.pdf World Bank:Good Dams, Bad Dams 2003] , p. 22 ] Using this analytical framework, Nam Theun II thus could neither be considered a "good" or a "bad" dam.

The comprehensive environmental and social measures designed to mitigate potential environmental and social impacts could become a global model, according to a group of social and environmental experts who advise on the project. [ [http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/LAOPRDEXTN/0,,contentMDK:21480018~menuPK:293702~pagePK:2865066~piPK:2865079~theSitePK:293684,00.html World Bank September 2007] ]

However, according to the NGO International Rivers, there have been substantial shortcomings in the mitigation of impacts. According to the organization, compensation payments and replacement land for villagers affected by construction activities have been "inadequate, unfair or non-existent". Poor resettlement planning has led to housing and infrastructure delays. Plans to restore the livelihoods of villagers on the Nakai Plateau and along the Xe Bang Fai have yet to be finalized. And the budget for the downstream program in particular is said to be woefully inadequate. [ [http://internationalrivers.org/en/southeast-asia/laos/nam-theun-2 International Rivers NT 2] ]

NT2 has a multi-layer environmental and social monitoring and evaluation mechanism consisting of the following elements:

* A Panel of Environmental and Social Experts (POE), reporting to the government. The POE normally visits Laos at least once per year.
* An International Advisory Group(IAG), advising the World Bank. The IAG normally visits Lao PDR at least once per year.
* Independent Monitoring Agencies, reporting to the Government. The Independent Monitoring Agencies was in the process of being contracted in December 2006.
* The Lenders’ Engineer [ [http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/LAOPRDEXTN/0,,contentMDK:21109109~pagePK:141137~piPK:141127~theSitePK:293684,00.html#mornitor World Bank Monitoring and Evaluation December 2006] ]

Downstream impacts in Xe Bang Fai

The flow of water in the Xe Bang Fai (XBF), which will receive the water diverted through NT2, will increase significantly, thus affecting the population living downstream of the release point.

The exact number of people affected is disputed. While NTPC speaks of 40,000 affected people, the NGO Environmental Defense speaks of up to 150,000 people. The impacts have been widely studied and have been disussed with local communitis that will be affected. Negative impacts on the downstream population include the washing away of river-bank gardens, changes in water quality, and impacts on fisheries. The impacts will only be exactly known once the project has been completed.

NTPC has promised to stop power production when floods occur on the XBF river. However, there is disagreement if this would be on average one week every two years or one month every year. This would obviously have important implications on the project’s financial viability.

Water quality may be negatively impacted through fouling of biomass in the reservoir. In order to avoid this, biomass will be removed “as much as possible”. Because the impacts are unknown, monitoring systems will be included and a commitment has been made to “adaptive management”.

Livelihood development programs are underway for the villagers living downstream on the XBF river, in districts such as Mahaxai. The programs are focused on agriculture, fish ponds and handicrafts to help them generate income beyond that derived from river fishing. The objective is to help villagers generate money from a variety of different sources to compensate for any changes in fishing catches after the river diversion. Affected communities expect to receive irrigation systems to allow for a second, dry season rice crop, drinking water systems and access to electricity. The provision of this infrastructure would not be the responsibility of NTPC, but of the government.

According to a joint progress report issued by the World Bank and the ADB in December 2007 implementation of the downstream program – particularly on implementing livelihood programs – remains a challenge. Lessons from the 20 villages where the programs have been piloted in a participatory manner are being applied as other villages are included. Micro-credit schemes that are being developed are not yet on a sustainable financial footing. [ [http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/LAOPRDEXTN/0,,contentMDK:21587429~menuPK:293689~pagePK:2865066~piPK:2865079~theSitePK:293684,00.html World Bank] ]

Downstream impacts on the Nam Theun River

There is relatively little information on downstream impacts on the Nam Theun River, where water flows will be significantly reduced. No permanent villages lie along the Nam Theun some 50km downstream below the dam. Fishermen and hunters, however, do use this stretch of the river. Fish diversity and abundance is expected to be affected by reduced water flows and sediment content. [ [http://www.adb.org/Documents/Environment/LAO/lao-nam-theun2.pdf Summary of 2004 Environmental Assessment] , p. 39 ]

Biodiversity and forests

Three existing protected areas on the Nakai plateau (the Nakai-Nam Theun, the Hin Nam Nor and the Phou Hin Poun National Biodiversity Conservation Areas), together nine times larger (4,106 km²) than the flooded area, are expected to be better managed through significant resources made available under the project - more than 60 times what the government has spent on its entire national parks system so far. The flooded areas are not considered critical natural habitat.

There used to be significant illegal logging in the protected areas, which the government claims has now been largely brought under control.

Detailed fish surveys showed that there are no fish species living only in the stretch of the river that will be inundated. A management plan for the Asian elephants in the area has been drawn up.

A Watershed Management Protection Authority (WMPA) has been established with the specific purpose of protecting the watershed of the reservoir and the protected areas in it. WPMA will receive US$1 million annually from NTPC through the concession period.

Resettlement

6,200 villagers from 17 villages have to move from the area that will eventually be the NT2 reservoir in the Nakai Plateau. NTPC and the Lao Government, have committed to double the income of resettled villagers, through so-called livelihood programs, five years after they have been relocated. This means that people who used to make US$410 per household a year in 2005, would have to make at least US$820 per household a year by 2012.

According to a recent joint report by the World Bank and the ADB progress on resettlement has been significant. A third of the new houses are complete, with new roads, water pumps, toilets, schools and electricity all in place. Construction of the remaining houses and facilities was due to be completed before May 2008. The full relocation process is expected to be completed before impoundment can begin in June 2008. Extensive consultations on house design, location and even construction materials were held and continue to ensure the outcomes reflect the wishes of the local people. According to the report, the health of villagers that have already been resettled has significantly improved due to better water and sanitation, regular health check-ups and the provision of mosquito nets, as documented by various assessments. Various experts are helping the resettlers to adopt improved practices to increase agricultural and income productivity. However the report stresses that the pace of the development of the livelihood activities must be accelerated including engaging additional technical assistance to help villagers develop the most effective cropping systems possible. [ [http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/LAOPRDEXTN/0,,contentMDK:20172670~pagePK:141137~piPK:217854~theSitePK:293684,00.html World Bank] ]

Reservoir sedimentation

At current sedimentation rates, the reservoir has a lifetime of more than five centuries. If substantial logging occurred in the upstream basin, the lifetime would be accordingly reduced and could affect the financial and economic viability of the project. This would especially be the case if sediments remained in the active storage area in the upper part of the reservoir instead of being washed into the dead storage area closer to the dam in the lower part of the reservoir.

The establishment of the relatively well-funded Watershed Management Protection Authority is expected to protect forest cover and thus limit erosion in the watershed of the reservoir.

See also

*Energy Industry Liberalization and Privatization (Thailand)
*Wildlife of Laos
*Economy of Laos

External links

* [http://www.namtheun2.com Nam Theun 2 official website]
* [http://www.edl-laos.com/index.html Eléctricité du Laos]
* [http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/LAOPRDEXTN/0,,contentMDK:20172670~pagePK:141137~piPK:217854~theSitePK:293684,00.html World Bank on NT 2]
* [http://www.adb.org/Projects/Namtheun2/default.asp ADB on NT 2]
* [http://internationalrivers.org/en/southeast-asia/laos/nam-theun-2 International Rivers on NT2]
* [http://www.environmentaldefense.org/article.cfm?contentID=4137 Environmental Defense on NT 2]
* [http://www.int.iol.co.za/index.php?click_id=31&art_id=qw1133075525276B242& iol.co.za]

References