Board approves Nam Theun 2 dam in Lao PDR

1 April 2005

In the wake of strong international opposition World Bank support for the controversial Nam Theun 2 dam was approved 31 March. As one of two controversial decisions on the same day, the Board of executive directors also approved the candidacy of Deputy US Defence Secretary Paul Wolfowitz as new President of the Bank, amidst outrage from southern and northern groups alike at Wolfowitz’s controversial role as one of the intellectual architects or the Iraq war, his proximity to the Bush administration and his lack of development expertise.

Nam Theun 2, the largest and most controversial of a series of planned hydropower projects for Lao PDR is located in Khammouane province in central Lao PDR. The $1.3 billion project is being developed by Electricité de France, the Electricity Generating Authority of Thailand, Ital-Thai Development and the Lao government. Justification for World Bank support of the project, to the tune of as much as US$270 million in funding, hinges on the ability of the Lao government to use project revenues, obtained from exporting electricity to Thailand under a guaranteed contract, to benefit the poor. Additional funds awaiting World Bank endorsement have now been approved by the Asian Development Bank and the European Investment Bank.

Opponents to the project have highlighted a range of severe problems, arguing that the project violates the Bank’s own environmental and social safeguard policies and the recommendations of the World Commission on Dams. It fails to demonstrate compliance with the three pillars of the Bank’s decision framework on NT2 which includes criteria on development and poverty alleviation; adherence to Bank safeguard policies; and broad support from donors and civil society. Critics also refer to the poor human rights and governance record of the Lao government, and its poor track record of managing revenues transparently.

dramatic and unexplained changes to the Bank's economic analysis

Flawed assumptions

The dam will displace at least 6,000 indigenous people living on the Nakai Plateau, and affect the livelihoods of another 100,000 people living downstream who rely on these rivers for fish, drinking water and agriculture.

A series of in-depth technical reviews, which include hydrology, water quality impacts and resettlement plans for villagers have revealed serious flaws in the project’s environmental impact assessment and social development plan and call into question the project’s viability and scale of its impacts. The reviews cite flawed baseline data, inadequate due diligence on social and environmental issues and indicate that proposed mitigation and compensation measures, resettlement plans of local communities, and environmental management strategies have a high risk of failure.

A petition signed by 153 NGOs from 42 countries sent to World Bank president James Wolfensohn in March urged the Bank not to support the dam and detailed a number of the concerns listed above. The Bank response provided by Ian Porter, country director of Lao PDR and Thailand disagreed with the conclusions of the technical reviews and claimed that: a sound framework for managing NT2 revenue transparently has been set up; Lao government capacity for managing revenue and expenditure is improving; and extensive information disclosure and discussion with civil society had taken place. He claimed that it was up to the Bank board, which he claimed “..to decide whether the project should continue in light of the issues raised”.

Cooking the books?

In an in-depth presentation to European executive directors in Brussels in March, Witoon Permpongsacharoen, of Thai NGO TERRA questioned the Bank’s economic assumptions and provided evidence to suggest that the Bank had:

  • manipulated Thailand’s power development plan to reveal a shortfall equivalent to the electricity that NT2 would generate;
  • exaggerated the growth of future electricity demand in Thailand;
  • suppressed analysis of cheaper energy conservation and renewable energy; and
  • ignored alternative options which are cheaper and cleaner than NT2.

Since then, final versions of the Bank’s two main economic analyses of the hydropower project released just a week before project approval, contained dramatic new assumptions regarding assumed costs of natural gas alternatives. This was raised in a letter by Thai economic and energy analysts sent to Bank executive directors on 29 March who questioned the dramatic diversion from the analysis in earlier versions of the studies. The unexplained changes appear to have been made at the last minute to provide a stronger case to support the project.

All EDs on the board voted in favour of the project except for the US ED who abstained on the basis of social and environmental risks and macroeconomic conditions in the country. Support was apparently contingent on a number of requirements, including:

  • a commitment that consultation concerns raised by civil society will be taken into account by management;
  • measures will be introduced to build the capacity of CSOs to monitor the project;
  • the Bank’s international advisory group will continue its role on the project for 25 years and be allocated two extra membesr; and
  • multilateral donors will commit to tightening arrangements if the project is deemed to have violated any part of the agreement.