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Setting the Standard
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In the remote jungles of central Lao People's Democratic Republic (Lao PDR), a landmark experiment is underway. A vast array of hard hats and heavy machinery can be seen working on a project that could change the lives of thousands of people and improve the economic landscape of one of Asia's poorest—yet most promising—countries.
If successful, the $1.25 billion Nam Theun 2 Hydroelectric Project (NT2) could set the standard for the construction of "good dams"—those that address environmental and social impacts, and steer revenue toward a country's neediest people.
"Nam Theun 2 is a test case for the way hydroelectric projects in Asia—and possibly the world—could be built in the future," said Rajat M. Nag, Director General of the Asian Development Bank (ADB)'s Southeast Asia Department and Special Advisor to the President on Regional Cooperation.
NT2—as the project is often called—is the result of studies beginning in the late 1970s of the hydroelectric power potential of the Nam Theun River, a tributary of the Mekong. The potential was there, but in the 1980s and 1990s, few major investors were willing to back large hydroelectric projects.
The World Commission on Dams renewed the debate on such mega projects by recommending that they be undertaken in conjunction with extensive public consultations on environmental and social impacts. Nam Theun 2 represents an attempt to live up to the high standards set by the commission.
"We realized that this project wouldn't be easy or risk free, but we came to the conclusion that the risks can be managed and the potential benefits to the country are vitally important," said Mr. Nag. "Given the issues that had to be faced, it is remarkable that this project took place at all."
Mr. Nag noted that it was vital to carry out the project despite the obstacles. "The Lao PDR has few other options for generating this kind of economic growth and poverty reduction," he said.
In December 2004, construction began on the power project with the support of a consortium of private investors, ADB, and World Bank. The innovative financing partnership brought together 27 different financial institutions—both public and private—from around the world.
"With a total project cost equivalent to more than 80% of the country's annual gross domestic product, this is the single largest foreign investment in the Lao PDR's history," said John R. Cooney, Director of Infrastructure for ADB's Southeast Asia Department. "But this is also the world's project, with partners from around the globe."
NT2 will export about 5,354 gigawatthours of electricity annually to Thailand and provide revenue to the Lao PDR through taxes, royalties, and dividends. This will generate about $1.9 billion in foreign exchange earnings for the government over the 25—year operating period, expected to begin in 2009. This will bring in about $80 million a year. After 25 years, the project will be turned over to the Lao PDR government at no charge, and with very low operational costs. It is expected to continue operating and generating revenue for the Lao PDR government for another 75 years after the turnover.
An economic impact study conducted in advance of the project estimated that the Lao PDR's gross domestic product will increase by 3.2% (without an increase in inflation) as a direct result of NT2. Once operational, the project's revenue is expected to make up 7–9% of the government's annual national budget.
"NT2 will be the Lao PDR's greatest economic asset," said Mr. Cooney. "It will be the largest foreign exchange earner in the country, as well as the largest single contributor to the economy."
The money generated by the project will be coursed through a carefully designed and monitored revenue management plan that will work toward reducing poverty and developing the country. To deal with the influx of foreign exchange, and with the assistance of its development partners, including ADB, the Lao PDR government is instituting extensive reforms of the country's public finance and expenditure management systems.
Ten percent of the project's total cost will go toward funding the environmental protection and social safeguards built into NT2. The company will give significant assistance for the duration of the concession period to the government for the conservation of the Nakai–Nam Theun National Protected Area, a pristine area in the Annamite mountain range upstream of the dam that contains some of the most natural areas in Southeast Asia.
The project also involves the resettlement of more than 6,000 people in 16 villages. To make sure that the lives of those resettled are improved, and that the programs that will do this reflect the peoples' wishes, more than 300 consultations and workshops have been conducted with the people in the project area. In addition, a development program is being prepared for about 200 villages in the downstream areas affected by the project.
"NT2 has been designed to set a new benchmark for environmental and social planning in the implementation of largescale hydroelectric projects," said Marla Huddleston, Senior Social Development and Resettlement Specialist. "The project requires that resettlement and other social issues be taken as seriously and pursued as urgently as the construction and engineering aspects."
Despite an unprecedented level of safeguards built into the project, and a high level of public scrutiny as to how they are implemented, the project remains a challenge for development professionals who hope that "good dams" of the future can become a powerful tool for fighting poverty while addressing critical energy needs.
"Let there be no illusions about how difficult it is going to be to complete this extraordinarily complex project and deliver its benefits to the people in the Lao PDR who need them most," said Mr. Nag. "The world is watching us and we need to deliver."
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