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LAO PDR Nam Theun 2 (NT2) Hydroelectric Project. October 12, 2007. NT2. The NT2 Story.
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LAO PDRNam Theun 2 (NT2) Hydroelectric Project October 12, 2007
The NT2 Story • Describes how natural resource rent from a hydro project in Lao PDR was shared among competing stakeholders in a fair and open manner, through due diligence on rewards and risks, backed by dialogue, communication and partnerships among stakeholders. • The stakeholders included international financing institutions, commercial financiers, Thailand and Lao PDR Governments, project affected people and consumers of energy in Thailand and Lao PDR. • The Bank spent nearly $8 million on project preparation and due diligence over ten years, signifying the size of the effort, besides large amounts spent by Government and the sponsors. In addition, the Bank is spending US$1 million per year in supervision; offset by $5 million cost recovery from the sponsors.
What is special about Lao PDR? • Large, landlocked poor IDA country with only 5 million people ($300/capita). Hydropower is one of few engines of growth. • Left behind in a fast-growing neighborhood; feels threatened; yet looks to China and Vietnam as development role models. • Slow transition to market economy: human development, institutional capacity, private sector, MDG indicators all weak. • Political system communist with politburo structure. Human rights and governance issues attract international attention. • Long but mixed track record on economic reform; opening up cautiously to deeper engagement within region and beyond.
Project History at a Glance (1) • Mekong Committee formed (1957) • Preliminary list of potential hydro projects prepared-- with assistance from Japan (1959-1961) • Inventory of “promising projects” published by Mekong Secretariat (1970) • NT2 site was one of three identified for large projects in lower Mekong basin • NT2 Pre-feasibility study (1988, Bank-executed; UNDP-financed) • NT2 Feasibility study (1990, Bank executed; UNDP-financed )
Project History at a Glance (2) • Bank support the NT2 project with a Partial Risk Guarantee sought (1995); • Substantial activity in support of project preparation (1996-1997); • Project on back-burner due to East Asian Crisis (1998-2000); • Project regains momentum with signing of Tariff Memorandum of Understanding (2000); • Intensive preparation efforts by Bank within context of Decision Framework(2001-2005). New management structure in Bank; • The NT2 project presented to the Board on March 31, 2005. The US Chair abstained. Others voted for but three European Chairs expressed reservations; and • Project now in third year of implementation. Impoundment in June 2008.
What is the NT2 project about? • Enclave $1.2 Billion 1070 MW private sector hydropower project in Laos on Mekong river tributary: 90% power export to Thailand under PPA with EGAT. • Technically a sound project: • Strong developer consortium headed by EdF, with Ital Thai and EGCO. • Purchaser of power is Thai EGAT, which is well regarded internationally • Strong technical features; thorough project preparation; high standard of due diligence by lenders led by Bank • Project attracts all ten Bank safeguard policies • Project watershed has remarkable biodiversity. Balance between conservation and development is a contentious issue; • Involves resettlement of 6000 persons. Transition from subsistence to market oriented village economies a complex issue; • Serious impacts on livelihoods in downstream areas directly and indirectly affecting 30000-100,000 people: its management a challenge; and • Complex cumulative impacts of direct and induced developments from project.
Why is NT2 special • Size – “huge” for a small country in terms of: power production capacity, revenues, and private investment. • Efficiency – particularly favorable site technical characteristics enables high power output for size of infrastructure. • Equity – a fair share of benefits to Lao PDR citizens and locally affected people. • Innovation – concession Agreement contains provisions for various innovative bonding mechanisms. • Synergy – provides impetus for building capacity and undertaking institutional and policy reforms. • Opportunity – enables the international private sector, neighboring countries and financial markets to become more aware of Lao PDR and its potential investment opportunities.
What are the main benefits of Project? • Broader Benefits: • Changes country mindset and encourages country to look at global and regional opportunities; • focuses Government on reforms for poverty reduction and environmental and social management; • gives fillip to international private sector involvement and strengthens engagement with the external donor/financial community; • establishes framework for responsible natural resource exploitation; and • highlights importance of transparency, disclosure and participation. • Direct Benefits • Electricity generation, robust economic and financial rates of return, and fair sharing of natural resource rents among various stakeholders. • Government revenues from project can make big difference to social and human development efforts of Government.
What are the main risks of the NT2 project? • Country Risks • Development Framework off track [Revenues main direct benefit] • Governance and institutional capacity [Financial management] • Project Risks • Completion and cost overrun [Technical) ] • Environmental and Social impact [Safeguards] • Thai power market [Economic] • Revenues, risk sharing and revenue management [financial] • Implementation capacity [institutional] • Bank Reputational Risk • Visibility and track record: WCD/Extractive Industry Review • NGO mobilization: vociferous anti-dam lobby
What was the risk mitigation strategy? • A Decision Framework was circulated to the Board in June 2002 and made public in July 2002 . This explained how the Bank would decide whether or not to finance the project ,based on reward/risk assessment. • This decision framework proved to be a good risk management tool for the Bank. It facilitated open discussion of risks with all stakeholders and helped manage the expectations of the project partners and government. • The Decision framework underwent few modifications during 2002-05.This enhanced Bank credibility • The Decision framework had three tracks: improving the development framework in which the project was to operate; strengthening the project technical quality and safeguard measures; and building broad stakeholder support and participation in the project. • The first track helped mange country risks; the second project risks; and the third, Bank’s reputational risks. • Framework governed Bank preparation activities till Board in March 2005. During implementation, its content provides a framework for monitoring progress and partner obligations
The Decision Framework (1) • Country Development Framework • Macroeconomic framework • Poverty Strategy and PRSP • Public Financial Management and Revenue Management critical for NT2 • Health of Donor portfolio • Technical Quality of Project • Hydrology and dam design/safety • PPA and CA • Economic and financial analysis • Thai case for buying electricity • Monitoring and Evaluation
The Decision Framework (2) • Safeguards • Environmental Assessment and Management Plan (EAMP) • Social Development Plan (SDP) • Social and Environmental Management Framework and first operational plan (SEMFOP) • Stakeholder Support and Participation • International, regional, local and national consultations • Project affected persons and local area development • Support from M&E during implementation • IAG and POE • Donor oversight • Communication and Website
NT2 Implementation . • The NT2 project has three components: (i) construction of a 1070 MW hydropower facility; (ii) management of the NT2’s environmental and social impacts; and (iii) project monitoring and evaluation arrangements. • NT2 Social and Environmental Project (NTSEP), financed by an IDA grant of US$20 million, supports the latter two components. The entire project is supported by IDA and MIGA guarantees of US$42 million and up to US$200 million, respectively. Total project cost $1.2/1.4 billion.
Update on NT2 Implementation • Status of construction: Progress Report • Environmental and social issues: Implementation Progress • M&E, consultation, communication and participation • Revenue management progress
Financial Stakes in NT2 • WB (US$20 million IDA credit for GOL equity and US$42 million guarantee; and MIGA (US$86 million guarantee for debt and US$5 million guarantee for equity) • ADB (US$50 million debt, US$42 million guarantee, and US$20 million for GOL equity) • EIB (US$43 million for GOL equity) and NIB (US$34 million) • European ECAs (US$200 million) • French Development Agencies (US$60 million) • Nine International Dollar Banks (US$500 million) • Seven Thai Commercial Banks (US$500 million equivalent) • Thai Exim (US$30 million) • Private Equity (US$260 million), plus contingent equity (US$100 million) • Equity partners: EdF 35%; Ital-Thai Construction Company 15%; EGCO (Thai electricity generation) 25%; Gov’t of Lao PDR 25%
NT2 Revenue Management Arrangements • Revenues applied to pre-selected priority programs based on NSEDP (2006-2010) and its successors. • Budget classification system effectively identifies eligible expenditures and system for tracking/reporting in place. • Baseline allocation to eligible programs established and “additionality” of NT2 resources determined one year prior to resources flowing into the system. • Government starts publishing budget execution reports, financial statements, and summaries of internal audit reports, and strengthens external audit capacity. • Monitoring and evaluation tools in place.
What Worked Well ? • Significant leveraging of multilateral guarantee mechanisms is possible – even in challenging environments; key factors include: reputable players, existing regional understandings, and creditworthy off-taker. • Clearly defining roles and responsibilities of the Government and Sponsors (via Concession Agreement in case of NT2 ) should be done early on, with sufficient detail, and ideally with Bank participation. • Establishing a Decision Framework – withdetailed expectations but sufficient flexibility in defined areas – is a constructive way to reach agreement with Government on broad principles of Bank engagement • Innovative financing of Government’s equity increases overall returns to Government. • Communications should aim at transparency, balance, and clarity of messages. Information needs to be up-to-date, meaningful to the audience, and available through multiple modalities. • Building trust and credibility, through quality stakeholder engagement over time, contributes to commitments being honored and goals achieved.
What We Could Do Better? (1) • Need to better understand constraints of private sector partners. Candid exchanges among all partners, early on, should identify constraints and the scope for accommodation. Bank staff well versed in working with private sector should be part of the Team. • Consider more carefully the balance between the Bank’s financing role and the policy leverage the Bank exercises, as this leverage brings both advantages and costs to the borrower and sponsors. Need to overcome perception of the Bank as high-cost, high hassle partner of last resort. • Optimize number of financial partners by: (i) having a smaller number of participants each taking up a larger share of the financing; or (ii) emulating the “Consortium” approach used in banking deals.
What could we do Better? (2) • Improve process efficiency. Private sector needs, up-front, more predictable budget and cost estimates for financial and other costs they have to bear (and open-ended commitments pose serious difficulties). • A two-stage risk management strategy would help signal Bank interest earlier (providing more comfort to Government and Sponsors), through transparent, monitorable goal posts. This strategy would involve: (i) up-front assessment of risks/rewards and the practicality of mitigating risks to an acceptable level, leading to a decision to prepare the project; and (ii) development of a Decision Framework (with detailed yet flexible, measurable targets) to guide preparation.
What Could We do Better? (3) • Consistency of message. Large project teams pose special challenges of coordination regarding communications -- both within the team and across to partners. Ensure predictability of expectations and avoid perceptions of “shifting goalposts.” Ensure that information flows are timely and digestible. • Address capacity building early on, in a comprehensive and integral fashion, with measurable indicators. Time-disconnect between need to build capacity and the need to get the preparation job done right within the time constraints of a project schedule.
What do the NT2 critics still highlight? • Recently, the project received good reviews in the Newsweek and other journals. • But, critics continue to attack the project. Their main points: • Project too risky for Lao PDR, given capacity and human rights record. • Environmental and social damage unacceptable even after mitigation • Resettlement implementation is flawed. • Environmental impacts not adequately handled • Closed society makes consultation and participation questionable. • Public disclosure insufficient.
