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The Case of TNCs and hydropower Projects in Lao PDR 1

History records that state sovereignty was the accepted norm in the past that even wars were fought to defend it. Is sovereignty then a thing of the past? This paper is just a small contribution to the already growing volume of literature that exposes the growing power of private transnational corporations (TNCs) over states.

Examples used to illustrate the point here are drawn from the hydropower industry. Transnational Corporations that are engaged in the development of hydropower projects in southern states create strategic conditions whereby these sovereign states that host these hydropower projects are forced to make more compromises and concessions than they had anticipated thus developing a kind of dependency between TNCs and states. When these dependencies are hugely biased in favor of TNCs, then states would have compromised on their sovereignty. The example of Lao People°s Democratic Republic (PDR) in East Asia, in the Greater Mekong Sub - region, and its relationship with TNCs that build dams there are used here to elaborate on the various aspects of this situation.

Lao PDR - an overview

Lao PDR shares borders with China (505 km in the north), Burma (236 km in the north-west), Thailand (1,835 km in the west), Cambodia (435 km in the south) and Vietnam (2,069 km in the east) 2. As it is not served by direct sea-routes it is referred to as a ´landlocked° country. It covers an area of 236,800 square kilometers. Its mountainous terrain with plateaus of varying heights (ranging from 200-2800 meters) 3 and poor infrastructure make communication between Vientiane the capital and provinces or even between districts of the same province extremely difficult.

The country has a scarce population density with 21 people per square kilometer 4 . This is one of the lowest in Asia. In comparison, Vietnam has a density of 230 people per square kilometer while Thailand has 120.

A culturally rich and indigenous population of diverse origins lives scattered in very remote corners of the country. The official view however has been to minimize the country's diversity, thus promoting the composition of Lao peoples on the basis of the altitude in which they live. Hence the Lao government has created three clusters, Lao Loum (57%), Lao Theung (34%) and Lao Sung (9%), they live in the low, middle and high altitudes respectively. The propaganda machinery has tried to institutionalize this division to such an extent that it is represented in national costume on every thousand Kip bill.

Administratively Lao PDR is divided into 18 provinces including Vientiane municipality and Sasisombun special zone. In the entire country in 1999 there were 141 districts, 10,089 villages and 799,000 households in 1999 5 . The total population in 1999 was five million. 6

On matters of economic growth and development the government of Lao PDR considers itself to be a least developed country. The government is determined to exit from this status by the year 2020 . It also admits that despite its abundant natural resources and policies taken towards reform, the country remains largely poor. 7

History of Dams on Mekong

Proposals to construct dams on Mekong River or its tributaries are not new. As early as in the 1950s there were talks about constructing several mega dams on the Mekong. A mission led by Raymond Wheeler a retired general of the United States Army Corps of Engineers estimated that by damming the Mekong mainstream from Northern Laos to Cambodia's Great Lake with several dams, more than 20,000 megawatts of electricity could be generated. 8 In 1957, in accordance with the recommendations of Raymond Wheeler the 'Mekong Committee' was set up by United Nations with offices in Bangkok. The Committee was mandated to co-ordinate the development of the lower mainstream with benefits going to Cambodia, Laos, Thailand, and Vietnam - known as the four lower riparian countries. But decades of war in the region ensured that such proposals remained only on paper.

With peace and stability returning to the region new dam proposals are being drawn up. The establishment of a 'Mekong River Commission' in April 1995, by Cambodia, Laos PDR, Thailand, and Vietnam was the first step in this direction. Thailand has already constructed hydropower projects on tributaries of Mekong on its side. As the focus here is on Laos, the developments on that side of Mekong river are examined here.

Laos with its many rivers and mountains is a dam builder's paradise. The Foreign Investment Management Committee (FIMC), which approves all foreign direct investments in Laos, is a one-stop-shop assisting the investor and reporting to the Prime Minister°s Office. FIMC in Vientiane (Lao PDR) maintains a list of 'promising hydropower projects' (Table.1) for the benefit of all interested foreign investors wishing to invest in hydropower projects. The list contains a range of locations for the developer to site a dam. It is an open invitation extended to anyone who has the resources. The following list has been made available by the FIMC.

Source: Permanent office of the Foreign Investment Management Committee, 1995 * Excluding the existing Nam Ngum 1 project and including Nam Song Diversion ** Including Nam Leuk Project

The above list is indeed prolific, and according to Asian Development Bank reports currently there are only around eighteen projects at various stages of preparation and they are listed in table 5. The fact that nearly fifty percent of hydropower projects are processed by the private sector (nine hydropower projects) is an indication of the great interest that private developers have shown in Laos.

Power Sector Policy Statement of Lao PDR

The government Lao PDR is crystal clear on its power sector policy. It seeks to promote social and economic development and earn revenue through the generation and sale of hydropower.

"GOL policy gives priority to power sector development as a means of achieving macroeconomic, microeconomic and social aspirations. The two overall aims of power sector policy are to: (a) maintain and expand an affordable, reliable and sustainable electricity supply within the country to promote economic and social development; (b) promote power generation for export to provide revenues to meet GOL development objectives." 9

As already mentioned above the second objective of Power Sector Policy Statement is to promote power generation for export with the aim of providing revenue to meet government of Laos development objectives. It is hoping that the sale of power would create a large pool of resources at the disposal of the government to be utilized for development and poverty alleviation projects.

Lao government hopes to promote power generation for export by (a) developing power trade with Greater Mekong Sub-region (GMS) countries. This could be in the form of government-to-government trade or intergovernmental cooperation focusing on mutually beneficial power exchanges. The policy clearly targets Thailand and Vietnam. Laos is expecting to export to Thailand 1,600 MW by 2006 and 1,700 MW by 2008. It hopes to export to Vietnam 1,500 to 2,000 MW by 2010. Before 1997, planners claimed that electricity demand in Thailand was growing at the rate of 10-15 percent per year and could increase seven times by the year 2020. 10

Secondly the government places great emphasis on tapping the resources of Independent Power Producers (IPP). This is where the role of the private sector becomes important. The government hopes to put in place a selection and implementation procedures for IPP participation in power generation. The policy gives a great deal of importance to independent power producers who would invest in power generation for export. The policy clearly states that "(t)he capital and resource requirements of large export power projects require private sector participation½" 11

Thirdly, the focus of the policy is also directed at the transmission infrastructure development for regional power trade. The government has concluded that the existing transmission infrastructure is inadequate to meet the expected output from Independent Power Producers. Hence it proposes to build new facilities so that Laos could emerge as a major power distributor in the regional power trade. The capital to finance these projects must also come from the private sector.

It appears that the policy makers are mesmerized by the idea that with the sale of electricity they can raise resources to support macroeconomic, microeconomic and social aspirations. However, the 1997 and post 1997 events in Thailand and its decreasing demand for electricity would compel the policy makers to review their stand. But even before such processes are activated one must admit at enough damage has already been done to people and ecosystems because of ill-advised policy decisions of the past.

A review of power generation facilities before 1996 reveal that with the exception of Nam Ngum dam (near Vientiane) most other hydropower facilities were indeed small, (see table 2). All these projects were publicly managed or managed with assistance from Asian Development Bank. If the objectives laid down in the 'Power Sector Policy Statement' are to be fulfilled then new facilities ought to be developed to tap into the power potential.

Source: Adapted from IMF Staff Country Report No. 3, January 2000 p.62 a Licensed Commitments above $ 20 million

In very general terms one is justified to say that foreign private investors have shown keen interest to invest in the hydropower sector in Laos. Though most of the commitments were made during early and middle 1990s, only two projects have been completed thus far. The Theun-Hinboun and Huay Ho hydropower projects. Our discussions in this paper will be limited to these two projects as these are the only ones that are operational. However there is an ever increasing amount of literature on the other hydropower projects. Nam Theun 2 in particular is the center of discussion since the World Bank has also got involved in it.

Major constraints preventing the speedy completion of further hydropower projects include difficulties in raising the required funds, the current uncertainty of energy demand by Thailand for Lao generated hydropower and increasing concerns on the social and environmental impacts of hydropower projects in Laos.

Theun-Hinboun Dam is one of the earliest instances of private investment in hydropower industry in Laos. This project has a unique story to tell. ADB which had in the past extended loans to Lao PDR, now tried to play multiple roles in getting the project implemented. To begin with it approved a loan to the tune of $60 million to Lao PDR for the project. The government passed on the loan to Electricite de Laos (EdL) a state utility to purchase a 60% stake in the Theun-Hinboun Power Company (THPC).

ADB successfully devised a new method to attract private capital to a hydropower venture in Laos which in normal circumstances would have no takers. It is known as ´project finance° or ´limited recourse financing.° The modality is simple. The sponsors of the project - in this case Nordic Hydropower (20%), MDX Power (now called GMS Power) (20%) and Electricite de Laos (EdL) (60%) - set up a new company to own and operate the project. In this case it was the Theun - Hinboun Power Company. The Lao government grants this company a concession to develop and operate the hydropower project. Thus the newly formed company builds the dam, manages and operates it.

Since the Laos government has given it a concession period for thirty years, the project is transferred to the government after the completion of thirty years. This is also known as ´Build, Own, Operate and Transfer (BOOT) method. THPC then is the borrower. The lender can demand debt service from only THPC and not the sponsors. However, ´a project completion guarantee° assured the lenders that if the project was not implemented or the company went bankrupt one month before successful operation, the lenders would have recourse to the sponsors.

ADB also successfully accomplished another feat that was a key to attracting private investors to the project. By successfully bonding together a public-private partnership, the bank was able to shift on to the public sector certain costs and risks that the private sector would be unwilling to shoulder. Ryder calls this "socialized risk". So in this case the public institutions such as the Lao government, Nordic Export Credit Agencies and Electricity Generating Authority of Thailand that has agreed to buy the electricity took on some of the risk associated with the project, because they had their own reasons to do so.

The management of finance has been even more interesting. There was no hesitation to experiment with new financial arrangements unheard of in Laos prior to this. The national currency, the Kip was bypassed. An offshore account was opened in Indosuez Bank which was used to manage all financial arrangements. All incomes are deposited into this account and the bank makes out payments to all beneficiaries of the project. The project is not affected by any kind of fluctuations in the national currency.

The 210 MW Theun-Hinboun hydropower project came on line in 1998. It is known as a "trans-basin diversion project." Water from one basin is diverted to another through a tunnel taking advantage of the differences in elevation of the basins. The project consists of a 25-metre high dam across the Theun river, a 24 kilometer reservoir, a 210-megawatt power station, and four-kilometer canal that releases water into the Hai river, a tributary of Hinboun river which flows into Mekong.

The second project to be completed in Laos is the Houay Ho hydropower project. It is a 150 MW trans-basin diversion project located in Champassak and Attapeu Provinces of Southern Laos with a price tag of US$ 210 million . Houay Ho is a joint venture between Korean company Daewoo (60%), Thai company Loxley (20%) and the Lao government (20%), and was financed entirely from Daewoo°s resources. The construction was begun in 1995 and was completed at the end of 1998.

Some of the major concerns of this project raised by researchers of International Rivers Network are in the areas of financial viability, resettlement concerns environmental degradation. 13

The financial viability of the project is in doubt due to cost overruns, and the unanticipated economic situation in Thailand. It appears that the concession agreement is weighted heavily in favor of the company because the Lao government lacked adequate expertise to bargain on its behalf when agreements were negotiated. Extremely poor resettlement and compensation practices have created more hardships for the people. Finally extensive logging and destruction of natural resources have taken place with little benefit to Lao citizens.

Damming Rivers or Laos?

From the perspective of the foreign investors, investments in Laos may seem worthwhile even though they may be extremely risky. But from the perspective of Laos government one might question the logic of encouraging a disproportionate number of investments in one particular sector while paying less attention to other sectors. Considering the overall development strategy one might ask whether this is the most suitable one for development of Laos PDR?

The crucial question then is what indicators are there that the TNCs are creating client states? At this stage it is only possible to point out to symptoms that have the potential for creating greater dependency among states on TNCs in the long-term.

'Expensive Swimming Pool' 14

It has already been pointed out that Laos government welcomes foreign investors into the power sector with the expectation that their presence would boost the economy and bring in much needed revenue which the government can utilize for the overall development of the country. The foreign private investors take their investments to Laos to do business and make a profit. In the relationship that has already been established, one does come across evidence to support the view that TNCs are comfortable with a state that does not ´mess around° with their investments. In other words expect to have a compliant state to do business with.

David Michaels, senior vice-president of MDX Power, a Thai company which is 20% owner of the Theun-Hinboun hydropower project, through his remarks makes clear the position of the company that he represents. "They have a strong incentive not to mess around. While we can°t remove the asset, the asset is worthless without the revenue from EGAT." He also goes on to say that if the Laos government does mess around the consequences would be that "it would be stuck with a very expensive swimming pool." 15 Unfortunately for Laos this would be the regrettable outcome because, even before the construction of the Theun-Hinboun, they were already producing surplus power. Without an agreement from EGAT which was negotiated by THPC - company created by the three partners of the project, Laos would have to be satisfied with a ´swimming pool°. What is significant about such comments is that they are real threats, but very diplomatically delivered.

"Rent-a-River"

Build, own, operate and transfer (BOOT) is the welcome greeting conveyed to foreign investors arriving in Laos. The concession may be in the range of thirty-five to forty or even fifty years. Investors build a dam on a river and operate the power generation facility for the agreed number of years, takes the profit, pays the government a royalty, repays debts if any and at the lapse of the agreement the facility is transferred to the government. Usher and Raider has called this the ´rent-a-river approach° when discussing it in the context of hydropower projects. But this red carpet welcome extended to foreign investors in the Hydropower sector has very serious consequences. As pointed out by Usher and Raider in their article 'Vattenfall Abroad: Damming the Theun River,' they argue that the act of renting out one river after another is a serious threat to Lao sovereignty.

"As Korean, Australian, Italian, Japanese and French companies stake their claims on one river after another in preparation for building even bigger dams than Theun Hinboun, questions must be raised about this ´rent-a-river° approach. Because of the lack of laws and institutions, and even absence of Lao personnel who read enough English to wade through voluminous project documents, the country risks loosing control over of its most valuable resources if even a fraction of these projects are realized. The mad dash for hydro could represent as serious a threat to Lao sovereignty in the long term as the colonial ambitions for foreign powers did in the past." 16

International Rivers Network researchers who have carried out extensive researches in Laos and others are concerned that the Laos government has whole heartedly embraced the Build, Own, Operate, Transfer (BOOT) strategy which is a relatively new approach to infrastructure development. IRN researchers argue that the benefits of this model are more based on beliefs than on empirical evidence. BOOT has no track record, less than ten years ago the concept was little more than a curiosity. 17

Politics of Withdrawal

In Laos the multilateral institutions do exercise their influence by exercising their advisory roles. The IMF Staff Country Report No. 3 released in January 2000 is noteworthy. It is generally accepted by investors that the 'Law on the Promotion and Management of Foreign Investment in the Lao People°s Democratic Republic' is one of the most liberal in the world and this view is endorsed by the International Monetary Fund documents that state that the 1996 Foreign Investment Law is itself and open and liberal one, generally friendly to foreign investors. 18 But IMF appears to be unhappy these days. The report argues that "(m)oreover, the more cautious attitude of the authorities towards further economic reform over the past few years, coupled with the macroeconomic instability the country has experienced, has made the business environment for foreign investors less welcoming than in earlier years" (IMF Staff Country Report, 2000). They are arguing for greater liberalization.

In the report IMF does raise a concern regarding those foreign investors that have ceased operation in Laos. According to the report 49 projects with wide sectoral coverage, worth US$0.9 billion have stopped. Though the report does not specify any reasons it makes a reference to the difficult ´economic situation°. 19 What the IMF actually is trying to tell the Lao government is that investors are leaving and they must prevent it by making the economic situation favorable.

But what is the real picture? The following table gives in detail the number of projects and their respective capital outlay in millions of dollars that have ceased operation. Table 4 The number of Projects that Ceased Operations

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1 This paper is adapted from DAGA°s research on Foreign Direct Investments in Laos-Human, Social and Economic Impact, to be presented at the Asia Pacific Research Network workshop on'´Power and Influence of TNCs: TNCs and the State' held in Sydney, Asustralia from 27-29 September 2001. To obtain a copy of the full report please contact DAGA at: bengseng@daga.org.hk

2 In Basic Statistics of the Lao PDR, 2000.

3 Country presentation by the Government of Lao People°s Democratic Republic at the Third United Nations Conference on the Least Developed Countries, 2001.

4 Ibid.

5 in Basic Statistics of Lao PDR, 2000.

6 Ibid.

7 Country presentation by the Government of Lao People's Democratic Republic at the Third United Nations Conference on the Least Developed Countries, 2001.

8 Ibid.

9 In Dams as Aid: Political Anatomy of Nordic Development Thinking, edited by Ann Danaiya Usher

10 Power Sector Policy Statement, Electricity Department, Ministry of Industry and Handicraft, Vientiane, March 15, 2001. quoted in Vattenfal Abraod: Damming the Theun River, Ann Danaiya Usher and Grainne Ryder.

11 Power Sector Policy Statement, Electricity Department, Ministry of Industry and Handicraft, Vientiane, March 15, 2001 p. 9 . ADB Country Assistance Plan, Lao Peoples Democratic Republic (2001-2003), December 2000.

12 Ibid.

13 I have borrowed these terms from Grainne Ryder°s article The Theun-Hinboun Public-Private Partnership: A Critique of the Asian Development Bank's Model of Hydropower Venture in Lao PDR, 1999.

14 Norton Rose advertisement in Asian Infrastructure profiles, 1997.

15 These points are taken from Power Struggle: The Impacts of hydro-development in Laos, International Rivers Network, 1999.

16 This phrase was used in Asian Infrastructure profiles, 1997 and is taken from there.

17 Ibid.

18 In Dams as Aid: Political Anatomy of Nordic Development Thinking, edited by Ann Danaiya Usher.

19 For a concise treatment of BOOT, which the Internatinal Rivers Network Researchers refer to as BOT see Power Struggle: the Impacts of Hydro-development in Laos, 1999.

20 Lao People°s Democratic Republic: Recent Economic Development, IMF Staff Country Report No. 3, January 2000.

21 Ibid

22 In A Guide to Doing Business in Lao, 1998.

23 In order to write this section I have relied extensively on the report Power Struggle: The Impacts of Hydro-Development in Laos.

After exam make that big buck after all. But the point is that the blame for withdrawal is placed squarely on the shoulders of Laos.

Raiding Natural Resources

Forests cover 55% of Laos land area. 20 The forests as in other parts of the world constitute an important source of national and provincial income as well as subsistence materials for villagers. Researchers have found that logging concessions constitutes an important component in siting a dam. The dam construction Industry and logging industry appears to have colluded in getting an easy access to logging operations which otherwise would be difficult to obtain. Logging operations are normally carried out in the area that would be submerged at the completion of the dam. If it timely logging is not carried out there would be some hazards associated with it as experienced in Nam Ngum dam where certain areas where not logged and the water had a foul smell for a long time causing much discomfort.

But the issue here is not about 'normal logging activity associated with dam construction. Researchers from International Rivers Network who studied logging operations at Nam Theun-Hinboun and Houay Ho, and at other locations such as Nam Leuk, Nam Theun 2, Xe Pian-Xe Namnoi and Xe Kaman 1 hydropower projects at various stages of implementation have found discrepancies with logging operations. 21

It has been pointed out conclusively that "(H)ydropower projects are being used as a pretext for logging of reservoir areas, long before a decision to build a dam has actually been made. In the case of Nam Theun 2 the military-run logging company, the BPKP, has logged more than one million cubic meters of timber on the Nakai plateau to clear the reservoir area even though the dam may never be built½ at Xe Kaman 1, all indications are that the dam may never be built, and that the project is in fact an elaborate logging scheme in disguise.

Opening up of roads and bridges into previously remote areas also facilitates increased hunting and logging. This is of particular concern as many hydropower schemes are often situated in protected areas of high conservation value.

Conclusion

As a concluding remark to this paper it may be pointed out that if Lao PDR, stubbornly holds on to the position that hydropower is the answer to all its development problems, it may then be on the road to facing a difficult set of thorny scenarios that were unanticipated.

If remarks and attitudes of TNC representatives are an indication of the desire to have a state that does not "mess around", it is time that those responsible took corrective measures.

References

A Guide to doing business in Laos, Shinawatra International Public Company Limited, Bankok, 1998.

Basic Statistics of the Lao PDR, State Planning Committee National Statistical Centre, Vientiane, 2000.

Country Presentation for Lao People°s Democratic Republic, Third United Nations Conference on the Least Developed Countries, United Nations, 2001.

Lao People°s Democratic Republic: Recent Economic Developments, IMF Staff Country Report No. 3, International Monetary Fund, Washington D.C. 2000.

Lao People°s Democratic Republic (2001-2003), ADB Country Assistance Plan, Vientiane, 2000.

Norton Rose advertisement in Asian Infrastructure Profiles, Asia Law & Practise Publishing Ltd. Hong Kong, 1997.

Power Sector Policy Statement, Electricity Department, Ministry of Industry and Handicraft, Vienatianne, 2001.

Power Struggle: The Impacts of Hydro-Power Development in Laos, International Rivers Network, 1999.

Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Lao People°s Democratic Republic for the Nam Leuk Hydropower Project, Asian Development Bank, Manila, 1996.

Ryder, Grainne, The Theun-Hinboun Public-Private Partnership: A Critique of the Asian Development Bank°s Model Hydropower Venture in Lao PDR, Probe International, 1999.

Theun-Hinboun Hydro Project -Water Everywhere, Asian Infrastructure Profiles, Asia Law & Practise Publishing Ltd. Hong Kong, 1997.

Usher, Ann Danaiya, Dams As Aid: A Political anatomy of Nordic development thinking, Routledge, Newyork, 1997.

Table 4 The number of Projects that Ceased Operations