Report of NGO Visit to Proposed Nam Theun 2 Hydroelectric Project Lao PDR

December 2004

Foreningen for Internasjonale Vann- og Skogstudier (FIVAS) Proyecto Gato

Aims of Visit

1) to gain first-hand and up-to-date information about the proposed Nam Theun 2

Hydroelectric Project; 2) to make our presence felt and set out NGO concerns to the project developers and

financial institutions, as well as other relevant parties. Participants

Ms Elise Christensen, FIVAS (Norway)

Mr Jan Cappelle, Proyecto Gato (Belgium)

Mr Andrew Preston, FIVAS (Norway) Methodology

The visit comprised a week in Thailand and a week in Laos. We had both formal meetings and informal conversations with representatives of international financial institutions, the project developers, international and Thai NGOs, consultants and independent researchers. We visited the project area with the assistance of the Nam Theun 2 Power Company (NTPC) and had informal conversations with affected people living along the Xe Bang Fai river (downstream of the power station) and on the Nakai plateau (in the area of the future reservoir). We travelled in the project area together with officials of the World Bank and Asian Development Bank (ADB). We did not expect to uncover a lot of new ground, but were able to make some general observations and draw conclusions in the following areas:

1) Environmental and social impact; 2) Local consultations; 3) Developments in the project area; 4) Activities of the multilateral development banks (MDBs);

Based on the above and other information already available, we have made a number of recommendations for the international network of NGOs following up the Nam Theun 2 project. During our stay, we also took the opportunity to follow up developments on other existing and planned hydropower projects in Laos, including Theun Hinboun, Nam Theun 3 and Houay Ho.

Observations and Conclusions

Environmental and social impact

On the Nakai plateau

The developmental impact of resettlement on villagers living in the Pilot Village (“new Nong Boua”) and the Experimental Farm (effectively now a village) generally appears to be positive, at least at this initial stage. Villagers are benefiting from increased income, improved housing and sanitation, an improved diet, and more regular health services.

The Pilot Village and the Experimental Farm are both heavily subsidised by NTPC, with villagers receiving free water supply, electricity and agricultural inputs (including seeds, fertilisers, irrigation equipment, and marketing advice). We were concerned that, without a clear strategy for a gradual reduction in external support, alongside measures to generate local income, resettlement of this nature would create dependency. This in turn raises questions about the long-term sustainability of the resettlement. This seemed to us a more critical question than whether the initial phase of resettlement has provided an improved standard of living.

Establishing an effective market for local produce is clearly critical to the success of resettlement. According to NTPC, it is expected that the influx of 6,000 construction workers and camp followers will provide an initial market, which will also encourage market interaction between vegetable and fish suppliers on the plateau and rice producers in the downstream areas. It is hoped that this dynamic will continue once construction is completed.

If project financing is approved in 20051, developers expect to “close” (complete) the dam on the Nam Theun river by May 2008, in advance of the wet season (May to October). This will allow the reservoir to fill up by the end of 2009, the commercial operations deadline (COD). This gives the developers 3 years to resettle the remaining 14 villages on the Nakai plateau. This may be too ambitious a timescale.

According to NTPC, they are aware of the importance of the elephant population on the Nakai plateau, and are currently conducting a study on the size of the population; its movement; management conflict between humans and elephants; and the possibility of creating artificial mineral licks to replace those flooded by the reservoir. According to NTPC, this study will be completed in 6 months time, i.e., after the May 2005 deadline for appraisal.

The extensive amount of unexploded ordinance (UXO) in the project area clearly has consequences for all activities being undertaken in the area, including environmental studies.

Along the Xe Bang Fai river

Environmental and social impact studies are still under preparation, including a study on the impact on fisheries and a baseline study on livelihoods. Clearly, meaningful consultations on environmental and social impact in the Xe Bang Fai area cannot be conducted until these studies are completed.

1 The expiry date for the Power Purchase Agreement (PPA) with Thailand is May 2005, which is also

generally regarded as the deadline for MDB appraisal.

Furthermore, comprehensive mitigation plans, to be included in the Social Development Plan and Concession Agreement, cannot be drawn up until these studies are completed, analysed and discussed, not least with the affected people. This raises serious questions about the May 2005 timeline.

Anti-erosion measures: according to NTPC, these cannot be determined until after the project has been completed. Only then will it be evident how increased flow in the Xe Bang Fai will impact on riverbanks. In other words, the environmental and social impacts (loss of land, loss of fish populations by increased sedimentation, etc.) remain open questions.

High risk of flooding during the wet season: NTPC claims that there will be no flooding, only higher water levels than before, and no resettlement. This contradicts previous studies and fails to take into account people living close to the riverbank whose houses run a high risk of inundation.

Local consultations

On the Nakai plateau

Amongst the villagers we talked to, it was difficult to find anyone who thought that resettlement was a bad idea. This applied both to those already resettled as well as those due to be resettled. Amongst the villagers we met, expectations were high and people seemed generally keen to get on with the resettlement. Villagers who had been told about the project as early as 1992 had long stopped repairing and upgrading their houses in expectation of a move.

We did not get any sense that people were nervous about talking to us or were concerned about giving the “right” answers. Nor did people seem worried by the presence of an official from the women’s union. We were assisted in our conversations by independent interpreters.

We did get the clear sense, though, that the many promises of material benefits made by the project developers have created a strong incentive for villagers to agree to the project. Some villagers indicated that the project was initially presented to them as something that would be happening and that they would have to move, but also that they decided they wanted the project. Consent from villagers appears to have been “manufactured” rather than won. NTPC’s direct role in raising villagers’ expectations means that they also bear a heavy responsibility for fulfilling these expectations.

Villagers still appear to be unaware of the timing of proposed resettlement. Along the Xe Bang Fai river

Only one round of consultations has been held to date (May-August 2004, with the assistance of a Thai organisation). The next round of consultations is due to be held on completion of the fisheries study (probably not before the beginning of 2005).

Consultations have clearly begun very late in the day (12 years after villagers on the Nakai plateau were first informed about the project). As well as requiring completed environmental and social impact studies to inform the debate, these consultations need adequate time to allow residents to understand fully the impacts.

Villagers appear unaware of the consequences of the project on fisheries. NTPC confirmed the difficulties of discussing fisheries impacts with villagers who were unable to conceive that fish stocks would be reduced. This indicates the need for more time to explain these impacts to villagers. Completing adequate, informed consultations by May 2005 would appear to be wholly unrealistic.

Problems related to inundation appear to have been seriously underestimated in consultations, and people seem uninformed about the potential consequences, including resettlement. In the NTPC promotional video on the Xe Bang Fai consultations, one facilitator is heard saying, “If there is heavy rain, remember the flooding is then due to the rain and not a consequence of Nam Theun 2!”

As with villagers on the Nakai plateau, promises made by the project developers to residents along the Xe Bang Fai have created a strong incentive for villagers to look favourably on the project.

Developments in the project area

Construction work is well underway. The site for the power station has been cleared. Beside the power station site, work has also begun on the excavation access tunnel which will be used to excavate the pressure tunnel and pressure shaft between the reservoir and the power station.

According to NTPC and the head contractor, Electricité de France (EDF), construction is underway because the contract with the Electricity Generating Authority of Thailand (EGAT) stipulates a 54-month timeline from contract signing to completion. The head contractor realised that this was insufficient time, but EGAT insisted on this. EDF have therefore initiated “preliminary” construction work prior to financial closure to be able to meet the deadline.

The sight of a busy construction site clearly sends strong signals to potential financiers and other visitors that this project IS happening.

A number of information centres have appeared in villages due for resettlement. These are single room houses, built by NTPC, to a demonstrably higher standard than the villagers’ own accommodation.

Dynamite is being used to blast the tunnel.

Activities of the Multilateral Development Banks (MDBs)

Our conversations indicated that MDBs are fairly comfortable with the financial aspects of the project, but are less happy with the social and environmental aspects.

It appears that MDBs are concerned that critical project documents needed for project appraisal will not be ready in time for the May 2005 deadline. Consequently, they are trying to encourage the developers to “get a move on.”

Our various conversations indicated that there does appear to be a greater commitment to “due diligence” by MDBs than previously, though, as noted above, perhaps not always for the right reasons. As one NTPC official put it, “sometimes the World Bank and ADB are worse than you guys!”

Other

The management of Theun Hinboun Power Company (THPC) did not express any serious concern about potential negative effects of the Nam Theun 2 Nakai dam on their own electricity generating capacity. THPC pointed to the fact that Theun Hinboun is more reliant on tributaries downstream of the proposed Nakai dam, but did concede that the dry season would be several weeks longer. Currently THPC has plenty of water for full operation by mid-May; with Nam Theun 2, this would be delayed until the beginning of June. However, the fact that studies are being conducted by THPC consultants on NG1 (previously known as Nam Theun 3), a proposed wet season storage dam upstream of Theun Hinboun, indicates that there are real concerns about the effects of Nam Theun 2 nonetheless.

THPC have set up their own in-house Environmental Division to follow up its ten-year

Mitigation and Compensation Programme (that began in 2000). This replaced the earlier EMCO which comprised government and THPC, but lacked leadership. THPC felt that questions about management capacity in government necessitated the new division, where THPC has prime responsibility and takes the decisions, while working closely with government (which still has a majority stake in THPC). This contrasts with the “more participatory approach” adopted by NTPC with a resettlement committee, the resettlement office and resettlement management unit.

The developers were already aware of the OECD complaint submitted to the French National Contact Point (NCP) at the end of November 2004.

The threat of Chinese involvement was raised by one MDB official visiting the project site, but this view did not appear to be widely acknowledged.

Recommendations to the network

1. Questions should be asked about the sustainability of the current resettlement model, both in terms of the danger of creating dependency and strategies for creating a market mechanism.

2. Questions should be asked about the details of the resettlement process (the when

and how), if and when financial closure is achieved.

3. Questions should be asked about the planned pace of resettlement which may be too ambitious.

4. Given that environmental and social impact studies are still being conducted, and that

some of these will not be ready until after May 2005, we should make it clear that there is no possibility whatsoever of completing adequate consultations or mitigation plans before the May 2005 deadline. At least one study (on natural fisheries and implementation of fisheries management) is not due to begin until after financial closure.

5. Further, there is a demonstrable need for much more time to be allocated to

consultations along the Xe Bang Fai river to ensure that villagers have an informed understanding of the impacts. Consultations began less than a year ago (May 2004).

6. Questions should be raised about the current lack of specific anti-erosion measures, as well as the potential for and effects of increased inundation during the wet season as a result of higher water levels in the Xe Bang Fai (in particular for those people living close to or on the river bank).

7. Given NTPC’s responsibility for raising expectations amongst villagers, the company

should be held fully accountable for fulfilling its promises. Furthermore, we should continue to stress that the social costs, in the case of failure, lie fully with the company and not the affected people. All unforeseen impacts, over and above the sums already allocated to mitigate these ($2.5 million for the Xe Bang Fai area), should be the responsibility of the company.

8. We should demand conditionality in MDB financing. If approved, financing

agreements should stipulate measures to address non-fulfilment of mitigation measures (which should be explicit in the Social Development Plan and Concession Agreement), including measures to penalise the company.

9. We should demand a system of independent 3rd party monitoring of implementation of

the Social Development Plan, if this does not already exist. Financing for this should be stipulated in the Concession Agreement.

10. We should draw attention to the fact that project construction is well underway long

before financial closure. We should ask whether this is a deliberate tactic to build up an unstoppable momentum around the project, weaken the resolve of potential financiers to ask difficult questions, and encourage their involvement. We should draw attention to this as a poor example of process in future policy debates.

11. Questions might be asked about the purpose of NTPC’s recent investment in

information centres in villages on the Nakai plateau due for resettlement.

12. We should establish whether use of dynamite for blasting the access tunnel is in line with environmental/safety guidelines.

13. Questions should be asked about the capacity of the Lao government to implement

community and livelihood development according to the management structure envisaged by NTPC. This model contrasts with the more directive, hands-on approach to implementation (using an in-house Environment Division) introduced by the Theun Hinboun Power Company.

14. We should consider focusing more in the period up to May 2005 on the environmental

and social aspects (what MDBs appear to be less comfortable with).

15. We should seek to raise greater awareness of the issues amongst government officials and ECAs, as well as Executive Directors in the World Bank and ADB.

16. We should recognise that there are some positive elements in the Nam Theun 2

project development process (particularly when compared to Houay Ho and other projects without supervision in Laos), e.g.:

livelihood improvement rather than cash compensation, committing the developers to longer-term involvement in mitigation activities;

initial positive developmental impacts on villagers in the pilot village and experimental farm, though the longer-term scenario is difficult to determine;

clearance of unexploded ordinance (UXO) by the company; apparent greater commitment to “due diligence” by MDBs than previously.

17. While we continue to raise the numerous project flaws (environmental, social, financial, etc.), we need to ensure that MDBs and governments do not lose sight of the central and overriding criticism of the project as one based on a seriously flawed process. We need to counteract any perception of the Nam Theun 2 process as “achieving a new standard” or as in any way “a model process”.

18. Finally, Nam Theun 2 should continue to be seen in its regional context and in the

light of the political forces driving forward projects of this type. Large-scale hydropower projects are on the table in Burma (Myanmar), Cambodia and China; Nam Theun 2 has a crucial role to play in drawing attention to the broader controversies related to these developments.