Lao People’s Democratic Republic: Greater Mekong Subregion: Nam Theun 2 Hydroelectric Project

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Lessons

Attainment of the environmental and social objectives of power sector projects requires close monitoring and supervision.

Thorough preparation enables the incorporation of social and environmental objectives in the design and implementation of power sector objectives. Ensuring their attainment however requires close monitoring and supervision. For example, several innovations drawn from intensive studies and prior relevant experiences by the Asian Development Bank (ADB) were integrated into this project but not all them were undertaken as planned. Transitioning from preparation to implementation was challenging and required intensive monitoring to ensure that the engineering contractor met all the requirements of the environmental assessment and management plan (EAMP). Implementation of the social development plan fell short of targets, particularly in developing sustainable forest livelihoods and providing viable irrigation on the Nakai Plateau. While the ability to adapt as conditions developed was helpful, the project was ultimately effective because of intensive monitoring and adequate implementation support from ADB and other key stakeholders.

Project Cycle Stage:

Preparation

Implementation

Multilevel and multipronged monitoring and reporting support adaptive management but require clear and consistent reporting frameworks.

Several entities, including a panel of experts (POE), an independent monitoring agent, and a lenders’ technical advisor (LTA) carried out oversight functions for this project. In addition, a range of biophysical and social monitoring programs and stakeholder participation in adaptive management committees complemented the oversight for this project, which marked the return of international financiers to hydropower following the World Commission on Dams (WCD) the 2000 report. Clearer reporting frameworks and consistency in the report structure as well as a unified schedule would have further enhanced the effectiveness of the project’s own oversight groups. Monitoring and reporting on the implementation of the Concession Agreement and internationally recognized frameworks such as the International Finance Corporation performance standards, the WCD, or the hydropower sustainability assessment protocol should also have been made more consistent. For future similar projects, ADB should be more proactive in ensuring thorough environmental and social monitoring and reporting procedures. It should also promote the institutionalization of processes and mechanisms that would enable the synthesis, sharing, and use of operational knowledge to improve project performance.

Project Cycle Stage:

Implementation

Addressing the biodiversity impacts of hydroelectric/hydropower plant (HPP) projects requires technical expertise and the services of specialized institutions.

The biodiversity value of the Nakai Nam Theun watershed, of which the Nakai Nam Theun national protected area (NNT-NPA) is a part, was recognized from an early stage, and biodiversity was surveyed and assessed thoroughly before and after project development. While the resource accounting conducted during EAMP preparation estimated that a total of 130,589 hectares (ha) of natural habitats would be lost or fragmented and modified by the project, a far greater area of 4,200 square kilometers or 420,000 ha was designated to be covered by the project’s watershed protection, biodiversity offset program that was also meant to prevent the sedimentation of the project reservoir. The areas of most habitat types to be protected were also expected to significantly exceed those that would be degraded. Implementation of the protection measures by the Watershed Management and Protection Authority (WMPA), a government institution created in 2005, was initially good; however, issues started to arise in 2009. Specifically, the POE noted that illegal cutting of rosewood continued despite WMPA patrols; poaching was a critical, probably increasing, biodiversity threat; the WMPA staff did not recognize that biodiversity could be threatened even if forest cover is maintained; and the slash and burn activities of newly resettled villagers were uncontrolled. In 2013, the LTA also reported that NTPC’s investment in the protection of the NNT-NPA continued to be eroded by illegal poaching and timber extraction by Lao and foreign nationals. In 2016, the POE recognized that the WMPA had failed and called for a new strategy for watershed and biodiversity protection, with measurable indicators of achievement. Overall, the experience has highlighted that it would be a significant risk to rely on an entirely new organization to implement a biodiversity offset program that requires a highly specialized technical expertise. Involving global nongovernmental conservation organizations and mobilizing international technical experts on a long-term basis would have mitigated this risk and improved the government’s local and national capacity in biodiversity conservation and environmental regulation. The Nam Theun 2 Power Company Limited (NTPC), the project developer, should also have been made accountable for conserving the biodiversity values of the NNT-NPA and adjacent corridors, rather than only providing finance. For biodiversity conservation to succeed in future projects, plans must clearly distinguish between (i) avoiding, minimizing, and mitigating biodiversity impacts, (ii) compensating through offsets for unavoidable impacts, and (iii) supporting wider conservation efforts and government commitment to conserve biodiversity.

Project Cycle Stage:

Preparation

Implementation

Occupational health and safety risks can be minimized even in complex construction situations.

Inadequate attention was given to occupational health and safety by the NTPC and the head construction contractor during the early stages of construction. The LTA’s reports highlighted this weakness and called for response measures, which were subsequently put in place. Overall, the experience has shown that accidents and safety risks can be minimized through effective occupational health and safety systems even in projects with complex construction components.

A well-defined results framework with relevant indicators is particularly important to monitor the environmental and social impacts of large hydroelectric/HPP projects.

Many of the intended results from this project were inappropriately or vaguely defined in the design and monitoring framework (DMF), preventing an adequate and reliable assessment of the project’s impacts, especially on communities and the environment. For example, implementation of the EAMP and the resettlement and ethnic minority development plans were defined as outputs, when they should have been activities. Corresponding indicators were weak, comprising qualitative, descriptive statements that did not allow for an objective assessment of the progress made. At the outcome level, “protection of the NNT-NPA” would have been better defined and gauged through indicators on relevant practices such as reduced logging and wildlife poaching rather than “satisfactory SEMFOP implementation” and “absence of legitimate claims by project-affected people,” as stated in the DMF. As they are meant to as well reflect and measure the results of environmental and social safeguards taken, the DMFs of future hydroelectric/HPPs, particularly large ones, should thoughtfully include outcomes and indicators that speak to changes between the pre- and post-project situations.

Project Cycle Stage:

Preparation

Background

As it marked the return of international financers to hydropower following the World Commission on Dams report in 2000, the Nam Theun 2 Hydroelectric Project received unprecedented global scrutiny. In response, environmental and social impacts and revenue potentials were equally considered during project preparation, which comprised a lengthy, iterative, and consultative process, beginning with the first feasibility study in 1991 and continuing in the mid-1990s when international financers became involved. The project was an integral part of the medium- and long-term framework for economic growth and poverty reduction of the government of Lao People’s Democratic Republic (Lao PDR). By developing hydroelectric resources, it aimed to export electricity, earn foreign exchange to support the government’s poverty reduction and conservation initiatives, and promote regional and national economic development.

At government’s request, the Asian Development Bank (ADB) approved in April 2005 a $20 million sovereign loan to finance part of the government’s $87 million equity contribution to the project, estimated to have a base cost of $1,250 million at appraisal. In addition, it also provided the hydroelectric plant developer, the Nam Theun 2 Power Company Limited (NTPC), a direct loan without government guarantee of up to $50 million and a political risk guarantee of up to $50 million. The World Bank; the French Development Agency; the European Investment Bank (EIB); export credit agencies from France, Norway, Sweden, and Thailand; and a group of commercial banks also financed the project.

At completion, the project achieved five of its six planned outputs. A 1,070-megawatt (MW) transbasin hydroelectric plant, which diverts water from the Nam Theun River to the Xe Bang Fai River, was constructed. Four turbines generate about 995 MW for export to Thailand, and two turbines produce 75 MW for domestic use. Transmission infrastructure included a single circuit 115 kilovolt (kV), 70-kilometer (km) line to the domestic grid and a double circuit 500 kV, 138-km line to a new substation in Roi Et, Thailand. Access roads, bridges, and residences were also built to enable the construction and operation and maintenance of the plant, which began commercial operations in April 2010 under a 25-year Concession Agreement between the NTPC and the government.

Drawing on a comprehensive range of studies, including 19 project alternatives, environmental risk mitigation measures were developed and incorporated into the Concession Agreement and ADB financing agreements. The measures were implemented largely as planned, although there were challenges with the NTPC head construction contractor and subcontractor performance on occupational health and safety management, site erosion, biomass clearance in the reservoir area, and solid waste management. Non-compliances only dissipated with the completion of construction. For the operational stage, the NTPC adopted an environment management system, which was certified to the International Organization for Standardization (ISO-14001) and is annually reviewed.

A social development plan (SDP) for resettling all households affected by land acquisition and managing all social impacts, including indirect ones downstream of the project and impacts on ethnic minorities, was likewise formulated and subsequently implemented. A total of 1,310 households were relocated; by 2011, their incomes improved beyond the national rural poverty line. The re-settlers also benefited from the new dwellings, infrastructure, education, and health services provided under the project, and until the lapse of the Concession Agreement, will receive support from the NTPC-financed $750,000 a year Nam Theun 2 Development Fund.

To offset the biodiversity loss it was causing, the project intended to protect the Nakai Nam Theun national protected area (NNT-NPA) and its corridors from illegal logging. Ineffective implementation of the protection measures that were identified was however evident in the continued wildlife poaching and illegal timber extraction throughout project duration. Timber extraction, which was brought under control only by the Prime Minister’s national decree in 2016, continues to be addressed by the ongoing NTPC environmental management system.

Successful delivery of most of the planned outputs enabled the project to achieve its intended outcomes. From 2011 to 2018, the project exceeded its target to export 5,354 GWh of electricity to Thailand and provide 200 GWh of electricity to domestic consumers. The innovations by the project ─ including social development and environmental protection as key objectives, high quality and detailed environmental and social planning that addressed an extensive range of issues, and the allocation of project revenues to help eradicate poverty and conserve the environment ─ set benchmarks for the hydropower sector, locally and globally. Completion of the project spurred the implementation of several hydropower development initiatives led by independent power producers in the country. As of end-2017, government poverty reduction allocations reached $195.2 million, surpassing its $180.4 million net revenues from the hydroelectric plant since operation.

The Ministry of Industry and Handicrafts was the initial project executing agency. Following the power sector restructuring in 2006, the Ministry of Energy and Mines assumed coordination and project administration responsibilities. The NTCP, responsible for civil works, was also jointly responsible with the government for implementing the project’s environmental and social safeguard.

Project Information

Project Name:

Greater Mekong Subregion: Nam Theun 2 Hydroelectric Project

Report Date:

July, 2019

Main Sector:

Energy

Country:

Lao, People's Democratic Republic

Project Number:

37734-013

Report Type: