Date of original Release: 10 November 2005
The Project
The "Nam Theun 2" (NT2) project is a major hydroelectric power scheme in Laos. The EIB signed a loan agreement in 2005 with the Laos Government for EUR 45 million to help finance the project. The EIB co-financed the project with the World Bank, the Asian Development Bank, the Nordic Investment Bank, bilateral agencies (AFD and Proparco) and syndicates of international and Thai banks. The Bank's loan closed the gap in the Lao Government's financing of its equity participation in the project company.
The project consists of a 48 m high, 325 m long dam creating a 450 km2 artificial water reservoir with an average depth of 7 m (with an active water storage volume of 3,530 Mm3, and with a related catchment area of about 4,000 km2) and a hydroelectric power plant with an installed generating capacity of 1,070 MWe. The plant is expected to generate approximately 5600 GWh of electricity per year under average hydrological conditions, which is enough to supply around 3 million households. The reservoir is located in the mountainous centre of Laos, on the Nakai Plateau through which the Nam Theun River flows. The area flooded by the lake includes some fertile zones that were, prior to implementation of the project, cultivated by the local population; however, for the most part the area was poor quality agricultural land and degraded forest, with some permanent and some seasonal wetlands and a few areas of untouched rainforest.
The project was built and is now operated by the "Nam Theun 2 Power Company" (NTPC), a special-purpose company which is owned 35% by Electricité de France (EDF), 25% by the Electricity Generating Public Co Ltd (EGCO) of Thailand, 25% by the Government of the Lao People's Democratic Republic (Laos) and 15% by the Italian-Thai Development Public Co Ltd.
The hydropower scheme makes a significant contribution to the development of Laos by generating hard currency revenues from the export of electricity to Thailand and though the provision of power to the Lao grid. Revenues are assured through two 25-year fixed-price power purchase agreements signed with, respectively, EGAT, the largest power supply company in Thailand, and EDL, the state-owned power company of Laos. Since being commissioned in April 2010, the project has generated over USD 145m of revenues for the Government of Laos from dividends and water usage charges.
The NT2 project has also made a material contribution to the conservation of the Nakai - Nam Theun National Protected Area, the largest protected area in the Lao PDR and one of the remaining regions of outstanding biodiversity in South East Asia. The environmental protection challenges are significant, with regional demand for wildlife products and timber resources fuelling poaching and illegal logging. The project has provided financing for the establishment of the Watershed Management and Protection Authority (WMPA), contributing US$1.3 million per year towards the operations of the WMPA throughout the concession period.
The interest for Laos
Laos is one of Asia's poorest and most underdeveloped countries, with limited strategic options to develop and generate the revenues needed to reduce poverty. For Laos, the NT2 project currently represents an opportunity to contribute towards its own sustainable social and economic development in a significant way. The use of revenues received by Laos from the project are managed under a legal framework designed to ensure that they are employed for eligible projects elsewhere in the country, primarily aimed at poverty alleviation through health and educational programmes as well as environmental management programmes. In the five years of commercial operation since 2010, NT2 has generated higher levels of revenue than originally anticipated and over the 25-year concession period it is expected to generate US$2 billion for the government to invest in priority development needs.
Laos and Thailand have a long history of bilateral electricity trade. Thailand began importing hydropower from Laos in 1971 and for many years Laos has been relying on medium voltage electricity from Thailand to supply its border provinces. Based on a common understanding since 1993, both governments have developed hydro power plants in Laos for the supply of electricity to Thailand, including the Theun-Hinboun and the Houay Ho hydro plants, which also use the Nam Theun river.
EIB's decision for the financing of the project
EIB lending in Laos is based on the Asia and Latin America (ALA) lending mandate, which to date has provided over EUR 5.1 billion of funding to support a broad range of investments in the region, including projects contributing to climate change mitigation, reconstruction following natural disasters (tsunami and earthquake), economic infrastructure and the EU’s presence in Asia through FDI or technology transfer from Europe.
The Bank decided to provide support to Nam Theun 2 because of the project's high development impact and its enhancement of regional integration in the power sector. The project is helping to reduce Laos' dependence on external development assistance and also represents a common interest for the European Union and Laos by virtue of the key role played by EDF, a prominent European power company, in the design, construction and operation of the project. Finally, the project supports the EU's and the Bank's environmental policy by tackling climate change and promoting the sustainable use of renewable natural resources. The project substitutes for alternative thermal generation and the associated emissions of greenhouse gases and other air pollutants, notably in Thailand.
Overall the project is expected to generate a net environmental benefit for the region, to improve living standards and to increase economic development opportunities for the local population.
Environmental and social issues
The NT 2 project underwent a thorough due diligence process conducted by the project financiers; it is subject to extensive and stringent project and structural conditionality to secure the implementation of important mitigating and compensating measures. The Environmental Impact Assessment (EIA) for the project was carried out in accordance with the Lao Environment Protection Law. A review concluded that the process satisfied the requirements of the country's Environment Protection and Resettlement Laws. The required notifications were issued to the countries of the Lower Mekong Basin through the Mekong River Commission Secretariat.
The main environmental impacts of the artificial water reservoir to date have been the loss of approximately 28 600 ha of primary forest and 1 000 ha of productive agricultural land. There has been some disruption to wildlife habitats (including for several threatened species) and there is a potential loss of biodiversity, including several threatened species. The transfer of water flow from the Nam Theun River to the Xe Bang Fai River has caused some changes in the aquatic ecosystem and a reduction in fish stocks, loss of riverbank agriculture, river bank erosion and flooding downstream; as well as some deterioration in water quality. The EIA confirmed, however, that the project is not expected to have any significant negative impact on protected areas, and cumulative impact studies indicate that there will not be any significant impact on the Mekong basin. In contrast, positive impacts include the renewable nature of hydropower generation, the opportunity provided by the project to fund conservation measures to reduce existing threats to forest resources, and the reduced cost of pumping for irrigation due to higher river levels along the Xe Bang Fai.
The environmental and social impacts and corresponding mitigation measures have been reviewed against the relevant policies of the EIB and the principles underlying related EU legislation. For non-EU countries, EIB policy states that projects must comply with the principles and standards set by EU policies, subject to local conditions and law' as is stated in EIB Environmental Statement 2004. The EIA and the design of mitigation measures are considered to have met EU standards. Overall, the project should help to reverse the trend towards the unsustainable exploitation of natural resources and help to improve the protection of ethnic minorities. Taking these aspects into account, the project was deemed environmentally and socially acceptable.
Environmental and social management plans for the project include: the establishment of long term watershed protection and management systems for the Nakai Nam Theun National Protected Area and associated corridors; compensatory forestry to offset the loss of primary forest in the reservoir; livelihood development initiatives for people to be resettled, with clearly-specified poverty reduction objectives; and reservoir fisheries managed by local people, with extensive independent monitoring, including penalties for non-compliance. Resettlement villages and farms have been established and compensation for livelihood losses resulting from the river diversion has been carried out.
To date, more than USD 65 million has been invested in supporting the resettlement of households on the Nakai plateau by the Nam Theun 2 Power Company. The Lao authorities, with support from multilateral co-financiers, have joined forces to foster the development of what was previously a poor and remote rural district. More than 1,300 new homes with electricity and toilets were built for resettler households, and access to clean water, education and healthcare was provided. Over 120 km of all-weather access roads have been constructed. Beyond cash compensation, significant efforts have been made to strengthen resettler livelihoods through the provision of equipment, training and advisory services, with a focus on agriculture, fisheries, community forestry, livestock and vocational training.
These investments have started to pay off in many areas and the development partners, together with the project company and the Lao authorities, are continuing to promote the necessary measures to ensure that the ambitious targets agreed when financing for the project was approved are met. Although not all objectives have yet been met, household surveys show that most resettled families are better off now than before they moved and over 87% of resettlers described life as better than before resettlement. In 2013, their median income was three times the national poverty line. Child mortality has dropped to 50 per 1,000 from 120 per 1,000. The incidence of parasitic infection is down to 21 percent of the population from 60 percent before. Today, 90 percent of children on the Nakai plateau aged 5 to 9 are attending primary school, up from 37 percent before the project. Improved management of natural resources, agriculture and livestock will nevertheless remain vital to sustaining the livelihoods of the resettled people
Ongoing monitoring
Since 1997, a Panel of Experts and an International Advisory Group have regularly reviewed the planning of the project. The Panel of Experts, which reports directly to the Government, is required to monitor compliance with environmental and social safeguards throughout the project implementation period and for at least three years after the start of operation. The International Advisory Group reports to the World Bank.
Both the Panel of Experts and the International Advisory Group undertook an assessment of the project in relation to the report of the World Commission on Dams (WCD) and considered that the project has gone a long way towards meeting the WCD recommendations. Taking the WCD recommendations into account, the EIB loan was made conditional on the implementation of mitigation measures for directly affected people going beyond mere compensation but also providing a share in project benefits. With respect to the more than 100,000 people living downstream of the power station and dam, the design and implementation of the NT2 project has included a programme to restore the livelihoods of all those affected by the project to at least the same levels as before, on a sustainable basis. The downstream programme was designed not just on a household-by-household basis but with a view to the development of local communities. Support included the provision of water supply, health services, micro-finance and livelihood training activities. Continuation of this downstream programme, which is being financed and implemented by the government, will be important to secure the envisaged benefits for the affected people over the long term.