Theun-Hinboun Hydropower Project (Loan 1329-LAO[SF])

7/31/2019 Theun-Hinboun Hydropower Project (Loan 1329-LAO[SF])

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ASIAN DEVELOPMENT BANK PPA: LAO 27325

PROJECT PERFORMANCE AUDIT REPORT

ON THE

THEUN-HINBOUN HYDROPOWER PROJECT(Loan 1329-LAO[SF])

IN THE

LAO PEOPLES DEMOCRATIC REPUBLIC

November 2002


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CURRENCY EQUIVALENTS

Currency Unit kip (KN)

At Appraisal At Project Completion At Operations Evaluation

(October 1994) (December 2000) (August 2002)KN1.00 = $0.001389 $0.000122 $0.000095

$1.00 = KN720 KN8,218 KN10,480

ABBREVIATIONS

ADB Asian Development BankADF Asian Development FundEdL Electricit du LaosEGAT Electricity Generating Authority of ThailandEIA environmental impact assessmentEIRR economic internal rate of return

EMCO

Environmental Management Committee OfficeEMD Environmental Management DivisionEMP environmental management planFIRR financial internal rate of returnLA Loan AgreementLao PDR Lao Peoples Democratic RepublicMCP mitigation and compensation programMDXL MDX Lao Public Company LimitedO&M operation and maintenanceOEM Operations Evaluation MissionPCR project completion reportPPA power purchase agreement

PPAR

project performance audit reportTHPC Theun-Hinboun Power Company

WEIGHTS AND MEASURES

GWh (gigawatt-hour) 1,000,000,000 watt-hourskm kilometerkV (kilovolt) 1,000 voltskWh kilowatt-hourm meterm3/sec cubic meter per second

MW (megawatt)

1,000,000 wattsMWh megawatt-hour

NOTE

(i) The fiscal year (FY) of the Government ends on 30 September.(ii) In this report, $ refers to US dollars.

Operations Evaluation Department, PE-610


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CONTENTS

Page

BASIC DATA iii

EXECUTIVE SUMMARY iv

MAP vii

I. INTRODUCTION 1

A. Rationale 1B. Formulation 1C. Purpose and Outputs 2D. Cost, Financing, and Executing Arrangements 2E. Completion and Self-Evaluation 3F. Operations Evaluation 3

II. PLANNING AND IMPLEMENTATION PERFORMANCE 4

A. Formulation and Design 4B. Achievement of Outputs 6C Cost and Scheduling 7D. Procurement and Construction 7E. Organization and Management 7

III. ACHIEVEMENT OF PROJECT PURPOSE 8

A. Operational Performance 8

B. Performance of the Operating Entity 9C. Financial and Economic Reevaluation 10D. Sustainability 11

IV. ACHIEVEMENT OF DEVELOPMENT IMPACTS AND GOALS 12

A. Environmental and Social Impacts 12B. Macroeconomic Impacts 15C. Impact on Institutions and Policy 15

V. OVERALL ASSESSMENT 16

A. Relevance 16B. Efficacy 16C. Efficiency 16D. Sustainability 16E. Institutional Development and Other Impacts 17F. Overall Project Rating 17G. Assessment of ADB and Borrower Performance 17


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VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS 18

A. Key Issues 18B. Lessons Identified 19C. Follow-Up Actions and Recommendations 19

APPENDIXES

1. Technical Note on Project Design 212. Operational Performance of the Project 263. Project Cost Comparison 284. Organizational Charts 295. Financing and Ownership Structure 316. Compliance with Loan Covenants 327. Technical Note on Project Operation 338. Financial Statements of the Theun-Hinboun Power Company 379. Financial and Economic Internal Rates of Return 40

10. Environmental Management Division 4411. Photographic Details 4512. Mitigation and Compensation Program and Its Implementation 51


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BASIC DATALoan 1329-LAO(SF): Theun-Hinboun Hydropower Project

Project Preparation/Institution BuildingTA No. TA Project Name Type Person-Months Amount

1($) Approval Date

2054 Theun-Hinboun Power ADTA 5.0 100,000 4 Jan 1994

As per ADBKey Project Data ($ million) Loan Documents ActualTotal Project Cost 270.0 240.2Foreign Exchange Cost

2270.0 240.2

ADB Loan Amount/Util ization 60.0 57.7ADB Loan Amount/Cancellation 2.3Amount of Cofinancing 70.0

Key Dates Expected ActualFact-Finding 1026 Jan 1994Appraisal 27 Jun12 Jul 1994Loan Negotiations 1921 Sep 1994Board Approval 8 Nov 1994

Loan Agreement 1 Dec 1994Loan Effectiveness 1 Mar 1995 19 Jan 1996First Disbursement 23 Jan 1996Project Completion 31 Mar 1998 31 Mar 1998Loan Closing 30 Jun 1998 14 Oct 1998Months (effectiveness to completion) 37 26

Key Performance Indicators (%) Appraisal PCR PPARFinancial Internal Rate of Return 18.7 19.5 17.0Economic Internal Rate of Return 18.5Internal Rate of Return to Government 23.6 30.8 28.3

Borrower Lao Peoples Democratic Republic

Executing Agency Theun-Hinboun Power Company Limited

Mission DataType of Mission No. of Missions No. of Person-DaysConsultation 1 16Fact-Finding 1 70Reconnaissance 1 20Appraisal 1 52Project Administration

Review 7 62Project Completion 1 38

Operations Evaluation3

1 36

= not calculated, ADB = Asian Development Bank, ADTA = advisory technical assistance, PCR = projectcompletion report, PPAR = project performance audit report, TA = technical assistance.1

Represents approved amount of technical assistance.2

Since most of the costs were incurred in foreign currency, local currency cost was not specified in the report andrecommendation of the President.

3The Operations Evaluation Mission comprised H. Hettige (Senior Evaluation Specialist/Mission Leader), V. Buhat-Ramos (Evaluation Analyst), W.M. Lewis (Staff Consultant/Power Sector Specialist), and K. Moua (DomesticConsultant/Environment and Social Specialist) from 5 to 15 August 2002. V. Lavongvilay (Assistant Project Analyst,ADB Lao Resident Mission) joined the team during discussions in Vientiane.


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EXECUTIVE SUMMARY

In 1994, the Asian Development Bank (ADB) approved a loan of $60 million from theAsian Development Fund (ADF) for the Lao Peoples Democratic Republic (Lao PDR) toimplement the first joint-venture hydropower project with foreign investors. The objective was tosupport economic growth by enhancing foreign exchange earnings through export of electricity

to Thailand.

A feasibility study of the Theun-Hinboun Hydropower Project (the Project) wascompleted in 1993 with a grant financing from the Norwegian Agency for InternationalCorporation. The Project was designed as a transbasin hydropower scheme diverting the NamTheun by means of a dam consisting of a combination of radial gates, flap gate, and a weir. Theflow is diverted through an underground tunnel to a 210-megawatt surface powerhouse and isdischarged to the Nam Hai, a tributary of the Nam Hinboun. An 86-kilometer transmission line tothe border at Thakhek exports power to the Electricity Generating Authority of Thailand (EGAT).

A public-private partnership, the Theun-Hinboun Power Company (THPC) Limited, wasformed in 1993 to plan, finance, construct, own, and operate the Project. Electricit du Laos

(EdL), the state-owned power utility, contributed 60% of the share capital, and two foreigninvestors, MDX Lao Public Company Limited and Nordic Hydropower AB, 20% each. Assistingthe transition to a market economy by supporting such private sector participation, ADB actedas the lead coordination agency for the Governments negotiations with the foreign investorsand provided legal and financial advice in the form of a technical assistance grant. A powerpurchase agreement (PPA) was signed with EGAT in 1996, guaranteeing an offtake of 95% ofTHPCs power generation estimated to average 1,645 gigawatt-hours per annum.

Of the total estimated project cost of $270 million, $110 million (40%) was to be equityfinancing and $160 million (60%), debt financing. The Government relent $51.5 million of theADB soft loan to EdL at 6.2% interest rate for its contribution to equity and the balance of$8.5 million directly to THPC at 10% interest rate. Commercial cofinancing was arranged for the

remaining amount. The foreign exchange risk of the ADB loan was passed on to EdL andTHPC, and the latter was appointed the Executing Agency. ADB financing played a major role inattracting private sector participation, as there had been previously no direct foreign investmentof this magnitude in the country nor any commercial lending.

The PPA between THPC and EGAT is based on the take-or-pay principle, has a term of25 years from the start of commercial operation, and contains an option for renegotiating thetariff after 10 years. The tariff in the first year of operation was $0.0484 per kilowatt-hour, andincreased by a fixed rate of 1% per annum after 1999. The payment is determined half in USdollars and half in baht at a fixed exchange rate of $1.00 = B25.35. Accordingly, the PPA hashad both advantages and disadvantages for THPC. While the quantity of electricity sold isguaranteed, THPCs revenues are affected by two risks. First, if the US inflation rate increases

by more than 1%, the tariff will decrease in real terms. Second, the baht exchange rate fixeduntil 2008 means that revenue in US dollars depends on the fluctuations in this rate. To mitigatethe latter risk, THPC has recently refinanced its commercial loans aligning the currency profilesof the debt payments with those of the revenues. Learning from the experience in the Asianfinancial crisis, future PPAs should balance considerations of the quantity sold with those ofpotential revenues and perhaps index the tariff at least partially to the inflation rate and/orprovide a hedging mechanism against the foreign exchange risk.


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vDespite a delay in loan effectiveness and several unforeseen construction problems, the

Project began operation on schedule, in March 1998, due to efficient project management byTHPC. As a result of significant cost savings in main civil works, mechanical works, andelectrical equipment, the Project was completed at a cost of $240 million, 11% below theappraisal estimate. The Project has achieved its intended purpose. It is currently the largestforeign exchange source in the Lao PDR. THPCs sales revenues increased from $42 million in

1998 to $58 million in 2001, and are expected to be maintained at this level in the future. Thecountrys current account deficit as a percentage of the gross domestic product improved from16.5% in 1997 to 6.9% in 2001.

THPCs financial performance is very good. THPC has a healthy profit and maintains acomfortable debt-servicing capacity. The Project generated a net income of $116 million from1998 to 2001, with an additional $156 million expected during 20022006. THPCs dividendpayments in the last 4 years amounted to $93 million, of which $56 million went to EdL. The useof ADF for an essentially commercial project was questioned within ADB during loanprocessing, but it was agreed that since the Lao PDR was eligible for ADF borrowing, such usewould be appropriate provided that earnings from the Project were utilized to increase the socialexpenditure of the Government up to 20% in 2000. Although this was not stipulated as a

covenant, the total share of education, health, and social welfare in the national developmentbudget did increase from 3% in 1994 to 21% in 2001. In addition to the dividends to EdL, THPCpays annual royalties to the Government amounting to about $3 million. From 2004 onwards,THPC will pay annual taxes of about $5 million.

The feasibility study included an environmental impact assessment that was completedin May 1993, but due to the lack of baseline data on environmental and social impacts, theextent of these impacts was not properly understood; this resulted in some design weaknesses.The Project was funded and constructed before ADB had fully developed its policies onenvironmental and social issues, and the lack of baseline information was dealt with bypostponing the study of impacts to post-construction period. The Loan Agreement stipulatedthat the Government should complete a post-construction environmental audit of the Project,

and implement an environmental management plan for the project-affected area satisfactory toADB. During implementation and initial operation, it became apparent that the environmentaland social impacts were more extensive than anticipated and various parties, includinginternational nongovernment organizations, raised their concern (e.g., the number of villagesaffected by loss of river gardens, erosion, and impacts on fisheries increased from 21 to 57). Amore detailed agreement regarding mitigation measures was signed between THPC and theGovernment, and THPC allocated more funds for such purpose. Additional independent studiesprovided better documentation of the baseline conditions and both THPC and EdL committed tomitigating impacts that were caused by the Project. However, at the time of the ProjectCompletion Review Mission in March 2000, some impacts were not yet mitigated to thesatisfaction of ADB, and the related loan covenants were not fully complied with.

To remedy the environmental and social problems, a 10-year mitigation andcompensation program (MCP) was agreed upon in June 2000, and a new EnvironmentalManagement Division was formed within THPC in 2001 to implement it. The MCP iscomprehensive and ambitious, and tries to adopt best practices in terms of participation.Particular attention needs to be paid to implement it according to the agreed time frame, as wellas to enhance ownership of the village-level projects, encourage more female participation inactivities, and establish better collaboration with local government agencies to ensuresustainability of the MCP. Lessons learned from the Project in terms of environmental and socialimpacts indicate that implementation should not proceed without developing adequate baseline


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vidata and designing a comprehensive mitigation plan. Sufficient time and staff should beallocated for this purpose.

To summarize, the Project is well designed and its revenue contributes substantiallytoward the Lao PDRs foreign exchange earnings. At less than 2 US cents per kilowatt-hour, thecost of generation is very low. The recalculated financial and economic internal rates of return

are 17.0% and 18.5%, respectively. Dividends received by EdL have strengthened its financialhealth, and the royalties and taxes paid to the Government have allowed it to increase socialexpenditures significantly. The PPA with EGAT ensures financial sustainability. The Project isalso physically sustainable, provided preventive maintenance is carried out. Important lessonshave been learned in terms of timely and comprehensive mitigation of social and environmentalimpacts, and these are being addressed. The Project can serve as a model for effectivelycombining multilateral and bilateral aid, and establishing a successful public-private partnershipthat benefits the country. Consequently, the Project is rated successful, bordering on highlysuccessful.

The lessons learned indicate that key ingredients for success of such joint-venturepower projects are (i) thorough technical and economic evaluation of a suitable hydropower site,

(ii) choice of a group of developers with relevant experience, (iii) negotiation of a PPA that isadvantageous to all parties involved, and (iv) the willingness to learn from mistakes made andtake responsibility to mitigate them.


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I. INTRODUCTION

A. Rationale

1. The Lao Peoples Democratic Republic (Lao PDR) had been exporting surplus power toThailand since 1972, and this was seen as a major source of foreign exchange for the country in

the 1990s. Reflecting the objective of increasing foreign exchange earnings, the primary thrustof the Asian Development Banks (ADBs) country operational strategy1 was to assist theGovernment in its transition to a market economy by supporting private sector activity andaugmentation and diversification of exports, and addressing basic needs and human resourcedevelopment. Based on its past experience in project implementation in the Lao PDR, ADBsstrategy in the energy sector was to help the Government (i) establish a policy and institutionalframework conducive to private sector participation; and (ii) promote direct foreign investments,particularly in the development and export of hydropower.

B. Formulation

2. The hydropower potential of the Nam Theun (river)2 had been recognized for a long

time. Site investigations for the Theun-Hinboun Hydropower Project (the Project) were financedby a grant from the United Nations Development Programme. In 1992, the Ministry of Industryand Handicrafts awarded the contract for a feasibility study to consultants from Norway. Thestudy, which was financed by a technical assistance grant from the Norwegian Agency forInternational Corporation, was completed in May 1993. During a consultation mission inFebruary 1993, the Government requested ADB to act as the lead coordinating agency for itsnegotiations with foreign investors, and provide financial and legal advice.3 In June 1993, theGovernment signed a memorandum of understanding with two foreign investors, MDX LaoPublic Company Limited (MDXL) and Nordic Hydropower AB, to jointly develop the Project. Ajoint-venture company, the Theun-Hinboun Power Company (THPC) Limited, was incorporatedfor this purpose under the foreign investment law of the Lao PDR. Electricit du Laos (EdL), thestate-owned power utility, was to contribute 60% of the share capital, and the two foreign

investors, 20% each. The license agreement with the Government, signed in October 1994,allowed THPC to plan, finance, construct, own, and operate the Project for 30 years from thestart of commercial operation, with the provision to transfer it to the Government thereafter. Theagreement included provisions for a 5-year tax holiday and a 5% royalty payment to theGovernment, and limited THPCs overall responsibility for the mitigation of environmental andsocial impacts to $1 million. ADBs Fact-Finding Mission visited the Lao PDR in January 1994and the Appraisal Mission, in July 1994. In November 1994, ADB approved a loan of $60 millionequivalent from the Asian Development Fund (ADF) to the Lao PDR to finance its contribution toTHPC.

3. The Project was designed as a transbasin hydropower scheme diverting the Nam Theunin the Borikhamxai Province by means of a dam consisting of a combination of radial gates, flap

gate, and a weir (see Map). The flow was to be diverted through an underground tunnel andused for generating 210 megawatts (MW) in a surface powerhouse. The flow was to be

1 ADB. 1991. Country Operational Strategy in the Lao PDR Development Assistance in a Transition Economy.Manila.

2Nam means river in the local language, and this will be used throughout the report for consistency.

3Legal advice was provided under TA 2054-LAO: Theun-Hinboun Power, for $100,000, approved on 4 January1994.


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discharged to the Nam Hai in the Khammouan Province, a tributary of the Nam Hinboun. 4 An86-kilometer (km) transmission line was to be built up to the border at Thakhek to export themajor portion of the power output, estimated to average 1,645 gigawatt-hours (GWh) perannum, to the Electricity Generating Authority of Thailand (EGAT). The power purchaseagreement (PPA) with EGAT was signed in June 1996. The Government and EdL wereexpected to receive annual foreign exchange revenues of about $25 million from the Projects

royalties, taxes, and dividends.

C. Purpose and Outputs

4. The main objective of the Project was to support economic growth in the Lao PDR byenhancing foreign exchange earnings through export of electric power. The Project representedthe new policy direction of the power sector by encouraging private sector investment. For thefirst time, the Government formed a joint venture with the private sector for financing,constructing, and operating a power plant. The physical outputs consisted of the followingcomponents: (i) civil works associated with the intake weir, waterways, powerhouse, andauxiliary structure; (ii) supply and installation of related facilities (turbines, generators,auxiliaries, switchgear, and metal structures); and (iii) construction of the transmission line,

metering station, and switching station.

D. Cost, Financing, and Executing Arrangements

5. Of the total estimated project cost of $270 million, $110 million (about 41%) was to beequity financing and $160 million, debt financing (Table 1). While the equity was provided byEdL and the two foreign investors, the balance of about 59% was to be met by commercialcofinancing, through a combination of US dollar loans from export credit agencies andmultilateral-supported debt facilities and baht loans from a syndicate of Thai commercial banks.The two foreign investors indicated in the shareholders agreement that if all efforts for arrangingcommercial financing on a project-specific basis were unsuccessful, they would providecorporate guarantees with each assuming half the responsibility for remaining financing

requirements. The initial risk of the Project was thus borne by the foreign shareholders. At thetime, the legal framework in the country was inadequate for the Project to be commerciallyfunded. Therefore, ADB financing played a major role in promoting private sector participation.Under two subsidiary loan agreements, the Government was to relend $51.5 million of the ADBsoft loan of $60 million to EdL at 6.2% interest rate for its contribution as equity capital and thebalance of $8.5 million directly to THPC at 10% interest rate. In addition, ADB, on anexceptional basis, approved in November 1996 a limited waiver of the negative pledgestipulated in the Loan Agreement (LA), waiving ADBs first right to THPCs assets (para. 10).This was intended to assist THPC in obtaining commercial loans against the creation of securityfor THPCs assets, thereby promoting commercial financing of the Project. THPC was appointedthe Executing Agency.

4Both Nam Theun and Nam Hinboun flow west to join the Mekong River at the border with Thailand. Downstream ofthe weir, Nam Theun is also called Nam Kading.


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Table 1: Summary of Estimated Costs and Proposed Financing ($ million)

Item Cost % of Total Source Amount % of Total

Civil Worksa

106.0 39.3 EquityMechanical and Steel Works 22.0 8.2 EdL 66.0 24.5Electrical Equipment 43.0 15.9 NH 22.0 8.1

Transmission Line 17.0 6.3 MDXL 22.0 8.1Consulting Services 9.0 3.3 Subtotal 110.0 40.7Project Management and Training 7.0 2.6Contingencies 23.5 8.7 DebtFinancing Fees 3.4 1.3 Government 8.5 3.1Interest During Construction 29.0 10.7 Commercial Loans 81.5 30.3Preoperational Expenses 6.8 2.5 Export Credits 70.0 25.9Initial Working Capital 3.3 1.2 Subtotal 160.0 59.3

Total 270.0 100.0 Total 270.0 100.0

EdL = Electricit du Laos, MDXL = MDX Lao Public Company Limited, NH = Nordic Hydropower AB.a

Including land acquisition and access roads.

E. Completion and Self-Evaluation

6. Construction was completed in March 1998, and the Project began commerciallyoperating and exporting at the end of the same month. The ADB loan was closed in October1998, 3.5 months after the original closing date, and was 96% utilized. The project completionreport (PCR) was circulated in December 2000, following the Project Completion ReviewMission of March 2000. Based on its timely completion, cost savings, high profitability, andcomfortable debt-servicing capacity, the PCR rated the Project successful. The PCR alsodescribed the Projects important impact on capacity building in the Lao PDR in terms ofexposure to new concepts and skill building. It attributed the concerns that arose onenvironmental and social impacts during implementation to the lack of baseline information andlimited capacity of the Environmental Management Committee Office (EMCO) established underthe Project. It pointed out that EMCO failed to expand the environmental management plan(EMP) as expected, to meet the detailed design requirements. The PCR was comprehensiveand objective, and the Operations Evaluation Mission (OEM) generally agrees with its findings.However, the PCR was not clear on the assumptions underlying the financial projections, andthe financial and economic analysis. There was no discussion of the projected small increasesin foreign energy sales and large increases in domestic sales. There was also no apparentadjustment for the predicted effects of Nam Theun 2, an upstream hydropower development,which was estimated to reduce the power generation capacity of the Project by 275 GWh perannum. The internal rate of return as calculated at the appraisal and PCR stages reflected theperspective of the Government, rather than that of the country.

F. Operations Evaluation

7. This project performance audit report (PPAR) is based on a review of the projectdocuments and the various relevant studies, discussions with ADB staff, and persons met bythe OEM in the field. The OEM visited the Lao PDR, including the project site, in August 2002,inspected the power plant facilities, and met with relevant government officers, projectimplementation officers, and representatives of other international organizations. It held focusgroup interviews in five villages in the affected area. The PPAR assesses the relevance,efficacy, efficiency, sustainability, and institutional development impact of the Project to identifylessons and follow-up actions for future ADB operations. The evaluation also focuses on other


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aspects, including project financing mechanisms, PPA, macroeconomic impacts, social andenvironmental impacts, and mitigation measures. The views of concerned ADB departmentsand offices, and those of the Government and THPC have been considered in finalizing thePPAR.

II. PLANNING AND IMPLEMENTATION PERFORMANCE

A. Formulation and Design

1. Power Purchase Agreement

8. The PPA between THPC and EGAT was a key element of project formulation.5 Itguarantees the sale of 95% of the energy generated on a take-or-pay basis with half of thepayment to be made in baht and half in US dollars, using the exchange rate of $1.00 = B25.35prevailing on the execution date of the PPA. It has a term of 25 years from the start ofcommercial operation, and contains an option for renegotiating the tariff after 10 years. The tariffin the initial year of operation was $0.0484 per kilowatt-hour (kWh), with a fixed increase by1% per annum after 1999.6 Accordingly, there are three important aspects of the PPA. First, the

bulk of the electricity produced has a guaranteed market. This has been a major advantage forTHPC as there has been no other comparable market for its product. Second, the fact that thetariff determined in US dollars can escalate only by 1% per annum during the first 10 years ofoperation implies a decline in real terms if the annual US inflation rate is higher. Third, the factthat the exchange rate for baht payments is fixed results in decreasing revenues in US dollarterms if the baht depreciates. In hindsight, the last two factors have been quite risky to THPCalthough this was not much anticipated at the time of appraisal (para. 52).

9. The technical aspects of the PPA are comparable to similar agreements for thepurchase and exchange of power currently in use in developed countries. The PPA includesprovisions on the development of interconnection facilities, dispatch and sale of the generatedenergy, and supply of energy to the power plant by EGAT when needed; defines and provides

examples as to the method of calculation of output and foregone generation; and sets standardsfor metering and confirmation of it. Daily confirmation statements of the amounts of generation,outgoing energy, spilled water, foregone generation, energy from EGAT to THPC, losses, etc.,are required by the PPA. The completeness of the PPA requirements has contributed totransparency in the dealings between the parties involved and enhanced the sense ofpartnership in the Project. The PPA provides for liquidated damages in the event that THPCplant fails to deliver power quantities it projects and EGAT subsequently requests. Another PPAbetween THPC and EdL governs the sale of energy to EdL rural consumers near the projectarea. This agreement also covers the provision of energy by EGAT through the switching stationof the power plant when the latter is not generating. The tariff for EdL purchases is set at 96.2%of the tariff with EGAT and payment terms are similar to EGATs PPA.

2. Financing Mechanisms

10. The financing mechanisms of the Project and the associated risks were carefullyconsidered during project formulation. The foreign exchange risk on the ADB loan was passedby the Government on to EdL and THPC in the subsidiary LAs. The main risk associated with

5Negotiations were initiated in November 1993 and an agreement was reached on the tariff in June 1994. The PPAwas signed in June 1996 after the development of EGATs standard grid code for all its power purchases.

6 If in the 11th year the parties cannot agree on modification, the tariff will continue to escalate at 1% per annum.


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the Project at formulation was the possible reluctance of commercial banks to provide fundingfor a joint venture in the Lao PDR. As there had been no commercial lending to the countrypreviously, several measures were taken to minimize the perceived political risk. First, THPCwas to set up an offshore escrow account into which all payments from EGAT were to be made,and the account was to be pledged to project lenders throughout the term of the borrowing.Second, in the absence of a sufficiently developed market-oriented legal framework in the

country, a technical assistance was provided by ADB (footnote 3) to advise the Government inthe preparation of legal documents. Third, the shareholders and license agreements for theProject contained protection arrangements to private investors similar to those found in thelegislation of other countries. Fourth, to help the private sector partners limit the sovereign risk,the Lao PDR agreed to join the World Bank Groups Multilateral Investment GuaranteedAgency. Finally, during implementation in November 1996, ADB approved a limited waiver ofthe negative pledge clause to provide security for commercial loans (para. 5). These measureswere very helpful in arranging financing of the joint venture, which was the first to attract privatecapital for an infrastructure project of this magnitude in the Lao PDR.7

11. During meetings with ADB management, the use of ADF for what was essentially acommercially viable project was questioned. Since the Lao PDRs borrowings were all from

ADF, the Appraisal Mission was instructed to request the Government to use the revenuesgenerated from the Project to finance other development activities, particularly in social sectors.Staff confirmed that the Government had agreed to increase the development budget share forsocial sectors from about 3% in 1994 to 20% by 2000. However, there was no specific loancovenant regarding this.

3. Environmental and Social Concerns

12. Due to lack of baseline information, the environmental impact assessment (EIA) wasinadequate in its coverage and depth of analysis of environmental and social impacts. Based onappraisal findings, strengthening of the analysis of environmental and social impacts and issueswas recommended. As some of the impacts were difficult to determine at that stage, a

monitoring program to commence immediately following ADB approval was outlined. Particularcovenants were included in the LA for the Government to have a post-constructionenvironmental audit prepared and an EMP implemented in the affected area.

4. Technical Features

13. The Project, as constructed, is generally well designed in that it makes efficient use ofthe available head and flow at the site (Appendix 1). The estimated levelized cost of generationat approval of $0.023 per kWh attested to the suitability of the site for construction and theProjects feasibility. Given this, it appears that no cost benefit analysis was done for alternativelocations. The construction of the powerhouse and substation made efficient use of the space;their layout is conducive to maintenance. Configuration of the diversion dam and associated

headpond was based on physical model studies carried out in Norway.

14. The inclusion of the inflatable rubber gates along the weir section has allowed the crestof the dam to be adjusted by 3 meters (m). In high flow conditions, the lowered rubber gateswould reduce the upstream elevation increase caused by the presence of the dam. As some

7In early 1997, the Project and Trade Finance Journal, as well as the Asiamoney Magazine, selected THPCsfinancing package as the project finance deal of the year for 1996. In September 2002, the Project FinanceInternational selected THPCs financing package as one of the top 10 financial deals made over the past 10 years.


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problems with operation and maintenance (O&M) of the rubber gates have occurred, they areplanned to be replaced with concrete in the coming dry season. The replacement will fix the weircrest at 400 m, which is the nominal operational elevation of the Project. It will also enable theoperators to maintain the headpond at a uniform level during low flows, which has not beenpossible due to the frequent failures of the rubber gates. The headrace tunnel appears to havebeen well designed. The number of radial gates (two) and their placement tend to draw flow

across the intake, which results in a gradient of the flow to be diverted to generation. In addition,large floating and submerged debris such as trees are also brought within the draw of theintake. This leads to the debris impinging on the trash racks and obstructs the flow to the intake.The computerized system for plant operation requires various inputs, including rating curves forgates. According to operational personnel, the original rating curves were inaccurate and havebeen replaced with upgraded versions recently.

15. The powerhouse and the turbine-generators are well designed and adapted to the site.The use of computer control and digital solid-state instrumentation and sensors in a countrywithout adequate computer maintenance and repair skills may have been questionable at theoutset. However, the OEM was informed that the power plant staff includes one engineertrained in maintenance of this system. The system has generally performed well to date. A

design flaw corrected after initial operation was the lack of adequate airconditioning throughoutthe facility to sufficiently cool the equipment. The double-circuit transmission line is welldesigned in terms of capacity and configuration, but evidence indicates that there have beenproblems with respect to shielding of lightning. In the period January 1999June 2002, therehave been eight incidents of both circuits being simultaneously interrupted by lightning strikes.The 86 km route of the transmission line was selected for cost-effectiveness following practicallya straight line through the limestone-protected area to Thakhek substation. If, as can besuspected, the majority of the two-circuit outages due to lightning have been along the linesegment traversing the limestone ridge, an alternative, slightly longer, routing may have beenbetter.

B. Achievement of Outputs

16. The Project is operated from a computerized control facility. Once the potentialgeneration is determined by the water level, the actual generation level is set by EGATs energydispatch schedule, based on a nominal take of 95% of the available energy at the site. 8Although their nominal capacity is 210 MW, the two units have been operating at as high as220 MW on numerous occasions. Of the electricity generated, 9598% has actually beenexported to EGAT since March 1998. The Project also supplies electricity to the nearby villagesas per the PPA with EdL. Since the sales to EdL are often less than 1% of the generationpotential, the excess water is released downstream to Nam Theun (Nam Kading). To date, thehighest sum of dispatched and foregone generation was recorded in 2000 at 1,589 GWh, or97% of the feasibility study estimate of 1,645 GWh. The increase in the initially stipulatedminimum flow release of 2 cubic meters per second (m3/sec) to 5 m3/sec minimum flow and a

plant availability factor of about 96%, as against 98% expected for this type of power plants,may have contributed to the slightly lower-than-expected annual output. Nevertheless, it is tooearly to draw firm conclusions on the basis of only about 4 years of operation (Appendix 2).

8 During several months, EGAT dispatches all available energy.


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C. Cost and Scheduling

17. The actual project cost was $240 million, 11% below the appraisal estimate of$270 million (Appendix 3). In fact, cost savings were even higher, but part of them (about$15 million) was allocated to reserves for debt service and O&M. The cost per installed kilowatt,excluding the transmission line, was $1,069, which compares well with typical run-of-river

hydropower plants and illustrates the high cost efficiency of the Project. Major cost savings wereexperienced on the main civil works, hydraulic steelworks, mechanical and electrical equipment,and the transmission line (despite the difficulties of crossing the limestone ridge). The savingsmay have partly resulted from the elimination of one gate in the weir, but additional expenseswere incurred for redesign of the powerhouse foundation due to unexpected subsurfaceconditions, changes in weir height, increased preoperational expenses, and the addition of there-regulating pond downstream of the powerhouse.

18. The loan effectiveness was delayed by over 10 months until the PPA was finalized withEGAT. According to the PCR, several construction activities experienced delays of a fewmonths, some of which could be attributed to the rather short period for planning, final design,preparing documentation for the construction and procurement contracts, and bidding. These

activities had to be accommodated between the completion of the feasibility study in May 1993and award of the first contract in late 1994. Since the PPA with EGAT was not finalized untilmid-1996 and contained design requirements not known at the time of contract award, anumber of design variations became necessary. THPCs project management efficientlyhandled implementation and met the PPA target date. Testing began in January 1998, andcommercial operation in March 1998, as scheduled.

D. Procurement and Construction

19. International competitive bidding procedures were used for all goods procured under theProject, and ADB-financed items were procured in accordance with ADBs Guidelines forProcurement. The construction work followed a very tight schedule. The PCR describes in detail

the challenges that had to be faced to complete the construction of civil works. The problemsencountered included (i) lack of good roads in the area, (ii) onset of the rainy season from mid-May to mid-October, (iii) lack of adequate equipment, (iv) unavailability of skilled operators ofequipment, and (v) complicated ground conditions. To expedite the transmission lineconstruction, especially over the limestone ridge, THPC split the contract and awarded asupplementary contract for the most demanding area over the ridge. As a result, construction ofthe transmission line was completed with a 6-month delay, but the electrical works contract wascompleted on time to meet the target for commercial operation. Despite the problemsencountered, timely interventions by THPC and the good performance by most contractorsenabled the Project to meet its schedule.

E. Organization and Management

20. THPC was able to react to the delays that occurred in an efficient manner and makealternative decisions to continue project implementation. Implementation was overseen by anexecutive committee of three persons each representing a shareholder. The day-to-dayexecution of implementation responsibilities was allocated to the two foreign partners. MDXLwas in charge of financial management. Nordic Hydropower AB, which was given theresponsibility for physical implementation, assigned the project management part to StatkraftSF, and awarded the contract for consulting services to Norconsult International AS, and thecontract for training, project operation, and maintenance, to Vattenfall AB. EdL seconded a


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majority of the technical inspectors during construction. The diverse experience of theshareholders in terms of construction and operation of hydropower plants (Nordic HydropowerAB) and financial management (MDXL) enabled them to respond quickly and appropriately tothe challenges of site-specific construction and the Asian financial crisis. The ability to meet theimplementation schedule and achieve significant cost savings indicate also good cooperationfrom the Government and EdL, and good performance by the consultants. Organizational charts

of THPC and the power plant are shown in Appendix 4.

21. Although the ownership of THPC has remained the same since 1994, there has recentlybeen a change in the ownership structure of one of the shareholders (Appendix 5). Until 2001,Statkraft SF of Norway and Vattenfall AB of Sweden jointly owned Nordic Hydropower AB,which in turn owned 20% of THPC shares. Following the recent sale of shares by Vattenfall AB,Statkraft now is the sole owner of Nordic Hydropower AB. THPC awards a separate O&Mcontract every 3 years. Vattenfall AB has held this contract to date. The power plant is managedby a plant manager who is responsible for the day-to-day operations. The OEM observed thatthe power plant and its premises are very well managed in terms of allocation and performanceof duties, maintenance, general housekeeping, availability of facilities to employees, andenvironmental friendliness. Following the expiration of the latest O&M contract, Statkraft will

assume this responsibility from January 2003 onward.

22. Compliance with Covenants. The Project required a multitude of agreements,including shareholders agreement among the owners, license agreement with the Government,PPAs with the EGAT and EdL, LA with ADB, and several subsidiary agreements betweendifferent parties. ADB legal advice (footnote 3) was helpful in terms of drawing up the differentprovisions that were important to these agreements. The LA between the Government and ADBcomprised covenants on engagement of local staff, amendment of legal agreements, enteringinto suitable O&M agreements, and environmental and social mitigation obligations. The ProjectAgreement between ADB and THPC included particular covenants on financial obligations,submission of progress reports, and financial statements. By project completion, all thecovenants were fully complied with except for the two covenants relating to environmental and

social impacts (Appendix 6). While one of these was substantially complied with at the time ofPCR preparation in 2000, the other on preparing the EMP was still under implementation at thetime. These covenants were generally complied with at the time of the OEM. THPC establishedEMCO in 1996 to oversee the implementation of environmental and social mitigation measuresand the monitoring program. The effectiveness of these measures and the program is discussedin paras. 3339.

III. ACHIEVEMENT OF PROJECT PURPOSE

A. Operational Performance

1. Operations

23. The Project has achieved its intended purpose. It is currently the largest foreignexchange source in the Lao PDR. The actual power output is decided according to the wateravailability and EGATs needs. The operators inform the EGAT dispatcher of the projectedgeneration available, and the EGAT dispatcher advises the level of generation required for thefollowing day. The operators then can control the generation level by the computer or manually.Available energy not dispatched by EGAT is calculated and the result is provided to bothparties. If the required dispatch schedule cannot be met because of equipment outage oroperational difficulties, liquidated damages for the shortfall are paid by THPC as per the PPA.


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The operators are well trained and competent in their assigned responsibilities. While there aresome problems with cooling systems, software, and trash handling in day-to-day operations,most have been handled well. From January 1999 to June 2002, the average availability of thegenerating units was about 96% (Appendix 2). The recorded descriptions of the various forcedoutages indicate that simultaneous tripping of the 230 kilovolts transmission circuits caused aloss of about 2.0 GWh or 16% of the liquidated damages (Appendix 7). Other causes included

component failures, cooling water problems that caused overheating of bearings, oil leaks ofvarious kinds, and one incident of operator error. Total forced outage time was 54 hours in2000, less than 4 hours in 2001, and 14 hours in the first half of 2002 (mainly as a result of anoil leak in a circuit breaker). It appears that a significant improvement has been achieved in thisregard.9 Elimination of the outages of both transmission circuits by lightning will further improvethe power plant reliability.

2. Maintenance

24. O&M has been exemplary to date. A review of the operators activities indicates a well-organized program of maintenance that is performed by trained personnel and appears to be ofvery high quality. The operators are diligent in their daily inspection. Preventive maintenance of

the transformers and circuit breakers is adequate. The spare parts inventory is adequate aswell. Specialty repairs and periodic preventive maintenance actions are performed by outsidevendors on scheduled or as-needed basis. The control and supervisory control and dataacquisition software is maintained in-house by a vendor-trained engineer. To further improvepreventive maintenance, the trash rack rake could be operated every 8 hours to ensure debrisdoes not accumulate at the rake. In addition, it is essential to do periodic mapping of sedimentaccumulation in the headpond and re-regulating pond. Maintenance in the form ofhousekeeping and general upkeep of the facilities is very good and reflects a managerialcommitment to high standards in that regard. Maintenance of the transmission line has beenlight to date. There were insulator failures at start-up. Discussion with the maintenance engineerindicates awareness of the need for periodic attention to tower grounds and foundations and formaintaining the right-of-way. Due to flooding conditions along the right-of-way at the time of the

OEM, only the portion of the line from the substation to about 2 km past the re-regulating pondcould be observed. Both the tower foundations and the steel lattice members were found to bein good condition.

B. Performance of the Operating Entity

25. THPC faced temporary financing problems during implementation because of the Asianfinancial crisis. The planned financing was a blend of US dollar loans from export creditagencies and multilateral supported debt facilities, and baht loans from a syndicate of Thaicommercial banks, structured to parallel the 50:50 US dollar/baht currency profile of the PPA.The flotation of the baht in July 1997, coupled with the subsequent major devaluation andfinancial crisis, had a dual impact on THPCs financing. First, the planned baht funds were

insufficient to pay for the costs that were incurred in US dollars. Second, the inability todrawdown the expected baht loans and their increasing cost compelled THPC to borrow about$10 million at a higher cost. Nevertheless, as a result of the construction cost savings, theactual debt portion at project completion was $130 million (54%), well below the appraisalestimate of $160 million (59%).

9In addition to the forced outages, periodic inspections entail planned outages. Although these outages do not resultin liquidated damages, they are included in availability calculations.


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26. In April 2002, THPC entered into a refinancing scheme that extended the existing USdollar facilities of $42.7 million provided by a group of Nordic-based lenders and raised a new3 billion baht facility with a 10-year term.10 This replaced the existing more expensive baht loansthat had a remaining term of 6 years. Another $30 million tranche was provided by the ThaiExport-Import Bank for a 10-year term and an interest rate floating at London interbank offeredrate plus 2.375%. This facility replaced the existing Thai Export-Import Bank loan, which had

8 years remaining, and a US dollar subordinated loan with 11.75% fixed interest rate. Therefinancing resulted in substantial cost savings in terms of interest payable, enabled a capitalreduction of $55 million by the shareholders of THPC (half of the original equity), and realignedthe payment profile of the debt enabling better risk management. Together with the previousdividends, the refinancing resulted in the shareholders recovering their original investment innominal terms within 4 years from the start of the commercial operation in 1998 and 8 yearssince the initial investment.

27. THPCs financial performance is very good (Table 2 and Appendix 8). THPC generatesa healthy profit and maintains a comfortable debt-servicing capacity. The refinancing with lessexpensive loans for a longer term has extended the debt service period. As such, the debtservice ratio is projected to be lower in 2006 than estimated at appraisal when a majority of the

loans were expected to be repaid by that time. In 2002, the ratios are somewhat different fromthe trend due to the refinancing and paying off half the equity back to the shareholders. TheProject generated a net income of $115.8 million from 1998 to 2001 and is expected to generatean additional $155.7 million from 2002 to 2006. Dividend payments in the last 4 years totaled$93.4 million, of which $56.0 million (60%) went to EdL. THPC had retained earnings of$13.6 million in 2001 and this is expected to increase to $47.5 million in 2006.

Table 2: Theun-Hinboun Power Companys Key Financial Indicators

Item 1999 2000 2001 2002 2003 2006

AppraisalEstimate

Actual Actual Actual Projected Projected Projected AppraisalEstimate

Debt Service Ratio(times)

2.2 2.2 2.4 2.4 2.8 2.1 2.1 3.1

Debt/(Debt + Equity)Ratio (%)

45.2 49.6 49.6 44.4 63.9 58.5 41.4 7.4

Rate of Return onEquity (%)

30.0 27.2 31.2 27.2 49.4 37.6 28.3 19.6

Current Ratio (times) 2.0 1.8 2.0 2.6 2.2 2.2 2.1 2.8

C. Financial and Economic Reevaluation

28. In calculating the financial internal rate of return (FIRR), the actual base capital costs areconverted to 2002 prices. The actual energy generated and the related tariff is used in thecalculation up to 2001. The energy generated is assumed to remain at the 2002 level through

2008. In 2009, when the Nam Theun 2 Project is expected to become operational, it is assumedthat there will be a 275 GWh drop in the electricity generated. A 1% annual increase in the tariffis assumed as per the PPA. Since half the electricity sold is valued at the fixed exchange rate of$1.00 = B25.35, the revenue is calculated taking into account the baht depreciation. On thisbasis, the recalculated FIRR is 17.0%, well above the weighted average cost of capital of 8.3%and close to the appraisal and PCR estimates (Table 3 and Appendix 9).

10 At a fixed interes t rate of 8% for the first 3 years and a floating rate of minimum lending rate plus 1.25% thereafter.


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Table 3: Summary of Financial and Economic Reevaluation (%)

Item Appraisal PCR PPAR

FIRR 18.7 19.5 17.0EIRR 18.5

IRR to Government 23.6 30.8 28.3

= not calculated, EIRR = economic internal rate of return, FIRR = financial internal rate of return,IRR = internal rate of return, PCR = project completion report, PPAR = project performance auditreport.

29. Economic costs exclude interest during construction, taxes, duties, and royalties. Theeconomic benefits to the country are the revenues from sales to Thailand plus the economicvalue of the domestic sales. The reevaluation does not capture the environmental and socialcosts and benefits that may have been generated. It is not possible to quantify such cost andbenefits without baseline data and extensive research. While there may have been costs to theenvironment because of the impact on fisheries and biodiversity, there have been both positiveand negative socioeconomic impacts such as better employment opportunities and increasedeconomic activity and reduced yields from river gardens and fisheries in the project area. Theongoing work on environmental and social mitigation measures may bring about significantadditional positive impacts, but these cannot be quantified as yet either. Taking into account thequantifiable costs and benefits, the recalculated economic internal rate of return (EIRR) is18.5% (Appendix 9). This figure cannot be compared with the appraisal and PCR estimates as itreflects the viewpoint of the country as a whole, while the appraisal and PCR estimatesconsidered only the costs and benefits to the Government. If the viewpoint of the Government istaken (including the benefits to EdL), the internal rate of return is 28.3%, compared to theappraisal and PCR estimates of 23.6% and 30.8%, respectively.

D. Sustainability

30. The Project is financially sustainable as shown by the margin of revenue over cost ofabout $0.03 per kWh sold and the financial analysis presented so far. The PPA with EGATensures the revenue flow. The sustainability depends on the generation efficiency, optimalsystem management, and financial management, all of which seem adequate. Thesedimentation of the headpond and intake facilities could have some impact on generatingcapacity and flow storage, but this can be mitigated by a well-planned program of sedimentmapping and the acquisition of appropriate removal equipment. THPC is protected by thelicense agreement, which does not allow the development of other upstream hydropowerprojects except for Nam Theun 2, the impact of which has been taken into account in thefinancial analysis. With the high quality of civil works and equipment, the service life can beexpected to go beyond 25 years. Sensitivity analysis of the impact of a further baht depreciationto $1.00 = B50.00 by 2005 shows that the FIRR would decrease only marginally from 17.0% to

16.4%. If Nam Theun 2 does not start operating in 2009, the impact will be a marginal increasein the FIRR to 17.5%. Reduced availability of water because of insufficient rainfall in thecatchment area is the only risk that would have a substantial impact. This highlights the need toprevent excessive logging there.


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IV. ACHIEVEMENT OF DEVELOPMENT IMPACTS AND GOALS

A. Environmental and Social Impacts

1. Background

31. The feasibility study included an EIA that was completed in May 1993. A summary EIAwas prepared in March 1994 before appraisal. ADB was not directly involved in financing orspecifying the scope of the feasibility study. Due to the lack of baseline data on environmentaland social impacts, issues like fish passage and yield, riverbank erosion and sedimentation, andthe potential number of affected villages were not properly understood. This resulted in designweaknesses in terms of the environmental and social mitigation, although impacts on thelimestone protected area through which the transmission line passes were reviewed quite well.The Project was funded and constructed before ADB had fully developed its policies onenvironmental and social issues, and the lack of baseline information was dealt with bypostponing the study of impacts to post-construction period. The LA between ADB and theBorrower (the Government) called for a post-construction environmental audit of the Project,including a study on the impact on downstream fisheries, and appropriate mitigation measures.

The LA further stipulated that the Borrower would implement, or cause to implement, an EMPfor the project-affected area satisfactory to ADB.11 However, funds or parties that wouldimplement the EMP, other than the Borrower, were not specified.

32. The EIA had expected that during operation, the headpond water level would be withinthe previous high water level of the Nam Theun, but the post-construction water level inundatedvegetable gardens near the riverbanks and a road crossing across the headpond. Physicalrelocation of persons was not anticipated, as the communities living in the project area mostlyconsisted of shifting cultivators. Therefore, the Project did not have a resettlement plan tosystematically address income restoration and other social impacts. However, the EIA didpropose several community programs in the project area. The impact zone was initiallyconsidered to be about 21 villages, mainly in the headpond area and on the upper Nam Hai

plain. None of the villages downstream of the weir, where the water flow would be reduced afterdiversion, were included in the impact zone at project preparation.

33. Due to concerns raised by various parties, including international nongovernmentorganizations, several studies were prepared during implementation, and a more detailedagreement was signed by THPC and the Government in 1996 regarding environmental andsocial impacts, increasing the funds available for mitigation from $1.0 million to $2.6 million.Additional independent studies provided better documentation of the baseline conditions andrevealed some additional social impacts. Although THPC and EdL were not legally bound totake mitigation measures proposed by such later studies, both of them verbally committed tomitigating impacts caused by the Project.

34. During implementation, THPC made reasonable efforts to remedy environmental andsocial problems as they became apparent. EMCO was established and staffed by localpersonnel to implement the mitigation measures and oversee the monitoring program. However,EMCO did not have a clear channel of authority, and the measures were designed reactivelyrather than in a strategically planned manner. With the onset of operations, significant

11The mitigation measures were to include (i) environmental protection; (ii) site rehabilitation; (iii) management ofprotected areas; (iv) fishery management; (v) compensation of local residents; (vi) community safety, health, andeducation; (vii) worker health/safety; and (viii) monitoring.


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environmental and social impacts became evident. This was attributable to a combination offactors, including higher water level in the headpond area, low water flow downstream of theweir, and higher water flow fluctuations downstream of the powerhouse. During the ADB SpecialReview Mission in November 1998, THPC agreed to redefine the project-impact zone to includeaffected villages in the Nam Theun area downstream of the weir, as well as affected villages inthe Nam Hinboun area beyond the Nam Hai confluence. It was also agreed that EMCOs

capacity was insufficient to fully execute its responsibilities, and that a comprehensive 10-yearmitigation and compensation program (MCP) should be developed. As a result of the largerimpact zone, the number of affected villages increased from 21 to 57. According to THPCestimates, about 3,000 households were affected. There was no involuntary relocation ofhouseholds, but riverbank vegetable gardens had to be relocated due to the increased waterlevel or erosion of the banks. At the time of the PCR Mission in March 2000, some impacts inthe villages were still not mitigated to the satisfaction of ADB.

35. The preparation of the 10-year MCP was completed in June 2000. The principalenvironmental impacts identified were increased erosion and sediment loads, reduceddownstream flows on the Nam Theun, and impact on fishery and transportation in the headpondarea. The main socioeconomic impacts identified were a loss of some land for construction and

dry-season river gardens, as well as the impact on common property resources (water supplyand fishery). Following the MCP recommendations, a new Environmental Management Division(EMD) was formed within THPC and an expatriate manager was appointed in March 2001. EMDreports directly to THPCs general manager and is mandated to execute the measures specifiedin the MCP. In February 2002, EMD developed a logical framework that compressedimplementation of the 10-year MCP between 2001 and 2006, taking into account ADBs policyon, and experience in, involuntary resettlement.12 EMD is currently staffed with 12 regular staffand engages short-term consultants and field assistants for its various special activities(Appendix 10). A qualified local person is working with and learning from the current manager totake over EMD management in 2003.

2. Mitigation

36. The initial design of the discharge facilities did not include a re-regulating (surge) ponddownstream of the powerhouse. During implementation, it became apparent that in the absenceof a pond, the Nam Hai would be subject to bank erosion and substantial flow fluctuations. Thesubsequent addition of a re-regulating pond dampened these fluctuations and reduced theirimpacts. Another important mitigation measure was related to water flow downstream of theweir. The project documents stipulated a minimum flow release of 2 m 3/sec, but it was decidedto increase this flow to 5 m3/sec to reduce the impact on aquatic life, despite the fact that thiswould entail financial losses to THPC during the dry season.

37. Several positive social impacts have resulted from the Project. Construction andimprovement of roads leading to the project site have increased peoples mobility and access to

market centers, opening opportunities for new commercial activities. At the request of localauthorities, THPC built new all-weather bridges in some downstream villages, allowing accessto large vehicles. The temporary employment opportunities at the dam and powerhouse areaprovided attractive additional income for local people during the construction period. Theconstruction activities also led to the establishment of several roadside settlements. Rivernavigation has become easier in the upstream area since small rapids at several locations weresubmerged by the increased water level. Bridges and culverts have also facilitated

12 ADB. 1995. Involuntary Resettlement. Policy Paper. Manila.


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transportation in that area. To mitigate the impact of the inundated road crossing across theheadpond, THPC provided a ferry. THPC also constructed a first-aid station near the powerplant and gave the local people access to it as needed. In addition, it built two new schools andrefurbished another.

38. On the negative side, the higher water levels and the collapse of dry season river

crossings in the Nam Hai area restricted communication and transportation in some locations.Increased and fluctuating water levels damaged some existing vegetable gardens on riverbanksand also deprived livestock of grazing lands in some locations. In addition, some villages lostlanding areas for boats and bathing places. EMCO provided floating docking areas or steps tolanding areas, and community drinking water wells were constructed in many villages. Due tothe frequent fluctuation of water level in the rivers, the villagers had to move their gardensfurther inland. Water level fluctuations may also have changed the nature of the fishery, both interms of species composition and the quantity. Most communities report that their fish catcheshave significantly dropped, although a few report temporary increases, especially duringinundation. The drop in yield could be a result of flow fluctuations, higher flows, increasedturbidity, inappropriate use of traditional technology under the new conditions, and possiblyreduced fish numbers.13 Although THPC attempted various mitigation measures, there were

delays in compensation to some local villagers and also in organizing fisheries managementefforts. Initial compensation payments made by THPC were quite generous, but thedetermination of payment amounts lacked clear objectives, detailed procedures, and fixed rates.

39. EMD is now implementing the MCP. During a survey conducted in 1999, it wasestablished that some of the 57 villages wanted immediate compensation, others desiredmitigation measures, and the rest sought a combination. To the 10 villages that soughtimmediate compensation, THPC, after deliberations with ADB and independent reviewers, gavethe equivalent in the form of rice. As there was inadequate baseline data regarding losses,indicative estimates were made. THPC established that the procedures for payments wereadhered to and the rice was successfully delivered to the expected recipients. Following this,11 other villages were prioritized for implementing the mitigation plans and the others were

informed about the phased program of implementation in the subsequent years.14

The socialmitigation activities in the first 11 villages include restoration of water supply for consumptionand dry season gardens, provision of protein replacement through improved fisherymanagement, and creation of income generation opportunities to supplement loss of livelihoodopportunities. In terms of the environmental mitigation activities, most of the construction-relatedenvironmental impacts have been taken care of and minor mitigation measures such asrevegetation of sites are to be completed within a year. To address some other environmentalimpacts, EMD has initiated several studies that will review the effectiveness of themethodologies and the quality of monitoring done up to date and provide guidance for follow-upactions. In addition, THPC is concerned about the impact of activities in the upstream watershedon the plant operating efficiency and utilization, and is undertaking conservation awarenessprograms in villages in collaboration with the provincial authorities. ADB has, in the recent

years, provided a program loan and technical assistance to enhance the capacity of the LaoPDR in terms of undertaking EIAs, as well as designing and implementing mitigation

13There is very little systematic evidence on fishery resources. An EMD-sponsored fisheries study is under way, withvillagers monitoring the fishery data.

14The logical framework envisaged implementation of such activities in 10 villages initially, followed by up to16 villages each in the subsequent 3 years. In reality, EMD is currently working with 11 villages and is expected tostart working with 67 more by the end of 2002 due to the severe flood damage that has occurred in the area in therainy season.


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measures.15 Pictures of the Project and some MCP activities are shown in Appendix 11, whilemore details about the status of MCP implementation and the OEMs suggestions on itsimprovement are given in Appendix 12.

B. Macroeconomic Impacts

40. In the past few years, THPC has been generating the expected foreign exchangerevenue to the country. THPCs energy sales revenues increased from $42 million in 1998 to$58 million in 2001, and are expected to remain at this level in the future. THPCs net incomeincreased from $16 million to $34 million during the same period. As a result of THPCs exports,total energy exports of the Lao PDR increased from $21 million in 1997 to $106 million in 2001.This helped reduce the current account deficit as a percentage of gross domestic product from16.5% in 1997 to 6.9% in 2001.

41. In 2001, THPCs dividends to EdL reached $18 million and its royalty payments to theGovernment amounted to $3 million. With the 5-year tax holiday ending in 2003, THPC isexpected to contribute an additional $5 million in income taxes from 2004 onward. Thus, theappraisal target of $25 million in annual foreign exchange revenues for the country will be

exceeded. The national development budget more than doubled in nominal terms between 1998and 2001. The combined share of education, health, and social welfare increased from 3% in1994 to 10% in 1998 to 21% in 2001. The expectation that the lending of ADF to the Lao PDR tofinance the Project would indirectly lead to increased expenditures in the social sectors has thusbeen met. Furthermore, EdL receives 60% of THPCs dividends, which amounted to$56.0 million between 1998 and 2001. This contributed to financing further joint-venture powergeneration projects in collaboration with foreign investors, expanding rural electrification, andsubsidizing the low domestic tariffs. Available data indicates that while total power generationincreased by 38% from 1996 to 1999, domestic consumption increased during the same periodby 68%, and the number of domestic consumers by 84%.16

C. Impact on Institutions and Policy

42. The financing of the Project was a pioneering effort in promoting private sectorparticipation and the largest commercial financing package arranged so far in the Lao PDR.ADB, as the lead coordinating agency, provided financial and legal advice (footnote 3). ADBalso helped develop the policy framework, including the methodology for evaluating privatesector proposals. The Government and EdL benefited by preparing and negotiating the licenseagreement and the PPA. This has been useful for other projects and the utility operation as awhole. Subsequent to the Project, similar agreements were processed for Houay-Ho (150 MW)and Nam Theun 2 (1,080 MW). The creation of a private company for the Project has providedexperience in working with private sector partners to EdL personnel who serve on its Board. TheProject can serve as a model for effectively combining multilateral and bilateral aid, andestablishing a successful public-private partnership that significantly benefits the country.

43. The Project has made a moderate contribution in terms of capacity building andtechnology transfer in the sector. The power plant staff have received training in the

15Loan 1867-LAO: Environment and Social Program, for $20 million, approved on 6 December 2001. In addition, TA3535-LAO: Energy and Transport Socio-Environmental Management, for $150,000, approved on 10 November2000, and TA 3746-LAO: Capacity Building for Environment and Social Management in Energy and Transport, for$600,000, approved on 22 October 2001.

16The Government targets electrification of 90% of households by 2020. For 2005, the target is 60% of householdsand 40% of villages, as against the 2001 levels of 34% and 20%, respectively.


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implementation and operation of a hydropower facility and in the maintenance of the relatedequipment. Similarly, the training received for EMDs activities has been of high quality and theexperience gained by the staff has augmented the capacity within the country. However, it is on-the-job training and limited to those who are currently employed by THPC. If EdL desires toexpand this training to its own staff as the majority stockholder of THPC, it can makearrangements for such. In a perverse sense, the unforeseen negative environmental and social

effects of implementing the Project without adequate baseline data and the resulting scrutiny bymany were valuable lessons to EdL and the Government, which will serve them well in futuredevelopments if heeded.

V. OVERALL ASSESSMENT

A. Relevance

44. The Project is assessed as highly relevant. It taps the hydropower potential of the LaoPDR and is currently one of its main foreign exchange earners. The Project is well designed inengineering terms to achieve the required output. The low average cost of generation attests toits feasibility and the suitability of the site for hydropower development. The only drawback was

the lack of baseline data at the formulation stage that hampered the proper design ofenvironmental and social mitigation measures and resulted in unanticipated impacts.

B. Efficacy

45. Since commissioning, the Project has operated at a 96% plant factor and exportedslightly more than 95% of available power to EGAT, as planned. THPCs sales revenuesincreased from about $42 million in 1998 to $58 million in 2001. The foreign exchange revenuetarget of $25 million a year for the Government and EdL will be exceeded once THPC startspaying income taxes. The earnings, distributed in the form of dividends among theshareholders, have substantially strengthened EdLs financial health and contributed to theexpansion of the domestic electrification program. The royalties, and the taxes to be paid to the

Government from 2004 onward, allow it to increase social expenditures. The Project isconsidered highly efficacious.

C. Efficiency

46. The Project was completed on schedule and 11% below the cost estimate. Theconstruction cost compares well with other similar power plants. At less than $0.02 per kWh, thecost of generation is low. Excluding the unquantifiable environmental and social impacts, theEIRR from the countrys perspective is 18.5%. The FIRR is 17.0%, well above the weightedaverage cost of capital of 8.3%. In 2002, THPC refinanced its debts, replacing the moreexpensive commercial loans. This also enabled a capital reduction of $55 million by theshareholders. The Project is assessed as highly efficient.

D. Sustainability

47. Given the quality of construction and maintenance, the Project should be physicallysustainable throughout its expected service life and beyond. The issues of sedimentation needto be addressed by periodic inspection and maintenance. The PPA with EGAT, in its presentform, ensures financial sustainability provided that future baht devaluations, if any, are not ofextreme magnitudes and the US inflation remains low. The PPA will be renegotiated in 2008.The impact of Nam Theun 2 upstream of the Project is expected to be limited. The sustainability


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of the MCP and the enhanced livelihood programs is not fully assured, but EMD is workingtoward this goal. Overall, the sustainability of the Project is assessed as likely.

E. Institutional Development and Other Impacts

48. The pioneering effort, in terms of promoting private sector participation in the power

sector and the technology transfer through on-the-job training, had a beneficial impact. TheProject can serve as a model for effectively combining multilateral and bilateral aid, andestablishing a successful public-private partnership. Its macroeconomic impact has beensubstantial. On the negative side, considerable environmental and social impacts becameapparent with the start of operations in 1998. At the time of the PCR mission, some impactswere not mitigated to the satisfaction of ADB and the related loan covenants were not fullycomplied with. To rectify the situation, the 10-year MCP was formulated, and its implementationis under way.

F. Overall Project Rating

49. Had adequate mitigation measures been taken at the outset, the Project would have

been highly successful, given its high relevance, efficacy, and efficiency, its likely sustainability,and its substantial institutional development and macroeconomic impacts. Because of the initialnegative environmental and social impacts, the OEM rates the Project successful, bordering onhighly successful.

G. Assessment of ADB and Borrower Performance

50. The initial EIA was prepared under the bilaterally financed feasibility study. In hindsight,it may have been prudent to have had it reviewed by environmental and social specialists.When the environmental and social concerns emerged, ADB did act in a decisive andresponsible manner to encourage THPC to formulate and implement the comprehensive MCP.ADB rightly made the loan to the Government, enabling it to relend it to EdL to finance its equity

in THPC. Given the professional capacity of THPC to manage procurement, construction, andfinancial matters, ADBs oversight role during implementation was appropriately minor. Therewere seven missions, two of which included environmental and social specialists. In addition,the ADB staff concerned requested the Operations Evaluation Department to include the Projectin its thematic evaluation of environmental and social impacts to derive lessons for the future. 17ADB did the right thing in giving a limited waiver for the negative pledge of the loan to facilitatecommercial financing. Without this waiver, the financing would certainly have been more costlyor even unavailable to THPC. This indirectly has led to higher dividends to EdL and taxreceivables to the Government, positively affecting the amount of funds available for socialdevelopment. ADBs performance is rated satisfactory.

51. THPCs performance has been satisfactory as well. During construction, THPC acted

responsibly and efficiently to meet the Projects timing and cost targets. Despite the Asianfinancial crisis and the ensuing financial problems, THPC was effective in accessing thenecessary funds. The significant construction cost savings helped ease the financial problems.By project completion, THPC complied with all loan covenants, except the two related to theEMP, and has now fulfilled also these in a satisfactory manner through the ongoingimplementation of the MCP. Although there were some delays in developing a comprehensive

17ADB. 1999. Special Evaluation Study on the Social and Environmental Impacts of Selected Hydropower Projects.Manila.


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EMP during implementation and in the early years of operation, when environmental and socialimpacts emerged, THPC acted in a responsible manner addressing the problems as theyhappened or undertaking to address them in the near future.

VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS

A. Key Issues

52. Power Purchase Agreement. The PPA has both positive and negative features forTHPC. While the quantity of electricity sold is guaranteed, the sales revenues depend on twokey factors. First, the annual tariff increase of only 1% in nominal terms implies a decrease inreal terms if the US inflation rate is higher. Second, the Asian financial crisis has drawn attentionto fluctuations in exchange rates. A baht rate set in 1996 and valid for 10 years aftercommissioning has resulted in a significant drop in revenues in US dollar terms. The recentrefinancing has aligned debt service payments with the currency profiles of EGAT paymentsbuilding a natural hedge against such foreign exchange risk. Learning from these experiences,future PPAs should balance considerations of the quantity sold with those of potential revenuesand perhaps index the tariff at least partially to the inflation rate, and/or provide a hedging

mechanism against the foreign exchange risk.

53. Use of an ADF Loan. The use of ADF for an essentially commercial project wasquestioned within ADB at the formulation stage, but it was agreed that since the Lao PDR waseligible for ADF borrowing, it would be appropriate to approve a soft loan provided earningsfrom the Project were used to increase the social expenditure allocation in the national budget.Although it was targeted that the share of social spending would increase to 20% in 2000, therewas no specific monitoring mechanism for this, nor was it stipulated as a covenant. It wasfortunate that the target was achieved as expected. If ADF is used for future projects of thisnature, which are essentially private sector commercially sustainable projects, a covenantshould be included to direct at least part of the government earnings to poverty reductionactivities.

54. Impact from Other Plants. Through its license agreement, THPC is protected againstupstream developments except the construction of Nam Theun 2 at 600 MW. Originally, NamTheun 2 was expected to reduce THPCs generation by 275 GWh per year from 2001 onwardwhen it was supposed to commence operations, but there has been a substantial delay. Thefeasibility study for a 1,080 MW power plant has now been completed, a PPA with EGAT hasbeen prepared, and financing is being sought, with a view to completing Nam Theun 2 in 2009.Although its capacity has increased, this change may not have an additional impact on THPCbecause at the request of EGAT, Nam Theun 2 is now proposed to operate as a 10-hourpeaking facility instead of a 24-hour base load facility. The water flow to THPC would, therefore,not be reduced more than what was envisaged at appraisal. However, this has to be carefullymonitored by THPC. In addition to changes in the water flow, Nam Theun 2s effect on sediment

load and other environmental impacts should also be closely monitored by THPC.

55. Mitigation and Compensation Program. EMDs MCP is very comprehensive andambitious and adopts best practices in terms of participation and building ownership. Particularattention needs to be paid to sustainability of the various programs. Specific recommendationsare made in Appendix 12. These include (i) building more ownership of the village-level projects,(ii) taking steps to make the savings and credit schemes more sustainable, (iii) encouragingincreased female participation in the livelihood activities and their management, (iv) establishingparticipatory benefit monitoring and evaluation, (v) improving collaboration with local


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government agencies, and (vi) disseminating more proactively results of the work being done forthe affected villages.

B. Lessons Identified

56. The successful financing, implementation, and operation of the Project can serve as a

model for such public-private partnerships in the power sector. The ingredients for success are(i) through technical and economic evaluation of a suitable hydropower site, (ii) choice of agroup of developers that has the necessary financial and technical experience, (iii) negotiationof a PPA that is advantageous to all parties involved, and (iv) the willingness to learn frommistakes made and take responsibility to mitigate them.

57. Transbasin hydropower projects, even if quasi-run-of-river in design and operation, canhave significant environmental and social impacts. Their implementation should not proceedwithout gathering adequate baseline data and designing a comprehensive mitigation program.Sufficient time and resources should be allocated for this prior to implementation. Any post-approval mitigation measures need to be supervised closely for timely implementation by partiesresponsible.

58. A qualified and adequately staffed environmental and social monitoring unit should be inplace prior to and during project implementation to monitor the impacts and take proactivemitigation actions in a timely manner. The responsible authority in the country should buildcapacity to fulfill its oversight function and ensure appropriate supervision of similar projects inthe future.

59. Given the importance of PPAs and their intrinsically complex nature from technical,commercial, and legal points of view, ADB should, if requested, provide assistance to itsdeveloping member countries in drafting and negotiating such PPAs.

C. Follow-Up Actions and Recommendations

60. The Government (through the Science, Technology, and Environment Agency), as wellas ADB, should continue to monitor the environmental mitigation efforts agreed to by THPC untilthese have been completed, and offer whatever support possible.

61. EMD should document the baseline information within 4 months of initiating the activitiesin a particular village and monitor the socioeconomic data for a sample of beneficiaries on anannual basis until the completion of the MCP.

62. Studies of erosion, sedimentation, fishery, and other impacts of THPC should becompleted and documented in the next few years before Nam Theun 2 is commissioned toensure that any effects detrimental to THPC operations and any negative environmental

impacts are not attributed to THPC. This is to avoid any future cost of mitigation that isattributable to the actions of others.

63. Although power plant performance, O&M, and site management are satisfactory,preventive maintenance should be carried out periodically to ensure sustainability. For thispurpose, it would be useful for THPC to procure some items such as depth finders, sedimentremoval equipment, and differential pressure measuring equipment for the trash racks, and agrappling hook within the next year. Appendix 7 gives more detailed recommendations on plantO&M. In addition, making the model tests available to the new operator who takes over at the


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beginning of 2003 would enable appropriate monitoring of the headpond operation and gateschedule. The correction of existing software glitches by April 2003 would allow the powerplant to respond during unforeseen circumstances.

64. The number of trained staff for some special operations (i.e., maintenance of thesupervisory control and data acquisition system and control system management) is limited.

THPC should get more staff trained in these areas by December 2004 and also establish anonline connection to the vendor as soon as possible for diagnostics, upgrades, and restorationin the event of a system crash.

65. Local government authorities, together with THPC and the villagers in the project area,should develop a watershed management plan by December 2004 for the upstream areas andassign its supervision to an agency with adequate funding and authority.


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Appendix 1 21

TECHNICAL NOTE ON PROJECT DESIGN

A. Project Description

1. The Theun-Hinboun Hydropower Project is located in the central highlands of the LaoPeoples Democratic Republic (Lao PDR). The Project is of transbasin configuration, diverting a

portion of the flow of the Nam Theun to the Nam Hai, which is a tributary of the Nam Hinboun.Both flow westward from the project site and discharge into the Mekong River. The difference inelevation of the two basins is about 245 meters (m). The diversion was accomplished by theconstruction of a concrete diversion dam on the Nam Theun, consisting of a combination of aflap gate, two radial gates, and a fixed overflow weir section on the right bank.1 The weir isequipped with adjustable rubber gates 2 to provide a 3-m variance in crest elevation. The dam isalso equipped with sand flushing gates installed along its base. The intake is gated andequipped with trash racks and situated along the left bank of the created headpond (forebay).The diverted flow passes through the narrow ridge separating the basins thr

Theun-Hinboun Hydropower Project (Loan 1329-LAO[SF])

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