Global Environmental Change 24 (2014) 20–29

Private equity, public affair: Hydropower financing in the MekongBasin

Vincent Merme a,e,*, Rhodante Ahlers b, Joyeeta Gupta c,d,e

a Independent Researcher, Franceb Independent Researcher, The Netherlandsc University of Amsterdam, The Netherlandsd Amsterdam Institute for Social Science Research, University of Amsterdam, Delft, The Netherlandse UNESCO-IHE, Institute for Water Education, Delft, The Netherlands

A R T I C L E I N F O

Article history:

Received 30 May 2013

Received in revised form 13 September 2013

Accepted 3 November 2013

Keywords:

Hydropower

Finance

Mekong

Water

Accountability

E&S impacts

A B S T R A C T

Large-scale hydropower development is increasingly popular. Although international finance is a

significant driver of hydropower market expansion, financial data is relatively obscure and literature

remains scarce. This article tracks the financial process in hydropower development in the Mekong River

Basin. It shows a shift in influence from traditional public international financial institutions to a diverse

mix of private actors, who are enticed with attractive terms of trade and complete decision making

power over water resource management. Traditional players have now taken on a more facilitating and

regulatory role by providing guarantees and mitigating social and environmental impacts partly

releasing the new global and regional private actors from these responsibilities. Because hydropower

financing involves opaque processes and confidential documents public accountability is severely

limited. While the private sector benefits from relatively short term returns, the public sector is left

responsible for long term impacts.

� 2013 Elsevier Ltd. All rights reserved.

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1. Introduction

Increasing global energy demand and the need to shift awayfrom fossil fuels contribute to the current renaissance ofhydropower development. Proponents commonly present hydro-power as a straightforward way to exploit the power potentialtrapped in uncontrolled rivers, thereby supplying electricity,reducing greenhouse gases and attracting foreign currency, forsustainable regional development. Both the International EnergyAgency and the World Bank (WB) argue that seventy percent ofeconomically feasible hydropower potential (1330 GW) is stillunexploited, of which most lies in Africa, followed closely by theAsia-Pacific region (IEA, 2010; WB, 2009). This potential farexceeds existing production capacity. A study commissioned bythe WB (corroborated by our own research) reveals that large-scalehydropower investment costs between US$ 1000 and 4000 per kWcapacity, depending on the unique nature of each project (IEA,2010; MRC Database, 2009; WB, 2000). Consequently, exploiting

* Corresponding author at: Archimedesstraat, 37 III, 2517 RR The Hague,

The Netherlands. Tel.: +31 645 511 954.

E-mail addresses: vincent.merme@gmail.com (V. Merme),

rhodanteahlers@gmail.com (R. Ahlers), j.gupta@uva.nl (J. Gupta).

0959-3780/$ – see front matter � 2013 Elsevier Ltd. All rights reserved.

http://dx.doi.org/10.1016/j.gloenvcha.2013.11.007

the energy confined in those undammed rivers appropriate forhydropower development would require roughly between US$1.33 and 5.32 trillion. The average returns on investment for equityinvestors depend on several factors but sits between seven andtwenty percent (and around two to three percent over the cost ofcapital for debt lenders) (Ljung, 2001). Such a prospective marketmakes investment in hydropower financially quite attractive ingeneral and in particular in the Mekong River Basin – the casestudy in this paper.

The current increased interest in large dam development and itsfinancial opportunities is not accompanied by increasing literatureon hydropower financing dynamics and the mechanisms that bring(private) financial actors together to finance a single dam project.Much literature is available on the social and environmentalimpacts of large dams (in general, see Gupta, 2002; Khagram,2003; Klingensmith, 2007; Scudder, 2005; WCD, 2000 and for theMekong, see Fergusson et al., 2010; Grumbine and Xu, 2011; Hoaet al., 2007; Kummu and Varis, 2007; Stone, 2011; Vaidyanathan,2011; Virtanen, 2006); challenges facing dam hydropowerdevelopment since the World Commission on Dams came outwith its influential report on sustainable dam building (in general,see Baghel and Nusser, 2010; Bosshard, 2010; Kaika, 2006; Karkiet al., 2005; Nusser, 2003; Shah and Kumar, 2008; and for theMekong, see Grumbine et al., 2012; Smits and Bush, 2010); and the

V. Merme et al. / Global Environmental Change 24 (2014) 20–29 21

history and geopolitics of dam development, including trans-boundary governance and institutional regimes (in general, seeGoldsmith and Hildyard, 1984; Klingensmith, 2007; McCully,1996; Swyngedouw, 1999; and for the Mekong, see Bakker, 1999;Friesen, 1999; Hirsch, 2001, 2010; Krongkaew, 2004; Li et al., 2011;Liebman, 2005; Magee, 2006; Makim, 2002; Sneddon and Fox,2006; Sneddon, 2012; Yu, 2002). More recently, the emergingconcept of water grabbing through infrastructure building isgaining attention (in general, see Hildyard, 2012; Islar, 2012; andfor the Mekong, see Matthews, 2012). Several studies discusslending policy and conditionality (in general, see Dreher, 2006;Kilby, 2008; Sklar and McCully, 1994; Strickland and Sturm, 1998;Temple, 2010; Usher, 1997), power sector deregulation (in general,see Ingco, 1996; Williams and Ghanadan, 2006) and privatization(in general, see Barnett, 1992; Ramamurti and Doh, 2004; Ward,2010). A few studies focus on the shifting roles of financiers, therising private sector, and new hydropower financing instruments(in general, see Briscoe, 1999; Ljung, 2001; WB, 2000, 2012; and forthe Mekong, see Molle et al., 2009; Wong, 2010); the role ofinternational bodies, such as the Clean Development Mechanismunder the Kyoto Protocol to the Climate Change Convention, andregional financial institutions in dam building (in general, seeErlewein and Nusser, 2011; Usher, 1997; WWF, 2003; and for theMekong, see Glassman, 2010; Kaisti and Kakonen, 2012; Kakonenand Kaisti, 2012; Middleton, 2009, 2011) and finally sustainablehydropower financing (in general, see WCD, 2000; UNEP, 2004;and for the Mekong, see MRC, 2010c).

Underrepresented in the literature on dams in general and onthe Mekong in particular is a discussion on hydropower financingdynamics and its implications for ownership, regulation, the rightto water, community life and sustainable development. To addressthis gap, this paper focuses on the role and influence of financialactors in capital-intensive hydropower development. It aims tocontribute to a better understanding of the financing andgovernance of large hydraulic infrastructures and how they areshaped by, and in turn shape, financial dynamics, given the scale ofboth the infrastructure and the capital involved. Using anintegrated approach for analysing socio-ecological transformationand dynamics of large-water infrastructures (Ahlers, 2011), thisresearch analyses the nexus between water, finance and develop-ment. Because the literature is scarce, and financing constructionsare highly intricate, we focus on one particular case, the NamTheun 2 (NT2) project in the Mekong River Basin (MRB). This casestudy is based on scientific literature, documentation availablefrom non-governmental organizations and financial institutions,information provided publicly by the actors involved in the NT2,and the lower Mekong hydropower database from the MekongRiver Commission (MRC Database, 2009). The results were cross-checked with key informants.

We begin our discussion by describing the context of theMekong Basin and our case study, the NT2 diversion dam. From thecase study we discern four new trends in hydropower develop-ment, which we subsequently link to the changing policy contextthat has facilitated the emergence of contemporary hydropowerfinancing. In particular, we focus on the shifts that have taken placeby discussing the emerging financial arrangements, the actorsinvolved, and their motivations. The paper concludes by assessingthe possible impact of commercial funds in shaping river basinsand the consequences of the institutional shifts on the reallocationof waters and thereby the socio-ecological integrity of the riverbasin.

2. The Mekong River hydropower expansion

The MRB has seen extensive hydropower development over thepast hundred years. Within a context of regional economic

integration, climate change awareness, alongside global restruc-turing of the power market, this development has attracted theinterest of a variety of financial actors. Of the assemblage of damsproposed, planned, and constructed in the basin, we selected theNam Theun 2 Power Company (NTPC) project as a case study. TheNTPC is a milestone in shaping regional development and paves theway for more ambitious dams to be built in the future (Wong,2010), especially in Lao PDR, where approximately seventy percentof the dams planned for the Mekong are located. With its complexfinancing scheme that includes 27 distinct parties, each with itsown interest and conditions for loan disbursement, this casereveals important insights into contemporary financing dynamicsof hydropower development. This section first discusses theMekong Basin (see Section 2.1), the rise of dam building and theemerging actors in the Mekong Basin (see Section 2.2), in order toset the context for the case study of the NTPC (see Section 2.3).

2.1. The Mekong Basin

The Mekong River and its tributary system run through sixriparian countries: China, Myanmar, Lao PDR, Thailand, Cambodiaand Vietnam. The basin is divided into two parts: the mainlymountainous Lancang or Upper Mekong Basin, and the LowerMekong Basin, which consists of lowlands and floodplains coveringaround 70 percent of the basin (Hirsch and Jensen, 2006; MRC,2010a; UNEP, 2006). Of the approximately 70 million people wholive in the MRB, 75 percent depends on two main economicactivities: fishery and farming (UNEP, 2006). Within this largelyrural population, 25 million people live within a 15 km corridor oneither side of the Mekong mainstream. They depend largely on theprovisioning, supporting and cultural ecosystem services providedby the river for their livelihoods, food security and source ofincome (MRC, 2010a; UNEP, 2006; Wong, 2010).

2.2. Emerging actors in financing dams in the Mekong

For the Mekong the move into the 21st century meantstructural changes. In response to the Asian financial crisis whichbegan in Thailand in 1997, the Mekong member countries had toimplement the structural adjustment programmes promoted bythe International Monetary Fund (IMF) (see Section 3.2), andrestructured their power sector (Makim, 2002; Yu, 2002). Butentering the twenty-first century, the regional commercial bankswere accumulating sufficient capital and understanding of thehydropower sector to develop complex financing mechanisms toshape the financing of this sector. Emerging regional financiersfrom riparian robust economies (i.e. Thailand, Vietnam, Malaysia,and China) are now scaling up their activities, making ample fundsavailable to stimulate the current increase in hydropowerdevelopment in the basin.

The total hydropower capacity in 2012 installed in the MRBamounted to more than 14,600 MW. From 1990 to 2012, 36hydropower dams were built in the Lower Mekong Basin and 5mega dams in the Upper Mekong Basin (MRC Database, 2009; IR,2013). Fig. 1 shows the scheduled hydropower development boomin the Lower Mekong Basin. The estimated hydropower potentialaccording to the Mekong River Commission equals to 53,000 MW,of which 33,000 MW are identified for the lower Mekong. Onehundred tributary and mainstream dams (85 in Lao PDR, 13 inCambodia and 2 in Vietnam; MRC Database, 2009) are either underconstruction, licensed or planned in the Lower Mekong and 8mainstream dams are underway in the Upper Mekong, all in China(MRC Database, 2009; IR, 2013). Only in Lao PDR, 22 dams arelicensed and 60 planned, of which 9 are proposed in the Mekongmainstream (Matthews, 2012). The Government of Lao (GoL) hasagreed to supply 7000 MW of hydroelectricity to Thailand by 2015.

Fig. 1. Cumulative installed hydropower capacity in the LMB.

Source: Based on MRC Database (2009). China and Myanmar dams are not included in this picture.

V. Merme et al. / Global Environmental Change 24 (2014) 20–2922

Not only are more dams planned, they are getting larger. TheXayaburi investment, the first mainstream dam under construc-tion in the Lower Mekong, will be almost three times bigger thanthe current largest investment (which is our case study NT2)(Smits, 2011). The Pak Beng dam, located north of Luang Prabang innorthwestern Oudomxay province, might be the second main-stream dam. It will cost US$ 1,88 billion and will have 1300 MWinstalled capacity (Radio Free Asia, October 18, 2012).

The total investment for the 100 scheduled dams in the LowerMekong, of which 12 are planned on the lower Mekongmainstream is estimated to be around US$ 50 billion (MRCDatabase, 2009). Regional investors and developers encourage theconstruction of mainstream dams in the Lower Mekong by makingthe necessary funds available. A combination of rising privatesector investment, strong support from International FinancialInstitutions (IFIs) and policy changes attracting investment makehydropower development in the Mekong booming business (Kaistiand Kakonen, 2012; MRC, 2010b; Middleton, 2011; Wong, 2010).

Of the regional energy firms, the Thai are most active withnumerous companies becoming involved, the most prominentbeing EGCO, Ratchaburi, GMS Power and Ch. Karnchang. Never-theless, Vietnamese companies such as EVN and Petro Vietnamalong with Malaysian companies MegaFirst and Gamuda and theChina Southern Power grid are also seeking to stake their claims inMekong power development. But also global power developers areinvolved in the Mekong, such as the French EDF, the NorwegianStatfkraft and the Chinese Sinohydro. These power sectordevelopers are accompanied by global banks (e.g. ING, BNPParibas, Bank of Tokyo) as well as regional ones. A similar shift isalso notable with the export credit agency, as traditional agenciessuch as Coface, GIEK and EKN, are moved aside by regional ECAssuch as the Thai export–import bank and China export–importbank. For the Mekong, this has enabled regional commercial banksto become key financiers and consequently, as we show in our case,major decision makers. For instance, in Lao PDR, Nam Ngum 2 dam(completed in 2010, with a US$ 760 million budget and an installedcapacity of 615 MW (Middleton, 2009)) has been entirely financedby three Thai commercial banks (Krungthai Bank, Siam City Bankand Export-Import Bank of Thailand). The power company is aholding by Thai construction and energy firms (Middleton, 2009;MRC Database, 2009). Another example is the controversialXayaburi dam. It took only four commercial Thai banks (BangkokBank, Kasikorn Bank, Krungthai Bank, Siam City Bank) to financethe US$ 3.8 billion project (BankTrack, 2013; Matthews, 2012). The

project will earn the developer, Ch. Karnchang, more than 4.5billion baht (roughly US$140 million) a year on average (BangkokPost, 2012).

2.3. The Nam Theun 2 Power Company

2.3.1. The context of the project

To illustrate the current capital-intensive hydropower rush, weexamine what Wong argues is ‘‘the most complex public–privatepartnerships in the history of dam development’’ (2010, p. 107).Considered a prototype for the best project finance deal in the Asia-Pacific region, it received six awards from diverse financialmagazines (EGCO, 2010). In addition, NTPC represents flagshipcollaboration between the WB and the GoL with broad effects onregional development (Wong, 2010). The intention to exploit theTheun River was first considered by French colonial engineers asearly as the 1920s (Cucherousset, 1927). Construction began in2005 and was completed in 2010. The NT2 power facility isoperational since May 2010 (EDF, 2010). Situated in the centralprovinces of Khammuane, Bolikhamxay and Savannakhet, approx-imately 200 km southeast of Vientiane, the NT2 is the largesttributary dam in the Mekong Basin with an installed capacity of1070 MW. As an export-oriented hydropower project, it generates95 percent for the Thai grid (sold to Electricity GeneratingAuthority of Thailand) and only 5 percent for Laotian domesticconsumption (sold to Electricite du Laos), both through a PowerPurchase Agreement signed between the power company and theelectricity facilities (ADB, 2005; EDF, 2007; WB, 2005) (Fig. 2).

2.3.2. Actors and sources of funding

The NTPC Limited, created in 2002 as a limited liabilitycompany under Lao PDR law, implemented the NT2 hydropowerproject. Until 2010, the firm was owned by four parties: Electricitede France International (EDFI – 35 percent), Electricity GeneratingPublic Company of Thailand (EGCO – 25 percent), the Lao HoldingState Enterprise (LHSE – 25 percent) and Italian-Thai DevelopmentPublic Company (ITD – 15 percent). Since then ITD has sold itsshares to EDFI and EGCO (EDF, 2010; EGCO, 2010). Twenty-sevendiverse parties have participated in financing the US$ 1.45 billionproject, with a typical debt/equity ratio of around 70:30 (Ward,2010). Equity investors buy shares in the power company. Whenenough equity is secured, debt financiers lend or secure theremaining amount of money needed to achieve the project. Thefour shareholders (owners) directly financed the equity package

Fig. 2. Key existing and proposed dams in the Nam Theun Basin, Lao PDR.

Source: IR (2008) (copyright permission pending).

V. Merme et al. / Global Environmental Change 24 (2014) 20–29 23

through loans, credits and grants, while financial institutions,ranging from development banks to private commercial banks,financed and supported the debt package through loans andguarantees. The different sources of project funds are summarizedin Table 1.

The financial plan revolved primarily around multilateraldevelopment banks, bilateral and export-credit agencies andequity sponsors (e.g. EDFI, GoL) to allow for project financialviability that would attract sufficient capital from the privatesector (e.g. commercial banks). The financial participation of theFrench parastatal energy company and the Laotian Governmentwas limited, but their participation in the equity package was aprerequisite for the project to take off (EDF, 2007; Kakonen andKaisti, 2012). Additional commercial loans (accounting for more

Table 1NTPC funding sources.

Sector/origin Scale

Equity (sponsors)

EDFI Public–private/France 157

EGCO Public–private/Thai 112

LHSE Public/Lao PDR 112

ITD Public–private/Italy, Thai 67

Debt (financial actors)

MDBs Public/international 210

BDAs Public/France, Thai 90

ECAs Public–private/France, Sweden, Norway 200

Private Private/Thai 500

Total 1450

Source: Data compiled and adapted from ADB (2005) and WB (2005).

than 20 percent of the total) were covered by guarantees providedby Multilateral Development Banks (MDBs) and Export CreditAgencies (ECAs) (WB, 2005). An ECA can guarantee an exporter thatit will repay loans taken out to finance the goods being exported ifthe importer fails to pay for them. A Bank guarantee is a promise torepay a loan if the original borrower defaults.

The role of the IFIs lies in sharing the political risks (risk ofpolitical, legal, policy change affecting taxes and duties regimes,property rights, force majeure or other specific obligations of asovereign nature) and ensuring compliance with Environmentaland Social (E&S) standards. Of the 16 commercial banks, the 9OECD banks are backed by the Political Risk Insurance provided bythe Multilateral Investment Guarantee Agency, the InternationalDevelopment Association (both part of the WB group), and the

(US$ million j %) Type

.5 10.9 Core capital (or loan)

.5 7.7 Core capital (or loan)

.5 7.7 Public grant/loan

.5 4.7 Core capital (or loan)

.0 14.5 Debt guarantees to lenders/direct loans

.0 6.2 Direct loans

.0 13.8 Debt guarantees to lenders

.0 34.5 Direct loans

.0 100%

V. Merme et al. / Global Environmental Change 24 (2014) 20–2924

Asian Development Bank (ADB). Despite financing around onethird of the total project cost, the 7 private Thai banks did not covertheir investments with political risk guarantees. Details of theinvolvement of private debt providers are not publicly available.One could argue that they refuse to disclose their activities forcompetitive purposes. The participation of public debt providers(MDBs, BDAs), however, is exhaustively detailed in institutionalreports.

For Laos, the NT2 cost more than 53 percent of Lao PDR’s annualGDP (US$ 2735 billion in 2005 in current US$ – WB, 2013).Therefore it is not only its most valuable asset, but also its largestsource of foreign exchange. Over the concession period, it isprojected that the Laotian government will acquire roughly US$ 2billion of revenue from its 25 percent share in the NTPC in tax,royalties and dividends (EDF, 2007; Kakonen and Kaisti, 2012). TheADB (2005, p. 23) argues that this translates into a very favourable38% return on equity over the 2011–2034 period. To attractinternational capital, the Laotian government established invest-ment incentives, such as extensive tax exemptions, special importduty rates for materials, equipment and supplies, and eased labourregulations (Powering Progress, 2012).

The initial involvement of the IFIs, introducing financialinstruments new to dam financing and appropriate investmentincentives, have enabled the financing of NT2. Fig. 3 is a schematicrepresentation of the financial structure showing the differentactors, the type of funding they provide, and the main contractsinvolved (Head Construction Contract, Power Purchase Agreement,Shareholders Agreement, and Concession Agreement). Beforecommissioning, financial flows come mostly from investors andshareholders into the power company to develop the project andmitigate impacts; whereas after the beginning of commercial

Fig. 3. Schematic representation of the main financial flows in dam building.

Source: Author’s drawing based on EDF (2007), ADB (2005) and MIGA (2006).

operation, financial flows are reversed, from the electricity buyersto the shareholders (dividends and royalties) and financial actors(loan repayment, plus interests). Loans are usually secured by cashflows from the power company (Molle et al., 2009).

2.3.3. Regulatory and legal framework

A regulatory and legal framework secures the legality anddurability of the power facility. The NT2 dam is structured as aBuild-Own-Operate-Transfer arrangement, which means that theforeign consortium holding NTPC is allowed to develop, finance,construct and operate the dam for a concession period of 25 years.If the lease is not continued the dam is transferred to the Laotiangovernment at no cost. Far from being a gift, the Laotians will bearsignificant expenses to cover needed maintenance, upgrading andrecovery works. This arrangement is formalized in the ConcessionAgreement, which stipulates the rights and obligations for both thegovernment and the NTPC (NT2 PCL, 2005; WB, 2005). Asstipulated in the publicly available summary of the ConcessionAgreement, NTPC is in charge of all water management related toNT2. Except for minimum water release obligations and restric-tions, NTPC has exclusive water rights over the flows of the NamTheun, the Xe Bang Fai and a few other rivers, including the right toretain all water as storage in the reservoir, to manage the timingand quantity of retention and release of all water in the reservoir,to alter the natural flows, levels and riverbank profiles ofdownstream rivers and to decide whether and how much wateris released for local irrigation. In fact, the summary specificallystates that: ‘‘In order to enable the Company to fully utilize andenjoy those Water Rights, the GOL agrees not to do or permitanything to be done in, or in respect of, the flows or levels of theNam Theun River, its tributaries or in the Catchment Area (whether

V. Merme et al. / Global Environmental Change 24 (2014) 20–29 25

upstream or downstream of the Reservoir) or the Xe Bang Fai Riverand the Downstream Channel which could impact on the Project inthe manner referred to in the Concession Agreement’’ (NT2 PCL,2005, p. 9). This shows just the tip of the iceberg of the loss ofLaotian decision-making power over its natural resources. As thefull Concession Agreement (a 1000-page document) is confidential– the details of the transfer are left out of public scrutiny andreduce public accountability. It thereby leaves those affected bythe construction of the dam and changes in river flows without anyaccess to information on the dam’s operating cost, liabilities, orwater management priorities (Probe International, 2004).

2.3.4. Environment and social principles

According to the WB, the NT2 project financing is one of the first(and likely the last) large funding packages that is conditioned onEnvironmental and Social (E&S) principles, which all of the projectlenders have endorsed (Kakonen and Kaisti, 2012; WB, 2005).Wong (2010, p. 109), in her dissertation on the historic and currentdevelopment of the Mekong, argues that the ‘‘NT2 was thelaboratory for testing this new view’’ of the WB as facilitator andmitigator in hydropower development. Three central documentsaddress the E&S impacts, mitigation, compensation, and restora-tion measures: the Environmental Assessment and ManagementPlan, the Resettlement Action Plan and the Social and Environ-mental Management Framework and Operational Plan (NT2 PCL,2005). In addition, the GoL makes funds available for povertyalleviation – generated by the Lao Holding State Enterprise as theprincipal source of funding for the country’s public budget –following the procedures and rules stated under the revenue andexpenditure management agreement signed between the Laotiangovernment and the WB (ADB, 2005; Middleton, 2009; MIGA,2006). On this point, it is important to note that Lao PDR is one ofthe ten most corrupt countries in the world (Kakonen and Kaisti,2012) and this raises question regarding the government’sintegrity in its participation in the dam. Furthermore, severalviolations of both the Concession Agreement as well as the WB E&Spolicies have already been reported (Matthews, 2012, p. 402compiles a range of violations identified by others). In 2010, forexample, International Rivers showed that the NTPC had beguncommercial operations despite not having fulfilled key E&Sconditions, especially regarding communities living along thedownstream Xe Bang Fai River (Middleton, 2009). Even though theADB responded that short-term impacts were to be expected andthat ‘‘the project will deliver sustained poverty reduction anddevelopment benefits over the long-term’’ (ADB, 2010), there is noevidence as yet for such optimistic results. Instead local villagersare concerned about their long-term food security, as communitiesfrom the watershed and forest areas now economically depend ondeclining reservoir fisheries and unsustainable illegal logging (IR,2012). Such impacts endanger future viability and protection of thewatershed, which were among the original justifications forbuilding NT2 (Wong, 2010).

Finally, because E&S responsibilities lie mostly with the IFIs(such as the WB, ADB and Government Agencies) and hostinggovernment (public agencies), private financiers feel less com-pelled to adhere to these obligations, especially when thesefunders have a dominant role in the financing arrangements (seealso, Hildyard, 2012; Wong, 2010). EDFI, for example, suggestedthat IFIs and host governments should prepare suitable E&Sbackgrounds in advance so that the private sector can be fullyreleased from these responsibilities and not waste too much oftheir resources on pre-operation (or mitigation) development costs(EDF, 2007). Likewise, Wong (2010, p. 122) shows through a seriesof interviews with Chinese and South-Korean hydropowercompanies that even though ADB loans were interesting becauseof their low interest rates, these firms were reluctant to take these

loans ‘‘because of the conditions that accompanied them’’. Wongconcludes that we can safely assume that hydro developers havelittle incentive in complying with E&S safeguards due to ‘‘theirfundamental market-oriented nature’’ (2010, p. 122). Even thoughcorporate social responsibility is a growing trend in privateinvestment, private investors are left to apply their own standardsand to monitor and self-certify their implementation (Hildyard,2012). Being less accountable to civil society and internationalinstitutions, their activities remain outside public scrutiny.

In sum, the NTPC case study within the context of the Mekong,reveals four trends in contemporary hydro-development: chang-ing actors, roles and motivations; economic and legal restructuringof the power sector; financial construction, ownership and thenature of the contracts; implications for changing rights to water,ecosystem integrity and sustainable development. These will befurther elaborated upon in the next section.

3. Neoliberal policy and emerging practices in large-damfinancing

The rise of neoliberalism globally in the 1990s has influencedthe changing nature of investment in natural resource manage-ment. This has come together with the resurgence of largehydropower dams in the wake of climate change and the need forrenewable energy. Dams that were once seen as the temples ofmodern India by Nehru, lost their significance because of relatedsocial and ecological concerns in the 1980s, but they have nowmade a come-back! The coming together of these two trends haschanged the nature of financial investment in dams with long-lasting consequences. The NTPC is clearly a product of the recentrestructuring of the global political economy and the impact thathas had on the power sector and large dam development since theearly 21st century. Our case study shows that global paradigms,rules and actors are seamlessly merging with local rules and actorsand the two arenas cannot always be separated. This sectionhighlights four key trends in large dam financing that our casestudy indicates.

3.1. Changing actors, roles and motivations

The first key trend is the changing role of actors in terms ofsector, origin, motivations and incentives.

Financial actors can be clustered as: Multilateral and BilateralDevelopment Banks (MBDBs), Export Credit Agencies (ECAs) andPrivate Commercial Lenders and State-owned agencies (Ljung,2001). Historically, MBDBs were central actors in providing fundsfor dam development; bilateral funds represented roughly only 5percent of the total investment compared to multilateral flowsmostly from the WB, the Inter-American Development Bank andthe ADB (Ljung, 2001, p. 21). In the post-1990 period, while thecontributions of the MDBs decreased, the ECAs stimulated privatesector financing for infrastructure (Ljung, 2001). Private lenders,essentially investment banks, funds and companies, steadilyincreased their investments in infrastructure. Their participationdeclined in 1998 with the Asian financial crisis, increasing againprogressively until a new drop following the 2008 crisis (Briscoe,1999; WB, 2012). At the time of Ljung’s report, the vast majority offunds for hydropower investments were provided by State-ownedutilities and agencies through tax revenues or loans taken out bygovernments (Ljung, 2001). Since then both the financial and legalcontext for dam development has changed considerably (seeSection 3.2). This, in turn, has not only brought new actors tobecome involved in dam development but also for dam develop-ment to be less about hydropower and more about finance.

The case study reveals that increasingly financial actors such asregional banks and international energy companies are taking on a

V. Merme et al. / Global Environmental Change 24 (2014) 20–2926

much more prominent role in dam building, while the traditionallydominant players such as the IFIs have become facilitators andproblem mitigators. Although support from IFIs bolster privateparticipation by enhancing bankability and providing guarantees,only the global players seek this as regional emerging banks andhydropower companies seem to have relatively little interest inthese issues. This raises two questions: is such support gearedtowards the global, rather than regional players, and does notseeking IFIs support also mean having to pay less attention tointernational standards?

The NT2 case shows three major motivations for private sectorfinance to participate in hydropower development. Firstly, returnsare potentially high, depending somewhat on the relative freedomto operate the reservoir, and the conditions for investment aremade attractive by governments providing tax breaks, easing traderules and obligations, and protection against political risk.

Secondly, in comparison to the high potential benefits, the risksinvolved are limited. The debt investment runs over a relativelyshort period and risks are primarily carried by the national hostand less so by the commercial investor. If any E&S impacts areenvisaged, IFIs, such as the WB and the ADB, produce safeguardsdocuments and condition their loans to comply with internationalstandards to mitigate these effects. Developers also favour privateinvestors, because they carry fewer obligations than public ormultilateral funding (Matthews, 2012).

Thirdly, the investment is not dependent only on returns frompower production as innovative financial processes emerge tosupport public–private projects. The financial complexity itselfhas becoming a marketing tool. For example, in the case of NT2,the creation and management of its financial scheme provides areputation that is mobilized in acquiring new projects. While theWB strongly promotes the success of the financial construction ofNT2 (Smits, 2011; Wong, 2010; WB, 2006), its financialparticipants actively promote their success in being able to dealwith extensive, multifaceted and risky investments, involving agreat number of actors, and their ability in defining guidelines forcomplex large infrastructural projects. Instead of basing theirreputation on the quality of the energy product, they extract itfrom the financial product. Large dam financing has become aparticular expertise (Biebuyck and Bahr, 2005; UNEP, 2004).Hildyard’s recent research shows that large infrastructuredevelopment ‘‘is less about financing development (which isat best a sideshow) than about developing finance’’ (Hildyard,2012, p. 3).

The case of the Mekong Basin shows that not only the playersbut also scale of hydropower financing are changing. Theinterested financial actors are motivated to favour large supplyprojects over small-scale alternatives given the favourableconditions, thus continuing the supply-driven trajectory of largehydropower projects (IR, 2012; Kaisti and Kakonen, 2012; Smits,2011; Strickland and Sturm, 1998). Similar patterns of actors andchanging roles can be expected elsewhere in the world.

3.2. The economic and legal restructuring of the power sector

Inspired by the neoliberal movement, Structural AdjustmentProgrammes (SAPs), imposed by the IMF and supported by theWB, were implemented from the early 1980s onward in LatinAmerica, Asia, Africa and Europe to open up national economiesto the global market (Ahlers, 2010; Dreher, 2006; Ingco, 1996;Islar, 2012). These programmes demanded liberalization, dereg-ulation and privatization. This allowed for an increase of privatecapital becoming active in sectors previously less accessible, suchas the power sector. The reform in the power sector aimed tocreate competitive markets and involved corporatization, com-mercialization, and privatization. These reforms included new

energy laws to legally permit private and foreign actors to enterthe power market (Williams and Ghanadan, 2006). This hasresulted in substantial changes in the manner in which powerfacilities are financed, built, owned and operated (Ljung, 2001;MRC, 2010a).

To stimulate large-scale infrastructure development, such aslarge dams, the new power sector reforms provided new financialavenues, constellations for capital accumulation and new finan-cial instruments that also reduce risks for investors. Theseincluded political risk guarantees, credit insurance, creditenhancement such as partial risk guarantees, bond insuranceand the Clean Development Mechanism (Erlewein and Nusser,2011; Hildyard, 2012; Ljung, 2001; Ramamurti and Doh, 2004). Toencourage the private sector to invest in power generation andtrading in the global market, property rights over naturalresources were released from the public realm and new public–private arrangements were created. Not only a lack of public fundsshaped this process, but also a surplus of private capital. Largeinfrastructure facilitates the absorption of surplus capital to avoidits devaluation (on the concept of spatial fix, see Harvey, 2001a,b,2003; Hildyard, 2012; Jessop, 2006). These new arrangements ledto the entry of two types of players in the power market, theIndependent Power Producers (IPPs) and the Public–PrivatePartnerships (PPPs). IPPs are commercial companies that finance,develop, own and operate power stations. Their primary interestin these stations is their commercial viability and potential togenerate profits in the medium term. Unlike fossil fuel powerplants, hydropower demands a longer-term investment and istherefore less attractive for IPPs (Ljung, 2001). Hence, the PPPsseem more popular in hydropower development, because theyallow for private capital investment with the longer-term riskcarried by the public sector (Ljung, 2001). To encourage privatesector involvement in energy development projects, appropriateforms of project financing were established. Private sectorparticipation in hydropower development was stimulated interms of research, design, investment, construction, operation,transmission and distribution through the establishment of newforms of contracts, such as Build-Own-Transfer, Build-Own-Operate, Build-Own-Operate-Transfer and Joint Ventures (Yu,2002). These help shareholders to recover their initial investmentand operational and maintenance expenses (WB, 2000). In theMekong, for example, the Build-Own-Operate-Transfer type offinancing structure is widely implemented, fostering the creationof PPPs, but also IPPs, mostly for energy exports rather than fordomestic use (Virtanen, 2006).

At the same time, the Clean Development Mechanismpromoted globally as an offset mechanism which allows forinvesting in developing countries in return for certified (green-house gas) emission reduction credits, is increasingly acting as acatalyst and facilitator in the rapid dam resurgence in thedeveloping world (Erlewein and Nusser, 2011), but also in theMekong region (although not in our case study area). The largenumber and diversity of financial actors combined with multipleforms of financing originating from regional as well as globalsources creates an intricate financial construction.

3.3. Financial construction, ownership, and the nature of the contracts

A third key trend is the nature of the financial construction, thechanging ownership patterns and the implications of the contractsto formalize financial investments.

With regard to financing, generally two types of fundingpackages are used: the equity and the debt package. Globally, inhydropower investment, equity represents around one third oftotal investment (Ljung, 2001). Equity investors hold the shares ofthe power company. Usually equity holders include the host

V. Merme et al. / Global Environmental Change 24 (2014) 20–29 27

government in addition to multinational public or privatecompanies. Host governments can buy power company sharesthrough loans, credits and grants provided by MBDBs or directlyparticipate in funding equity when they have sufficient financialcapacity (e.g. through a national investment bank). Privatesponsors hold equity shares through direct investment orindirectly through loans. Usually they are public–private foreignhydropower developers, multinational engineering, procurementand construction companies and national energy private groups(Briscoe, 1999; Ljung, 2001; WB, 2000; WWF, 2003; Williams andGhanadan, 2006). Shareholder’s return on investment is around15–20 percent over 40 years (Ljung, 2001; Biebuyck and Bahr,2005; WB, 2000). Debt represents around two thirds of the totalinvestment. Funds are raised in the form of direct loans to the damcompany, as guarantees to commercial financiers, and as loans orgrants to the host government (and less frequently through bondissues). Hydropower projects are generally not feasible withoutpublic funding and guarantees. In the past, MDBs used to be themost important source of debt financing. To a lesser extent, BDAsalso provide debt financing in forms of loans and guarantees. ECAscan finance up to 30 percent of the total project cost (Briscoe, 1999;Ljung, 2001; Williams and Ghanadan, 2006; WB, 2000).

Changes in funding patterns have implied that ownership andfinance is increasingly private and less sovereign. Our case studyshows that the Concession Agreement grants the power companywith exclusive water rights through the implementation of a Build-Own-Operate-Transfer contract. This raises questions aboutlegitimate property rights. Use rights and decision making powerover the exploitation of natural resources have been centralizedand privatized into the hands of a consortium that has financialinterests in maximizing power production. This may indicate atrend towards increasing privatization of the water resource. Ingeneral, one could argue that during the 20th century dams weremainly public assets but as of the 21st century they have becomeprimarily private assets.

One implication of increasingly engaging the private sector indam building is that arrangements are formalized in contracts.Under national and international commercial law, all contracts andmany documents related to contracts are confidential documentsand only the parties to the contract may see these documents. Ifand when such documents are made available to third parties thisis often under the condition of confidentiality. This is also true withrespect to the contracts made under the Clean DevelopmentMechanism (Klijn et al., 2009).

In line with this expectation, our case study researchrevealed that most NT2 related contracts, agreements, andplans involving private actors, are not accessible to the public.Publicly available documents provide information related to thehost utility’s involvement in dam building through loans andgrants, and the participation of public debt providers. However,information concerning equity investments by the sponsors(core capital, loans) and private debt providers (ECA, Banks andother financial lenders) is not accessible, despite substantialcapital involved and the huge temporal and scalar dimensions ofthese projects. We faced numerous data accessibility dead ends,such as details of interest rate dynamics, conditionality, privateloans’ conditions (equity and debt), the level of competitivenessor sponsors’ involvement. Such lack of access implies lack oftransparency and accountability. This is exacerbated by the factthat only one shareholder – the GoL has public responsibility,but has only 25 percent of the vote in the company, whichmay limit its ability to change company policy. Furthermore,because NTPC provides the bulk of the Laotian national budget,with very favourable returns, one could argue that the GoL’sdesire to be critical or disruptive of NTPC operations issomewhat compromised.

3.4. Implications for changing rights to water, ecosystem integrity and

sustainable development

The changing actors, legal and economic framework, and theinstruments used have transferred authority over water to theprivate sector in our case study. This not only transfers decision-making power over natural resources (conservation, irrigationdevelopment, fisheries) but also the decision-making power overthe trajectory of how these will develop in the future lies with theconsortium. Furthermore, because the impact of these decisionscarry a larger temporal shadow (i.e. have long-term impacts) thanthe life-time of the consortium (25 years), the Laotian government(which is ranked as highly corrupt as mentioned before) is left todeal with the negative consequences of the dams such asinvoluntary resettlements, loss of fisheries, changing floodregimes, and the general disruption of socio-economic and eco-systemic processes (Klingensmith, 2007; Smits, 2011; WCD, 2000;Wong, 2010).

This implies risks for local livelihood security and environmen-tal sustainability over the long run, given that the time-horizon ofthe private sector is so much shorter than the existence and impactof the dam. The pay-back period to lenders is about 10 years (muchshorter than a dam’s lifecycle). The shareholders own the companyfor about 20 years, before transferring it to the host government(Biebuyck and Bahr, 2005). Shareholders seek their dividends backbefore major maintenance or rehabilitation costs come into view.These and the socio-environmental risks were already taken intoaccount by the World Commission on Dams (WCD), in response toincreasing social and environmental protests concerning theimpacts of dam development in the 1970s and 1980s. Eventhough the guidelines that the WCD produced have not beenimplemented by most states, environmental and social concernshave resulted in a set of international standards. Commercial banksin general have committed to international standards such as theEquator Principles, Hydropower Sustainability Assessment ForumProtocol, United Nations Principles for Responsible Investment,WCD standards, International Finance Corporation PerformanceStandards and WB safeguard policies (Hirsch, 2010; WB, 2009;WCD, 2000). For instance, 79 financial institutions have adoptedthe Equator Principles (Equator Principles, 2012), which committhem to abandon a loan if the borrower cannot comply with theseprinciples. Using such standards, members can reduce theirexposure to reputational risks and get greater access to projectfinance (Middleton, 2009). However, in practice the system is notfool proof, notably due to a lack of transparency that underminesexternal accountability (Wright, 2012). Hildyard (2012, p. 29) goesas far as to say that financial institutions ‘‘are deliberately usingintermediaries such as private equity funds to circumvent many oftheir current environmental and social ‘safeguard’ policies.’’ Theexperience of the NT2 case may easily represent the situation inother dam building exercises in the developing world, but furtherresearch needs to confirm this.

4. Conclusions

Large-dams financing is morphing from a rather straightfor-ward 20th century model with public funding from IFIs andmanagement by local utilities, to an opaque 21st century modelthat includes a mix of regional and global commercial fundingalongside international and national public investments. TheNTPC’ case study reveals that traditionally dominant players havebecome facilitators and problem mitigators and new regional andglobal actors largely fund and manage the project. Financierspromote their financing success and apply E&S standardsopportunistically to shield their investments where necessaryand by-pass them where possible. The resulting increasing

V. Merme et al. / Global Environmental Change 24 (2014) 20–2928

financial complexity and contractual agreements are obscure andinaccessible for the public. Structural policy changes in the powersector have facilitated these new hydropower-financing patternsthrough the establishment of new funding mechanisms, appropri-ate investment incentives, and the breaking open of the powermarket and property rights regimes to enable the entrance of aregional and global private sector. Ownership and finance isincreasingly private and less sovereign as use rights and decisionmaking power over the exploitation of natural resources have beencentralized and privatized into the hands of a consortium that hasfinancial interests in maximizing power production. Not only doesthis engender a separation between private investment interestand common public responsibility, such financial interests do notnecessarily align with the priorities of food security, access towater or ecosystem integrity. This is of particular concern in acontext where a large proportion of the population depends fortheir livelihoods on free flowing river waters.

With this paper we raise a number of questions that open up anew field of enquiry. As large hydropower programmes developworldwide, greater attention to hydro-finance should be given inorder to scrutinize the impacts of secretive contracts and emergingfinancial actors on ownership, regulation, the right to water,accountability, sovereignty, sustainable development patterns andthe protection of ecosystem services. Given the scale of both theinfrastructure and the capital involved, additional studies over theprocess of converting a shared public heritage into privateeconomic goods through public–private mergers can significantlycontribute to an improved comprehension of water governance.Without condemning the ‘right to develop’ or negating the need forclean and affordable energy, our study questions the singular focuson large scale and privately funded hydropower developmentwhen other alternative modes and scales of power developmentand management may be equally, if not more appropriate,especially in light of their impact on democratic decision makingover water resources and on the livelihoods and ecosystems thatdepend on them.

Acknowledgements

The authors would like to thank the four key experts for theiraccessibility, time and knowledge. Their contribution substantiallyimproved our understanding. This article greatly benefited fromthe insights and support provided by Ineke Kleemans. Further, wewould like to thank the four anonymous reviewers for theirconstructive and valuable comments that certainly improved theoverall quality of the paper.

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