Completion Report Completion Report

Project Number: 37734-013 Loan Number: 2162 July 2019

Lao People’s Democratic Republic: Greater Mekong

Subregion: Nam Theun 2 Hydroelectric Project This document is being disclosed to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS

Currency unit – kip (KN)

At Appraisal At Project Completion (28 February 2005) (9 July 2018)

KN1.00 = $0.000097 $0.0001185403 $1.00 =

KN10,300

KN8,435.95

ABBREVIATIONS ADB

CEMMP COD DSRP EAMP EDF EIB EIRR FIRR GDP GMS GRM HCC IDC IFI IMA JWG Lao PDR LSMS LTA MAF NNT-NPA NTPC NT2 OCR POE RAP RIP RMU SDP SEMFOP TA WMPA

– − − − − − − − − − − − − − – − − – − – − − − − − − − –

− −

− −

Asian Development Bank company environmental management and monitoring plan commercial operation date Dam Safety Review Panel environmental assessment and management plan Electricite de France European Investment Bank economic internal rate of return financial internal rate of return gross domestic product Greater Mekong Subregion grievance redress mechanism head construction contractor interest during construction international financial institution independent monitoring agent joint working group Lao People’s Democratic Republic living standards measurement survey lenders’ technical adviser Ministry of Agriculture and Forestry Nakai Nam Theun national protected area Nam Theun 2 Power Company Limited Nam Theun 2 ordinary capital resources Panel of Experts resettlement action plan resettlement implementation period resettlement management unit social development plan social and environment management framework and operational plan technical assistance Watershed Management and Protection Authority

WEIGHTS AND MEASURES ha

km km2

− − −

hectare kilometer square kilometer

kV m m3 m3/s MW

– − − − −

kilovolt meter cubic meter cubic meter per second megawatt

NOTES

(i) The fiscal year (FY) of the Government of the Lao PDR and its agencies ends on 30 September.

(ii) The FY of Nam Theun 2 Power Company Limited ends on 31 December. (iii) In this report, “$” refers to United States dollars.

Vice-President Ahmed Saeed, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Directors Andrew Jeffries, Energy Division, SERD

Yasushi Negishi, Country Director, Lao Resident Mission, SERD Team leader Pradeep Tharakan, Principal Climate Change Specialist, SERD Team members Jeffrey Almera, Senior Operations Assistant, SERD

Ostiane Goh-Livorness, Counsel, Office of the General Counsel Daniel Miller, Finance Specialist, SERD Genevieve O’Farrell, Environment Specialist (Safeguards), SERD Melody Ovenden, Social Development Specialist (Resettlement), SERD

Maria Aloha Samoza, Senior Project Officer, SERD Thippaphone Silaphet, Associate Project Analyst, SERD Vongphet Soukhavongsa, Safeguards Officer, SERD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

I. PROJECT DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 1

A. Project Design and Formulation 1 B. Project Outputs 2 C. Project Costs and Financing 4 D. Disbursements 4 E. Project Schedule 4 F. Implementation Arrangements 5 G. Technical Assistance 5 H. Consultant Recruitment and Procurement 6 I. Gender Equity 6 J. Safeguards 6 K. Monitoring and Reporting 8

III. EVALUATION OF PERFORMANCE 9

A. Relevance 9 B. Effectiveness 9 C. Efficiency 10 D. Sustainability 10 E. Development Impact 11 F. Performance of the Borrower and the Executing Agency 12 G. Performance of Cofinanciers 12 H. Performance of the Asian Development Bank 12 I. Overall Assessment 13

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 13

A. Issues and Lessons 13 B. Recommendations 15

APPENDIXES

1. Design and Monitoring Framework 16

2. Project Cost at Appraisal and Actual 19

3. Project Cost by Financier 21

4. Disbursement of ADB Loan Proceeds 22

5. Contract Awards of ADB Loan Proceeds 23

6. Chronology of Main Events 24

7. Project Implementation Schedule 25

8. Environmental Aspects 26

9. Social Aspects 54

10. Status of Compliance with Loan and Project Covenants 81

11. Project Description 105

12. Economic Reevaluation 109

13. Financial Reevaluation 120

BASIC DATA A. Loan Identification

1. Country Lao People’s Democratic Republic 2. Loan number and financing source 2162, ordinary capital resources (OCR) 3. Project title Greater Mekong Subregion: Nam Theun 2

Hydroelectric Project 4. Borrower Lao People’s Democratic Republic 5. Executing agency Ministry of Industry and Handicrafts

(Ministry of Energy and Mines after 2006) 6. Amount of loan $20 million 7. Financing modality Project loan B. Loan Data

1. Appraisal – Date started – Date completed

28 January 2005 12 February 2005

2. Loan negotiations – Date started – Date completed

28 February 2005 8 March 2005

3. Date of Board approval 4 April 2005 4. Date of loan agreement 26 April 2005 5. Date of loan effectiveness – In loan agreement – Actual – Number of extensions

3 June 2005 30 May 2005 none

6. Project completion date – Appraisal – Actual

November 2009 April 2010

7. Loan closing date – In loan agreement – Actual – Number of extensions

2 February 2011 2 February 2011 none

8. Financial loan account closing date – Actual

2 February 2011

9. Terms of loan – Interest rate – Maturity (number of years) – Grace period (number of years)

LIBOR-based lending facility + ADB spread, minus rebate 30 6

10. Terms of relending (if any) – Interest rate

LIBOR-based lending facility + ADB spread, minus rebate

– Maturity (number of years) 30 – Grace period (number of years) – Second-step borrower

6 Lao Holding State Enterprise

ii

11. Disbursements

a. Dates

Initial Disbursement 15 June 2005

Final Disbursement 27 January 2006

Time Interval 7.4 months

Effective Date 30 May 2005

Actual Closing Date 2 February 2011

Time Interval 68 months

b. Amount ($ million)

Category

Original Allocatio

n (1)

Increased during

Implementation (2)

Cancelled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

Equity portion expenditure

15.50 0 0 15.50 15.50 0

IDC

4.50

0

0

4.50

2.93

1.57

Total 20.00 0 0 20.00 18.43 1.57

IDC = interest during construction.

C. Project Data

1. Project cost ($ million)

Cost Appraisal Estimate Actual

Foreign exchange cost 995.7 1,304.8 Local currency cost 454.3 Total 1,450.0 1,304.8

2. Financing plan ($ million)

Cost Appraisal Estimate Actual

Implementation cost Borrower financed 330.0 330.0 ADB financed 65.0 65.5 ADB sovereign loan 20.0 18.4 ADB direct loan 45.0 46.1 ADB guaranteed loan (political risk) 1.0 Other external financing 1,055.0 909.3 Total implementation cost 1,450.0 1,304.8

Interest during construction costs Borrower financed 0.0 0.0 ADB financed ADB sovereign loan 4.5 2.9 Other external financing 191.9 191.7 Total interest during construction cost 196.4 194.6

3. Cost breakdown by project component ($ million)

Component Appraisal Estimate Actual

A. Construction cost 711.5 734.1 B. Environment and social mitigation 48.8 78.6 C. Development costa 164.6 225.0 D. Financing costb 279.3 267.1 E. Base contingencies 45.8 0.0

Total base cost 1,250.0 1,304.8

iii

Component Appraisal Estimate Actual F. Contingent financing 200.0 0.0

Total cost 1,450.0 1,304.8 a Development costs include pre-operating costs, compensation to the Government of Lao People’s Democratic Republic, and Nam

Theun 2 Power Company Limited administration, works, and preparation. b Financing costs also include upfront and commitment fees; charges related to political risk guarantees extended by the Asian

Development Bank, International Development Association, and Multilateral Investment Guarantee Agency; and risk premium on export credit agency facilities.

Source: Nam Theun 2 Power Company Limited estimates.

4. Project schedule

Item Appraisal Estimate Actual

Financial closurea May 2005 May 2005 Commencement of head construction contract June 2005 June 2005 Commercial operation November 2009 April 2010 Environmental and social mitigation activities in the EAMP, social development plan, SEMFOP, and CA

June 2005– December 2015

June 2005–July 2018

Protection activities under the watershed management plan June 2005– December 2015

June 2005–December 2017

Environmental and social capacity building activities agreed in the CA

June 2005– December 2015

June 2005–December 2017

Capacity building to support the government's PEMSP June 2005– December 20110

June 2005–December 2017

CA = Concession Agreement, EAMP = environmental assessment and management plan, PEMSP = public expenditure management strengthening program, SEMFOP = social and environmental management framework and operational plan. a Financial closure refers to the fulfillment of all conditions under the private sector financing for the project prior to the initial availability

of funds.

5. Project performance report ratings

Implementation Period

Ratings

Development Objectives Implementation Progress

From 30 April 2005 to 31 December 2010a Satisfactory Satisfactory a There were no project ratings for the period from 1 January 2011 to 28 February 2011 because of the transition from Project

Performance Rating to eOps. The project was no longer rated after financial closing of the loan account.

D. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons No. of

Person-Days Specialization of Members

PPTA and inception fact finding 27–30 Jan 04 1 4 a Inception report workshop mission 23–25 Mar 04 3 10 d, j, m Consultation mission 3–8 May 04 2 3 a, c, j Cumulative impact assessment interim report review

12–13 May 04 17–19 May 04

2 3 d (2)

Donor coordination mission 21–25 Jun 04 6 20 a, g (2), f (2), j Technical workshop for the CIA 3–6 Aug 04 2 8 a, j International consultation workshops 6 49 a, c, d, m (3) Bangkok 31 Aug 04 Tokyo 3 Sep 04 Paris 7 Sep 04 Washington 10 Sep 04 Vientiane 24 Sep 04 Joint social safeguard mission 10–14 Oct 04 7 25 a, c (3), I, m (2) Pre-appraisal mission 6–17 Dec 04 8 49 a, g, c (3), d, j, m Appraisal mission 28 Jan–12 Feb

05 10 65 a, c, d, g, h, j, m

(4) Loan negotiation mission 28 Feb–8 Mar

05 6 40 a, g, h, j, m (2)

Inception and project launch workshop mission

6–12 Jun 05 8 48 a, c, d, g, h, m (3)

iv

Name of Mission Date No. of

Persons No. of

Person-Days Specialization of Members

Debriefing by panel of experts and international advisory group

12 Aug 05 2 2 c, m

Special mission for financial closing ceremony

6-9 Aug 05 1 3 a

IFI supervision mission 31 Oct–4 Nov 05

4 20 a, c, j, m

NTPC briefing on IMA procurement 7–13 Jul 06 2 4 c, m Annual IFI management review mission 5–9 Mar 07 4 15 a, b, c, m Second annual stakeholder’s forum 27–29 Jun 07 4 12 a, c, l, m Debriefing by panel of experts 24 Aug 07 2 2 b, c Semiannual review mission 9–21 Nov 07 4 40 b, c, d, m IFI management review mission 3–11 Jun 08 7 40 b, c, d, i (2), m

(2) IFI management review mission 31 Jan–9 Feb

09 4 35 b, c, i, m

Biannual IFI management review mission 28 Feb–6 Mar 10

6 35 b, c, d, k, m (2)

Consultation mission with lenders’ technical advisors

18 Jun 10 1 2 m

Consultation mission with panel of experts 2–5 Nov 10 2 8 i, m Inauguration ceremony 6–10 Dec 10 3 10 i, m (5) Consultation mission with WB on NT2 1–3 Feb 12 1 3 m Consultation pre-completion review 15–18 May 12 2 8 b, h IFI management review mission 7–15 Oct 12 4 32 a, b, i, m Joint ADB–WB review mission 11–15 Feb 13 2 10 b, c IFI management review mission 4–14 Nov 13 5 47 b, h, f, i, m IFI management review mission 10–21 Nov 14 6 31 a, b, f, h, i, m IFI management review mission 5–16 Oct 15 5 42 a, b, f, i, m IFI management review mission 31 Jan–10 Feb

17 10 90 a, b, c, d, f, h (2),

i, k, m Joint working group meeting on IMA report 30 May–1 Jun

17 1 3 i

IFI management review mission 4–8 and 18–22 Sep 17

10 60 a, c, d, f, h, k, m (4)

IFI management review mission 27 Nov–1 Dec 17

4 16 a, c, h, i

Panel of experts debriefing on closure of NT2 RIP

10 Jul 18 2 2 a, h

Project completion review mission

15–23 Oct 18

11

95

a, c, d, f, h (2), i, j, k (2), m (2)

ADB = Asian Development Bank, a = mission leader or energy specialist, b = energy economist, c = resettlement/social specialist, CIA = cumulative impact assessment, d = environment specialist, f = financial specialist, g = counsel, h = project analyst or project officer, i = resettlement or social consultant, IFI = international financial institution, IMA = independent monitoring agent, j = power systems specialist, energy specialist, or other consultant, k = environment consultant, l = LRM national staff, m = project engineer or other ADB specialists or staff, NT2 = Nam Theun 2, NTPC = Nam Theun 2 Power Company Limited, PPTA = project preparatory technical assistance, RIP = resettlement implementation period, WB = World Bank.

I. PROJECT DESCRIPTION 1. The Greater Mekong Subregion: Nam Theun 2 Hydroelectric Project developed, constructed, and operated a 1,070-megawatt (MW) hydroelectric plant in the central region of the Lao People’s Democratic Republic (Lao PDR).1 By developing hydroelectric resources, the project aimed to export electricity, earn foreign exchange to implement the Lao government’s poverty reduction and conservation initiatives, and promote regional economic development. The project was an integral part of the government’s development framework for medium- and long-term economic growth and poverty reduction. The project aimed to export 5,354 gigawatt-hours (GWh) of electricity to Thailand and supply 200–300 GWh to the Lao PDR. It also targeted reducing poverty under the National Growth and Poverty Eradication Strategy,2 conserving the watershed area in the Nakai Nam Theun national protected area (NNT-NPA), and managing the project’s environmental and social impacts on the Nakai Plateau, where the majority of physically displaced people were originally located—and in areas downstream from the Nakai dam on the Nam Theun, the regulating pond on the Nam Phit River, and the lower Xe Bang Fai River. 2. The hydroelectric plant is a transbasin diversion project that diverts waters from the Nam Theun River to the Xe Bang Fai River; both feed into the Mekong River. Four turbines provide about 995 MW for export to Thailand, and two turbines provide 75 MW for domestic use. The plant was developed by the Nam Theun 2 Power Company Limited (NTPC), which is owned by Electricite de France (EDF) Nam Theun Holding (40%), the Electricity Generating Public Company of Thailand (35%), and the Government of the Lao PDR, represented by the Lao Holding State Enterprise (25%). On 3 October 2002, NTPC and the government (represented by the Committee for Investment and Cooperation) signed a concession agreement which runs for a period of 25 years from the Commercial Operations Date (COD) that granted NTPC the right to implement the plant on a build-own-operate-transfer basis (Concession Agreement). The project achieved financial closure3 in May 2005 and began commercial operations on 30 April 2010.4

II. DESIGN AND IMPLEMENTATION A. Project Design and Formulation 3. At preparation, the project was aligned with the Asian Development Bank (ADB) country strategy and program update, 2004–2006 for the Lao PDR and with ADB’s regional cooperation strategy and program, 2004–2008 for the Greater Mekong Subregion: both focused on private sector development, sustainable environmental management, and subregional connectivity and cooperation.5 The project was also aligned with ADB’s private sector operational strategy,6 which aimed to promote private sector participation in infrastructure. The project was considered highly relevant to the government’s plans for medium- and long-term economic growth, poverty reduction, and environmental conservation. At completion, the project’s design remains highly relevant to ADB's country partnership strategy, 2017‒2020, which aligns with the inclusive and

1 ADB. 2005. Report and Recommendation of the President on a Proposed Loan to the Lao People’s Democratic

Republic for the Greater Mekong Subregion: Nam Theun 2 Hydroelectric Project. Manila. 2 Lao PDR. 2003. National Growth and Poverty Eradication Strategy. Vientiane. 3 Financial closure refers to the fulfillment of all conditions under the private sector financing for the project prior to the

initial availability of funds. 4 Project Description (see Appendix 11). 5 ADB. 2003. Country Strategy and Program Update Lao People’s Democratic Republic, 2004–2006. Manila; and

ADB. 2004. The Greater Mekong Subregion: Beyond Borders: Regional Cooperation Strategy and Program, 2004–2008. Manila.

6 ADB. 2000. Private Sector Development Strategy. Manila.

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sustainable growth agenda of the Lao PDR’s Eighth Five-Year National Socio-Economic Development Plan, 2016–2020.7 The project’s export of electricity continues to be highly relevant, as discussed in ADB’s forthcoming energy sector assessment, strategy, and road map for the country.8 4. The project’s design resulted from a lengthy, highly iterative, and consultative process, beginning with the first project feasibility study in 1991 and continuing in the mid-1990s when international financers became involved. The government and NTPC conducted a comprehensive study of 19 project alternatives, a power sector strategy study, and a power sector development plan, in order to determine whether the project was the most attractive option. A range of alternative configurations, especially concerning the size of the Nakai reservoir and downstream flows in the Xe Bang Fai and Nam Theun rivers, were also considered. 5. The project received unprecedented international scrutiny because it marked the return of international financers to hydropower following the World Commission on Dams report in 2000.9 This led to the design prioritizing the management of environmental and social impacts at the same level as exporting electricity and generating revenue. There were no changes in the project design and scope during project implementation, but NTPC changed the engineering design to optimize construction and adaptively managed environmental management and social safeguards. The design and monitoring framework at appraisal in March 2005 and achievements at project completion in July 2018 are in Appendix 1. B. Project Outputs 6. The project achieved five out of six output targets as originally envisaged; it did not achieve output 5 (protecting the NNT-NPA from illegal logging). 7. Output 1: Physical infrastructure built for power generation. The project constructed the dam and power generation facilities within budget and with minimal time slippage. 8. Output 2: Physical infrastructure built for power transmission. The project constructed (i) a single circuit 115 kilovolt (kV) 70-km line to supply power to the Lao PDR domestic system and (ii) a double circuit 500 kV transmission line to a new substation at Roi Et, Thailand to supply electricity into the Electricity Generating Authority of Thailand system, consisting of 138 kilometers (km) in the Lao PDR and 166 km in Thailand.10 9. Output 3: Environmental measures implemented. Drawing on a comprehensive range of studies, an environmental assessment and management plan (EAMP) set out (i) detailed environmental measures for the area outside the NNT-NPA and (ii) environmental management plans for NTPC, its head construction contractor (HCC), and the government. The environmental and social commitments for the project were prescribed in the Concession Agreement as well as

7 Lao PDR. 2016. Eighth Five-Year National Socio-Economic Development Plan, 2016–2020. Vientiane. 8 ADB. Forthcoming (2019). Lao PDR Energy Sector Assessment, Strategy, and Road Map. Manila. 9 Earthscan. 2000. Dams and Development: A New Framework for Decision Making. The Report of the World

Commission on Dams. London and Sterling VA, USA. The World Commission on Dams argued for a shift away from top-down decision-making and a technology focus and towards options analysis, participatory decision-making, and use of a rights-and-risks-based approach that would raise the social and environmental dimensions of dams to the same level of importance as the economic dimension.

10 The Electricity Generating Authority of Thailand was responsible for planning and constructing the transmission line to the Thai grid, and did not receive financial support from ADB or the World Bank to construct this transmission line.

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ADB’s financing agreements, including the scope of each party’s obligations.11 The project implemented the measures as planned, although there were challenges with HCC and subcontractor performance in environmental, health, and safety management in the early stages of construction; site erosion; biomass clearance in the reservoir area; and solid waste management. Ongoing non-compliances only dissipated with the completion of construction. NTPC prepared a company environmental management and monitoring plan (CEMMP) in 2010 in accordance with the requirements of the Concession Agreement for plant operation, updated the CEMMP in 2014, and adopted an environment management system, which is certified to the International Organization for Standardization (ISO-14001) and annually reviewed. 10. Output 4: Resettlement and ethnic minority development plans implemented. A social development plan (SDP) initially set out the measures for resettling all households affected by land acquisition and managing all social impacts, including indirect impacts downstream of the project and impacts on ethnic minorities. The project relocated 1,310 households from the Nakai Plateau and resettled them satisfactorily; by 2011, their incomes improved beyond the national rural poverty line on a sustainable basis.12 Monitoring reports suggest that all households have restored their livelihoods to pre-project levels, and resettlers have benefited from the provision of new dwellings, infrastructure, education, and health services. The government and NTPC are providing ongoing support to sustain livelihoods through a fund financed by NTPC, the Nam Theun 2 (NT2) Development Fund, that provides $750,000 per year through the concession period. 11. Output 5: Nakai Nam Theun national protected area protected from illegal logging. The project intended to protect the NNT-NPA and its corridors—around 4,200 square kilometers (km2)—from illegal logging in order to offset the loss of biodiversity caused by the project’s footprint and to protect the watershed by preventing sedimentation of the reservoir; the protection from illegal logging was a key component of the Concession Agreement.13 A social and environment management framework and operational plan (SEMFOP) and later the SEMFOP II set out protection measures. However, throughout implementation, there was continued poaching of wildlife and illegal extraction of timber; timber extraction was brought under control only by the Prime Minister’s national decree in 2016. Although the project did not achieve output 5, protection activities are continuing under a third SEMFOP (paras. 38–39); the board of the Watershed Management and Protection Authority (WMPA) approved the latest Five-Year Plan and SEMFOP III in October 2017. 12. Output 6: Strengthened public expenditure management system. Under its letter of implementation policy to ADB,14 the government committed to (i) using all its net revenues from NTPC to finance incremental spending on eligible poverty reduction programs, environmental protection programs, and project-related government obligations and (ii) preparing budget and expenditure reports. The government initially did not identify and report all revenue streams during 2010‒2017. The World Bank and the government subsequently agreed on remedial action. By the end of 2017, the government prepared satisfactory budget and expenditure reports that showed it allocated 100% of accumulative net revenues (approximately $180 million) from all

11 Nam Theun 2 Hydroelectric Power Project Concession Agreement between the Government of the Lao PDR and

NTPC (Signed on 3 October 2002). Clause 30. Unpublished. 12 At appraisal it was estimated that 1120 households would be resettled. In total, 1310 households were resettled,

including households that formed after the census date and households that won appeals to be included. 13 The NNT-NPA is slightly smaller than the area referred to as the watershed, which covers the watershed catchment

area of the Nam Theun 2 Hydropower Plant. This larger area comprises the middle and upper reaches of the Nam Theun River as well as the NNT-NPA.

14 Letter to ADB dated 7 March 2005 from the Deputy Prime Minister of the Government of Lao PDR on Nam Theun 2 Hydroelectric Project: Implementation Policy Framework.

4

revenue streams to eligible poverty reduction and environmental conservation programs in 2010‒2017. C. Project Costs and Financing 13. At appraisal, the base project cost was estimated at $1,250 million, including $795.7 million in foreign currency cost and $454.3 million equivalent in local currency cost. Project lenders committed to contingent financing of $200 million of debt to cover any cost overrun. The project was to be financed with loan facilities amounting to about $900 million and shareholders’ equity of about $350 million. ADB provided a $20 million public sector loan from its ordinary capital resources to the government (Loan)15 to finance part of the government’s $87 million equity contribution to the project. ADB also provided a direct loan without government guarantee to NTPC of up to $50 million and a political risk guarantee for up to $50 million. The project was also financed by the World Bank; the French Development Agency; the European Investment Bank (EIB); export credit agencies from France, Norway, Sweden, and Thailand; and a group of commercial banks. 14. At loan closure, the total project cost was $1,304.8 million, a 7% capital cost overrun (Appendix 2).16 This is considered minor in the context of a complex hydropower project, particularly given that the Thai baht strengthened by almost 25% against the dollar over the construction period, and the overrun was well within the allowance for contingent financing in the project’s financing plan. Expenditure on environmental and social mitigation, not including the watershed, reached $70.4 million at COD (not including staff costs and studies) against $38.4 million estimated at preparation, mainly because of higher-than-planned resettlement costs. The actual financing structure of the project (and of NTPC) was the same as at appraisal (Appendix 3). The project drew $57 million of contingent financing from the available pool of $200 million, with approximately 60% in the form of equity from the project’s owners. All debt financing was pooled at the corporate level (financiers did not fund specific project components or contracts). D. Disbursements 15. ADB made all disbursements under the Loan through direct payments to NTPC in accordance with ADB’s Loan Disbursement Handbook. Actual disbursements totaled $15.50 million, as provided for in the Loan Agreement. They were generally consistent with the project S-curve, but were less than projected because of decreased interest during construction (IDC) and partial cancellation of loan proceeds allocated for IDC. All disbursements from the Loan were completed in January 2006. ADB continued to disburse semiannual payments for IDC from the loan proceeds until the Loan closed in February 2011. Appendix 4 shows projected and actual disbursements while Appendix 5 shows projected and actual contract awards. E. Project Schedule 16. The Loan was approved by ADB on 4 April 2005 and declared effective in May 2005. Construction of plant and project facilities followed the planned schedule with minimal delay. The Loan account closed in February 2011, as envisaged at appraisal. There were no extensions to the Loan closing date. However, overall project completion was delayed considerably because

15 The loan agreement between the Government and ADB (Loan Agreement) and the project agreement between ADB

and NTPC (Project Agreement) (Both signed on 26 April 2005). 16 The World Bank Implementation Completion and Results Report assessed the actual capital cost to be $1.308

million. The difference of approximately $3 million stems from an item of capital expenditure that NTPC indicated as a residual budgetary allocation rather than actual expenditure. The World Bank included this item in its capital cost assessment, but it was not included in this completion report’s assessment.

5

the project extended the resettlement implementation period (RIP) from December 2015 until July 2018 for reasons described in para. 24 of this report. The main processing and implementation events are presented chronologically in Appendix 6. The actual project implementation schedule compared with that at appraisal is in Appendix 7. F. Implementation Arrangements 17. The Concession Agreement describes the allocation of responsibilities between the government and NTPC in implementing the project, including the environmental and social mitigation measures. The project’s executing agency was the Ministry of Industry and Handicrafts, however after the restructuring of the Lao PDR power sector in 2006, the Ministry of Energy and Mines assumed coordination and project administration responsibilities on behalf of the government through its Department of Energy Business, previously the Department of Energy Promotion and Development.17 18. Under the Concession Agreement, NTPC was responsible for the civil works and was jointly responsible with the government for implementing environmental and social measures. The government was responsible for policy and regulatory issues such as land transfer and issuing titles. To address its environmental and social obligations under the Concession Agreement, NTPC established an environmental management office and a resettlement office. During construction, the environmental management office comprised up to 15 personnel, responsible for supervising compliance by the HCC and its subcontractors, environmental monitoring, and working closely with government agencies. The government established an environmental management unit, with offices at central and field levels, and a resettlement management unit (RMU). NTPC and the government coordinated through several committees such as the resettlement committee and adaptive management committee. The environmental management unit is now assimilated into Provincial and District Offices for Natural Resources and Environment, while the RMU will continue to execute a transition plan and downstream program. These arrangements were adequate to deliver project outputs. 19. The Prime Minister’s office established the WMPA to implement the SEMFOP in the NNT-NPA. The WMPA was responsible for coordinating and managing all activities in the NNT-NPA and its corridors.18 The WMPA’s institutional structure and implementation arrangements were not adequate to meet the output and outcomes for the watershed, and were revised substantially in response to weak performance (Appendix 8).

G. Technical Assistance

20. During project preparation, ADB supported two phases of technical assistance (TA) studies to help carry out: (i) additional studies, including a cumulative impact assessment study, an assessment of compensatory forestry requirements, due diligence of the transmission line

17 Paras. 30–34 describe the role of the panel of experts, international advisory group, and lenders’ advisers in

implementation arrangements. According to the Concession Agreement (Schedule 4, Part II, Clause 10), in addition to its own implementation and financing obligations, NTPC is responsible for funding the environmental measures for which the government is nominated as the responsible party and such measures which the government has elected to perform. Budget amounts are limited to those specified in Clause 10.3(d). In Schedule 4, Part III, Clause 5, the Concession Agreement sets out the funding obligations of NTPC with respect to the watershed area.

18 The Nakai Nam Theun Watershed, including the NNT-NPA, is a key environmental offset for the Nam Theun 2 Hydropower Project (NT2), and is one of the most important biodiversity areas in the region. World Bank. 2017. Nam Theun 2 Hydropower Project Update: Naka Nam Theun Watershed. Washington, DC. http://documents.worldbank.org/curated/en/667241517927024038/text/123176-WP-PUBLIC-P049290-NTwatershedbrief.txt.

6

constructed by the Electricity Generating Authority of Thailand, a review of hydropower project performance in the Lao PDR, and a power sector strategy study; (ii) the assessment and building of government capacity to undertake social and environmental mitigation measures; and (iii) consultation and communications with project-affected people and civil society.19 This TA also helped to incorporate the results of the additional studies into the safeguard document and to prepare a summary environmental and social impact assessment.20 During implementation, ADB provided additional TA to closely monitor social safeguards aspects, particularly the sustainability of the livelihoods of the resettlers on the Nakai Plateau.21

H. Consultant Recruitment and Procurement

21. NTPC used the Loan, which partly financed the government’s equity in NTPC, to finance goods and works in accordance with relevant provisions for procurement under private sector loans in ADB’s Guidelines for Procurement. Two contracts that NTPC directly negotiated with the HCC and a civil works contractor were deemed not eligible for ADB financing at the time of development. The other two civil works and two electromechanical subcontracts were awarded based on competitive tenders and were eligible for ADB financing. ADB was satisfied that the procurement process for the four contracts was transparent and arrived at a fair price with qualified and experienced contractors.

I. Gender Equity

22. During preparation, NTPC incorporated gender action plans in the SDP and SEMFOP I to (i) identify issues of gender equity and women’s needs and perspectives, (ii) mainstream these issues into all aspects of the social development plans, and (iii) undertake women-specific activities to promote their capability, leadership, and opportunities. The gender strategy aimed to improve women’s capacity, economic opportunity, and agency (equality in voice and action at household, workplace, and public levels). NTPC reported on its activities on gender mainstreaming in its project-wide annual implementation plans and semiannual environment and social reports (Appendix 9). In 2014, NTPC evaluated the project’s gender-related obligations and found that the government and the NTPC resettlement office generally met gender obligations under the Concession Agreement.22 In 2017, the Panel of Experts (POE) (para. 31) concluded that the gender program was well applied and effective, improved maternal health and nutrition and women's literacy and numeracy, provided substantial capacity training (including education, health, and nutrition) for women, and helped women become more involved in off-farm and home-based livelihoods. J. Safeguards

19 ADB. 2003. Technical Assistance to the Lao People’s Democratic Republic for Preparing the GMS: Nam Theun 2

Hydropower Development Project. Manila (TA 4213-LAO, for $700,000, approved on 9 November 2003); and ADB. 2004. Technical Assistance to the Lao People’s Democratic Republic for the GMS Nam Theun 2 Hydropower Development Project Phase II. Manila (TA 4323-LAO, for $1,000,000, approved on 29 March 2004).

20 ADB. 2004. Project Performance Audit Report on the Nam Leuk Hydroelectric Power Project in the Lao People’s Democratic Republic. Manila; ADB 2002. Project Performance Audit Report on the Theun-Hinboun Hydroelectric Power Project in the Lao People’s Democratic Republic. Manila; and ADB. 1999. Special Evaluation Study on the Social and Environmental Impacts of selected Hydroelectric Power Projects. Manila.

21 ADB. 2008. Technical Assistance to the Lao People’s Democratic Republic for the GMS: Nam Theun 2 Hydroelectric Project—Social Safeguards Monitoring. Manila (TA 7094-LAO, for $875,000 including increases, approved on 7 July 2008); and ADB. 2017. Completion Report on the GMS: Nam Theun 2 Hydroelectric Project—Social Safeguards Monitoring. Manila.

22 A. L. Esser. 2014. Evaluation of Government of Lao PDR and Nakai Resettlement Office Concession Agreement Obligations Related to Gender. Vientiane.

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23. The project was categorized as A for environment, involuntary resettlement, and indigenous peoples. The government and NTPC implemented the environmental and social requirements under the Concession Agreement based on the Summary Environmental and Social Impact Assessment and EAMP (Appendix 8), SDP (Appendix 9), and SEMFOP. NTPC prepared an initial environmental examination and a resettlement plan for the expansion of the regulating dam spillway.

24. Nakai plateau. Resettlement on the Nakai Plateau was managed by NTPC’s Nakai resettlement office working in coordination with the government RMU. The resettlement process commenced in 2006 and it was expected that all the resettlement objectives and provisions as set out in the Concession Agreement, including the physical relocation of all affected households, to be certified by the POE would be achieved by 2015 (i.e. the RIP). All households were physically relocated by 2008, shortly before the filling of the reservoir. Livelihood restoration programs focused on four pillars identified in the SDP: agriculture and livestock, forestry, fisheries and off-farm. On the POE’s advice, the government extended the RIP until December 2017 to ensure that they achieved resettlers’ income targets on a sustainable basis, that NTPC fully provided all entitlements, and that the Nakai district could effectively carry out government plans and policies throughout the remainder of the concession period. The government at central and local levels, along with NTPC, created a joint working group (JWG) to systematically identify non-compliance and shortcomings and developed mitigation measures and responses. This renewed effort helped to close out all outstanding issues and led to the POE endorsing closure of the RIP in July 2018 in its report #28.23 25. Project lands. NTPC created a project lands office to register all land parcels to be acquired for project construction, provide compensation for acquired land, relocate household dwellings where required, and restore livelihoods. The project lands program began in 2005 and compensated 2,846 households, or about 15,000 people. Of these, 228 households (about 1,300 people) were also entitled to livelihood restoration because the project acquired more than 10% of their productive land assets. The project lands program was completed in December 2010; internal monitoring indicated that all significantly affected households had restored their livelihoods to pre-project levels.24 26. Downstream. The downstream program operated from 2005 to 2012 and included populations downstream of the project in both the Nam Theun and Xe Bang Fai catchments. The Khamkeut program provided livelihood assistance to 39 villages (about 30,000 people) affected by reduced flows in the Nam Theun. The Xe Bang Fai component provided livelihood assistance, replacement infrastructure, compensation for riverbank gardens, water supply, and other technical assistance to 92 riverside villages (about 62,000 people). The downstream program was limited by cost ($16.0 million) but was extended for 1 year at a cost of $2.3 million, in order to compensate 67 additional hinterland and upstream villages (about 52,000 people) in the Xe Bang Fai catchment and ensure effective transition of ongoing programs to the government. The program was closed and handed over to the government in December 2012.25 Internal monitoring found that livelihoods had been restored, on average, to pre-project levels.26 27. Ethnic minority development plans. The SDP included an assessment of the project's impact on ethnic minority groups and the effectiveness of mitigation, including restoring affected

23 Panel of Experts. 2018. Nam Theun 2 Hydroelectric Project Report No. 28. Vientiane. 24 Livelihoods of affected households are shown in the documentation of the final cash livelihood restoration planning,

the socioeconomic survey for project lands, and the living standards monitoring survey of the downstream program. 25 The panel of experts’ approval of closure was not a requirement for the downstream program or project lands. 26 Downstream Program. 2014. Socio-Economic Survey Final Report (DKS-1-S-K14-0203-00000A).

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livelihoods among different ethnic groups. Ethnic minority development was mainstreamed across all social components of the project and recognized that the Lou Loum (lowland Lao) were potentially advantaged over other groups on the Nakai Plateau and that Ahoe people were at a potential disadvantage because of their more limited education and the small population size. Particular attention was given to the Ahoe households on the Nakai Plateau, but their resettlement was challenging because their small population (under 20 households) precluded the formation of a separate Ahoe village (Appendix 9). 28. Compensatory forestry program. As the project involved significant degradation of forest area, the Bank’s Policy on Forestry was automatically triggered.27 The Loan Agreement required the project to rehabilitate and/or reforest 28,700 hectares (ha) of forest area through a compensatory forestry program.28 The EIB’s loan agreement contains a similar provision.29 SEMFOP I identified multiple options for compensatory forestry locations, including the degraded forests within the NNT-NPA and areas on the Nakai Plateau not affected by inundation. The government was unable to undertake significant afforestation efforts in the area that it initially identified, because of lack of funds and implementation capacity. In 2018, ADB, EIB, and the government agreed on a revised approach to identify eligible areas outside the project area that were targeted for afforestation under an ongoing government program, ADB, or other donor projects during 2010–2022.30 The government is expected to meet its obligation by 2022. 29. Grievance redress mechanism. A grievance redress mechanism (GRM) was established as required under the Loan. The government, which was responsible for operating the GRM, was assisted by NTPC with field assessments and management of a grievance database. A large number of grievances were raised and resolved, indicating an effective and widely available GRM. The GRM will be ongoing throughout the concession period. K. Monitoring and Reporting 30. The government and NTPC complied with the majority of loan covenants and partially complied with covenants on the watershed (NNT-NPA), SEMFOP, and WMPA. Covenants on resettlement obligations and provisions were substantially complied with as of July 2018, while the compensatory forestry requirement is expected to be fully met by 2022 (Appendix 10). 31. The project received regular and intense scrutiny, monitoring, and reporting through: (i) the POE reporting to the government (as required by the Concession Agreement), which comprised three experts (for social issues, environmental issues, and biodiversity) approved by the World Bank and delivered 28 reports during 1997–2018;31 (ii) the lenders’ technical adviser (LTA), which was appointed by NTPC under the company’s obligations to its commercial lenders, delivered 39 reports in 2005–2019; (iii) the dam safety review panel (DSRP), appointed to advise on technical construction, operations, and dam safety issues; (iv) the International Advisory Group, advising the World Bank on project implementation, which last reported in 2011; (v) independent monitoring agents, appointed by the government as external monitors; and (vi) regular missions of international financial institutions (IFIs), bilateral agencies, and their external monitors.

27 ADB. 1995. Bank’s Policy on Forestry. Section B. Part 2(b). Manila. 28 Loan Agreement between Lao PDR and ADB. Schedule 1, para 3 and Schedule 5, para 16(b). 29 Loan Agreement between Lao PDR and EIB. EIB FI No. 22984 (concerning the project Nam Theun 2 Hydroelectric

2002-0596). 30 Government of Lao PDR, Ministry of Agriculture and Forestry. 2018. Status of Compensatory Forestry Requirement:

Report from MAF to ADB. Unpublished. 31 NTPC. Report Documents. http://www.namtheun2.com/index.php/reports/reports-doc.

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32. The LTA and DSRP monitored and reviewed the engineering works in detail. The LTA reported quarterly through construction and annually thereafter; the DSRP reported regularly until 2016, when it concluded that the plant design and construction was safe, and that operation and maintenance programs were being undertaken satisfactorily (paras. 17–19). 33. NTPC prepared monthly, quarterly, and semiannual progress reports and annual implementation plans for social and environmental activities since 2005, reporting will continue until the end of the concession period. These reports included the results of the Nakai living standards measurement surveys, the Nakai quarterly socioeconomic monitoring survey, downstream socioeconomic surveys, and livelihood monitoring for the project lands office. 34. Because NTPC is a special purpose vehicle established for the project, ADB did not undertake a formal financial management assessment at appraisal. However, NTPC and the Lao Holding State Enterprise submitted audited financial statements with no material qualifications identified in management letters. The government met its financial reporting obligations towards project completion with assistance of the World Bank.

III. EVALUATION OF PERFORMANCE A. Relevance 35. At completion, the project design was highly relevant. The government continued to prioritize developing the country’s hydropower resources to export surplus electrical energy to neighboring Thailand, Viet Nam, and Cambodia in order to achieve sustainable economic growth and deliver regional environmental and social benefits. The project brought several innovations to the Lao PDR and the global hydropower sector that continued to be relevant at completion: social development and watershed protection as project objectives; high quality, detailed environmental and social planning that addressed an extensive range of issues; and the allocation of project revenues to help eradicate poverty and conserve the environment.

B. Effectiveness 36. Outcome 1: Provide stable and affordable electricity to Thailand and the Lao PDR in an environmentally and socially sustainable way. From 2011 to 2018, the project exceeded its targets to export 5,354 GWh of electricity to Thailand and provide 200 GWh of electricity to Lao PDR consumers; this success is directly and wholly attributable to the achievement of outputs 1 (generation) and 2 (transmission) (paras. 7–8). The project achieved this outcome in an environmental and socially sustainable way, attributable to outputs 3 and 4, despite delays and challenges (paras. 9–10). The project spurred the development of several hydropower projects led by independent power producers in the Lao PDR to export energy and meeting domestic demand; they adopted many of the project’s social and environmental safeguard elements. 37. Outcome 2: Generate revenue for the government through the project for its poverty reduction programs. In its annual budgets, the government allocated project revenues to eligible priority poverty reduction and environment programs and met the requirement to report actual spending on eligible priority programs in annual budget reports (the requirement for quarterly reporting was revised to annual reporting in 2014). Before 2017, there was a gap between revenues received and allocation to eligible programs. However, in the 2017 budget, the government allocated a total of $66.3 million, more than needed to close the gap. By the end of 2017, the government received estimated net revenues from NT2 of $180.4 million and allocated $195.2 million to eligible programs and projects. This outcome is attributable to outputs 1, 2 and

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6. The government’s reporting to financers on project revenue use helped to drive public financial management reforms significantly. Led by the World Bank, development partners promoted broader reforms, including the revision of the State Budget Law, followed by the introduction of the government financial information system. A turning point came in 2016 with the appointment of a new government, which strengthened the commitment to public financial management reforms. 38. Outcome 3: Protection of the Nakai Nam Theun national protected areas. The project did not achieve the expected outcome in terms of species diversity or forest cover. The abundance of species, including species of conservation importance, has likely decreased due to logging and wildlife poaching. For example, a stand of the critically endangered Chinese swamp cypress was entirely logged during project implementation. Rates of forest cover loss have increased over the project lifetime: not including the reservoir, the area lost 409 ha/year in 2009‒2012, increasing to 499 ha/year in 2012‒2017. However, forest loss is low in percentage terms—forest cover is now around 88% in the NNT-NPA overall, and within that, 97% in a totally protected zone and 70% in a controlled use zone32—and in 2016–2018, there has been strong progress to reform WMPA, re-establish patrols, and declare the area a national park. The project did not satisfactorily implement SEMFOP, which would have been more appropriately an output rather than an outcome indicator. There were no legitimate claims by project-affected people; this is indirectly related to outcome 3. Outcome 3 is very similar to output 5 (NNT-NPA protected from illegal logging); output 5, if achieved, would have led to the achievement of outcome 3. Progress towards the target for output 5, alternative livelihoods for 5,800 people of ethnic minorities (due to access restriction in NNT-NPA) by 2015, was limited under SEMFOP I and II, but SEMFOP III continues to promote alternative livelihoods. 39. The project is highly effective in providing electricity and generating revenues. However, it is not yet effective in protecting the NNT-NPA. Overall, because of the importance and profile of protecting the NNT-NPA, the project is considered effective. C. Efficiency 40. The project’s economic internal rate of return (EIRR) was recalculated considering the project from a national perspective and a regional perspective (the Lao PDR and Thailand together), following the project appraisal’s approach. The reevaluated EIRRs are 29.7% (regional perspective) and 15.0% (national perspective), comfortably exceeding the hurdle rate of 12% (Appendix 12). The project is rated highly efficient in achieving outcomes and outputs. D. Sustainability 41. The financial internal rate of return (FIRR) of the project (and of NTPC) was estimated at 10.4%, compared to 12.4% at appraisal. This difference between the appraisal and reevaluated FIRR is not considered to be material, particularly because the reevaluated weighted average cost of capital is 7.0%, compared to the appraisal estimate of 10.1% (See Appendix 13 for more details). NTPC is in a strong financial position and the company’s financial performance is generally ahead of its own operational budgets and of the financial projections made by ADB during appraisal. External audits have all been unqualified and very few audit issues have been identified over the company’s life. The financial viability of the project from the government’s perspective was also reevaluated. The re-estimated FIRR exceeds the weighted average cost of capital by a wide margin.

32 Forest Carbon. 2018. Mapping Forest Cover Change 2012–2017, Nakai Nam Theun National Protected Area,

Lao PDR. A Summary Report to the World Bank. Jakarta.

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42. The project is technically sustainable. Iterative design and planning over decades led to an effective design, achieving a power density of 2.2 watts/m2 due to the significant flows used and large net head.33 The project will displace an estimated 65 million tons of carbon dioxide equivalent emissions (from displaced thermal generation) over the concession period. The project’s hydro-meteorological network and monitoring is best practice, and the project shares hydrological dam safety data with EDF for analysis on an ongoing basis. The LTA will continue to report on an annual basis, and EDF plans to continue to inspect infrastructure safety and hydro safety every 2 years. 43. During project preparation, NTPC and the project lenders assessed environmental and social sustainability issues and developed corresponding plans. NTPC’s ongoing environmental management, the government’s transition plan for resettled communities, and local committees, such as those for adaptive management and reservoir management, will provide the mechanisms to meet environmental and social commitments in the Concession Agreement on an ongoing basis. The key area that requires ongoing support in the long term is the conservation of the NNT-NPA. 44. Compensatory forestry program. In addition to 21,066 ha reforested in 2008–2017 across nine project areas deemed eligible by a joint ADB and government survey, the government expects to restore over 17,000 ha across several areas in 2018‒2022 in order to achieve the targets set in the Loan Agreement. Ongoing commitments specify that the Ministry of Agriculture and Forestry (MAF) will share a monitoring report that reviews reforestation activities and the national forest cover survey based on 2018 satellite images. 45. The government’s investment in NTPC and the technical sustainability of the project are most likely sustainable. Overall, considering environmental and social sustainability, the project is likely sustainable. E. Development Impact 46. Gross domestic product (GDP) growth averaged 7.8% over the last decade, with income per capita reaching $2,270 in 2017 over $475 in 2005, which met the target for sustainable economic growth. Economic growth is expected to remain robust in 2018–2019 at about 6%–7%.34 Hydropower projects helped drive growth, with installed capacity increasing tenfold in 2000–2016 and export revenues from NT2. The project investment of $1.30 billion, compared to the country’s GDP in 2003 of only $2.1 billion, was highly significant. Over 2012–2016, the electricity sector contributed about 5% of the Lao PDR’s 33% GDP growth, in constant 2012 local currency terms.35 47. The government’s most recent national expenditure and consumption survey shows that the poverty rate—based on the national poverty line—declined from 34% in 2002–2003 to 23% in 2012–2013 (around 1.5 million people). Another poverty rate—based on the internationally-comparable poverty line of $1.90/day in 2011 purchasing-power-parity—declined from 24% to 15% over the same period, achieving the poverty reduction target. The Lao PDR is expected to be eligible to graduate from Least Developed Country status by 2021, based on the United

33 Head is the distance between the water levels at the hydro intake and at the point of the turbine generators. 34 World Bank. The World Bank in Lao PDR. https://www.worldbank.org/en/country/lao/overview. 35 Estimated from: Lao PDR Ministry of Energy and Mines. Energy Statistics 2018. Vientiane. Data for 2010 and 2011

was not available.

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Nations’ assessment.36 In the project’s area of influence, household living standards, including non-economic factors such as household quality and health, have visibly improved since 2005. This improvement is in line with national trends: nationally, rural household expenditure and consumption grew by about 2% per year in 2005–2018. 48. The project impact of environmental conservation, with a national target of 70% forest cover by 2020, is yet to be achieved. National forest cover was 60.9% of the total land area in 2005 but was reduced to 58.0% in 2015.37 The government’s 2016 moratorium on logging and ambitious national reforestation program aims to raise forest cover to 70% by 2020.38 Recent reform in the forestry sector is expected to lead to an improved outcome on forest rehabilitation and conservation. 49. Overall, the development impact is satisfactory. F. Performance of the Borrower and the Executing Agency 50. The government continuously supported missions for loan processing during project preparation and for joint consultation and management review throughout project implementation through the Department of Energy Business and the executing agency (initially the Ministry of Industry and Handicrafts; the Ministry of Energy and Mines after 2006). The implementing agency, NTPC, successfully implemented the project and, together with the government, responded to environmental and social issues to reach RIP closure. NTPC committed to continue its obligations under the Concession Agreement until the end of the concession period. The government implemented a revised compensatory forestry program, with all outstanding obligations expected to be met by 2022. Overall, the performance of the government and the executing agency is satisfactory. G. Performance of Cofinanciers 51. The project was a good example of effective donor coordination throughout the project life. ADB and the World Bank played a very important role in improving the project design during preparation. The World Bank effectively coordinated the IFI project review missions, and led consultations with the government to develop corrective actions for the revenue management program. ADB and the World Bank collaborated closely to identify shortfalls in achieving resettlement requirements and, together with the government, spearheaded the creation of the JWG. The French Development Agency and EIB actively participated in joint missions with ADB and the World Bank. EIB also worked jointly with ADB to support the government’s compensatory forestry program. H. Performance of the Asian Development Bank 52. ADB played a key role in designing and implementing the project. It was involved in all aspects of project design and adopted lessons from the Theun Hinboun project to advocate a comprehensive downstream program.39 ADB was responsive to government and NTPC requests.

36 United Nations. 2018. Country Profile: Lao People’s Democratic Republic. New York.

https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/LDC Profile Lao PDR.pdf 37 Figures from the Government of Lao PDR, Forest Inventory and Planning Division of the Department of Forests,

which prepares an estimate of forest cover based on remote sensing every 5 years. 38 P. Xuan To, N. Treanor and K. Canby. 2017. Impact of the Laos Log and Sawnwood Export Bans. Washington, DC.:

Forest Trends. 39 ADB. 2000. Project Completion Report on the Theun Hinboun Hydropower Project. Manila.

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No delays were reported on ADB’s approval of withdrawal applications or approvals and issuance of no objection. ADB also provided capacity building in project implementation procedures and TA for social safeguards monitoring. During implementation, ADB participated in all joint IFI missions. However, ADB safeguards specialists did not participate in IFI missions in 2013–2016. From 2017 until RIP closure in July 2018, ADB increased its monitoring efforts and involvement in the project and took on a leadership role, alongside the World Bank, to help the government and NTPC address outstanding safeguards issues. ADB was part of the JWG, played a key role within the JWG framework to address the recommendations of the IMA report, and in developing the comprehensive action plan to meet the Concession Agreement’s resettlement objectives and provisions. Overall, the performance of ADB is rated satisfactory. I. Overall Assessment 53. The project is highly relevant, as hydropower continues to contribute to sustainable economic growth and deliver environmental benefits. It is highly efficient because of a high EIRR at regional and domestic levels. The project is highly effective in providing electricity and generating revenues, but it is not yet effective in protecting the NNT-NPA, resulting in a rating of effective. The government’s equity in NTPC and the technical sustainability of the project are most likely sustainable, but after including environmental and social sustainability, it is rated likely sustainable. The overall project rating is successful.

Overall Ratings Criteria Rating

Relevance Highly relevant Effectiveness Effective Efficiency Highly efficient Sustainability Likely sustainable Overall Assessment Successful Development impact Satisfactory Borrower and executing agency Satisfactory Performance of the Asian Development Bank Satisfactory

Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons 54. Close monitoring during implementation. Comprehensive preparation establishes a strong foundation for achieving social and environmental objectives but requires close monitoring during implementation. At preparation, the environmental and social plans were highly comprehensive and based on intensive studies, and the management plans were embedded in detail in the Concession Agreement. Project design and implementation incorporated innovations such as the regulating dam and the downstream program, which have been used in other ADB-financed hydropower projects. Transitioning from preparation to implementation was challenging and required intensive monitoring to ensure that an engineering contractor followed all the requirements in the EAMP. Implementation of the SDP and SEMFOP fell short of targets, particularly in forest livelihoods and providing viable irrigation on the Nakai Plateau. The ability to adapt as conditions develop is therefore critically important, and the project was ultimately effective because of intensive monitoring and additional support. 55. Clear and consistent reporting frameworks. Multiple levels of monitoring and reporting support adaptive management but require reporting frameworks. The oversight functions of the POE, IMA, and LTA were complemented by a range of biophysical and social monitoring

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programs and participation by stakeholders in adaptive management committees. Clearer reporting frameworks would have further enhanced the effectiveness of these oversight groups. The POE and LTA reports did not use (i) consistent report structures from month to month and year to year, (ii) the specific Concession Agreement requirements or other binding agreements as a structure, or (iii) internationally recognized frameworks such as International Finance Corporation performance standards, World Commission on Dams, or the hydropower sustainability assessment protocol for structure. A government should report against its obligations in a concession agreement where they are responsible for broad social and environmental objectives such as allocating revenue to reduce poverty or protect watersheds. For future projects of this length, ADB should improve institutional continuity and share knowledge internally across the project life. 56. Clear institutional structures and budgetary commitments. The NNT-NPA illustrates the need for clear objectives, institutional planning, and budgetary commitments as pre-requisites for transformational projects. Biodiversity offsets require clear definition of both the underlying biodiversity values and accountability for achieving the offsets. The NNT-NPA area far exceeded the areas of habitat lost in the project footprint for almost all habitat types, and no attempt was made to focus on areas within the NNT-NPA that correspond to habitats or species populations lost in the project footprint. Following the polluter-pays-principle, a developer should be accountable for conserving defined biodiversity values of an offset, rather than only providing finance. Plans must clearly distinguish between (i) avoiding, minimizing, and mitigating biodiversity impacts, (ii) compensating through offsets for unavoidable impacts, and (iii) supporting wider conservation efforts and the government’s commitments to conserve biodiversity. Relying on an entirely new government organization (WMPA) to conserve the NNT-NPA was a significant risk, which could have been mitigated by involving global conservation nongovernmental organizations from the beginning and mobilizing long term, international technical expertise, to improve the government’s capacity at national and local levels to manage the environment and fulfill the function of an environmental regulator in the long term. 57. Clearly defined monitoring responsibilities and mechanisms for adjustment. Detailed environmental and social stipulations in concession agreements are effective, but they require monitoring and a mechanism for adjustment. The Concession Agreement is highly detailed: this has probably ensured that NTPC paid greater attention to social and environmental requirements, but it may also have enabled a government with weak capacity to rely on NTPC’s diligence rather than regulating concession agreement stipulations effectively. The government and IFIs could have clarified the monitoring of concession agreement commitments. In addition, a mechanism for adjustments in the details on meeting concession agreement commitments—such as defining quantitative targets on incomes and the livelihood sustainability, but not fundamentals such as entitlements—without having to amend the concession agreement itself would have been of practical value. 58. Prioritizing occupational health and safety. During the early stages of construction, it appears that inadequate attention was being paid to occupational health and safety by NTPC and the HCC. The LTA’s reports during this period did highlight this aspect and called for improvements, which were subsequently put in place. With effective occupational health and safety systems, accidents and safety incidents can be minimized even on complex construction sites. 59. Defining social and environmental project outcomes and outputs with directly relevant indicators. The design and monitoring framework includes outputs on “environmental measures implemented” (with an indicator of “satisfactory implementation of environmental

15

management plan measures under the EAMP and Project Implementation Plan”) and “resettlement and ethnic minority development plans implemented.” All of these are activities rather than deliverable outputs. No corresponding outcome results from these activities. At the outcome level, “protection of the NNT-NPA” would have been better defined in terms of the behavior resulting from the project—reduced logging and wildlife poaching in the NNT-NPA—instead of the indicators that were used, “satisfactory SEMFOP implementation” and “absence of legitimate claims by project-affected people.” Safeguards in the design and monitoring framework should be defined as the delivery of environmental or social improvements. B. Recommendations 60. Future monitoring. NTPC will continue to monitor its environmental, health, and safety performance through its CEMMP and environment management system, and to report annually to the LTA. ADB will continue to receive progress reports on NTPC’s environmental, health, and safety performance until the repayment of the private sector loan in May 2022. NTPC will continue to help develop resettled villages through the NT2 Development Fund and should continue to submit reports on the fund’s activities and performance to ADB until 2022. The Second Lao Environment and Social Project40 will closely monitor SEMFOP III implementation and the progress of renewed efforts to enable people residing in the watershed to adopt alternative livelihoods and to protect forest cover. 61. Covenants. No change is recommended in the covenants in the loan and project agreements; they may be maintained in their current form. 62. Further action. To ensure sustainability of outcomes, it is recommended that the government and NTPC continue to pay attention to the following aspects: (i) Review by MAF of the reforestation activities completed in 2018, and dissemination of the results from the forthcoming national forest cover survey based on 2018 satellite images; (ii) The government is also advised that a key risk affecting technical and financial sustainability is the construction of additional projects (such as the proposed dam on the Xe Bang Fai River), which may limit the ability of NT2 to generate power without additional cumulative downstream impacts on flooding; (iii) The WMPA through SEMFOP III and the Second Lao Environment and Social Project, are encouraged to budget for, or otherwise obtain sources of finance for watershed protection (in addition to NTPC’s contribution) for the long term; and (iv) The Provincial Office of Natural Resources and Environment, District Office of Natural Resources, and Environment and the Reservoir Management Committee, continuously update the reservoir management plan with technical support from NTPC, to address issues such as managing shoreline development and using the drawdown area as a grazing resource. 63. Timing of the project performance evaluation report. Although the plant was commissioned in April 2010, the RIP was closed only in July 2018. To allow for a complete evaluation of the ongoing and remaining post-RIP closure activities, including progress towards achievement of the compensatory forestry requirements, it may be prudent to conduct a project performance evaluation after 2 years (after July 2020).

40 World Bank. 2015. Additional Financing: Second Lao Environment and Social Project. Washington DC. http://projects.worldbank.org/P152066/?lang=en&tab=overview

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance

Targets/Indicators Project Achievements

Impact • Sustainable economic growth • Poverty reduction in Lao PDR • Environmental conservation

Sustained gross domestic product growth of 6%–7% in Lao PDR throughout the operating period Reduction in the percentage of people living below the poverty line to below 15% by 2020 Graduate from being a least developed country by 2020 Achieve the national target of 70% reforestation by 2020

GDP growth averaged 7.8% over the last decade and is expected to be 6.7% in 2018. Using an internationally comparable poverty line, this % reduced from 24% in 2002/03 to 15% in 2012/13. To graduate from the list of LDCs by 2020 requires that Lao PDR meets the threshold for at least two the three socioeconomic criteria set by the UN: GNI per capita income, human assets index (HAI), and economic vulnerability index (EVI). The 2018 review suggests that Lao PDR’s performance in terms of GNI and HAI is now satisfactory, however, in EVI it is still lagging. If Lao PDR sustains development gains and meets the criteria again in 2021, Lao PDR is expected to be eligible to graduate from LDC status by 2021. Forest cover declined from 60.9% of the total land area in 2005 to 58.0% in 2015. The government’s 2016 moratorium on logging and ambitious national reforestation program is expected to raise forest cover to 70% by 2020.

Outcome • Provide stable and affordable electricity to Thailand and the Lao PDR in an environmentally and socially sustainable way • Generate revenue for the Government through the Project for its poverty reduction and conservation programs

Export 5,354 GWh of electricity to Thailand and provide 200 GWh of electricity to Lao PDR consumers by 2010 Revenues clearly reflected in annual budget allocations for eligible priority poverty and environment programs from 2010 Actual spending on eligible priority programs clearly reflected in quarterly budget execution

These targets have been exceeded for every full year of commercial operation of the plant (i.e. since 2011), with over 300 GWh dispatched to Lao PDR annually. Revenues received were allocated in annual budgets. Total net revenues from NT2 received are estimated to amount to $180.4 million by the end of 2017, whilst a total of $195.2 million have been allocated to eligible programs and projects. A persistent gap between revenue received and allocation to eligible programs from 2010 was

Appendix 1 17

Design Summary Performance

Targets/Indicators Project Achievements

• Protection of the NNT-NPA

reports and financial statements by 2010 Satisfactory implementation of social and environmental programs under SEMFOP throughout the concession period Absence of legitimate claims by project affected people

corrected with allocation of $66.3 million in 2017. SEMFOP I and II were not implemented satisfactorily. A SEMFOP III has been under implementation since 2017 with additional financing from the World Bank-financed Second Lao Environment and Social Project and is showing good progress. This indicator refers to claims beyond the restrictions on use required for NNT-NPA protection. There were no claims, but the indicator is not of relevance to the Outcome.

Outputs 1. Physical infrastructure built for power generation 2. Physical infrastructure built for power transmission 3. Environmental Measures implemented 4. Resettlement and ethnic minority development plans implemented 5. NNT-NPA protected

Construction of dam and power generation facilities by 2009 Construction of 138 km of transmission lines to Thai grid and 70 km in Lao grid by 2008 Satisfactory implementation of environmental management plan measures under the EAMP and Project Implementation Plan 1,120 Nakai Plateau families satisfactorily resettled, and incomes improved to the National Rural Poverty Line by 2011 Project lands and downstream areas affected people satisfactorily compensated and resettled and alternative livelihoods in place by 2010 Ethnic minority development plans satisfactorily implemented by 2015 Provision of

Achieved with commercial operation date slightly later than planned in April 2010. Achieved. EAMP measures were implemented as planned, with Nam Theun 2 Power Company Limited paying line-by-line attention to the Concession Agreement requirements, though there were challenges in many areas. Achieved for 1310 households and also the next generation of households. Sustainability of livelihoods into the future is underpinned by ongoing support from the Nam Theun 2 Development Fund until the end of the concession period. Monitoring indicates that all households have restored their livelihoods to pre-project levels. The ethnic minority development plans were integrated into plans for resettlement and livelihood restoration, which were implemented satisfactorily, with formal resettlement closure in 2018.

18 Appendix 1

Design Summary Performance

Targets/Indicators Project Achievements

from illegal logging 6. Strengthened public expenditure management system

alternative livelihoods for 5,800 ethnic minorities (access restriction in NNT-NPA) by 2015 Fiscal planning, budget preparation, budget execution, accounting and financial reporting by 2010

Satisfactory peer review by International Organization of Supreme Audit Institution member by 2010 Satisfactory budget and expenditure reports prepared by 2010

The output of protection from illegal logging was not achieved due to illegal wildlife poaching and extraction of timber that continued throughout implementation. The indicator on alternative livelihoods was not achieved due to ineffective SEMFOP I and II implementation, This output was achieved, albeit much later than 2010. Public expenditure reviews and expenditure tracking surveys were conducted and published.

EAMP = environmental assessment and management plan; GDP = gross domestic product; GWh = gigawatt-hour; km = kilometer; Lao PDR = Lao People’s Democratic Republic; LDC = least developed country; NNT-NPA = Nakai Nam Theun-national protected area; SEMFOP = social and environment management framework and operational plan. Source: Asian Development Bank.

Appendix 2 19

PROJECT COST AT APPRAISAL AND ACTUAL ($'000)

Component

Appraisal Estimate Actual

Foreign Exchange Local Currency Total Cost Total Cost

A. Construction Costs

Head Construction Contract 94.1 29.1 123.2 127.1

Civil Works 112.3 239.7 352.0 368.2

Electro-Mechanical 181.1 45.0 226.1 226.1

Project Implementation and Management 8.7 1.5 10.2 0.0

Construction insurance 0.0 .0.0 0.0 12.6

Subtotal (A) 396.2 315.3 711.5 734.1

B. Development Costs

Pre-Operating and Working Capital 16.6 8.0 24.6 21.4

Environment & Social Mitigation 48.8 0.0 48.8 78.6

Compensation to Gov’t. and Gov’t. Works 32.2 0.0 32.2 65.5

Nam Theun 2 Power Co. Administration 29.6 4.0 33.6 65.3

Project Preparation 72.2 2.0 74.2 72.8

Subtotal (B) 199.4 14.0 213.4 303.7

C. Financing Costs

Interest During Construction 98.4 98.0 196.4 194.6

Insurance and Bonding 30.1 0.0 30.1 42.3

Other Financing Charges 44.5 8.3 52.8 30.2

Subtotal (C) 173.0 106.3 279.3 267.1

D. Contingencies

Head Contract 6.1 5.8 11.9 0.0

Financial 21.0 12.9 33.9 0.0

Subtotal (D) 27.1 18.7 45.8 0.0

Total Project Base Cost 795.7 454.3 1,250.00 1,304.8

Contingent Costs

A. Debt Service 50.0 52.5 102.5 0.0

B. Administrative Costs 6.6 0.9 7.5 0.0

20 Appendix 2

Component

Appraisal Estimate Actual

Foreign Exchange Local Currency Total Cost Total Cost

C. Physical Cost Overruns 17.5 17.5 35.0 0.0

D. Liquidated Damages 42.6 12.5 35.0 0.0

Subtotal – Contingent Costs 116.6 83.4 200.0 0.0

Total Costs (Base + Contingent) 912.3 537.7 1,450.0 1,304.8

Source: Asian Development Bank estimates.

Appendix 3 21

PROJECT COST BY FINANCIER ($ million)

Source At Appraisal Actual

A. Equity

Governmenta 87.5 87.5

Electricite de France International 122.5 122.5

Electricity Generating Public Company of Thailand 87.5 87.5

Italian Thai Development Public Company Limited 52.5 52.5

Total Base Equity 350 350

B. Debt

ADB Direct Loan 45.0 45.0

USD Commercial Lenders (ADB-guaranteed loan) 45.0 37.8

USD Commercial Lenders (IDA-guaranteed loan) 45.0 37.8

USD Commercial Lenders (MIGA-guaranteed loan) 45.0 37.8

Export Finance Lenders (Coface-guaranteed loan) 166.5 180.0

French Development Agency 27.0 27.0

PROPARCOb 27.0 27.0

Thai Exim Bank 22.5 27.0

NIB 0.0 30.6

Thai commercial lenders ($ equivalent in baht) 450.0 450.0

Total Base Debt 900.0 900.0

Total Base Financing 1,250.0 1250.0

C. Contingent Equity 100.0 31.5

D. Contingent Debt, of which: 100.0 23.4

ADB Direct Loan 1.1

ADB Guaranteed Loan 1.0

Total Contingent Financing 200.0 57.0

Total Financing 1,450.0 1,304.8

ADB = Asian Development Bank; IDA = International Development Association; MIGA = Multilateral Investment Guarantee Agency; NIB = Nordic Investment Bank. a Includes the ADB $20 million public sector loan (L2162-LAO) to the Government. b A development financial institution partly owned by the French Development Agency. Sources: Asian Development Bank and Nam Theun 2 Power Company.

22 Appendix 4

DISBURSEMENT OF ADB LOAN PROCEEDS

Table 4.1: Annual and Cumulative Disbursement of ADB Loan Proceeds ($ million)

Annual Disbursement Cumulative Disbursement

Year Amount

($ million) % of Total Amount

($ million) % of Total

2005 11.101 60.2% 11.101 60.2% 2006 4.989 27.1% 16.090 87.3% 2007 0.909 4.9% 16.999 92.2% 2008 0.744 4.0% 17.743 96.3% 2009 0.451 2.4% 18.194 98.7% 2010 0.152 0.8% 18.346 99.6% 2011 0.081 0.4% 18.428 100.0% Total 18.428 100.0% 18.428 100.0%

ADB = Asian Development Bank. Source: Asian Development Bank.

Figure 4.1: Projection and Cumulative Disbursement of ADB Loan Proceeds

($ million)

Appendix 5 23

CONTRACT AWARDS OF ADB LOAN PROCEEDS

Table 5.1: Annual and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

Annual Contract Awards Cumulative Contract Awards

Year Amount

($ million) % of Total Amount

($ million) % of Total

2005 11.066 71.4% 11.066 71.4% 2006 4.434 28.6% 15.500 100.0% 2006 0.000 0.0% 15.500 100.0% Total 15.500 100.0% 15.500 100.0%

ADB = Asian Development Bank. Source: Asian Development Bank.

Figure 5.1: Projection and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

24 Appendix 6

CHRONOLOGY OF MAIN EVENTS Date Event

A. Project Processing 9 November 2003 Approval of Phase I project preparatory assistance (TA 4213-LAO) 29 March 2004 Approval of Phase II preparatory assistance (TA 4323-LAO) 25 November 2004 First management review meeting 6–17 December 2004 Pre-appraisal mission 1 10–28 January 2005 Pre-appraisal mission 2 18 February 2005 Second management review meeting 28 February–8 March 2005 Loan negotiations (together with WB, AFD and other commercial lenders) 30 March 2005 WB Board approval 4 April 2005 ADB Board approval 26 April 2005 Loan and project agreements signing 30 May 2005 Loan effectiveness B. Project Implementation 2005 Commencement of safeguards implementation and construction activities May 2005 Financial closure November 2005 Nam Theun 2 cornerstone ceremony April 2006 – April 2008 Construction of resettlement villages and relocation of villagers to new

homes January 2009 Water releases from Nakai Dam for testing and commissioning March 2009 Energization of 500 kV Transmission Lines & Substation June 2009 Successful testing of first Francis Unit turbine and synchronization with Thai

national grid April 2010 Commercial Operations Date achieved; 25 years NTPC concession begins December 2010 Official Inauguration at the Power Station 2 February 2011 Financial loan closing December 2011 Project Lands Program successfully completed December 2012 Handover of the NT2 Downstream Program to the Lao Government December 2013 Handover of the NT2 Public Health Program to the Lao Government December 2013 Nakai District declared out of poverty January 2014 Achievement of the Household Income Target for Nakai resettlers December 2015 Resettlement Implementation Period (RIP) extended by 2 years February 2018 Panel of Experts (POE) Report #27 recommends extension of the RIP until

31 December 2018 July 2018 POE Report #28 recommends closure of RIP 15–23 October 2018 Project completion report mission fielded

ADB = Asian Development Bank; AFD = Agence française de développement (French Development Agency); kV = kilovolt; NT2 = Nam Theun 2; NTPC = NT2 Power Company; POE = panel of experts; RIP = resettlement implementation period; TA = technical assistance; WB = The World Bank. Source: Asian Development Bank and Nam Theun 2 Power Company.

Appendix 7 25

PROJECT IMPLEMENTATION SCHEDULE (At Appraisal vs. Actual)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Y1 Y2 Y3 Y4 S1 S2 S3 S4 Q1 Q2 Q3 Q4

A Processing

1 Loan processing

2 ADB Board approval

3 Loan signing

4 Loan effectiveness

B Implementation

1

Procurement and installation of equipment and

materials (dam, power generation facilities,

transmission lines, etc.)

2

Environmental and social mitigation activities in

EAMP, Social Development Plan, SEMFOP and the

CA

3Protection activities under the watershed

management plan

4Environmental and social capacity building activities

agreed in the CA

5Capacity building to support the Government's

PEMSP

C Loan closing

Source: Asian Development Bank and Nam Theun 2 Power Company Limited.

Appraisal

Actual

Continuing activities under Concession period

2010 2011 2018

ADB = Asian Development Bank, CA = Concession Agreement, EAMP = envrionmental assessment and management plan, PEMSP = public expenditure management strengthening program, SEMFOP = Social and Environmental Management Framework and

Operational Plan, Q1 = first quarter, Q2 = second quarter, Q3 = third quarter, Q4 = fourth quarter, S1 = 1st half 2016, S2 = 2nd half 2016, S3 = 1st half 2017, S4 = 2nd half 2017Y1 = 2012, Y2 = 2013, Y3 = 2014, Y4 =2015.

ID Task

2004 2005 2006 2007 2008 2009 2016 to 20172012 to 2015

Closure of

Resettlement Imprementation

Period

Two-year extension of

Resettlement Implementation Period

Start of

commercial operations

26 Appendix 8

ENVIRONMENTAL ASPECTS A. Introduction 1. The management of environmental and social aspects of the project was an important component of the project, with significant emphasis placed on the conservation of the 4,200 km2 Nakai-Nam Theun national protected area (NNT-NPA), improved incomes and living conditions for over 6,000 resettled villagers, livelihoods development on the Nakai plateau, and the allocation of Government of Lao People’s Democratic Republic (Lao PDR) revenues for poverty reduction and conservation programmes. The Asian Development Bank (ADB) report and recommendation of the President (March 2005) identifies “Management of Environmental and Social Impacts” as one of two main components, the other being “Construction of [the] Hydroelectric Power Plant and Related Infrastructure”, and the design and monitoring framework that includes indicators of environmental and social outputs and outcomes. Expenditure on environmental and social mitigation was estimated at $48.8 million, compared to a total project cost of $1250 million at this time. B. Environmental Assessment and Planning During Preparation

2. Table 1 sets out the chronology of environmental assessment studies and preparation of management plans. Assessment of the potential environmental impacts of the Nam Theun 2 project began as early as 1991, with an Environmental Status Report that was part of a feasibility study. Numerous specialist studies and iterations of impact assessments culminated in a final environmental assessment and management plan (EAMP) in 2005. In addition to the EAMP, a social development plan (SDP) and a social and environmental management framework and operation plan (SEMFOP) for the watershed set out plans for the management of social impacts, and protection of the Nakai-Nam Theun watershed, respectively. The SDP combined resettlement action plans and ethnic minority development plans for the reservoir area, land acquisition in the footprint of civil works and the downstream channel, and resettlement and livelihood restoration in the downstream areas. These were the synthesis of studies conducted and updated from the beginning of the project and were reviewed by project-affected people, the Government, Dam Safety Review Panel (DSRP), the World Bank, and other financers. An international panel of experts (POEs) was established during preparation, giving strategic oversight and review of all social and environmental plans. 3. The EAMP drew upon a comprehensive range of studies – more than 230 main studies are referred to – including Nam Theun 2 Power Company Limited (NTPC)-commissioned studies and independent studies. They encompass, for example: analysis of the riparian release and spills from the Nakai Dam; assessment of the biomass in the inundation zone; a Lower Xe Bang Fai Hydrology Modeling Study, assessing the potential for flooding; a cumulative impacts assessment (ADB); Thai Transmission Lines environmental impact assessment due diligence (ADB); capacity and institutional assessment (ADB); strategic and economic studies; a Physical Cultural Resources Survey; Natural Habitats Accounting Analysis; compensatory forestry study; public health plan; and a gender strategy. Impacts assessed encompassed: impacts on water quality, public health, fisheries, wildlife, and aquatic habitat; potential riverbank erosion on the Xe Bang Fai; impacts on fish migration and loss of breeding habitats in the two basins; and increased pressure on resources due to increased population, for example.

Appendix 8 27

Table 1. Assessment of Environmental Impacts During the Development of the Project Year Steps / Documents

1991 Lao PDR Government with support from the World Bank and UNDP commissioned SMEC to undertake a Project Feasibility Study, which included an Environmental Status Report

1993 Nakai Nam Theun National Biodiversity Conservation Area gazette, combining two NBCAs (Nakai Plateau and Nam Theun) proposed by IUCN

1994 The Government invited the World Bank to become involved in the Project, and NTEC engaged TEAM to prepare a preliminary environmental assessment

1995 Second preliminary environmental assessment report by TEAM, based on further hydrological information, and dry season investigations; World Bank issued a list of outstanding concerns, including the need for an Alternatives Study that ranked power generation projects, an Economic Impact Analysis and an Environmental and Social Project

1996 World Bank mission developed a concept for IDA grant financing to support Government investment in the social and environmental planning and management of the project (the Nam Theun Social and Environmental Project)

1997 First draft of the EAMP prepared (led by Seatec International, Thailand)

1997 to 2000

Additional studies including water quality modeling; water quality impacts in the Xe Bang Fai; hydrological model; reservoir management; review of downstream flooding impacts and mitigation; aquatic biodiversity study and additional fish surveys

1998 Study of Alternatives which identified the basis for selecting the Nam Theun 2 Project (Lahmeyer and Worley International, 1998)

2000 World Bank study to rank potential hydropower projects throughout Lao PDR (Lahmeyer and Worley International, 2000)

2000 Second draft EAMP

2001 Third draft EAMP, with changes related to: ceasing operation when flows in the Xe Bang Fai are high; design release structure to improve water quality on the Nam Theun and the Xe Bang Fai; and Government institutional capacity measures

2003 Fourth and fifth drafts of the EAMP

2004 Final draft EAMP; Nam Theun 2 Power Company Limited formed and responsibilities of NTEC transferred to NTPC

2004 Summary Environmental and Social Impact Assessment for the project was disclosed on ADB website in November 2004

2004 Compensatory Forestry studya and Compensatory Forestry Framework Agreement signed by NTPC, ADB, EIB, World Bank and the Government

2005 Preparation of the first Social and Environmental Management Framework and Operational Plan

2005 Public disclosure of the EAMP ADB = Asian Development Bank; EAMP = environmental assessment and management plan; EIB = European Investment Bank; IDA = International Development Association; IUCN = International Union for Conservation of Nature; Lao PDR = Lao People’s Democratic Republic; NBCA = National Biodiversity Conservation Area; NTEC = Nam Theun 2 Electricity Consortium; TEAM = TEAM Consultants of Thailand; UNDP = United Nations Development Programme. a Singh. 2004. Compensatory forestry in Nam Theun 2 hydropower development project in Lao PDR and ADB. 2003.

Technical Assistance to the Lao People’s Democratic Republic for GMS Nam Theun 2 Hydropower Development Project. Manila.

4. The Concession Agreement made between the Government and NTPC includes the measures specified in these documents in detail, specifically in three corresponding parts of Schedule 4 to the agreement:

i) Part 1 addresses social and resettlement objectives outside of the watershed area, to be implemented by The Government and NTPC, and funded by NTPC;

ii) Part 2 addresses environmental objectives outside of the watershed area, to be implemented by The Government and NTPC, and funded by NTPC; and

iii) Part 3 addresses the social and environmental objectives in the watershed areas, to be implemented by The Government only, and funded by NTPC.

28 Appendix 8

5. The EAMP and Part 2 of Schedule 4 of the Concession Agreement refer to a head construction contractor’s environmental management and monitoring plan (HCCEMMP) and a company environmental management and monitoring plan (CEMMP). The former covers the measures that are the responsibility of the head construction contractor (HCC) to minimize and/or mitigate impacts during construction, whilst the latter concerns NTPC’s environmental management and monitoring plan (EMMP) for the operation stage. Detailed covenants were included in the Loan Agreement and project agreement, similar to the Concession Agreement requirements. 6. Consultation during preparation was far-reaching and highly detailed, with the Government and NTPC initiating consultation with project-affected people in 1997, and from 2004, ADB and the World Bank engaging independent consultation experts to ensure their informed participation. C. ADB Safeguards Analysis During Preparation 7. The main safeguards-related documents were as described above: the EAMP, HCCEMMP, SDP and SEMFOP. ADB safeguard policies on environment, involuntary resettlement, and indigenous peoples were applicable to the project, and ADB classified the project as category A for all three safeguards. In addition, ADB considered that a number of operational provisions in sector and thematic policies, such as forestry, water, energy, and gender and development were applicable. To ensure these policies were met, ADB was closely involved in preparatory studies over 2002–2005, supporting two phases of technical assistance (TA) studies. ADB assessment of safeguards was intended to complement the due diligence work being undertaken by the World Bank and avoid duplication, to jointly ensure that the safeguard policies of the two institutions were complied with and the sector issues were addressed appropriately. 8. Phase 1 of the TA supported a cumulative impact assessment study; an assessment of Government capacity, specifically to implement social and environmental mitigation measures, and the development an appropriate capacity-building program; assessment of compensatory forestry requirements; communications with project-affected people; and coordination with civil society, nongovernmental organizations and other stakeholders. Phase 2 supported implementation of the short- and medium-term capacity building program; additional economic and financial analysis to include risks and distributional effects and to integrate the results of a social and environmental cost-benefit analysis; poverty analysis macroeconomic impacts; and further consultation with local and international nongovernment organizations, and other civil society stakeholders. 9. This Technical Assistance also supported the incorporation of the results of the additional studies into safeguard documents, and the preparation of a summary environmental and social impact assessment (SESIA).1 The SESIA was a relatively concise stand-alone document of c.60 pages that integrated key information from the EAMP, SDP, and SEMFOP, and the numerous environmental and social analyses that were undertaken during project preparation.

1 SESIA was included in the RRP as Appendix 4, and the EAMP, SDP and SEMFOP each included in Supplementary

Appendix B to the RRP.

Appendix 8 29

Table 2. TA Support for Safeguards Preparation - Examples Studies Approach and Key Conclusions

Cumulative Impact Assessment

• 1st stage assessed NT2 project-affected areas

• 2nd stage assessed the macro-level and Mekong River basin

• River basins and linear development zones of the transmission lines and roads assessed

• Potential impacts of the project alone on the downstream Mekong River conditions would be very marginal on floodplain and fisheries

• Induced impacts on the long-term sustainability of the downstream ecosystem was considered to be insignificant

• Results presented to Cambodian National Mekong Committee and the Mekong River Commission

Due Diligence on EGAT’s Transmission Line

• Thai Environmental Assessment Guidelines required an Initial Environmental Examination since the transmission line is not in a watershed area

• Approx. 554 m of the 160 km line traverses a forest reserve area requiring clearance from the Royal Forestry Department

• Environmental and social impacts of the Thai transmission line and the due diligence results included in the SESIA

Evaluation of Hydroelectric Projects

• Evaluation of other ADB-financed hydroelectric power projects in Lao PDR

• Three evaluation reports were produced, on Nam Leuk hydroelectric project, Theun-Hinboun hydroelectric power project, and on the social and environmental impacts of other hydroelectric projects

• Lessons highlighted included: (i) need for an early comprehensive assessment of social and environmental impacts, (ii) establishment of baseline data needs, (iii) need to estimate and manage downstream impacts of trans-basin projects, with monitoring and adaptive management, (iv) emphasis on the restoration of livelihood, (v) need for comprehensive monitoring mechanism to evaluate achievement of objectives during implementation and operations, (vi) provision of sufficient funds for environmental and social mitigation, and (vii) strengthening of capacity for effective implementation and monitoring of the project due to the inadequate capacity in Lao PDR in planning, management, implementation and monitoring of social safeguard and environmental mitigation measures.

Compensatory Forestry

• A studya to quantify the area and types of forest that would be lost due to inundation by the reservoir, and to identify areas for forest protection and rehabilitation as compensation.

EGAT = Electricity Generating Authority of Thailand; Lao PDR = Lao People’s Democratic Republic; NT2 = Nam Theun 2; SESIA = summary environmental and social impact assessment a ADB. 2003. Technical Assistance to the Lao People’s Democratic Republic for GMS Nam Theun 2 Hydropower

Development Project. Manila.

D. Implementation Arrangements 10. Figure 1 depicts the organizational structure envisaged at the time of project preparation for the implementation of social and environmental management plans. NTPC would establish an environmental management office (EMO) to implement the EAMP, including supervision of the HCC, and a resettlement office to implement the SDP. The Government would establish an environmental management unit (EMU) to oversee NTPC’s implementation of the EAMP, and a resettlement management unit (RMU) to oversee SDP implementation, including Government responsibilities. The EMU would be comprised of officials from the key central and provincial government agencies, under the direction of STEA (Science, Technology and Environment Agency; now the Ministry of Natural Resources and Environment, MONRE). A panel of experts would, continuing their role during preparation, conduct monitoring visits and advise the

30 Appendix 8

Government. In addition, the Government would appoint Independent Monitoring Agents (IMAs) for specific issues (resettlement, watershed) when needed. 11. As envisaged, NTPC established an EMO and a resettlement office. During construction, the EMO consisted of up to 15 personnel, responsible for the supervision of compliance by the head contractor and its subcontractors, environmental monitoring, and working closely with the EMU and other government agencies. The team was required to undertake all HCCs environmental monitoring, reporting, training and site inspections. The EMO was, along with the resettlement office, part of NTPC’s Environmental and Social Division. In addition, in 2008, EDF created an ‘Aquatic Environment Laboratory’ (AE Lab) that included as many as 30 staff at its peak, conducting the monitoring and analysis of chemical and hydrobiological parameters, including greenhouse gas (GHG) emissions, and in 2010 the lab was merged into the NTPC Environmental and Social Division.

Figure 1. Organizational Structure for EAMP, SDP and SEMFOP Implementation (as depicted

in the RRP, 2005)

12. Also, as envisaged, the Government established the EMU, which consisted of representatives from central government (originally the Ministry of Industry and Handicrafts Hydropower Office), Electricite du Laos (EDL), the Khammoune Provincial Office, and the District Offices of Nakai and Gnommalat. An EMU office was established at STEA/ MONRE in Vientiane and a field office was established in Khammoune Provincial STEA/ MONRE office. The responsibilities envisaged for the EMU were similar to those of an environmental regulator: to monitor and supervise mitigation measures by both the Government and NTPC and issue approvals; to approve environmental specifications for the HCC; to coordinate mitigation between the Government and NTPC and allocate responsibilities to Government agencies to meet Concession Agreement obligations; to appoint and coordinate the independent monitoring agents and POE; and advise Government on the adequacy of mitigation or compensation measures. Five years after commercial operation date (COD), as envisaged, the EMU was assimilated into Provincial and District Offices for Natural Resources and Environment. A number of committees

Appendix 8 31

– Resettlement Committee, Adaptive Management Committee (for the management of downstream issues on the Xe Bang Fai), and Reservoir Management Committee – were used to coordinate NTPC and Government activities. 13. In 2005, the establishment of the EMU was behind schedule, and there were delays in appointing TA to the EMU due to World Bank procurement procedures. In 2006, the TA began but progress was slow, and the Government was still filling positions in the EMU; expenditure on the EMU’s operations was minimal and remained at only c.40% of the budget at this stage. Lender’s technical adviser (LTA) reports throughout the construction period refer to EMU mainly in reference to waste management in the Nakai area, and the absence of environment, health and safety (EHS) standards on salvage logging operations. An EMU water quality testing lab, required in the Concession Agreement, was never established. The EMU didn’t fulfill the responsibilities of an environmental regulator, as envisaged at the time of its establishment. The TA produced its final report in 2010 and restructuring of the EMU meant it no longer had a permanent presence on the Plateau. 14. The Government established the Watershed Protection Management Agency (WMPA) to protect the watershed, including NNT-NPA and adjacent biological corridors. This is discussed further under the section ‘Watershed Protection’ below. Implementation arrangements were overseen by a Steering Committee consisting of representatives of the Department of Energy Business/ Ministry of Energy and Mines, Ministry of Agriculture and Forestry (MAF) and the Board of Directors of WMPA, STEA/ Water Resources and Environmental Agency/ MONRE. E. Reporting and Supervision 15. NTPC Environmental and Social Division has prepared an Annual Implementation Plan (AIP) for social and environmental activities since 2005. These set out the objectives, Concession Agreement obligations, scope of work, budget, organization and procurement for a range of social and environmental aspects. Each report consists of volumes on social activities, environmental activities, and compliance with the HCCEMMP. NTPC also prepared a Project Implementation Plan, documenting how NTPC will implement its obligations with respect to environment and social matters. 16. The NTPC Environmental and Social Division has prepared monthly, quarterly and semi-annual environmental and social progress reports since 2005. Monthly reports present on all aspects of environmental management, including non-compliances and EMMP activities, as well as wider issues such as water quality and wildlife management. Quarterly and semi-annual reports detail activities and results in areas such as HCC performance, water quality, biodiversity, invasive species, hazardous waste management, environmental training etc. However, these reports do not present activities and results in comparison to the objectives, Concession Agreement obligations, and activities set out in the AIPs. NTPC prepared semi-annual and annual E&S monitoring reports. Initially these reports were not made publicly available. ADB raised the matter in 2017 and received all reports for disclosure. Environment and social safeguards (E&S) reports are now routinely uploaded to ADB and NTPC websites, and all previous reports are publicly available except for semi-annual reports for the period July 2007 to June 2010. 17. In addition, the project was subject to regular and intense scrutiny through:

i) POE – an international panel of experts reporting to the Government, consisting of

three experts (for social issues, environmental issues, and biodiversity). The POE reported from 1997 until 2018, delivering a total of 28 reports;

32 Appendix 8

ii) LTA – appointed by NTPC under the company’s obligations to its commercial lenders, the LTA has produced roughly quarterly reports (on engineering, environmental and social issues) from 2005, delivering a total of 39 reports to-date;

iii) A DSRP provided advice on technical construction, operations, and dam safety issues;

iv) An International Advisory Group advising the World Bank’s President on project implementation, covering revenue management arrangements as well as environmental and social aspects, which began in 1997 and last reported in 2011;

v) Independent Monitoring Agents – a number of different agents were appointed by the Government to report independently on, including an IMA on the Monitoring of Environmental Impacts and Measures completed its 8th report in 2014, an IMA on the WMPA that reported in 2014 and 2016, and an IMA on Nakai resettlement; and

vi) Regular missions by IFIs and bilateral agencies and their external monitors (such as the social TA mentioned above) in the form of site visits and management and technical missions (an environmental specialist joined 11 out of the 39 ADB missions listed in Table D).

18. NTPC was required in its agreement with commercial lenders to deliver E&S reports to the LTA, initially on a monthly basis during construction, then quarterly for the first three years after COD, and on a semi-annual basis for the subsequent seven years until ten years after COD. The agreement requires NTPC to provide an annual E&S report to the LTA after ten years since COD (which will be April 2020) through the concession period.

F. Environmental, Health and Safety Management by the Head Construction Contractor

19. Table 3 provides a comparison of the environmental and social plans identified during preparation with what was or is being implemented during construction and operation. The EAMP and HCCEMMP covered all components including ancillary works. EAMP plans that were identified for HCC implementation included: erosion and sedimentation control; spoil disposal; quarries; water quality monitoring; chemical waste and control of spills; emergency plan for hazardous materials; air quality; noise management; physical cultural resources; vegetation clearing; waste management; environmental training (of workers); traffic and access; explosive ordnance survey and disposal; construction work camps; project staff health programme; and the minimization of impacts during the construction and upgrading of roads. A range of sub-plans similar to this were included in the HCCEMMP, and the main plan covered the key elements of an environmental management system, including environmental policy, identification of environmental risks, legal and conceptual framework, objectives, structure and responsibilities, environmental organization, training and awareness programs (including for contractor staff), control and corrective action, internal and environmental auditing, and senior management environmental review. The HCCEMMP required that a site-specific environmental plan (SSEP) was prepared by any contractor for each specific site of work.

Appendix 8 33

Table 3. Environmental and Social Mitigation Measures and Management Plans as listed in Appendix 1 of the Summary ESIA (November 2004)

SESIA Appendix 1

Corresponding plans in final EAMP (March 2005), or (in italics) SDP or

SEMFOP Implementation

Construction Management and Mitigation Plans

(i) Erosion and Sediment Control Plan

Erosion and Sediment Control HCC Implemented as Sub-plan 1 in the HCCEMMP: Erosion and Sediment Control Plan

(ii) Spoil Disposal Planning and Management Plan

Spoil Disposal HCC Implemented as Sub-plan 2 in the HCCEMMP: Spoil Disposal Planning and Management Plan

(iii) Quarry Management Plan Quarries HCC Implemented as Sub-plan 3 in the HCCEMMP: Quarry Management Plan

(iv) Water Quality Monitoring Plan Water Quality Monitoring HCC Implemented as Sub-plan 4 in the HCCEMMP: Water Quality Monitoring Plan

(v) Chemical Waste/Spillage Management Plan

Chemical Waste & Control of Spills

HCC Implemented as Sub-plan 5 in the HCCEMMP: Chemical Waste/ Spillage Management Plan

(vi) Emergency Plan for Hazardous Materials

Emergency Plan for Hazardous Materials

HCC Implemented as Sub-plan 6 in the HCCEMMP: Emergency Plan For Hazardous Materials

(vii) Emissions and Dust Control Plan

Air Quality HCC Implemented as Sub-plan 7 in the HCCEMMP: Emissions and Dust Control Plan

(viii) Noise Control Plan Noise Management HCC Implemented as sub-plan 8 in the HCCEMMP: Noise Control Plan

(ix) Physical cultural resources Physical Cultural Resources HCC Implemented as Sub-plan 9 in the HCCEMMP: Physical Cultural Resources

(x) Landscaping and Revegetation Plan

- - Implemented as Sub-plan 10 in the HCCEMMP: Landscaping and Re-Vegetation Plan

(xi) Vegetation Clearing Plan Vegetation Clearing HCC Implemented as Sub-plan 11 in the HCCEMMP: Vegetations Clearing Plan

(xii) Waste Management Plan Waste Management HCC Implemented as Sub-plan 12 in the HCCEMMP: Waste Management Plan

(xiii) Reservoir Impoundment Management Plan

Water Quality Improvements by Reduction of Biomass in the Nakai Reservoir Area

GOL Implemented as Sub-plan 13 in the HCCEMMP: Reservoir Impoundment Management Plan

(xiv) Environmental Training for Construction Workers Plan

Environmental Training HCC Implemented as Sub-plan 14 in the HCCEMMP: Environmental Training For Construction Workers Plan

(xv) On-site Traffic and Access Management Plan

Traffic and Access

HCC Implemented as Sub-plan 15 in the HCCEMMP: On-Site Traffic and Access Management Plan

(xvi) Explosive Ordnance Survey and Disposal Plan

Explosive Ordnance Survey and Disposal

HCC Implemented as Sub-plan 16 in the HCCEMMP: Explosive Ordnance Survey And Disposal Plan

(xvii) Construction Work Camps Construction Work Camps HCC Implemented as Sub-plan 17 in the HCCEMMP: Construction Work Camps

(xviii) Manual of Best Practice in Site Management of Environmental Matters

- - Implemented as Sub-plan 18 in the HCCEMMP: Manual of Best Practices in Site Management of Environmental Matters

(xix) Project Staff Health Plan Project Staff Health Programme HCC Implemented as Sub-plan 19 in the HCCEMMP: Project Staff Health Program

- Transmission Lines HCC Environmental management implemented by HCC

- Roads HCC Environmental management implemented by HCC

34 Appendix 8

SESIA Appendix 1

Corresponding plans in final EAMP (March 2005), or (in italics) SDP or

SEMFOP Implementation

Mitigation Programs during Construction and Operation

(i) Control of Synthetic Chemical Use for Pest Management

Control of Synthetic Chemical Use for Pest Management & Other Purposes

NTPC Not clear. Briefly mentioned as a Concession Agreement requirement in CEMMP 2007.

(ii) Water Quality Management and Monitoring Program

Water Quality Monitoring and Assessment Programme

NTPC Highly comprehensive water quality management and monitoring programme. Refer to detailed findings in paragraphs 26 to 30 of this appendix.

(iii) Resettlement Action Plan and Ethnic Minorities Development Plan for the Nakai plateau

Resettlement Action Plan and Ethnic Minorities Development Plan for the Nakai plateau Minimisation of environmental impacts at resettlement sites

GOL

Fully implemented. Refer to the Social Appendix for details.

(iv) Resettlement Action Plan and Ethnic Minorities Development Plan for Xe Bang Fai and downstream Nam Theun

Resettlement Action Plan and Ethnic Minorities Development Plan for Xe Bang Fai and downstream Nam Theun Minimisation of environmental impacts at resettlement sites

GOL

Fully implemented. Refer to the Social Appendix for details.

(v) Project Lands Resettlement Action Plan

Project Lands Resettlement Action Plan

Fully implemented. Refer to the Social Appendix for details.

(vi) Social and Environment Management Framework and First Operational Plan (SEMFOP)

Social and Environment Management Framework and First Operational Plan (SEMFOP)

GOL SEMFOP I and II not successfully implemented. SEMFOP III now underway. Refer to paragraphs 48 to 58 of this appendix for details.

(vii) Public Health Action Plan - Public Health Program implemented as separate projects: Resettler Health Program; the Regional Health Program; and a camp follower program. Refer to the Social Appendix for details.

(viii) Human Trafficking and Safe Migration Awareness Program Mitigation Programs during Operation

- Human trafficking was managed by RMU and is mentioned in Annual Implementation Plans from 2006 to 2010, including awareness-raising on human trafficking by the Lao Youth Union.

Mitigation Programs during Operation

(i) Control of riparian release into Nam Theun

Riparian Release to Downstream of the Nam Theun

NTPC Implemented as planned: refer to ‘Management of Downstream Impacts’ in paragraphs 64 to 74 of this appendix.

Appendix 8 35

SESIA Appendix 1

Corresponding plans in final EAMP (March 2005), or (in italics) SDP or

SEMFOP Implementation

(ii) Management of the reservoir and associated fish populations

- A prime ministerial decree in 2008 sets out measures for reservoir management including the Reservoir Management Committee, and rights of resettlers to the drawdown zone and to fisheries for 10 years. A Reservoir Fisheries Association was formed in 2010/2011. Refer to the sub-section on Reservoir Management (paragraphs 31-35).

(iii) Aeration of water downstream of power station in downstream channel and Nam Kathang

Aeration of Water in the Downstream Channel and the Nam Kathang

NTPC Aerator structures built into downstream channel as planned. Refer to ‘Water Quality’ in paragraphs 26 to 30.

(iv) Protecting downstream channel fisheries

Protecting Downstream Channel Fisheries

NTPC Downstream livelihood restoration programme included compensation for loss of fisheries.

(v) Prevention of Increased Flooding at Mahaxai on Xe Bang Fai

Prevention of Increased Flooding at Mahaxai

NTPC Implemented as planned: refer to ‘Management of Downstream Impacts’ in paragraphs 64 to 74 of this appendix.

(vi) Monitoring and control of scouring and erosion of river channel in Xe Bang Fai

Degradation of the Xe Bang Fai River Channel

NTPC Implemented as planned: refer to ‘Management of Downstream Impacts’ in paragraphs 64 to 74 of this appendix.

(vii) Protection of downstream channel

Downstream Channel In-Stream Degradation

NTPC Implemented as planned: refer to ‘Management of Downstream Impacts’ in paragraphs 64 to 74 of this appendix.

(viii) Wildlife Management and Protection Program

Wildlife Management and Protection Programme

NTPC Mostly implemented as planned: refer to ‘Biodiversity and Invasive Species’ in paragraphs 36 to 47 of this appendix.

(ix) Management of endangered and threatened species

- Refer to ‘Biodiversity and Invasive Species’ in paragraphs 36 to 47 of this appendix.

(x) Control and enforcement of access and hunting

Control & Enforcement – Access & Hunting

GOL Weak implementation, through SEMFOP I and II, with increases in illegal wildlife poaching and hunting.

(xi) Public education concerning environmental issues

Public Education Concerning Environmental Issues

GOL There has been public education concerning environmental issues on the Nakai Plateau over the last few years.

(xii) Plantation forestry program on Nakai plateau

Compensatory Forestry Programme

NTPC Responsibility allocated to GOL, as agreed with NTPC. Slow implementation, but with recent progress. Refer to ‘Compensatory Forestry’ in paragraphs 59 to 63 of this appendix.

(xiii) Restrictions to unsustainable forms of shifting cultivation

Restriction of Shifting Cultivation GOL Weak implementation, through SEMFOP I and II.

(xiv) Funding support for implementing agencies

Funding Support for the Implementing Agencies in the Pre-Operating Phase

NTPC It is not clear whether NTPC gave this support in pre-operating phase.

- Transmission Lines GOL No information is available on whether GOL is fulfilling responsibilities to keep the Transmission Line clear of encroachment.

36 Appendix 8

20. The HCC established an environment team that consisted initially of one environmental engineer and two environmental officers. The HCC established health and safety procedures and developed a workforce training program with emphasis on road safety, health and hygiene (medical checkup, insect-borne diseases, food and sanitation, STDs), emergency planning and casualty evacuation, and basic worksite safety (wearing of protective boots and helmets, etc.). The HCC also provided security measures such as barriers at the entrance to each worksite to protect local population from entering the works as well as paths and bridges to divert public around the sites. 21. However, in the initial stages of construction, compliance with HCCEMMP requirements was weak. In 2005, the LTA reported non-compliances that were not being identified by the environmental specialists of NTPC or the HCC, a lack of on-site monitoring by NTPC or HCC, under-resourcing for environmental management, concerns on communications between NTPC and HCC, concerns on limited use of SSEPs, and cursory induction training. The LTA noted that environmental monitoring methods for dust, air quality, noise and water quality were not in accordance with internationally recognized methods. In 2006, the HCC made significant improvements in staffing and there were improvements in sediment and erosion control and management of point source discharges, but construction works were still commencing before SSEPs were approved, and there was a range of open non-compliances, and worker training was minimal. In 2007, as construction intensified, the HCC’s environmental and safety inspection teams merged, and the LTA reported that the improvements in environmental management observed in their last three reports had significantly slowed in some areas and that several expected improvements had not materialized. In 2008, there was a breakdown in cooperation between NTPC and HCC, which the LTA reported as a serious failure in the management system. NTPC-HCC cooperation on environmental management improved in 2009, but by that time, the intensity of construction was reducing. Ongoing non-compliances identified by the LTA, especially related to erosion control and landslides, and wastewater effluent, were ultimately resolved when construction activity and staff numbers were reducing. 22. Occupational health and safety (OHS) management by the HCC during the initial stages of construction had significant weaknesses according to the LTA. This included a lack of on-site NTPC staff monitoring OHS, poor food and limited leisure facilities for workers leading to reliance on camp followers for services, and quarters for some Lao workers and truck drivers had no sanitation facilities and were located next to the river. In 2008, the HCC appointed a new safety manager to improve safety performance, and the LTA reported that OHS was much improved from the early stages of the project. The project aimed to achieve a Lost-time Incident Frequency (LTIF) of no more than 25 accidents per million hours worked. LTIF peaked at 32 in 2008, was typically around 20, and lessened as construction work ended. Site access and security was initially weak but improved for the main part of the construction stage. G. EHS Management During Operation 23. NTPC prepared a Company EMMP (CEMMP) in 2010 in accordance with Concession Agreement requirements for the operating project and updated the CEMMP in 2014. The CEMMP sets out content that would be expected of an Environmental Management System. This includes details of the company quality, health and safety and environmental policies, identification of environmental aspects and legislation, management programs (Waste Management Plan, Hazardous Materials and Contamination Control Management Plan, Water Management Plan, and Biodiversity Management Plan), roles and responsibilities including training and communication, and monitoring programs (site inspections, biodiversity monitoring, water quality monitoring, hazardous materials inventory inspections), non-compliance management, and

Appendix 8 37

management review. The management review will be conducted annually to: revise policy, objectives targets and programs for the following year; and identify improvements to the EMS or operational controls to improve environmental performance. 24. During operation, until recently, the Environmental and Social Division remained responsible for CEMMP implementation, and ongoing implementation of other environmental programs (e.g. human-elephant conflict management). With the completion of the resettlement implementation period in 2018, this division has been restructured into separate teams, with an environmental laboratory under the Technical Branch that continues chemical and hydrobiological monitoring and environmental compliance monitoring; and a separate unit for corporate social responsibility, Government Relations and Communications. Coordination will continue through committees such as the Adaptive Management Committee and Reservoir Management Committee. A Risk and Strategy team leads a Quality, Health and Safety and Environment Management System, which is certified to ISO-14001, OHSAS 18001, and ISO 9001. Details of ongoing programs, including the hydrosafety program and a range of other management and monitoring programs are discussed in detail in the thematic sections below. Table 3 provides a comparison of the environmental and social plans identified during preparation with what was or is being implemented during construction and operation. H. Water Quality 25. Water quality issues identified at the time of project development, included periodic episodes of low dissolved oxygen concentration in parts of the reservoir and downstream rivers, increased nutrient concentrations in surface waters in initial years, and wastewater discharges from construction sites and work camps. A number of design measures were incorporated into project designs, to aerate waters discharged to the downstream channel and the Nam Theun: an aeration weir in the downstream channel; the positioning of the gate for environmental flows at Nakai Dam in the upper layer of the reservoir (in the epilimnion, the warmer oxygen-rich water layer) and the inclusion of a cone valve to aerate water passing through this gate. In addition, there were plans for the removal of biomass in the area to be inundated, prior to reservoir filling. 26. The EAMP also proposed a water quality monitoring and assessment programme, for NTPC implementation. NTPC’s water quality monitoring program began in January 2005, but it was expanded with the support of EDF Hydro Engineering Centre in 2008 into an ambitious monitoring and research program, which remains operational. An on-site laboratory was established to ensure sampling and analysis, of water quality, GHG emissions, phytoplankton, zooplankton, benthic macro-invertebrates, and fish. EDF developed a 3D numerical model to use monitoring data to predict the long-term changes in water quality and GHG production of the reservoir. Table 4 presents the parameters monitored across 10 groups, at a total of 36 locations (10 on the Nam Theun River downstream and tributaries upstream of the reservoir; 9 in the reservoir area; 7 downstream of the power house and along the downstream channel; and 6 and 4 respectively set up in the Nam Kathang/Nam Gnom and Xe Bangfai watersheds). NTPC has been involved in research and development collaborations with French universities (Toulouse and Rennes) and research institutes, including on GHG emissions from the reservoir. During operations, NTPC continued to monitor 36 water quality parameters at 26 locations, until April 2017 when monitoring at 4 reservoir locations was discontinued. NTPC now monitors 22 locations: 3 on tributaries; 5 in the reservoir; and 14 downstream. In addition, NTPC monitors the quality of effluent from sites such as the Residence Nam Theun and the powerhouse oil separator. In response to concerns with groundwater contamination from the NTPC landfill, NTPC monitors groundwater quality in 887 boreholes across 6 districts, including in the resettlement villages.

38 Appendix 8

Table 4. Parameters monitored by NTPC AE Laboratory Number Groups Parameters

1 In situ Temperature, pH, dissolved oxygen, turbidity, conductivity, transparency

2 Carbon budget Dissolved CH4, dissolved CO2, total organic carbon, total carbon, total inorganic carbon (calculation / measurements / alkalinity)

3 Other major parameters BOD, COD, TSS, total N, total P, Fe II, Fe III, total dissolved iron, silica

4 HPLC Potassium, sodium, calcium, magnesium, ammonia, phosphate, sulfate, chloride, nitrite, nitrate, fluoride

5 N2O Dissolved N2O

6 Gas fluxes Bubbling CH4, CO2, N2O, diffusive CH4, CO2, N2O

7 Chlorophyll a Chlorophyll a

8 Phyto and zooplankton Number of individuals and species identification, biomass, visual observation (bloom, hydrophytes, macrophytes...)

9 Benthic invertebrates Number and identification of individuals per family (per genus or species whenever possible)

10 Fish Number, identification (species), size, weight, sex, maturity of specimens per net. Stomach content, flesh samples for mercury analysis

27. Following the initial impoundment of the reservoir in March 2008, anoxic conditions developed throughout the reservoir at depths greater than 3 m, but there were good levels of dissolved oxygen in the surface layer (epilimnion). With reservoir filling continuing through 2008, the LTA became concerned that biomass had not been cleared sufficiently from the reservoir area and that NTPC’s ‘fill and flush’ method for removing anoxic waters was not feasible (as there was no bottom outlet at the dam). However, despite an incident of dissolved oxygen decreasing below the guideline of 5 mg/L in the riparian release from Nakai Dam and downstream until the confluence with the Nam Phao, water quality in the reservoir and downstream has exceeded expectations. At the close of 2009, shortly before COD, the LTA reported that discharges from the reservoir had not resulted in any of the anticipated problems with downstream water quality in the Nam Theun, Nam Kathang or Xe Bang Fai or in the odour problems that were originally feared. There was occasional H2S odour at the Nakai Dam but measured levels were less than 0.1 mg/L, and the aeration weir on the downstream channel had proved its effectiveness. 28. Ongoing monitoring results show that the reservoir is monomictic, meaning it undergoes one total mixing per seasonal cycle. During the dry season, all water quality parameters such as temperature, DO, conductivity, ammonium (NH4), and heavy metals show stratification, and during the rainy season they are uniformly distributed through the depth of the reservoir. DO levels are above 4-5 mg/l through the year near the surface, and average DO levels have risen since impoundment. Comparison of water quality in the Xe Bang Fai upstream and downstream of the confluence with the downstream channel indicates that DO, pH, nitrates and ammonia are similar, whilst there are effects on temperature, conductivity, and TSS. Temperature is lower during the warm-dry season (mid-February to mid-June) but similar in the warm-wet season due to higher Xe Bang Fai flows. A significant difference in conductivity and major cations/anions is due to the lower conductivity of waters from the crystalline Nam Theun watershed compared to the calcareous Xe Bang Fai. TSS concentrations are higher after the confluence, except at higher Xe Bang Fai flows when they are similar. 29. Regarding the management of wastewater discharges from construction sites and work camps during construction, the HCC began monitoring in 2005, covering a total of 63 sample points by 2006. However, there were ongoing non-compliances, including, for example, run-off from septic tanks, leaching from spoil dumps, and inadequate treatment of black and grey wastewaters at construction camps. The LTA reported that the HCC did not initially identify water

Appendix 8 39

quality criteria against which to assess compliance that HCC-recorded data on water quality was not reported to NTPC in breach of the Concession Agreement, and that the project continued to significantly impact local watercourses, with fecal coliforms exceeding requirements.

Figure 2. Evolution of the reservoir water level from impoundment in April 2008 (upper graph),

and the reservoir surface at a low level (530 m) and at FSL (538 m). (Reproduced from Declaux et al, 2014, Main features of the Nam Theun 2 hydroelectric project

(Lao PDR) and the associated environmental monitoring programmes. Hydroecol. Appl. http://www.hydroecologie.org © EDF, 2014)

I. Reservoir Preparation, Filling and Management 30. The reservoir area fluctuates from 86 km2 at the minimum operating level of 525.5 m-asl, to 489 km2 at the full supply level of 538 m-asl and is highly dendritic. It is relatively shallow with an average depth of 8 m, and maximum depth of 39 m. Figure 2 shows the evolution of reservoir levels following impoundment and the reservoir area at a low level and FSL.

31. Environmental impacts related to the reservoir were assessed in detail through project preparation and the development of the EAMP (as were the social impacts of land acquisition and resettlement). The EAMP summarizes the results of detailed water quality modeling which began

40 Appendix 8

in 1997, and also identifies issues of reservoir sedimentation, aquatic macrophytes, biodiversity impacts, and the loss of physical cultural resources in the area. There was some discussion of reservoir GHG emissions in the EAMP, comparing its generation GWh per km2 of the reservoir area with other tropical/sub-tropical hydropower projects as a proxy for emissions, for example. Plans for reservoir preparation included in the EAMP were (for NTPC implementation) pre-impoundment surveys and post-impoundment programmes for animal species in the inundation area, development of a transitional strategy for reservoir impoundment (i.e. rescue of animal populations and their protection from hunting during salvage logging and impoundment), and wetland conversion and formation, and (for Government implementation) water quality improvements by the reduction of biomass. 32. NTPC implemented programs on biological surveys and rescue, as described under Biodiversity below. However, the removal of biomass, including salvage logging and smaller biomass, did not proceed as envisaged at the time of preparation. In 2006, the Government contracted a private logging company to remove all sellable biomass from the reservoir area after larger logs of commercial value had been removed. The LTA reports in 2007 that salvage logging was poorly controlled and did not comply with EHS requirements, and that there was an enormous quantity of remaining biomass, and ineffective burning of cut biomass. A World Bank specialist provided an overview of the options available for biomass removal, considering the selective removal of biomass in strategic areas (for example navigation areas, the headrace channel, and to provide access to saddle dams). In January 2008, biomass removal began in 1500 ha of the permanently inundated part of the reservoir, although 3000 ha was previously agreed and Water Resources and Environment Agency (now MONRE) had requested 4500 ha. Ultimately 1872 ha (18.72 km2) were cleared, mainly for navigation and fisheries purposes. Combining this with areas previously cleared for agriculture, NTPC estimated that 60% of the permanently flooded area (i.e. that below 525.5 masl) was cleared. 33. The filling of the reservoir began in April 2008, when the Nakai dam diversion tunnel was closed. The water level increased gradually until November 2008 to 537 m as a result of high inflows during the wet season and was maintained at this level for 44 weeks and slowly increased to FSL in October 2009. NTPC’s transitional strategy for impoundment was implemented as planned, for example with anti-poaching patrols and rescue programs, and cage and camera traps on the islands. NTPC also implemented the removal of floating debris (logs etc.) from the reservoir. The reservoir level was then not drawn down significantly until 2010. 34. Responsibility for the management of the reservoir has passed to the Government. WMPA is now conducting water patrols, with checkpoints and two patrol teams, to control timber extraction and poaching from NNT-NPA. Resettled peoples’ Reservoir Fisheries Association seeks to manage the fisheries resource, and NTPC and Government District and Provincial authorities coordinate through a Reservoir Management Committee. However, there appears to be no reservoir management plan, for example that would address issues such as the management of shoreline development or the use of the drawdown area as a grazing resource. J. Biodiversity and Invasive Species 35. The biodiversity value of the Nakai Plateau and watershed was recognized from an early stage, and biodiversity was surveyed and assessed thoroughly before and after the project’s development. The Annamite mountains that form the border between the Lao PDR and Viet Nam are recognized as an area of global significance for biodiversity, and 19 mammal and bird taxa are considered near or strict endemic to the northern Annamite rain forest ecoregion, within which the NNT-NPA is situated. At the time of the project’s appraisal, of the 106 mammal, 403 bird, 38

Appendix 8 41

reptile, and 25 amphibian species recorded on or in the Nakai plateau, NNT-NPA, and the Nam Theun corridor, 38 mammal, 17 bird, and 10 reptile species were the International Union for Conservation of Nature (IUCN) Red-listed as globally threatened. The most widespread habitat on the plateau was mixed broadleaf and coniferous, followed by upper mixed deciduous forest. Coniferous forest on the Nakai Plateau dominated by Tenasserim Pine (Pinus latteri, Near Threatened) was thought to be the most extensive in Indochina. 36. ‘Natural habitats accounting’ conducted during EAMP preparation estimated that –including all of the project footprint (reservoir and all civil works) and the fragmentation of habitats that this would cause – a total of 130,589 ha would be lost or modified due to fragmentation. This consisted of 62% natural forest habitat and 38% either non-forest habitat or disturbed/ regenerating areas. Approximately 15% of habitats on the Nakai Plateau, and 12.6% of habitats in the inundation area, had already been disturbed, and it was estimated that from 1973 to 2003, forest cover within the area of the Nakai Plateau decreased by 11% to 60% cover, and forest cover within the inundation zone decreased by 13% to 48%. With threats to the watershed area increasing, and likely to be exacerbated by increased access created by project roads and the reservoir, the NT2 project was extended to include a significant biodiversity offset program in the 338,718 ha NNT NBCA (later to become the NNT-NPA) and adjacent corridors. Progress in protecting this offset is discussed in the section on watershed protection below. 37. Additional programs planned for the mitigation of impacts on terrestrial biodiversity were an Asian Elephant program (Elephas maximus; Endangered), a strategy for reservoir impoundment, and wetland development (including a component for the White-winged Duck, Asarcornis scutulata, Endangered, which would lose 51% of its range on the Nakai Plateau). 38. Fish of the Nam Theun and Xe Bang Fai basins were surveyed at 42 sites in 1996, at 25 sites in 2002, and 16 sites in 2003. Understanding of fish biota in the region was limited at the time, resulting in a decrease in the numbers of species endemic to these basins with each survey, and the discovery of species new to science (35 in 1997, for example). Fish diversity was higher on the Xe Bang Fai than the Nam Theun, which has relatively low diversity compared with the Mekong mainstream. Fish migrate from the Mekong into both rivers, and some species migrate along the Nam Theun, though passage is blocked by the Theun Hinboun project (fish are reported to attempt to leap over the Theun Hinboun dam wall). Programs that were planned for fish biodiversity included: a riparian release downstream of the Nakai Dam; management of low flow events in the downstream channel to avoid stranding; and a monitoring program. 39. Procurement of consultants for terrestrial surveys of the inundation area, and pre-impoundment species and habitat inventory of wetland areas was initially delayed, and three wildlife programs (terrestrial animals in the inundation area; wetland development; transitional strategy for reservoir impoundment) were ultimately rolled into one contract. Terrestrial baseline surveys began in October 2006 for completion by July 2007. The resulting Wildlife Management and Monitoring Plan (2007) set out a range of budgeted measures based on sound conservation principles: restrict the rescue of fauna during impoundment to conservation-priority species (identifying more than 20 mammal species, 2 bird species, and all turtles); measures for wetland restoration / recreation for maintaining populations of global significance for some species (e.g. several species of turtle) through physical works (dykes/bunds) and translocation of wetland plants and soils that were to be inundated; strategies for highly threatened species including Chinese Swamp Cypress, turtles, white-winged duck, fish eagles, otter, and large-antlered muntjac (a newly discovered endemic species); minimize human-wildlife conflict; invasive species control; and monitor biological responses to the reservoir and wetland creation. The plan notes that the highest priority is reduction of hunting and other resource extraction stimulated by the

42 Appendix 8

project – both in the inundation area and the adjacent NNT-NPA – and proposes ranger stations, patrolling, reservoir zoning, and public awareness campaigns to achieve this. The plan highlights the importance of the Nakai Plateau turtle population, as they have been decimated by illegal trade in Southeast Asia. 40. A total of 269 individuals of 49 species had been rescued and released in the NNT-NPA by the end of February 2009, including 38 large-antlered muntjac. Wildlife anti-poaching patrols and rescue teams operated on the reservoir and surrounding areas, and an education program to discourage exploitation of wildlife was conducted. 41. NTPC began a first phase of the Asian elephant program in 2005 with Wildlife Conservation Society (WCS) assistance, continuing to-date. Transects and DNA counts indicated a population of over 140 individuals. Activities include monitoring of elephant movements, and the establishment of artificial mineral licks. Human-Elephant Conflict is higher in the rainy season when elephants are attracted to ripening crops, and conflicts have continued to be a serious issue, with a boy trampled in 2015. In 2016, NTPC contracted WCS to prepare a plan to sedate and relocate a group of 3 elephants to the NPA or the Elephant Conservation Centre. 42. Wetlands created by NTPC above FSL in the NNT-NPA have generally proved successful, with construction of 30 one-hectare wetlands and surveys showing good levels of use and recruitment by wildlife. Trapping and release of turtles was completed in 2009, and a total of 490 individuals of 7 species of turtle were captured and released by the Cambodian Turtle Conservation Team. 43. Six stands of the Chinese Swamp Cypress (Glyptostrobus pensilis, CR) were located during surveys of the Nakai plateau, and the largest stand was inundated upon impoundment. The total number of trees remaining in Lao PDR is estimated to be less than 100. NTPC’s initial actions were unsuccessful with the grazing by livestock of seedlings in 2009, and the felling of a stand in the NNT-NPA by loggers. In 2016, NTPC invited an expert from the IUCN Conifer Red list Authority to undertake a site visit, and in 2018 seeds from 7 trees at 3 alternative sites were collected and a nursery set up, with over 1,300 seedlings cultivated for replanting. It is not clear why no further action was taken in relation to the other species of highest conservation priority identified in the 2007 plan: white-winged duck, otter, and large-antlered muntjac, for example. 44. Baseline surveys for the ‘fish impacts in upstream and downstream rivers’ program were completed in May 2006, with a 2007 supplementary survey report, a Fisheries Management Plan, and a report on the impact of sediment loads from construction on fish stocks. Further fish monitoring surveys by the baseline expert were undertaken in 2009, and the last surveys of high conservation value fish were completed by the same specialist in May 2012. NTPC’s environmental laboratory continues to monitor fish populations. Fish biodiversity and abundance in the reservoir decreased following impoundment from March 2008, but both appear to have stabilized. Species of the greatest conservation importance appear to have been maintained in the reservoir, although some species are under pressure. 45. In addition, NTPC established a program to identify invasive species focusing on five invasive species. For example, Mimosa pigra, an invasive shrub, has increased substantially, and NTPC is trying to control it with physical removal. Instances of worker hunting and poaching during construction appear to have been low. 46. NTPC’s Biodiversity Management Plan 2013 addresses invasive species, the ongoing elephant program, and fish biodiversity program, and a policy on possession, consumption and

Appendix 8 43

trading in wildlife. All other biodiversity programs are now the responsibility of Government and WMPA. K. Nakai – Nam Theun national protected area – Watershed Protection and Offset 47. The value of the Nakai Plateau and Annamite Mountains for biodiversity was recognized in the early 1990s based on wildlife surveys conducted by the IUCN and WCS. IUCN proposed protected areas on the Nakai Plateau, as part of a proposal for the formation of more than 30 protected areas in Lao PDR in 1990. Nakai Nam Theun National Biodiversity Conservation Area (NNT NBCA) was gazetted, and the NNT – Hin Ham Corridor and Phou Hin Poun – NNT Corridor were protected in 1993 by PM Decree 193. Even at the very outset, the development of the NT2 Hydroelectric Plant was considered, including by the Government, to be part of a broader effort at sustainable river basin development, as indicated by the first POE report in 1997. “Protection of the NNT-NPA” is one of the three outcomes included in ADB’s Design and Monitoring Framework, and “NNT-NPA protected from illegal logging” is one of six outputs. 2. Protection of the NNT-NPA and the adjoining corridors was a key component of the Project and therefore the Loan Agreement reflected the parties’ obligations under the Concession Agreement through the inclusion of detailed covenants.21 At the time of project appraisal, $31.5 million was committed to the NNT-NPA: $6.5 million to be provided during construction and a further $1 million per year (rising with inflation) throughout the concession period. The Concession Agreement also required NTPC to compensate the Government $30.0 million for the loss of biodiversity and/or ecotourism assets, and in payment of the Government project development costs. 48. Protection of the NNT-NPA and corridors, with an area of around 4,200 km2, was intended as an offset for the loss of biodiversity in the project footprint, as well as watershed protection to prevent sedimentation of the project reservoir. An analysis of the rationale for the offset is included in the EAMP, based on quantitative assessment of the areas of habitat types. It concluded that the areas of most habitat types protected in the NNT-NPA significantly exceed those that would be degraded by the project: the loss of dry evergreen, upper mixed deciduous, coniferous and gallery, gallery/riverine forests would be fully offset; lower mixed deciduous, dry dipterocarp, swamp, and mixed broadleaf and coniferous habitats would not be adequately offset, but the impact on these natural habitats was not perceived as significant at either the national or provincial level, with the exception of swamp habitat. In terms of aquatic habitats, the NNT-NPA would protect 859 km of river with a slope less than 5°, compared to 622 km lost in the reservoir. It emphasized that the rationale for the offset is that, without the project, the biodiversity in the NNT-NPA would be lost. The EAMP also includes an analysis of reservoir sedimentation under three scenarios: under a scenario of about 5 X the baseline rate of erosion from the catchment, the reduction in reservoir storage would be only 2.8% after 100 years, and the majority of the loss would be in the dead storage of the reservoir; a far worse scenario of 60 X baseline erosion would be necessary to reduce storage by 28% after 100 years. So, the offsetting rationale for the NNT-NPA was far more credible than the watershed-protection rationale. 49. Under SEMFOP I, the Government created a new institution, the NT2 WMPA, under Prime Ministerial Decree 25 in 2001, amended in 2005 (PM Decree 39) and in 2010 (PM Decree 471), to be responsible for coordinating and managing all activities in the NNT-NPA. Decree 25 established 5 objectives for WMPA, which were reflected in SEMFOP I objectives:

2 Loan Agreement. Schedule 5, paragraphs 5, 10, 15 and 16.

44 Appendix 8

i) protection and rehabilitation of forest cover in the NT2 Watershed/NPA to assure adequate water flows with low sedimentation to the Nam Theun 2 Reservoir;

ii) conservation, maintenance and promotion of biological diversity coupled with the development of culturally rich, national park appropriate for tourism and scientific research;

iii) building and strengthening capacity of the Authority and those Stakeholders contributing to management and implementation of the Authority’s activities;

iv) facilitation of improved livelihoods for inhabitants of the NT2 Watershed-NPA by focusing on poverty reduction through environmentally sustainable development; and

v) prudent management and effective use of funds for the purpose of furthering the above objectives.

50. SEMFOP I was intended for implementation over 2005 to 2011, with a total budget of $8.5 million, consisting of NTPC’s contribution plus additional World Bank financing of $3.1 million. NTPC contributed $6.73 million by COD in keeping with its Concession Agreement obligations. SEMFOP II, approved by the WMPA Board in June 2012, continued from 2011 to 2016, with similar objectives, but with some institutional changes to WMPA to enable it to use other agencies as needed. 51. Initial progress was good, with the POE noting in 2006 that “the WMPA appears to be making real progress across its many responsibilities”, but concerns arose thereafter. A commercial gold mine was developed in the NNT-NPA, to be closed in 2008 after concerns were raised. The POE stated in 2009 that capacity-building was too slow and WMPA was the weakest Government institution, and it raised concerns that illegal cutting of rosewood continued despite WMPA patrols, that poaching was a critical, probably increasing, threat to the biodiversity, and that WMPA staff did not recognize biodiversity could be threatened even if forest cover is maintained. Efforts to minimize the footprint of the road leading to the Nakai dam by contractors were negated by uncontrolled slash and burn activities of newly resettled villagers. In 2013, the LTA reported that NTPC’s investment in the protection of the NNT-NPA continued to be eroded by illegal poaching and extraction of timber by Lao and foreign nationals, and the POE concluded that WMPA has been totally ineffective in protecting watershed biodiversity. An independent fiduciary review of WMPA was commissioned by the World Bank in 2014, concluding that WMPA’s annual financial statements were not compatible with international reporting standards, and financial management, procurement and disbursement were all high fiduciary risks. 52. In 2016, the POE recognized that the reform of WMPA had failed and called for a new strategy with indicators of identifiable achievements of actions and to reorganize and restructure the WMPA. In August 2016, payments to WMPA were reduced and staff numbers reduced, until an action plan could be agreed. In 2017, the IFIs agreed an Action Plan with the Government including the retrenchment of WMPA staff, improved fiduciary management and administration, and the appointment of a technical advisor. A further Prime Ministerial decree (Decree 122, 2017) amended membership of the WMPA Board of Directors, repositioned WMPA under the direction of MAF (previously it was under the Prime Minister’s Office), and appointed MAF as chair of the WMPA Board. A Prime Ministerial decree banning all logging in Lao PDR in 2016 appears to be effective to-date. 53. SEMFOP III is under implementation with ongoing financing from NTPC (c.$8 million) over 5 years (2017–2021). In addition, the World Bank Second Lao Environment and Social Project is providing c.$3 million over 5 years to augment NTPC funds, focusing on the upgrading of the current protected area to a National Park, and professionalization of the WMPA into a National

Appendix 8 45

Park Office. SEMFOP III consists of components on planning and administration, including improved fiduciary management; watershed protection, including patrolling and law enforcement; research and monitoring; and community engagement and livelihoods. WMPA appointed a Consortium of Technical Experts (COTE) comprised of the Wildlife Conservation Association of Laos, Agrisud International, Project Anoulak, and Creative Literacy Laos in October 2017 for its implementation. As of October 2018, the WMPA has 19 staff out of a planned 55, and 17 staff from COTE. The IUCN has been contracted to oversee recruitment of staff with appropriate expertise to WMPA, including senior positions. 54. SEMFOP III is proceeding as planned, with good progress in the establishment of new fiduciary and administrative systems. COTE activities are proceeding satisfactorily with a zoning plan that identifies biodiversity priority areas (with highest biodiversity and threat), establishment of a standardized monitoring system with operational data management system (SMART database) that enables identification of patrolling and apprehension activities. Teams of rangers conduct land and water patrols at several checkpoints, and a joint border patrol by the military and WMPA is now established and operating in the provinces of Khammoune and Bolikhamxay through a contract and TOR between WMPA and each border army unit. WMPA through COTE has mobilised a ‘Koumban Law Enforcement Network’ composed of enclave village authorities, village planning community members, and women’s unions. Currently, there are 14 forest ranger teams, each consisting of 7 rangers in the three high priority biodiversity zones, addressing c.50 km2 each. The research and biological monitoring component are also underway with wildlife and threat occupancy foot surveys, wildlife camera-trap surveys, and an environmental DNA program. 55. Protection of the watershed is a long-standing requirement for the offsetting of the loss of biodiversity due to the development of NT2 and is as important to the reputation of its financers as the operation of the project. The POE reiterated in recent reports that if watershed protection fails, the NT2 project will be regarded internationally as a failure. A Prime Ministerial decree establishing NNT-NPA and adjacent corridor areas as a National Park and further amending the Board of Directors and its mandate has been drafted, and is ready for adoption, expected in 2019. This is a necessary but not sufficient step to achieve biodiversity protection in the long term. Resources remain limited – COTE state that each forest ranger team should cover no more than 10–15 km2 – so international technical expertise and finance – will be essential in the long term following SEMFOP III implementation period. 56. Forest cover is now around 88% in NNT-NPA, and within that, 97% in a totally protected zone and 70% in a controlled use zone. Forest cover has been only slightly lost in the NNT-NPA, but rates of loss have increased over the project lifetime and it is highly likely that the abundance of species, including species of conservation importance, has decreased due to logging and wildlife poaching. Figure 3 shows areas of forest cover and deforestation, based on Landsat imagery with 30 m resolution. Table 5 compares data on forest cover for 2009-2012 and 2012-2017: the higher total rate of loss over 2009–2012 is due to the formation of Nakai reservoir; not including the reservoir, the area lost per year over 2009-2012 was 409 ha/year, increasing to 499 ha/year over 2012–2017; forest loss has increased slightly in the controlled use zone where most of the population lives; in the totally protected zone, loss has increased expected to be due to logging because of its remote and patchy distribution.

Table 5. Rate of gross forest loss in NNT-NPA Zone 2009-2012 2012-2017

ha/yr %/yr ha/yr %/yr

Totally Protected Zone 10 0.01 113 0.08

Controlled Use Zone 228 0.48 296 0.63

46 Appendix 8

Zone 2009-2012 2012-2017

ha/yr %/yr ha/yr %/yr

Other 536 0.42 89 0.07

TOTAL 774 0.25 499 0.16 Source: Forest Carbon, 2018, and National Protected Area and Wildlife Project NPAW)

Figure 3. Forest cover change 2012–2017. Source: Forest Carbon 2018 Summary Report:

Mapping Forest Cover Change 2012–2017. L. Compensatory Forestry 57. ADB’s Forestry Policy (1995) requires that “for any infrastructure project where the environment assessment indicates that the project will contribute significantly to natural forest degradation or conversion to non-forest land use, ADB will require rehabilitation or reforesting an equal area.” ADB raised the compensatory forestry requirement with the Government and NTPC in 2003, and used technical assistance (PPTA No. 4213-LAO) for preparation of a study, which determined that c.28,700 ha of forest would be lost due to inundation by the reservoir, and that approximately 38,900 ha of degraded forests within the NNT-NPA could qualify for rehabilitation, including approximately 28,700 ha for natural regeneration. The study estimated that if all 28,700 ha could not be identified within the NNT-NPA, up to 5,000 ha was available in the Nakai resettlement area and in other areas outside of the project area if these areas were not sufficient. 58. Compensatory forestry requirements were then included as a formal requirement in the sovereign loan agreement between ADB and the Government, and also in the loan agreement between the European Investment Bank and the government. The ADB-Government loan agreement states in Schedule 1, clause 3, Part D that “the WMPA together with the Borrower, and with assistance from NTPC, will […] be responsible for rehabilitating and reforesting 28,700

Appendix 8 47

hectares of forest area to offset habitats lost due to the inundation of the reservoir area”, and in Schedule 5, clause 16 (b) that the Borrower shall “cause WMPA to implement, with specific plans, budget and timetable, the compensatory forestry program introduced into the SEMFOP in accordance with the requirements of ADB's forestry policy”. The EAMP and SEMFOP I stated: “the Project will undertake activities to rehabilitate and/or reforest degraded forest areas currently having less than 20% crown cover… there are 41,737 ha of un-stocked forest within the NNT-NPA which could potentially be reforested to meet the ADB’s compensatory forest requirements”. 59. In 2004, an ADB-financed forestry study identified 5 potential areas for compensatory forestry with an expected area available of 93,211 ha: around the Nam Kading / Nam Theun confluence; an area around Lok Sao in Khamket District (both in Bolikhamsay province); Hinboun district of Khammouane Province; and Upper and Lower Xe Bang Fai areas. This specialist also confirmed that 38,900 ha would be available in NNT-NPA but advised that it would be difficult to ‘track and isolate’ compensatory forestry activities from the wider WMPA programme. In 2008, WMPA undertook GIS analysis to overlay areas of previously identified un-stocked forest with proposed land use zoning and concluded there were limited opportunities for compensatory forestry in NNT-NPA. It was also considered too early to begin reforestation in Nakai resettlement area allocated for community forestry, as the priority was to organize the resettled hamlets at their new locations. The Ministry of Agriculture and Forestry (MAF) proposed a basic reforestation framework in December 2008, targeting the Khamkeut district of Bolikhamxay province (adjacent to Nakai Dam). The Government cancelled an ADB $10 million grant intended to support compensatory forestry as agreement couldn’t be reached on policy sector reforms. Government budget was not allocated for compensatory forestry until 2011, and up to 2015, just $120,000 per year was allocated annually. Around 59 ha were established in 2013 and 2014, and 300 ha in 2015, equivalent to 1.25% of the target of 28,700 ha. 60. In 2017, MAF Department of Forestry (DOF) agreed with ADB, that as appropriate reforestation sites were not available in the project area, other reforestation programs could be considered if compliant with the Forestry Policy requirements. DOF with the support of an ADB financed Forestry Specialist undertook a review of completed and planned national reforestation efforts across Lao PDR in order to develop a revised plan to reach the compensatory forestry target by 2022. Out of a potential 300,000 ha of forestry projects undertaken since 2008, the plan sought to identify those that meet eligibility criteria under the ADB Forestry Policy (1995), as set out in the EAMP: current crown cover less than 20%; potential for good regeneration – a mixture of species is available on the ground; and low human pressure on the areas. The review identified nine projects, covering an area of 38,960 ha (the majority of these projects were financed by NT2 revenue, ADB or the Government), comprised of 21,066 ha of reforestation activities that had already been completed and 17,894 ha where there is a realistic chance of achievement between 2018 and 2022. ADB approved the revised plan in July 2018. This required MAF to share a monitoring report on the review of the reforestation activities and the results of the national forest cover survey to be undertaken by the end of 2019 based on 2018 satellite images. 61. The programme is well underway with the Government expected to meet its continuing obligations by 2022. Lessons of this experience are: (i) the rationale for compensatory forestry was not clear, and apparently it was simply to establish forest cover rather than to do so for biodiversity or carbon sequestration objectives, and with unclear distinction from the NNT-NPA offset; (ii) the programme was restricted as intended funding sources at preparation (NTPC and the ADB grant) were not accepted; (iii) an approach in which NTPC as beneficiary of project revenues and owner of the project that is the cause of the loss of forest cover, rather than the Government, was accountable for compensatory forestry may have been more effective; (iv) it raised the risk that the Government would actively establish trees in the NNT-NPA offset or its

48 Appendix 8

corridors or even replace natural forest with plantations (and this possibly took place in Khamkeut District); and (v) WMPA was correct to rule out compensatory forestry in the NNT-NPA. M. Management of Downstream Impacts 62. As an inter-basin project, NT2 alters flows in two river basins: flows are significantly reduced in the Nam Theun and increased in the Nam Kathang and Xe Bang Fai. Flows in the Mekong between its confluence with Nam Kading (into which the Nam Theun flows) and that with Xe Bang Fai are also reduced. Table 6 presents the pre-project, and with-project flows in these rivers.

Table 6. Pre-project and With-project Flows River / stations Pre-project flows With-project flows

Data series Mean annual discharge (m3/s)

Mean driest month (m3/s)

Mean wettest month (m3/s)

Nam Theun at the Dam site

1950-2002 238 31.9 (Apr) 734.7 (Aug) 2 m3/s minimum except when spilling

Nam Kathang at the Regulating Dam

1994-2002 10.2 0.3 (Apr) 38.5 (Sept) As pre-project flows

Xe Bangfai at Mahaxai

1989-2002 265.4 12.7 (Apr) 921.2 (Aug) Additional 330 m3/s, except during outages and when Xe Bang Fai is in flood

Mekong after the confluence of the Xe Bangfai

1922-1992 6960 1552 (Apr) 21453 (Aug) Slight reduction in wet season flows and increase in dry season flows.

63. Hydrological impacts of the scheme were thoroughly assessed during project preparation. The EAMP summarises flows including extreme flows in the Nam Theun, Nam Kathang, and Xe Bang Fai, tributary inflows, river levels, and the extent and depth of flood events on the Xe Bang Fai. Two hydrological models were used for the Xe Bang Fai (Xe Bang Fai to the Mekong, and the Mekong and Lower Xe Bang Fai), based on field surveys of river cross-sections, floodplain topography, riverbank profiles and flood control structures. An additional riparian release study was undertaken which assessed biological and social impacts of reduced flows in the Nam Theun, based on thorough hydrological analysis, river morphology, sedimentation, community uses of the river etc. 64. Nam Theun. The riparian release study concluded that the proposed guaranteed minimum riparian release of 2 m3/s would maintain a basic level of natural processes and ecological value in the aquatic ecosystem and maintain connectivity between pools. This compares to a lowest observed flow at Ban Thalang (slightly upstream) of 4.4 m3/s in April 1986. No villages are present between the Nakai Dam and the confluence of the Nam Phao 12 km downstream, although people fish this reach to a limited extent. The study recommended that there should be adaptive management to maintain ecological value using an additional release of 5 million m3 per year (about an additional 30 days of doubling the minimum flow). Hydrological studies predicted that spilling at the dam site would be relatively rare, occurring in 18 years out of 47 for which modeling was run. In addition, the downstream impacts of NT2 on the Nam Theun are limited in extent by the Theun Hinboun project located approximately 50 km downstream (with its reservoir tail approximately 32 km downstream). The cumulative impact of the two projects would be that flows in the Nam Kading will be limited to the minimum riparian release from the Theun Hinboun project for a longer portion of the year.

Appendix 8 49

65. There were incidences of spilling from Nakai Dam resulting in temporary flooding of villages at the tail of the Theun Hinboun reservoir, for which NTPC compensated villagers. To avoid and mitigate this risk NTPC has established a Protocol of Notice, under which it notified Theun Hinboun Power Compay in advance of spilling, so that Theun Hinboun can lower reservoir levels in advance. 66. Mekong. In the reach of the Mekong between its confluences with the Nam Kading and the Nam Hinboun, flows were predicted to be reduced by an average of 302 m3/s due to both NT2 and Theun Hinboun, and between its confluences with Nam Hinboun and Xe Bang Fai they were predicted to reduce by 220 m3/s. These are an average 3% reduction in Mekong flows. Below the Xe Bang Fai confluence, there is a small reduction in flows in the wet season (lowering flood levels 18 centimeters) and a small increase in the dry season, but these changes are minimal compared to Mekong flows. 67. Nam Kathang and the Regulating Pond. The project’s regulating pond, located downstream of the powerhouse, was originally intended to mitigate impacts of daily peaking generations. The pond would capture powerhouse discharges that vary considerably with peaking generations and provide a constant flow downstream (except on Sundays when limited power demand would result in significantly lower flows). At present, as a result of the EGT power purchase agreement, NT2 does not operate as a peaking plant, though there is the potential that it may be used as such in future. The pond does enable the regulation of varying flows resulting from planned or unplanned outages, however. The regulating pond was constructed within the river channel of the Nam Kathang however, so it provides a downstream flow into Nam Kathang downstream that is managed to be identical to inflows. 68. Xe Bang Fai. Modelling showed that the extent of seasonal flooding in the Xe Bang Fai floodplain would increase in extent and depth: 3,820 ha of land was predicted to be under more than 1 m depth of water due to the discharge of 330 m3/s, for an average duration of 3.6 days per year. To avoid discharges resulting in a much greater seasonal flooding extent, generation is reduced when flows in the Xe Bang Fai approach flood level, and for EGAT entirely halted when the Xe Bang Fai is at or above 15.5 m at the gauge at Mahaxai (a village slightly downstream of the confluence between the downstream channel and Xe Bang Fai). This procedure was applied in 2011 and in 2018, when generation for EGAT was halted for 24 days. In addition to this measure, NT2 has implemented a downstream program to address the social impacts of the project – Appendix 13 discusses this program in detail. 69. NTPC are continuing water quality and hydrobiological monitoring on the Nam Theun (downstream of the Nakai Dam), in the downstream channel, and on the Xe Bang Fai downstream of the downstream channel, though fish catch monitoring has ceased. Fish catch monitoring has showshown a trend of an increase in abundance, biomass and taxonomic richness since COD. It has not been possible to ascertain impacts on fish biodiversity due to undersampling and the difficulty of comparing results of different sampling methods that are usable in low pre-project and higher post-project flows. (“No conclusion on the impact of NTPC activity on the fish diversity of that stretch of the Xe Bangfai can be derived from this sampling” – Kottelat M., 2015, The fishes of the Nam Theun and Xe Bangfai drainages, Laos. Hydroecol. Appl.). 70. In addition, NTPC continue an erosion monitoring programme on the Xe Bang Fai to determine the erosion / sedimentation effect of increased flows. The programme consists of 27 photo-monitoring points, a further 647 non- indicator photo-monitoring sites (annual), and 40+ river cross-sections (every five years, last completed in 2013 and 2018). An NTPC report from May 2017 documents the results of photo-monitoring, indicating no erosion. However, some

50 Appendix 8

downstream communities have identified areas of riverbank erosion following the receding of the 2018 flood. Whilst the river-bank erosion resulting during the flood of 2018 is unlikely to be attributable to NT2, it is impossible to determine whether or not long-term river channel morphology changes are due to NT2 without scientific sedimentological analysis of TSS data and cross-section data. 71. Provincial and District authorities and NTPC continue to participate in the Adaptive Management Committee for downstream issues, but it is unlikely to meet more than annually. 72. A proposal to construct a dam on the Xe Bang Fai River at Keng Keo, downstream of its confluence with the Downstream Channel, has been publicly announced. NTPC are concerned that this project may affect their ability to generate power, especially during the wet season when the Xe Bang Fai level is high and NTPC must reduce its generation to avoid downstream flooding. This development would be in contravention of Clause 4.2(k) of the Concession Agreement. NTPC are awaiting further details and position of the Government but will commission its own hydraulic model if the development is to proceed without sufficient assurance that there will be no effect on NTPC’s operations. NTPC have also been notified of two additional dam proposals between Mahaxai and Kaeng Keo, which would further complicate flood prediction in the Xe Bang Fai. No information has been received for these developments, which NTPC plan to follow up in order to avoid any disturbance to generation capability. N. Dam Safety 73. Dam safety is a key consideration for large dams, and the NT2 project presents public safety risks associated with other infrastructure including its 13 saddle dams, reservoir and headrace channel, regulating pond, downstream channel, transmission towers and lines, and roads. Project preparation included detailed hydrological modeling for dam safety design for the probable maximum flood, and geological investigations. As a result of the World Bank’s Policy on Safety of Dams (OP 4.37), a DSRP was convened during preparation and retained through implementation. The DSRP formally commented on and made recommendations on infrastructure designs, and the operations and maintenance plan. Regular review and reporting by the DSRP until six years after COD were a requirement of the Concession Agreement, and the panel made its final review in 2016. The panel consisted of three members for civil engineering, geology, and electro-mechanical infrastructure. 74. Starting from impoundment, NTPC established Emergency Contingency Plans based on U.S. Federal Emergency Management Agency standards for (i) Nakai Dam, reservoir and saddle dams, and (ii) the regulating dam and downstream. Monitoring is thorough, with weekly and monthly reports on the parameters monitored (for dam movement, leakage, and groundwater pressure). During the wet season, reports are increased in frequency to biweekly, or more if there are high inflows. All data is shared with EDF for analysis. Infrastructure is tested routinely, with annual spillway testing for example. NTPC maintains an extensive network of automatic hydromet stations and forecasts flows using three models. 75. Key issues arising included leakage at Nakai Dam, and the sufficiency of infrastructure to pass maximum floods. Nakai Dam leakage increased steadily from impoundment and significantly through 2012 and 2013, reaching 2600 litres per minute. Following underwater repairs using an Italian contractor, leakage was reduced to 170 litres per minute. In 2011, exceptionally high inflows were experienced with 1300 m3/s on Nam Kathang, at that time estimated to be a 1-in-5000-year flood. In response, NTPC revised its hydrological analysis, increasing the 1-in-10,000-year flood from 1500 to 2062 m3/s, and built an expanded spillway on the regulating dam. In the

Appendix 8 51

same year discharges exceeded 6,500 m3/s, the highest ever recorded and estimated in previous hydrological analysis to be a 1-in-100-year flood. Nakai Dam is able to pass floods up to 16,000 m3/s. 76. NTPC operates a system of ramping flows up and down at Nakai Dam, starting from 50 m3/s and rising to 100 and 150 m3/s over three hours, then 500, 1000, 1500 etc, to avoid biological and social impacts downstream. They seek to avoid repeatedly opening and closing gates. District authorities are informed with each increase. However, there have been incidents of the downstream population not being adequately warned of the increases, and NTPC has compensated villagers located at the Theun Hinboun reservoir for damages arising. 77. NTPC undertakes a ‘hydrosafety’ program to train communities on the dangers of the downstream channel, especially at weirs, and consequently there have not been any fatalities in the downstream channel since 2013. However, there are continuing incidents of people entering the channel, even in vehicles, and continued efforts and fencing will be required to minimize risks to the public. Public safety on the reservoir is a further concern, with a fatality resulting from the wake of an NTPC boat in 2008. 78. The DSRP concluded its work in 2016 with the statement that NT2 is safe in design and operation, and operation and maintenance programs are impressive. Expert review of dam safety will continue, with LTA reports and every two years, an EDF / ETG assessment of infrastructure safety and an EDF inspection of hydrosafety. 79. Unexploded ordnance. A positive contribution to public safety from NT2 has been the removal of unexploded ordnance (UXO). NTPC engaged a UXO Clearance Organization early in construction in 2006 to conduct awareness programs for villages at new sites and to remove any UXO found near sites. In 2006 alone, more than 1000 UXOs were removed. O. Solid Waste Management 80. Issues of solid waste management including spoil management were originally identified during project preparation in the EAMP and SESIA. These refer to a waste management plan to be developed by the HCC, solid waste collection from camps and proper disposal outside the reservoir area, and a spoil disposal planning and management plan for the construction stage. It was estimated that 15 million m3 of spoil would be generated during construction. 81. There was no waste collection services or licensed facilities for disposal in the area at the time of the project’s development, and the disposal or recycling of hazardous wastes was particularly challenging. NTPC and district authorities have invested considerably in solid waste collection and management, creating entirely new landfill facilities. However, there have been challenges concerning potential groundwater contamination, landfill capacity, and financial and institutional sustainability of the district-managed facilities. 82. Initially in 2005, contractors disposed of solid domestic waste in an open tip, and unlined pits, which was not in compliance with the Concession Agreement. In 2006, NTPC built a lined sanitary landfill consisting of 4 cells in Gnommalat District. This has since been expanded, and now consists of 7 cells each 30 m by 50 m, as part of a 6.5 ha waste management centre. Recyclables, such as plastics, glass, metals, used tires, etc., are separated from the waste stream, and sold to waste recycling dealers. NTPC now plans to build an additional 5 or 6 cells.

52 Appendix 8

83. Evidence of groundwater contamination, potentially from the NTPC Gnommalat landfill, initially emerged in 2007. The LTA raised this as a serious non-compliance, and more wells were dug and tested to determine the source and extent of pollution. NTPC made improvements to the landfill in 2009, and the LTA removed the serious non-compliance, while noting that there remained a need for evidence on whether the contamination was due to leachate from the Gnommalat landfill. NTPC hired consultants to investigate, which in 2011 reported that the groundwater contamination was not likely to be caused by the landfill. In 2015/16, issues of groundwater contamination re-emerged when NTPC monitoring of groundwater quality around the NTPC Gnommalat landfill showed exceedances of pH, BOD, COD, and Lead. NTPC engaged a hydrogeologist to investigate and install additional monitoring wells. NTPC continues to monitor 9 wells (5 existing, and 4 new wells) on a monthly basis. Exceedances in some parameters (pH, BOD, COD and Lead) continue to be seen. 84. NTPC initially permitted Gnommalat District authorities to use the NTPC landfill for the disposal of solid waste. However, concerned with potential liabilities, in 2009, NTPC undertook a study to find an alternative site for a district cell, and jointly financed (with HCC) a new lined cell for Gnommalat district on a site close to NTPC’s landfill. A high-density polyethylene liner and an improved leachate treatment system were installed following concerns that it was insufficiently lined and the leachate system was too small, and drainage and slope stabilisation undertaken. The facility was completed in December 2016, but NTPC delayed handover to Gnommalath District Office of Natural Resources and Environment (DONRE) until they had appointed a contractor for waste collection and landfill management. Two previous waste contractors walked away from the contract after they failed to be profitable, but Gnommalath district is now in the process of contracting a new company. With no waste collection occurring, people have used the newly constructed landfill area to dump their waste which is now littered across the site. Despite NTPC building the facility and helping train Gnommalath DONRE staff, no functional sustained collection system has resulted. 85. In Nakai district, the community and resettled people continue to use an open dump. The Concession Agreement does not specify a requirement for NTPC to provide assistance for solid waste collection and disposal services to the Nakai resettlement villages and people in Oudomsouk. Despite this, NTPC provided technical and financial assistance to support Nakai DONRE in the development of a waste collection and disposal system, but there was some disagreement between NTPC and Nakai DONRE on ongoing waste collection operating costs. NTPC approved the Nakai DONRE solid waste management plan in 2012, and has supported rehabilitation of the existing landfill, and the construction of a new high-density polyethylene-lined landfill (at a cost of $200,000, with one third financed by SERF and two thirds by NTPC). Completion has been delayed from the original target of end of 2018, due to the need to find a suitable plot, obtain the land certificate, and permits for tree cutting. Construction has now begun, and completion is expected before the end of 2019. Two landfill cells are also under rehabilitation near the Phonesak sawmill. P. Cultural Heritage (Physical Cultural Resources) 86. NTPC conducted a baseline survey of Physical Cultural Resources (PCR), which, according to the LTA, provided an excellent basis for the analysis and mitigation of potential impacts and compensation for PCRs during implementation. The EAMP included identification and mapping of sites of prehistoric, palaeontological and historic value, and religious, sacred and unique natural values, based on community consultations, satellite imagery, transects and walk-over surveys. The LTA reported very good progress on PCR issues in 2005, and the setting of a high standard, evidenced by cooperation between NTPC, contractors, district authorities and the

Appendix 8 53

Institute of Cultural Research for the retrieval of important archaeological finds and training for identification of chance finds. This ‘excellent work’ continued through the construction stage, and by February 2009 plans for the relocation of moveable PCR in the project footprint and reservoir had been completed. An additional plan was prepared for Xe Bang Fai, including an inventory of temples and prioritization based on the distance from the riverbank. Q. Scientific Collaborations 87. NTPC has worked with a range of scientific collaborators throughout the development and implementation of the NT2 project. For example, this has included collaborators from the University of Toulouse, Hydreco (the Environment Laboratory at the Petit-Saut Hydropower Project in French Guyana), Institut National pour la Recherche en Agriculture in France, and the Natural History Museum in the United Kingdom, and a range of issues, including hydrodynamic modeling, ecological surveys, water quality modeling, and carbon stocks, and GHG emissions. A total of 26 scientific articles have been submitted and 23 published and are accessible online. 88. As an example of the contribution that the NT2 project has made, aquatic biodiversity surveys conducted for the project resulted in an increase in the number of fish species known in Lao PDR from 210 to 481 from March 1996 to June 1999, the discovery of 128 species new to science, and the publication of an identification guide. A research program initiated by EDF Hydro Engineering Centre in 2008, concerning the flux of GHG emissions from the reservoir, and its catchment and downstream flows, has contributed significantly to improved understanding of GHG emissions from reservoirs, and the development of a methodology to rapidly estimate reservoir emissions. R. Conclusion 89. Assessment of issues of environmental and social sustainability, and the development of corresponding plans was very thorough during the preparation of the project. Design measures, such as the aeration weir and regulating pond address key environmental issues. The monitoring and analysis of water quality and hydrobiological parameters is state-of-the-art, with the involvement (and financing) of EDF Hydro Engineering Centre and international scientific collaborations. Specific issues – such as the removal and preservation of cultural heritage, translocation of critically-endangered turtle species, and the removal of UXO – were handled well during implementation. 90. NTPC’s ongoing environmental management, and the Government’s Transition Plan concerning resettled communities and local committees such as the Adaptive Management Committee and Reservoir Management Committee will provide the mechanisms to meet environmental and social Concession Agreement commitments on an ongoing basis. The key area that requires ongoing support – in the long term – is the conservation of NNT-NPA, as discussed elsewhere. Other issues requiring ongoing attention are: support to local government capacity and solid waste management; effective management of the reservoir area, including shoreline and drawdown area, as a resource and for public safety; hydrosafety on the downstream channel; erosion monitoring and expert analysis on the Xe Bang Fai; strengthening of NTPC’s review of its social performance, as part of its regular review of its environmental and social performance, beyond the precise requirements of the Concession Agreement and the limited capacity of the Adaptive Management Committee; and the use of a more systematic framework for reporting on sustainability performance by the LTA or other independent advisers.

54 Appendix 9

SOCIAL ASPECTS A. Introduction 1. The social impacts of the Nam Theun 2 (NT2) project extended over several geographic and functional areas:

i) Nakai plateau resettlement. Resettlement of 1,310 households consisting of 6,289 people from 17 communities on the Nakai Plateau as a result of the creation of the Nakai Reservoir.

ii) Downstream area. Livelihood impacts on a population of 100,000 to 150,000 people living downstream of the project, affected by project impacts on fisheries and riverbank gardens as well as potential impacts from increased flood duration. This includes both communities in the Nam Theun catchment downstream of the main dam and communities downstream of the powerhouse in the Xe Bang Fai catchment.

iii) Land acquisition for construction. Acquisition of land from 2,846 households consisting of around 15,000 people, of which 228 households (around 1300 people) lost more than 10% of their productive land.

iv) Catchment and Watershed Management Protection Authority. The project also includes funding of the 4,200 km2 Nakai-Nam Theun national protected area (NNT-NPA), which encompasses the watershed area of the project. Management of this area has social implications, as it involves land use restrictions to prevent land clearance and collection of non-timber forest products (NTFPs) in areas of high biodiversity, as well as restrictions on hunting and access. The NNT-NPA includes 13 enclave village clusters with a total population of approximately 7,000 people, and 42 Peripheral Impacted Zone villages with a population of approximately 24,400.

B. Social Impact Assessment and Social Development Plans 2. The Project had a long history of development starting in 1991 with the commissioning of the first feasibility studies. The initial studies focused largely on the technical feasibility and environmental impacts. The first documents to investigate resettlement and mitigation of social impacts on the Nakai Plateau were produced in 1997 (first draft of the resettlement action plan [RAP]) and subsequently revised in 2002 and 2003. Public consultations on the design of the project were undertaken from 1997 to 2005. Social impact assessment, RAPs, ethnic development plans, and social action plans1 were produced, incorporating feedback from local, regional and international communities and community organizations, and finalized in 2004. 3. The social development plan (SDP) and the social and environmental management framework and operations plans (SEMFOP I, II and III) encompass a suite of documents addressing the social and livelihood issues of the project. The SDP includes the RAPs and ethnic development plans for resettlers on the Nakai Plateau, Social Action Plans for the Downstream population and a Health Impact Assessment and Management Plan. The SEMFOP describes the plans and operations to be undertaken in the Nakai-Nam Theun National Biodiversity Conservation Area (NNT NBCA); later NNT-NPA; to protect the biodiversity and ensure the supply of low sediment water to the reservoir. Implementation of the SEMFOP was the responsibility of

1 Social Action Plans are required by Government Policy for issues directly impacting Project Affected persons aside

from those to be resettled and includes downstream areas.

Appendix 9 55

the Government of Lao People’s Democratic Republic (Lao PDR), through the Watershed Management Protection Authority (WMPA), funded by the Nam Theun 2 Power Company Limited (NTPC).

4. The development of these documents drew on a wide range of national and international studies and included over 30 social, economic and resource studies undertaken in the project area of influence.2 These studies included baseline socio-economic surveys, cultural and ethnographic studies, assessment of land requirements, surveys of physical cultural resources, forest, fisheries and groundwater resource surveys, and records of public consultations. 5. The SDP and SEMFOP were approved by the government, endorsed by the international panel of experts (POE), and approved by the Asian Development Bank (ADB) as well as the World Bank and other international financial institutions supporting the project. Financial close was achieved in May 2005. C. Safeguards 6. The project triggered two ADB Social Safeguard policies at category A levels:

i) ADB Policy on Indigenous People (1998); ii) ADB Policies on Involuntary Resettlement and Operations Manual F2 (2003).

7. To ensure these policies were met, ADB was closely involved in preparatory studies over 2002–2005, supporting two phases of technical assistance (refer Environmental Appendix for details). ADB also supported the development of national laws and policies on resettlement and compensation that were compatible with the World Bank and ADB safeguards:3

i) Prime Ministerial Decree on Resettlement and Compensation; and ii) Technical Guidelines on Resettlement and Compensation.

8. The requirements of the social safeguard and national policies and laws were incorporated into the social development plans for the project (SDP and the SEMFOP). They were also incorporated into and expanded on in the Concession Agreement between the Government and NTPC. D. Concession Agreement 9. The measures and policies described in the SDP were incorporated into Schedule 4 of Concession Agreement. All impact assessment, social development and RAPs and a summary of the Concession Agreement have been made publicly available on the NTPC, ADB and the World Bank websites.4 10. Resettlers and project lands. The Concession Agreement sets out in substantial detail the activities to be undertaken in the planning and development of resettlement villages,

2 EAMP Volume 1, Appendix G: Bibliography. 3 ADB. 2001. Technical Assistance to the Lao People’s Democratic Republic for Capacity Building for Environment

and Social Management in Energy and Transport. Manila. 4 http://www.namtheun2.com/index.php?option=com_content&view=article&id=65&Itemid=77 http://www2.adb.org/projects/project.asp?id=37734

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/LAOPRDEXTN/0,,contentMDK:21111184~pagePK:141137~piPK:141127~theSitePK:293684,00.html

56 Appendix 9

implementation of livelihood programs, provision and replacement of community infrastructure, and a detailed matrix of project affected persons (PAPs’) entitlements (Nakai and Project Lands) including compensation and rehabilitation measures. The Concession Agreement also describes the activities to be undertaken in the Resettlement Health program. 11. Downstream areas. The downstream section of the Concession Agreement specifies the activities to be undertaken and the entitlement of PAPs. The parties to the Concession Agreement are required to undertake baseline surveys, develop implementation plans, and fund mitigation, compensation and resettlement processes. The list of the activities to be undertaken and the entitlements to be provided are more considerably more general than that for the Nakai resettlement program. 12. The Concession Agreement sets out legally-binding targets for resettlement and livelihood restoration for each social component of the project. 13. Nakai Resettler targets are:

i) Household income target which requires that Nakai resettlers have their income earning capacity enhanced, achieve the Household Income Target (elimination of poverty) and materially improve their livelihoods on a sustainable basis. The household income target was the greater of the current National Rural Poverty Line or a fixed rate of 1,420,800 kip/person/year.

ii) Village income target (VIT) for each village in the Resettlement Area, being the greater of the current Average Rural Income Per Person or a fixed amount of 2,131,200 kip/person/year.

14. Reaching the Household Income Target was a requirement for closing the resettlement implementation period (RIP) with any extension of the RIP being funded by NTPC. Reaching the VIT was the responsibility of the Government. In practice, reaching the Household Income Target (the elimination of poverty) meant that the VIT was almost certainly reached as well (unless poverty was also eliminated in the rest of the country). 15. The livelihood restoration targets set for people resettled from project lands and for downstream PAPs were less specific, being restoration of livelihoods within 18 months of project impact for Project Lands, and within 5 years of commercial operation date (COD) for the Downstream Program. However, the Downstream Program was limited by cost ($16 million5) rather than scope (achievement of targets) and there was no provision for extension unless NTPC deemed that the project had not achieved its objectives. E. Public Consultation 16. ADB Social Safeguards recognize that public consultation and transparency are important processes during preparation and provide the opportunity to engage project-affected peoples, and stakeholders at the local, national, and international levels. 17. During preparation, a three-stage public consultation process was undertaken and is described in the SDP. Stage 1 included the collection of basic information and the dissemination of the project features and potential impacts on the social and physical environment to

5 Clause 30.7 (e) allows for a $2.5million overrun of expenses for the Downstream Program if the company determines

that the amount allocated for the program is insufficient to meet the social and environmental objectives.

Appendix 9 57

stakeholders. Stage 2 comprised of eliciting stakeholder concerns, discussions of alternatives, and mitigating measures to be included in the project. Stage 3 comprised active involvement of stakeholders in project design and implementation, including resettlement locations, village layouts and location, dwelling design etc. The Government and NTPC initiated consultation with the project-affected people in 1997, and from 2004, ADB and the World Bank engaged independent consultation experts to help the Government and NTPC ensure the informed participation of affected communities. A series of national and international workshops were convened in Bangkok, Paris, Tokyo, Vientiane, and Washington, D.C. to provide a forum for dialogue. 18. Concerns and recommendations of stakeholders provided through these consultations influenced the RAPs on issues such as:

location of the main resettlement area on the Nakai Plateau adjacent to the reservoir;

design and composition of resettlement villages; livelihood models and compensation measures; location of the powerhouse to avoid resettlement; construction of the regulating dam, downstream channel, and aeration weirs; commitment to shut-down operation before significant natural overbank flooding

in the Xe Bang Fai; and minimum environmental flow in the Nam Theun downstream of the main dam.

19. One of the important outcomes of the consultation process was that the majority of Nakai Resettlers opted to remain on the Plateau on the south-eastern margin of the reservoir, though a small number of households (including about half of the households of the Vietic minority) initially opted to relocate to a resettlement area near Lak Sao. The relocation of resettler villages to the margin of the reservoir marked a departure from other resettlement programs in the Lao PDR and meant that there was no host community and the resettlers stayed largely within their traditional lands. 20. ADB recognized that it is difficult to undertake meaningful consultation in the Lao PDR. Only half the population can read; 70% of the population comprises ethnic groups who speak different languages and dialects; basic infrastructure to facilitate public access to information and services is limited and there are no local organizations that are independent from the Government. Public consultation, and participation at local, national, regional and international scales is fully described in the SDP including criticisms of the process and the project.6 A criticism of the early phase consultation was that it was biased towards promoting the benefits and downplaying the negative aspects of the project, which the Government wished to proceed in the national interest.7 However, both the POE and Independent Advisory Group accepted that the public consultation and participation process had been sufficient in approving the commencement of the project. Once the project was approved, consultations suffered less from the bias of organizations promoting the project and local people spoke out more freely. Further public consultation at the local level during the construction and resettlement was extensive and included finalizing resettlement plans, participatory land use and village planning. The project has fully satisfied that requirements for public consultation and participatory development required in the Resettlement and Indigenous Peoples Safeguards.

6 SDP Volume 1 – Chapter 4: Public Consultation, Participation and Disclosure. 7 ADB. 2005. Report and Recommendation of the President on a Proposed Loan to the Lao People’s Democratic

Republic for the Greater Mekong Subregion: Nam Theun 2 Hydroelectric Project. Manila.

58 Appendix 9

F. Implementation Arrangements

21. Institutional responsibilities for resettlement, land acquisition and livelihood restoration were set out in the Concession Agreement and are shared between the Government and NTPC as illustrated in Figure 1. The Concession Agreement required the Government to set up a Resettlement Committee, a Resettlement Management Unit (RMU), and District Resettlement Working Groups.

Figure 1. Organizational structure for implementation of the social aspects of the project

22. Resettlement committee. The resettlement committee was the highest-level Government organization and had joint overall responsibility for guiding and overseeing the resettlement process in coordination with the Company. The responsibilities of the resettlement committee included formulating policies, preparing and issuing regulations, approving budgets, appointing the independent monitoring agents, resolving issues arising between government authorities, and supervising the distribution of entitlements. The Resettlement committee, on the advice of the POE, had the final responsibility of closing the Resettlement Implementation Period when satisfied that the resettlement objectives and provisions had been achieved.

23. Resettlement management unit. The RMU was responsible for coordinating with the Company Resettlement Office in planning and implementing the resettlement process. The RMU’s responsibilities included day-to-day management of the resettlement process, coordinating government authorities, participating in carrying out socio-economic surveys, public consultations, managing budgets, organizing and facilitating resettler participation, ensuring participation of Lao Women's Union and the Lao National Front, participating in the grievance procedures, and participating in reservoir management amongst other tasks.

24. District working groups. The social impacts of the project (resettlement, land acquisition, and downstream impacts) were distributed over multiple districts across three provinces. The

Appendix 9 59

Concession Agreement therefore included the formation of District Resettlement Working Groups in three districts (Nakai, Gnommalath and Khamkeut) and district compensation working groups in four other Districts.

25. Village resettlement committees. The final level of government organization was at the level of the individual village. Each village on the Nakai Plateau had a Village Resettlement Committee. Each Village Resettlement Committee was responsible for representing the village interests in the resettlement process, developing village development plans, organizing village participation, and running the first stage of the grievance procedure.

26. Nam Theun 2 Power Company Limited’s environmental and social division was responsible for working with the government on all aspects of resettlement, compensation, livelihood restoration, and public health. Each impact area had separate internal organizational and financing structures within NTPC, as well as separate objectives, outputs and timelines.

27. Nakai resettlement office. NTPC’s Resettlement Office was required to work in close cooperation with the RMU and resettlement committee and was responsible for all social and resettlement activities of NTPC including community consultation, resettlement planning, community infrastructure, unexploded ordnance clearance, compensation, livelihood restoration, and public and community health. 28. The Company also set up separate Project Lands and Downstream Programs. These programs fulfilled similar roles to the Resettlement Office and were responsible for the implementation of compensation and livelihood restorations programs. The Project Lands program overlapped with the Downstream Program where downstream households were also affected by land acquisition. 29. The organizational structure of NTPC’s Social and Environment Division changed over time with the closure of the Project Lands office in December 2011 and the closure of the Downstream Program in December 2012. The closure of the Resettlement Implementation Period in 2018 resulted in the restructuring of NTPC with the transfer of remaining environmental monitoring responsibilities to the Operations and Maintenance Division. Ongoing social activities (i.e. the management of the Name Theun 2 Development Fund [NT2DF]) has been transferred to the newly created Government Relations, Communications and Corporate Social Responsibility Division). G. Grievance Redress Mechanism 30. ADB Safeguards (OM Section F2/BP Issued on 29 October 2003) require that grievance redress mechanisms (GRM) for affected people are established. National legislation (Resettlement Decree 192) requires that the Government takes responsibility for this and that a separate GRM be established in each district. The Concession Agreement further sets out the

specific structure and mechanisms of the GRM (Figure 2). Each village was required to set up a Village Grievance Unit as the first level of the GRM. If not resolved at the village level, a grievance is forwarded to the District Grievance Committee, and if still not satisfied, thereafter to the statutory legal process.

60 Appendix 9

Figure 2. Structure of grievance redress mechanisms

31. The GRM was established as required, although initially, the understanding of the purpose of the GRM was not clear to affected households. NTPC and the Government conducted an information dissemination campaign to increase awareness, including appropriate posters that depict project-related issues and, as a result, a considerable number of grievances were lodged during the project. The Government, which was responsible for operating the GRM, was overwhelmed by the workload generated and NTPC assisted with field assessments and management of a grievance database. 32. The number of grievances and resolution of grievances was reported in the annual implementation plan (AIP) and RAP Project Lands:

i) Most of the grievances were related to amounts of compensation – with many related to the official compensation unit rates agreed for the project.

ii) In Xe Bang Fai downstream area, for example, there were 4,252 riverbank gardens compensated with a total payment of c.$ 500,000 or about $116 per garden. For this area, there were 1,114 grievances lodged, mostly concerning riverbank gardens, and 25% of cases were found to be valid as the team possessed reliable mapping data to determine validity of claims.

iii) All grievances (resettlers, downstream, project lands) were resolved by the completion of the project, and no cases reached the Provincial Court (though this would be unusual in the Lao PDR).

iv) Ongoing grievance procedures during operation will be dealt with through the normal government grievance mechanisms.

Appendix 9 61

33. The large number of grievances indicates that there was both a large number of valid grievances and that the GRM process was operational, effective and widely available.8 H. Monitoring, Reporting and Supervision 34. Multiple levels of internal and external monitoring and oversight arrangements were established for NT2. These were: (i) internal monitoring, (ii) external monitoring, and (iii) independent monitoring.

1. Internal Monitoring 35. NTPC put in place a program of internal monitoring to collect and report on activities and outcomes for each of the three social programs (Nakai Resettlement, Downstream Program, and Project Lands). Each of these programs provided progress reports on land acquisition, unexploded ordnance clearance, construction of infrastructure, compensation, livelihood programs, and establishment of village income restoration funds. Internal monitoring also included assessment of project outcomes relevant to achieving Concession Agreement targets and Social Safeguards.9

36. Nakai resettlement. Monitoring included two quantitative household surveys: the Living Standards Measurement Survey (LSMS) and the Quarterly Socio-Economic Monitoring Survey, as well as baseline, mid-term and end-of-project health surveys, and a range of fish catch monitoring surveys. The LSMS survey was a multi-indicator household survey derived from the Living Standards Measurement Study surveys supported by the World Bank. The Quarterly Socio-Economic Monitoring Survey (QSEM) was a smaller socio-economic household survey that was undertaken more frequently with a larger sample size. The QSEM survey was designed to monitor simple indicators of resettler well-being between LSMS surveys and to provide feedback on the progress of individual communities and ethnic groups. It was undertaken 18 times between 2010 and 2017.10 37. Downstream program. The Downstream Program also undertook a multi-indicator survey, the downstream socioeconomic survey, which was based on the Nakai LSMS. In addition, the program undertook fish catch monitoring, health surveys, and a dietary intake survey at the start of commercial operations. The objective of the survey was to evaluate the restoration of livelihoods to pre-project levels. 38. Project lands. Monitoring of outcomes within Project Lands was relatively limited in scope and designed to evaluate if households had been provided with livelihood assistance programs and to determine if those programs had been adopted, particularly for those households where greater than 10% of productive assets had been lost. A full description of land acquisition, compensation and an assessment of livelihood restoration was provided in the RAP completion reports. 39. Progress reporting. NTPC produced monthly, quarterly and semi-annual progress reports and an Annual Implementation Plan that was reviewed and approved by the international financial institutions (IFIs) that also included a summary of progress to date.

8 The Concession Agreement required that all grievances had to be free of costs to the complainant 9 NTPC produced monthly, quarterly and semi-annual progress reports. Annual Implementation Plans also included

a status update for each project area. 10 The QSEM did not start until 2010 as it replaced a diary-based income monitoring system which proved too difficult

for resettlers to complete.

62 Appendix 9

2. External Monitoring 40. Panel of experts. As required under the Concession Agreement, an environmental and social POEs was mandated to provide independent review of, and guidance on the treatment of environmental and social issues to the Government (RC). The membership of the POE varied over time but was required to have (i) an environmental generalist with experience in environmental/development trade-offs, (ii) a social scientist with expertise in resettlement and indigenous people of Southeast Asia, and (iii) a tropical forest and biodiversity conservation expert. The panel therefore had only one social scientist to cover community consultation, resettlement, livelihoods, ethnicity, gender, health, education, and socio-economic monitoring and evaluation. In the final years of the Nakai Resettlement program a fourth member was added to assist the three principals. 41. Independent monitoring agency. The Concession Agreement specified that the Government engage an independent monitoring agency with experience in social surveys. This agency was required to train and guide the Lao personnel in monitoring methodology, check and verify monitoring data, and undertake monitoring and data collection. Separate independent monitoring agents (IMAs) were retained for each social program (Nakai Resettlement, Downstream, and Project Lands) and for the WMPA. In practice the RMU undertook little direct socio-economic data collection and the main role undertaken by the independent monitoring agency was to monitor and report on the fulfilment of the terms of the Concession Agreement. 42. Lenders’ technical advisor. The lender’s technical advisor (LTA) was appointed by NTPC under the company’s obligations to its commercial lenders. The LTA reported to the commercial lenders on (i) the commercial aspects of the project, (ii) engineering aspects, and (iii) environmental and social aspects. Membership of the LTA varied over time, but the social aspects of the project were monitored by a social scientist and a livelihoods expert with prior experience in the Lao PDR. The LTA has produced roughly quarterly reports from 2005 to 2017. Social monitoring by the LTA ceased in 2018.

43. An international advisory group advising the World Bank’s President on project implementation, covering revenue management arrangements as well as environmental and social aspects, which last reported in 2011.

44. Regular missions by IFIs and bilateral agencies in the form of site visits and management and technical missions. I. Nakai Resettlement

1. Impacts 45. A total of 1,310 households (6,289 people) from 17 communities were moved from the area that became the Nakai reservoir to resettlement villages located along the edge of the reservoir (Figure 3). Resettlement included low-lying households located within the District Town of Oudomsouk and the village of Phonphanphek (which was also partially affected through the loss of low-lying agricultural land).

Appendix 9 63

Figure 3. Map of Nakai Plateau resettlement showing original and final location of

resettled communities

64 Appendix 9

Impounding of the reservoir inundated 537 ha of agricultural land, of which 88 ha was paddy and 449 ha upland rice, though these figures do not include upland agricultural land used by residents of Oudomsouk. The Nakai resettlers were also affected by the loss of forest land which had been used for collecting timber for construction, firewood, and NTFPs.

2. Entitlements 46. A matrix of resettler entitlements is set out in Schedule 4 of the Concession Agreement and included transitional food support, provision of irrigable agricultural land including 0.16 ha suitable for rice paddy, land areas for additional development, cash compensation where the value of land acquired exceeded the value of replacement land, housing with electricity from the national grid, improved water supply and sanitation, community infrastructure (e.g. all weather roads, schools, village meeting hall, fish landings) and livelihood support. 47. The livelihood support program included extension program to promote and improve livelihoods, a cooperative forestry program, a fisheries package that included exclusive access to the reservoir, community fisheries management, and an off-farm program that included vocational training, value-adding, marketing, and business development. Resettlers were also provided with agricultural, forestry and fishing equipment including boats and fishing gear. 48. Vulnerable households. Vulnerable households were identified prior to resettlement so they could be provided additional assistance during resettlement, including provision of additional food support, health and livelihood assistance. The vulnerable households program operated throughout the RIP and is continuing as part of the NT2DF. Vulnerable households were identified on the basis of socio-economic conditions primarily by a lack of working members and limited family support, and single-headed households (both male and female) with dependents with low income and limited support. Vulnerable households received additional support throughout the resettlement process, including rice and protein support, and priority access to individually designed livelihoods programs that were tailored to their circumstances. Support for vulnerable households continues today after closure of the Resettlement Implementation Period through a social safety net program supported by the NT2DF. 49. Most of the population of the Nakai Plateau are ethnic minorities but a small group of Ahoe households (14) was also identified as potentially vulnerable and extra attention was given to their needs during relocation (please refer to the Ethnic Minorities section below).

3. Implementation 50. Relocation of low-lying villages. The schedule for implementation of resettlement was driven by project construction activities and particularly inundation of the reservoir. Financial Close was achieved on 31 April 2005 and all villages had to be relocated before closure of the main dam planned for May 2008. 51. Construction and closure of the coffer dam was recognized as bringing an increased risk of flooding for the villages on the Nakai Plateau during the construction phase. A review of these flood issues led the project to the conclude that low-lying villages (Village Group 1) must be relocated prior to the start of the 2006 wet season for their own safety. This led to 9 out of 14 villages being relocated to temporary housing at the start of the 2006 wet season, with final resettlement of all villages prior to the 2008 wet season.

Appendix 9 65

52. Changes in resettlement location. The SDP included a plan for some resettlers to relocate to an area near Lak Sao that was suitable for the development of a small irrigation system. A small group of Resettlers from Sop Hia and Nam Nian villages, including 15 Ahoe households, initially opted to resettle to this area. However, this area proved to be unsuitable because of poorly controlled mining upstream and the resultant heavy metal contamination of the main water course to be used for irrigation. As a result, these households were relocated to the northern cluster of resettlement villages on the Nakai Plateau, an area that was already relatively short of agricultural land.

4. Compensation and Livelihood Restoration 53. Livelihood restoration programs focused on the four pillars identified in the SDP (Agriculture and Livestock, Forestry, Fisheries and Off-Farm) with households making their own decisions as to which combination of livelihood opportunities to pursue based on the natural resources available in their area of the reservoir, their own labour availability, skills and preferences. 54. Agriculture. The Resettlement Area, on the southern edge of the Nakai reservoir, is located in an area with generally poor soils and the reduced amount of land available precludes the use of swidden agriculture with long periods of fallow to maintain productivity. Thus, a range of new agricultural practices had to be developed to ensure sustainable and economically-feasible production on the 0.66 ha farm plots. Three approaches to increasing production were adopted:

i) Improving soil quality through building up the organic content of the soil using organic fertilizer;

ii) Land development for irrigation; iii) Establishment of value chains for market production of cash crops.

55. Agriculture had been an important component of livelihoods prior to resettlement, although only 17% of families could produce enough rice for the year and 50% had a rice deficiency for more than 6 months of the year (SDP). The objective of the agricultural livelihoods pillar was not to create self-sufficiency in rice or other subsistence crops, but to promote the use of this land for the most productive purposes possible, as one element of a broader set of livelihoods activities. The agriculture pillar faced two problems that have limited its success: difficulties with the irrigation systems, and poor-quality soils. 56. The SDP provided an indicative plan of each village irrigation system. The plans envisaged pumps drawing water from the reservoir and providing irrigation water to each 0.66 ha farm plot via surface channels. Each farm plot would include 0.16 ha of irrigated paddy. However, the initial design was substantially modified with only 0.16 ha of land on each plot being irrigable and no paddy irrigation developed. The original irrigation design included a single pump for each village delivering water via a surface distribution system. The system that was implemented consisted of 220 separate water distribution systems that piped shallow groundwater to each plot. The complexity of the irrigation system and the low rate of water delivery resulted in many systems breaking down and households opting to pursue other livelihoods.

57. The resettlement area also has relatively poor soils that would need significant inputs to improve productivity. The Resettlement Office provided agricultural training to the resettlers in methods of improving soil quality and productivity using stylo (Stylosanthes guianensis) fallows and organic fertilizers supplied from the demonstration farms. However, soil improvement methods were not widely adopted.

66 Appendix 9

58. The agriculture pillar was also weakened by difficulties with the use of small plots in the drawdown area that had been identified as a potential source of income in the SDP. In practice it was not possible to mark the boundaries of individual plots or provide land titles and many of the plots were also unsuitable for agriculture.

59. Overall, the difficulties in improving soils for the majority of households, low productivity, lack of paddy, limited irrigation, and attraction of more productive livelihoods led to relatively low use of the farm plots, an issue regularly reported on by both the POE and LTA. 60. Livestock. Inundation of the reservoir resulted in a large reduction of the land available for grazing, from about 57,000 ha to about 12,000 ha.11 The objectives of the Resettlement Office livestock program were to (i) reduce livestock numbers prior to resettlement, and (ii) increase production on the land available in the new villages by improving pasture quality, intensifying production through cut-and-carry of livestock feed, reducing stock deaths through improved vaccination, promoting cattle as an alternative to buffalo, and building up a commercial livestock market. The project also promoted the keeping of smaller livestock, such as pigs, chicken and ducks, which are more suitable to the conditions in the new locations and easily marketable in small quantities. 61. The inundation of the reservoir and the substantial reduction in the land available for grazing combined with the limited destocking, and other environmental factors led to widespread buffalo deaths in 2008/09. While not accepting blame for stock deaths, the project provided ex gratia payments to affected households for the loss of 555 buffalos. 62. Total livestock numbers on the Nakai Plateau have increased substantially since 2009 with nearly 2,000 buffalo and 3,000 cattle recorded in 2016. There has been no repeat of the stock deaths and no reports of significant resource degradation in the Resettlement Area. The drawdown zone appears to provide good grazing areas for livestock, particularly in the flat low-lying southern portion of the reservoir. However, overstocking of the common grazing areas and the presence of large livestock in the NNT-NPA remain areas of concern. 63. The project has been successful in the promotion of improved livestock production and the raising of smaller animals. The share of household income from livestock increased from 4% in 2011 to 13% in 2017.12 Agriculture and livestock combined now contribute 41% of household incomes, making the combined “agriculture and livestock pillar” the most important source of income on the plateau. 64. However, the POE and LTA expressed concern about the long-term sustainability of livestock production and various actions related to livestock were included in the Comprehensive Action Plan (see below). The management of livestock continues to be supported by the project after closure of the RIP and forms an important component of the mid-term development plan funded by the NT2DF and the French Development Agency. 65. Forestry. The formation and management of the Village Forest Association (VFA) was the responsibility of the Government. The VFA provided the resettlers with a forest concession area of approximately 23,400 hectares surrounding the resettlement villages for the exclusive use

11 SDP Vol 2 Chapter 12-page 30 Agriculture and Livestock Development. 12 Household income is not normally distributed with a few households owning large numbers of stock. The mean of

income shares (the mean of the percentage income each household obtains from livestock) is a more robust and less volatile indicator of the importance of livestock incomes.

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of the Resettlers for 70 years. The main objectives of the VFA were to develop resettler livelihoods, generate income including cash dividends and to provide opportunities for employment. The VFA was considered particularly significant during the planning stage as a potential source of income for the most vulnerable people on the plateau because it would provide dividends to all resettled households on the plateau, even those who are unable to work. 66. Both the VFA and its successor, the Village Forestry Development Association failed over time.13 Reported reasons for the failure include: (i) management did not fully represent resettler interests; (ii) villagers and the VFA had insufficient skills to manage commercial forestry operations and the timber mill; (iii) the value of timber resources was overestimated initially; (iv) illegal extraction of timber by outside agents as well as the villagers; and (v) high government taxes and charges. Commercial forestry on the Nakai Plateau has now ceased at the request of the villagers and the new Village Forest Management Plans focus on village-level management of NTFPs, grazing etc. 67. Income from forests now contributes very little to resettler incomes. LSMS data showed that forests were the most important source of incomes (38% of households) in 2011, largely due to the illegal harvesting of rainforest timber, but by 2017 the trade in rainforest timber had ceased due to improved enforcement, closure of timber mills and the exhaustion of supply. Forests income contributed only 5% of total income in 2017.

68. Fisheries. The resettlement of households to the southern margin of the newly-formed reservoir made the reservoir fishery a potentially important livelihood pillar. The land lost to the reservoir was effectively replaced by aquatic resources of almost equal area. Predicting the size and significance of the reservoir fishery was difficult but it was thought that the reservoir would:

i) form an important source of animal protein for household consumption; ii) contribute to additional household cash income; and iii) provide employment opportunities both in actual fisheries and fish trade.

69. These predictions have proved to be relatively accurate and fishing has proved to be one of the most important sources of income and food for the resettlers: fisheries have provided around 30% of household income since the filling of the reservoir. Incomes from fishing have benefitted from improved access to the Nakai Plateau, and there is ongoing support for fisheries management and value-adding to fishing incomes by processing raw fish to higher value products. Fish also forms an important part of the diet and resettlers now eat around 6-9 kilograms of fish (wet weight) per person per month. 70. Off-farm/ other sources of income. Before the project, only a few households on the plateau had any off-farm income, which was mostly limited to small village shops. The Off-Farm livelihood program promoted a wide range of skills including vocational training (e.g. handicrafts, motor-cycle maintenance, hospitality), business planning and development, ecotourism development, awareness of markets, value-adding to fishery and agricultural products, support for resettlers to obtain project employment, and village development funds. 71. The off-farm pillar had to strike a balance between providing vocational and business development training (supply side) and market demand for those businesses and products. Early

13 In 2011, the VFA was converted to a non-profit limited liability company with an experienced forester from DAFO

appointed as manager.

68 Appendix 9

efforts in promoting businesses including handicrafts (and cash cropping in the agriculture pillar) often failed because of insufficient demand. 72. The off-farm sector (business, employment and value-adding) has grown in the latter part of the resettlement implement period. Employment, business and other incomes (interest, remittances, hire of agriculture equipment) now accounts for about 25% of household income according to the last LSMS survey. It is not possible to attribute the increase in importance of the off-farm sector solely to the assistance provided by NTPC because the area has also benefitted from improvements in the national and regional economies, and improved transport links (the road from Oudomsouk to Lak Sao, passing through the central and northern part of the resettlement area, is now sealed).

5. Outcomes and Closure 73. It was envisaged in the Concession Agreement that resettlement would take about 9 years to complete from the start of the resettlement process in 2006. The RIP thus included a period of about 7 years after relocation during which resettlers would establish and consolidate their new livelihoods. 74. Extension of resettlement implementation period. The resettlement implementation period could only be ended if the Resettlement Committee accepted, on the advice of the POE, that (i) all the resettlers had received all their full entitlements, and (ii) that the resettlement objectives had been achieved, particularly the Household and VITs, and livelihoods of the resettlers had been materially improved on a sustainable basis. In October 2015, the POE reviewed the resettlement program and concluded that the Resettlement Objectives had not been reached and recommended an extension of the RIP for 2 years, until December 2017. The POE (report 24) provided a list of binding and non-binding recommendations that the POE believed were necessary in order to achieve the Resettlement Objectives and Provisions. At the same time the IMA for resettlement provided an analysis of Concession Agreement non-compliance issues that needed to be resolved. 75. Comprehensive action plan to close resettlement implementation period. In response to the extension of the RIP, NTPC, the Government, and the IFIs, formed a Joint Working Group to respond to the issues raised by the POE and the IMA. The joint working group undertook a review of the list of Concession Agreement non-compliance issues and the sustainability of Resettler Livelihoods and developed a comprehensive action plan for the closure of resettlement in 2018. ADB took the lead to address the recommendation of the IMA report, reviewing the list of Concession Agreement non-compliance issues. The plan included a Mid-Term Development Plan and the longer-term support of resettlers after resettlement closure.

76. The comprehensive action plan comprised seven components: four livelihood plans (Forestry, Fisheries, Agriculture and Livestock, and Off-Farm) and three cross-cutting plans (Poor and Vulnerable Households, Ethnic Groups, and Gender) and addressed the list of actions agreed to reach compliance with Concession Agreement provisions. The plan also included a list of actions to be undertaken under the mid-term development plan led by the Government and supported by NTPC funding under the NT2DF. The plan included resolving outstanding land conflicts between villages, developing a comprehensive forest management plan, improving reservoir patrols and fisheries management, identifying vulnerable households and developing a Social Safety Net for vulnerable households to prevent them falling into poverty, and implementing a capacity-building scheme for District staff during the hand-over phase.

Appendix 9 69

77. The creation of the NT2DF formed a key element of the actions undertaken to reach closure. The NT2DF was not a Concession Agreement requirement but was set up to ensure long-term sustainability of resettler livelihoods and provide a form of benefit-sharing to the communities most directly affected by the project. NTPC will provide 1,000 LAK per megawatt-hour of electricity generated to the NT2DF, estimated to be about $750,000/year, to be operational after closure of the RIP until the end of the concession period in 2035. The establishment of the NT2DF was approved by the NTPC Board in December 2015. 78. Re-establishing livelihoods. NTPC undertook detailed socio-economic monitoring throughout the RIP to demonstrate the restoration and consolidation of resettler livelihoods. NTPC undertook a total of 8 of the larger LSMS surveys, 14 QSEM surveys and one VITs Survey. 79. Socio-economic monitoring showed that household incomes, consumption and expenditure fluctuated widely during the resettlement period particularly during the early phases of resettlement. Resettler households benefitted substantially from transitional support, employment in preparing new resettlement villages and farming lands, fisheries in the newly formed reservoir, compensation payments, and the economic opportunities associated with the greatly improved access to the Nakai Plateau. Median real incomes were 97,000 LAK/person/month in 1998 and peaked at 261,000 LAK/person/month in 2006 and 217,000 LAK/person/month in 2011. Incomes are currently stable at around 200,000 LAK/month, substantially higher than pre-project levels.

Figure 4. Household living standards (consumption and expenditure) between 1996 and

2017. The rural median consumption is interpolated from Lao Expenditure and Consumption Surveys as reported in the LECS V Poverty Profile. The pre-project income is derived from the SDP. All

values are corrected for inflation. 80. Household and village income targets. The LSMS 8 survey showed that about 97% of households were living above the poverty line, effectively reaching the Household Income Target. The VIT survey indicated that all resettlement hamlets had reached the Village Income Target. Importantly, analysis of the QSEM surveys showed that while differences in the economic status of different ethnic minorities remained, all ethnic groups had benefitted from resettlement including the Vietic minority who were originally the poorest group on the plateau. The QSEM

70 Appendix 9

surveys also showed that there were no significant differences between original resettler households and “second generation” households that formed after resettlement (2008).

81. In December 2017 (POE Report 24), the POE accepted that household incomes targets had been met and were sustainable for the immediate future but observed that sustainability had not been maintained “for a reasonable period of time” in any sector except fishing. However, the POE accepted that incomes would be sustained at current levels because NTPC and partners had made long-term funding commitments (NT2DF) for livelihood development and support of vulnerable households, and in July 2017, the POE accepted that all the Resettlement Objectives had effectively been achieved or processes had been put in place to achieve those objectives through the Mid-Term Development Plan funded by the NTPC. NTPC is committed to ongoing post-RIP monitoring, through the Nakai Expenditure and Consumption Survey. J. Downstream 82. The Concession Agreement defined the downstream area in the Xe Bang Fai catchment as including all riverside communities on the Xe Bang Fai from just upstream of the Xe Bang Fai confluence with the Nam Gnom (which is approximately 11 km upstream of its confluence with the downstream channel) down to the Mekong River. The Concession Agreement definition also included hinterland villages which “access the Xe Bang Fai or Nam Phit for fishing or collecting aquatic products”. The SDP included an initial estimate of the downstream population of 50,000, but in contrast other estimates were as high as 120,000-150,000.14 In the end, the Downstream Program operated in 92 villages to provide a full package of support, and 67 hinterland villages, compensating a population of about 115,000.

1. Impacts 83. Xe Bang Fai. The main physical impacts of the project in the Xe Bang Fai catchment were predicted to be:

i) increased flows (predicted annual average discharge of 220 m3/sec compared with an average dry season flow of 13 m3/sec and an average wet season flow of 920 m3/sec) and water levels;

ii) incremental increase in the duration of floods in wet season; iii) fluctuations in dry season flows due to changes in power generation; iv) reduced water quality; and v) increased riverbank erosion.

84. The social and economic impacts of these changes included impacts on livelihoods due to reductions in fish catch, increased duration of floods, loss of dry season riverside gardens, and loss of dry season access across the river. The physical changes also had potential impacts on domestic water supply (water quality), and operation of river pumps. 85. Predicting the downstream economic impacts of the project in the Xe Bang Fai catchment were difficult. The largest impact was predicted to be in the loss of fisheries income (including the collection of other aquatic resources). The SDP predicted impacts would be higher in the main stream than the tributaries and wetlands, proportionally higher in the dry season, and would decrease downstream from the discharge point. “Ballpark” figures for loss of fisheries ranged from

14 The People and Their River A Survey of River-Based Livelihoods in the Xe Bang Fai River Basin in Central Lao PDR

By Bruce Shoemaker, Ian G. Baird and Monsiri Baird

Appendix 9 71

30% to 80% in the dry season and 10% to 80% in the wet season (depending on location in both seasons). 86. Nam Theun. The area downstream of the Nakai dam was impacted by the reduced flow in the Nam Theun, since discharge will be limited to the minimum riparian release of 2 m3/s on the stretch between the dam and the Nam Phao tributary. There are no permanent settlements or established villages along this reach of the river, but some households from nearby villages occasionally use this reach for their fishing activity. The SDP predicted impacts of about 60% on mainstream fisheries and 10% to 35% on the tributaries, which are not directly affected by the project.

2. Entitlements 87. The activities to be undertaken by the project and the entitlements of Downstream project affected households (PAHs) are set out in the Concession Agreement (Schedule 4 Part 2: Social Component – Downstream Areas). The project was required to: develop mitigation, compensation and livelihood development programs; and ensure that PAPs promptly receive compensation for loss of land, communities are compensated for loss of community property and resources, and that the livelihoods of PAHs are at least restored to pre-project levels. The downstream program differed from the resettlement program in that it was limited by cost rather than the achievement of targets (scope) and there was no provision for extending the program if those objectives were not met.

3. Implementation 88. The Downstream Program was established in 2005 and began operating in 20 pilot villages in the Xe Bang Fai catchment (downstream of the powerhouse) in 2006. Over the following 2 years the program was expanded to include 37 villages (5,810 households and ~32,000 people) downstream of the Nakai Dam in Khamkeut District, and all 92 significantly-affected riverside villages downstream of the Xe Bang Fai catchment (11,686 households and ~ 65,000 people).

89. The Downstream Program completed activities in the significantly-affected villages (Xe Bang Fai) and the Khamkeut area (Nam Theun) in 2011. The project was extended for one year to provide cash compensation to 67 hinterland villages (10,056 households and approximately 52,000 people) in the Xe Bang Fai catchment in 2012.

90. The program provided regular updates on expenditure, budgets, progress and proposed activities for each year in the Annual Implementation Plans. However, no formal closure report for the Downstream Program was produced and no summary of outputs was included in the AIP produced following program closure.

4. Compensation and Livelihood Restoration 91. Operation of the project had the greatest impacts on communal or open pool resources (e.g. fisheries). As a result, the SDP proposed a community-based compensation and livelihood development program open to all households in the downstream area regardless of their use of river. The five components of the Downstream Program were:

i) village income restoration funds (VIRF); ii) livelihood development;

72 Appendix 9

iii) water supply and sanitation; iv) physical cultural resources; and v) compensation for riverbank gardens.

92. Village income restoration fund. VIRF is a revolving village fund set up with money provided to each village by NTPC. Capital was provided to each VIRF based on the number of households per village, and each household was then entitled to borrow against their entitlement (share) for livelihoods activities. Households were not allowed to cash in their share. Setting up of the VIRF in 92 villages along the Xe Bangfai started in 2006 and was completed in 2011. The total value of compensation paid through the VIRF was c.$ 2.09 million with an average share value of $180 per household. No VIRFs were established in the Nam Theun catchment as impacts were significantly lower. 93. VIRF has performed reasonably well with repayment rates better than for many village funds in the area. While all households were able to access the fund for livelihood development activities, poorer households were found to access the fund less frequently than more prosperous households. By the end of the Downstream Program in 2012, the total value of shares in the VIRF had risen by nearly 10%, though there were questions of long-term sustainability.15 No program-wide data was available to assess VIRF sustainability in 2017. 94. Livelihood development. The downstream livelihood development program operated in both the Xe Bangfai and Nam Theun areas. In the Xe Bangfai area livelihood development included promotion of submergent-tolerant rice (in response to increased duration of minor flooding), mechanization of agriculture, distribution of improved rice seeds, promotion of cash crops, improved livestock breeds and raising systems, and aquaculture as a replacement for natural fisheries. The program established 19 training farms, and more than 3,000 farmers were trained. Most of the households borrowing money from the VIRF did so for agriculture. 95. The Downstream Program operated in in 39 villages (5,810 households) in the Khamkeut District downstream of the Nam Theun dam. The project started in April 2008 and was completed in November 2011. The program provided physical inputs and technical livelihood assistance to households that wished to participate from a suite of livelihood options that ranged from the provision of livestock to land preparation. 96. Water supply and sanitation. The environmental assessment and management plan predicted that, under worst-case scenario conditions, water quality in the Xe Bang Fai may experience a significant decline during the dry season (when the relative impacts of water discharged from the powerhouse on the is greatest). While it was thought unlikely that water in the Xe Bang Fai would be unsuitable for human consumption or domestic use, NTPC chose to undertake an extensive water supply program partly to maintain access to water of domestic quality under worst case scenarios, and partly as an additional benefit for the community. 97. The program focused on provision of improved water sources and sanitation in eligible riparian villages in the Xe Bang Fai catchment. The program provided a total of 547 boreholes in 91 heavily-impacted villages, 6,575 household latrines and 137 community toilets. By the end of the program in 2012, over 93% of households adjacent to the Xe Bang Fai were using improved (safe water) sources compared to only 77% of households prior to the start of the project.16 While

15 Two village visited as part of the project evaluation had operating VIRFs 16 Calculated from data provided in the SDP.

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there is a general improving trend in access to safe water across the country, much of the improvement in the Xe Bang Fai area is attributable to the project.17 98. Compensation for riverbank gardens. Power generation by the project substantially increases dry-season flows in the Xe Bang Fai, thereby inundating low-lying river bank gardens which would normally be used during the dry season. The need to compensate households was identified prior to COD, and full compensation for 3,316 households (~17,000 people), paid directly to the household, was finalized by November 2011 following completion of the grievance process. While land-for-land compensation is preferred, the absence of replacement land precluded this option. A total of approximately $490,000 was paid in compensation, with amounts varying to each household according to their intended use, but at an average of around $150 per household. 5. Outcomes and Closure 99. Impacts have been clearly felt in loss of fisheries, but it has proved difficult to estimate both the reduction in fishing income and amount caused by the project. At one extreme, the downstream socioeconomic survey estimated a decline in fishing income on the Xe Bang Fai of 60%–70% between 2009 and 2014. On the other hand, fish catch monitoring shows fish catches were reduced by about 20% following COD. While changes in flow and water chemistry have undoubtedly changed the species composition in the Xe Bang Fai, it is difficult to attribute causes and the extent of impacts between project impacts, changes in fishing gear and practices, changes in fish populations, and environmental and ecological factors. 100. A reduction in fishing income does not necessarily translate directly into a loss of total income as households adjust their investment decisions (commitment of labour and capital to more productive activities). Overall the monitoring data indicates a great deal of volatility in household incomes, and that whilst incomes from fishing have declined, this has largely been offset by other income sources, with most households reporting improved living conditions (expenditure and consumption, improved dwellings, higher savings, and more large livestock) and fewer households living in poverty.

101. Interpretation of the socio-economic monitoring data was hampered by the short duration of the monitoring (3 surveys from 2009 to 2014). It is not possible to attribute the decline in poverty in the project area solely to the impact of livelihood development program or the VIRF given the overall increase in economic activity in the affected Provinces and across the Lao PDR.

Table 1. Per capita poverty in downstream districts in 2005 (pre-project) and 2015 (5 years after commercial operation date)

Province District Population –

2005

Per capita poverty-

2005 Population

– 2015

Per capita poverty-

2015

Khammuane Mahaxay 30,919 45% 36,688 27%

Nhommalath 27,699 52% 32,774 28%

Nongbok 40,023 31% 47,366 22%

Xebangfay 25,504 44% 28,467 29%

Savannakhet Xaybuly 54,441 43% 59,564 28%

17 Lao census data shows that access to safe water nationally has increased from 35% of households in 2005 to 61%

of households in 2015.

74 Appendix 9

Province District Population –

2005

Per capita poverty-

2005 Population

– 2015

Per capita poverty-

2015

Xe Bangfai Downstream

178,586 42% 204,859 27%

Nam Theun Downstream (Khamkeut)

34,255 35.7% 2,557 21.4%

Source: Lao Decide. Note that the LaoDecide data is aggregated by District and includes villages not directly impacted by the project.

102. Implementation of the Downstream program was limited by cost, with a budget which was fully disbursed by the end of 2011. ADB’s loan agreement with the Government (as with the World Bank’s grant agreement with the Government) required the Government to take on any outstanding compensation and mitigation measures in downstream areas thereafter. In the event, NTPC’s Board agreed to extend its funding for a further one year to the end of 2012 at a further cost of $2.3 million. This extension primarily covered additional cash compensation payments (c.$ 945,000) provided to 67 hinterland villages with relatively low impacts from project operations. Supervision of all VIRFs and livelihood development programs have now been handed over to the Government. K. Project Lands

1. Impacts 103. The SDP initially identified 68 land parcel areas that would need to be acquired for project construction, of which 38 would result in some degree of social impact. A more detailed estimate of households affected by land acquisition was provided in the five project lands RAPs produced in 2007. These documents initially estimated that a total of 2,738 households would be affected, of which 394 would have losses that exceeded 10% of their annual income. The RAP for the Nakai area estimated that up to 47 households would be physically-displaced within their existing communities.

2. Entitlements 104. The entitlements set out in the Concession Agreement included (i) compensation or replacement of land that was permanently acquired for the project, (ii) compensation for temporarily-affected land, (iii) compensation for loss of dwellings, other buildings, and assets such as fruit trees, timber trees etc, and (iv) compensation/replacement of common property structures and resources. Households that were significantly impacted, i.e. who lose 10% or more of their income-generating land assets, were also entitled to transitional income assistance and livelihood assistance programs to help them restore incomes to pre-project levels.

3. Implementation 105. Plans for land acquisition were described in five separate RAPs for (i) Khamkeut District, (ii) Oudomsouk, (iii) Gnommalath and Mahaxai Districts, (iv) Roads, and (v) Transmission Lines. Acquisition of land for the project commenced almost immediately after Financial Close in May 2005 as the project moved to acquire key land parcels required for commencement of the project (e.g. quarries, land needed for access roads and construction sites). Early payments were provisional as compensation rates and grievance redress mechanisms were not yet in place. Land acquisition for RAPs 1, 2, 3, and 4 were completed by June 2006 (though compensation was not

Appendix 9 75

completed until all GRM processes had been resolved). Identification of lands for the transmission lines required final design and location of towers and acquisition was completed in September 2007. The Project Lands program continued operations through to the end of 2011 completing compensation, resolving grievances (including additional disputes during constructions) and undertaking livelihood restoration programs. Additional land was acquired for the expansion of the spillway for the regulating dam following the 2011 wet season floods. A total of 2,846 households (~15,000 people) were provided compensation for acquired land of which 238 households (~1,200 people) were impacted more than 10%.

4. Compensation and Livelihood Restoration 106. The baseline survey estimated that a revised total of 380 households would lose more than 10% of their income. However, the initial assessment overestimated incomes because (i) impact estimates used total land area irrespective of productivity, (ii) total land ownership by resettlers was under-reported, and (iii) the project made conservative over-estimates of land requirements. A re-assessment of impacts and incomes found that only 238 households would experience impacts on incomes of greater than 10%. 107. Significantly-affected PAHs were entitled to land-for-land compensation. However, availability of agricultural land, particularly paddy land, in Gnommalath was limited and the majority of households were provided with cash compensation. Many households stated they preferred cash compensation as they still had enough land, could develop other land they owned or wished to invest in other activities. Cash compensation was only provided following completion of a “final cash compensation plan” by each household which described how they would invest or use their compensation.

108. ADB safeguards require that land must be compensated at market value. However, in the absence of a well-documented and functioning land market, land was valued at 7 times the estimated annual gross production (as specified by the Concession Agreement). Final cash compensation payments to significantly-affected households totalled $2.6 million at an average of $13,000 per household. 109. Significantly-affected households were also entitled to livelihood assistance to restore incomes to pre-project levels. The Project Lands Office provided support for improving (i) rice cultivation, (ii) livestock production, (iii) aquaculture focusing on fish and frogs, (iv) horticulture and mushroom production, (v) off-farm activities such as small businesses and weaving, and (vi) land development.

110. Evaluation of household income as well as consumption and expenditure indicated significantly-affected households were better-off than before the project and better off than similar PAHs. However, the improvement in livelihoods cannot be attributed solely to the livelihood restoration programs because of the influence of other factors. The majority of significantly-affected households were located in the Gnommalath Valley which included the main construction camps and benefitted from the economic multiplier effects of the project. 111. Where farmers lost less than 10% of their productive land, cash compensation was considered the most appropriate form of compensation from the start. Many of the parcels of land acquired for the project were small in area, e.g. the footpads for the transmission towers, and replacement of such small parcels of land was not feasible.

76 Appendix 9

112. The number of grievances lodged, and the results of the assessment are documented in the Project Lands RAP closure reports. Project lands received a total of 670 grievances, of which 28% were found to be valid. All grievances were fully resolved by the time the Project Lands program closed in 2011.

5. Outcomes and Closure 113. The program did not achieve all objectives within the designated timelines: for example, the IMA noted that the project failed to address grievances within the specified 15 days nor pay all compensation prior to impact. But progress was considerable during the closure process and all the outstanding issues were addressed. Concession Agreement Compliance was monitored and reported by the Independent Monitoring Agency (76 in the RAP closure reports) and the Project Lands office was closed at the end of 2011.

L. Watershed and NNT-NPA 114. Thirteen enclave villages (32 hamlets) were located within the NNT-NPA with a population of approximately 7000 people in 2003. The WMPA is also active in 42 villages (with a population of approximately 24,400) in the Peripheral Impact Zone, the inhabitants of which also use NNT-NPA resources.

1. Impacts 115. The project had no significant direct impacts on the residents of the watershed but the environmental assessment and management plan identified indirect impacts. The SEMFOP-I outlined the potential social impacts of improved biodiversity management in the NNT-NPA. Restrictions on community and household access to natural resources which might negatively impact on livelihoods included:

i) implementation or enforcement of existing NPA rules and regulations including extraction of wildlife and prohibited NTFPs;

ii) implementation of land use zoning systems including the delineation of Totally Protected and Controlled Use Zones; and

iii) elimination of pioneer shifting cultivation in enclave villages. 116. The construction of high-quality access roads to the Nakai Plateau combined with inundation of the reservoir area was predicted to significantly improve access in and out of the NNT-NPA. While improving access had the potential to facilitate illegal logging and wildlife poaching, it also had the potential for improving living standards with better access to supplies, markets and health facilities. The influx of population and expected economic growth in the project area would also potentially increase demand for agricultural products, wildlife and NTFPs.

2. Entitlements 117. There were no entitlements specified in the Concession Agreement in relation to the NNT-NPA. However, ADB’s social safeguards and the Government resettlement policy require that livelihoods are restored to at least pre-project levels if the project has a negative impact on livelihoods.

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3. Implementation 118. The main elements of the livelihood development strategy set out in SEMFOP-I were to improve productivity of the allowable land use by developing new paddy, constructing small-scale irrigation systems where possible, improving swidden fallows, improving soil management, promoting agroforestry, and integrating grazing and forestry with the overall aim of preventing swidden agriculture in primary forest. 119. Livelihood development was seen as an important component of WMPA activities for two reasons. Firstly, to mitigate and restore incomes affected by land use restrictions. Secondly, because it was assumed that improving incomes would reduce the need for villagers to expand cultivation and foraging areas into protected areas. 120. It is difficult to assess the effectiveness of the WMPA livelihood development program prior to 2016. WMPA annual reports indicate that activities in livestock vaccination programs etc, and construction of social infrastructure were undertaken, but there is no evidence this has led to either improved livelihoods or the resulting reduction in wildlife poaching that was assumed.

121. In October 2017, the restructured WMPA appointed a Consortium of Technical Experts (COTE) – including Agrisud International and Creative Literacy Laos – for the implementation of a revised SEMFOP (SEMFOP-III). Agrisud is an international livelihoods development NGO specializing in rural development and is assisting the Livelihood Development component of WMPA. Recent progress of WMPA has been good with the project completing a baseline socio-economic survey and rapid agronomic assessment following the objectives laid out in SEMFOP-III. Resources remain limited given the size of the NNT-NPA, but the WMPA now has additional funding through a World Bank-financed Second Lao Environment and Social Project and is focusing attention on core elements and enclave communities within the NNT-NPA.

4. Livelihood Restoration

122. Very little livelihood monitoring has been undertaken in the watershed and NNT-NPA. A rapid socio-economic survey of the Nakai Plateau and watershed estimated that about 50% of the population were living in poverty. In a 2018 study, 90% of those interviewed in the survey felt life had improved (“life has gotten better”) in the last 10 years, with 75% associating improvements with WMPA works.18 In women’s focus groups, participants said that: access to education had improved, citing primary school rates of 70%–100% depending on the village; and universal health services for maternal and pre-natal care and child vaccination has resulted in lower infant mortality. M. Ethnic Minorities 123. The overall project area (Downstream, Resettlement, Project Lands and NNT-NPA) is populated by a wide range of ethnic groups divided into four main ethno-linguistic families: Tai-Lao, representing the majority population and located predominantly in the lowlands, Mong-Khmer (mainly Makong and Bor) located in the upper reaches of Xe Bang Fai catchment, Nakai Plateau and NNT-NPA, and Vietic groups located predominantly in the mountains of the NNT-NPA but with a small group living on the Nakai Plateau. Ethnic minorities make up approximately 40% of the population in the broader project area but are in the majority on the Nakai Plateau and in the NNT-NPA where they make up about two thirds of the population.

18 Based on qualitative survey methods (e.g., key informant interviews, focus groups)

78 Appendix 9

124. The SDP and SEMFOP included an evaluation of ethnic groups (populations, location, belief systems, livelihoods, and socio-economic status). These evaluations assessed how impacts, mitigation, and livelihood restoration would affect different ethnic groups. The conclusions were that the main ethnic groups in these areas were largely fluent in the Lao language, particularly younger members, and that there was significant overlap in the culture and the livelihoods of each group. The project therefore mainstreamed ethnic development within each element of the resettlement program. However, the project recognized that the Lou Loum (lowland Lao) were potentially advantaged over other groups and that Ahoe were at a potential disadvantage because of their more limited education and the small size of their population. 125. The resettlement of the 14 Ahoe households on the Nakai Plateau was challenging because the small size of the population precluded the formation of a separate Ahoe village or hamlet in the resettlement area or the provision of services to a separate village near their original location. Resettlement of the Ahoe households faced significant issues that were regularly reported by the LTA and the POE. Initially, some Ahoe households opted for resettlement to the Lak Sao area, which was planned to have had irrigated paddy and was closer to the regional center. When this area proved unsuitable, the Ahoe households were assigned to a section of another resettlement village. Subsequently, some of these households requested that they remain at a site above their old village in a wildlife corridor of the NNT-NPA. The POE requested that the Ahoe be provided with a separate village in the resettlement area. However, the small number of Ahoe households meant that it was not possible to either provide a viable village and services at the site above their old location or in a separate village in the new location. 126. Following resettlement to the new village, the Ahoe have now adjusted to their new circumstances in an ethnically-mixed settlement. However, older members of the community retain a strong attachment to their original “spirit country” and return regularly, some on a semi-permanent basis. Socio-economic monitoring of the resettlers (LSMS and QSEM) found that the Ahoe were not significantly poorer than other similar ethnic groups, though they lack a wealthy group. Importantly, the Ahoe have not been impoverished by their resettlement, though the traditional culture and customs of the older generation remain at risk. N. Gender 127. During preparation, gender action plans were incorporated in the SDP and SEMFOP I, with the purposes of (i) identifying issues of gender equity and women’s needs and perspectives, (ii) mainstreaming these issues into all aspects of the social development plans, and (ii) undertaking women-specific activities to promote their capability, leadership and opportunities. Examples of gender-related actions incorporated into plans are: provision of all land titles and compensation to both the head of household and spouse; gender-sensitive participatory planning; classification of female-headed households and families with more than 5 children under 10 years as vulnerable and the provision of extra assistance and targeted livelihood development for these families; disaggregation of monitoring data by gender; gender-sensitive training for income generation and skills training; and family planning and community education on sexually-transmitted infections, alcoholism, and domestic abuse. A gender mainstreaming team was set up in each social program in NTPC (Resettlement Office, Project Lands and the Downstream Program), and NTPC Annual Implementation Plans and semi-annual environment and social reports reported on gender mainstreaming. 128. An evaluation of the project’s gender-related obligations undertaken in 2014 found that the Government and the Resettlement Office generally met gender obligations under the

Appendix 9 79

Concession Agreement. Key factors influencing project success in meeting gender obligations included: early recognition of barriers to female participation; involvement of the Lao Women’s Union, District Promotion of Progressive Women; establishment of gender mainstreaming teams in the early stages of the project; improved gender balance among Resettlement Office staff; and targeted interventions for women. In 2017, the POE concluded that the gender program had been well applied and effective. It found that maternal health and nutrition had improved as had women's literacy and numeracy; substantial capacity training for women had been undertaken (focusing on education, health and nutrition); and women had become more involved in off-farm and home-based livelihoods activities. O. Public Health 129. The Health Impact Assessment (SDP) identified two areas of potential impact (i) Communities affected by resettlement or environmental impacts, including the downstream area, and (ii) Construction Camps including workers, camp followers, local residents, and the transportation corridors. 130. The Public Health Program was divided into separate projects: the Resettler Health Program, focused on improving the health and the health services of the resettler communities; the Regional Health Program focused on sectoral support for the delivery of Governments health services in the broader area of project impact; and the camp follower program

131. The health program undertook a combination of public information campaigns and improvements to health delivery systems including a vaccination program, mother and child health clinics, and nutrition programs. Improvement to public health also flowed from the improvements to community infrastructure, particularly improvements in water supply, sanitation, and housing quality, for the Nakai Resettlers and highly affected villages in the downstream area.

132. The health program mobilized early and was fully established in 2005 and operated in various formats through to the closure of resettlement program in 2007. The program was well received with the POE commenting in 2012 (POE 16) that the health program was one of the most successful elements of the overall program and could serve as a model for the rest of the country. The main issues of concern for the health program was the availability of birth control in light of the high population growth rates, and nutritional status of children under five years of ages, which, while reduced, remained significant.

1. Nakai Resettlement

133. The effectiveness of an integrated public health and development program that combines preventative health measures, improving medical infrastructure and services with improvements in housing, water supply, sanitation, and income is demonstrated by the large improvement in child nutritional status and reductions in child mortality: child mortality dropped from 120 to 50 per 1000 and stunting decreased from 43% to 34%. While there was no counterfactual (control group not exposed to the project), the improvements in child nutritional status were greater than improvements recorded in national surveys.

2. Regional Health Program

134. The regional health program focused on improvements to the Governments health care delivery outside of the resettlement program. The Downstream Program also provided

80 Appendix 9

improvements to public health through provision of improved water supply and sanitation, but this was focused only on the riparian villages. 135. Monitoring of health outcomes in the downstream area found that child nutritional status, particularly reduced prevalence of stunting, improved over the lifespan of the project. For example, child stunting in the riparian villages of the upper Xe Bang Fai reduced from over 60% in 2009 to about 40% in 2014. Nutritional status of children and adults improved in all downstream areas but these improvements cannot be solely attributed to the project because of the range of non-project related factors occurring in the broader Downstream Areas. 136. Commencement of operations and discharge of water from the Downstream Channel to the Xe Bang Fai coincided with an unexpected outbreak of dermatitis along the river with a maximum of 1600 cases being reported in 2011. The issue was promptly identified, reported and scientifically investigated. The dermatitis was caused by larval schistosomes shed by infected snails. Surveys demonstrated that mollusc populations had declined after initial operations, but species composition of snail populations had changed. However, no definitive cause of the dermatitis was found.

Figure 5. Prevalence of underweight, wasting and stunting in resettlement areas, 2001–2010

3. Camp Followers

137. The control and management of Camp Followers was primarily the responsibility of the Government. NTPC aided the Government assisting with health programs focused on alcohol abuse and other drugs, control of sexually transmitted diseases, prevention of human trafficking, and hygiene in restaurants. Control and management of camp followers in the vicinity of the project was successful with the LTA noting that the situation was well under control with good reporting, and follow-up.

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STATUS OF COMPLIANCE WITH LOAN AND PROJECT COVENANTS

Loan Agreement Covenants Reference Status of Compliance

Particular Covenants

The Borrower shall cause NTPC to carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental and utilities practices.

Section 4.01 (a)

Complied with.

NTPC has satisfactorily implemented the Project on behalf of the Government.

In the carrying out of the Project and operation of the Project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 5 to this Loan Agreement and in the Environmental and Social Plans.

Section 4.01 (b)

Complied with.

The obligations set forth in Schedule 5 of the Loan Agreement and in the Environmental and Social Plans have been addressed, especially where they are clear NTPC responsibilities. However, a significant project component for Government implementation concerning protection of the watershed was delayed and required intensive efforts to ensure progress. The compensatory forestry commitment was implemented through the national reforestation programs and donor-funded projects. NTPC’s ongoing environmental management, and the Government’s Transition Plan concerning resettled communities, and local committees such as the Adaptive Management Committee and Reservoir Management Committee will provide the mechanisms to meet E&S and Schedule 5 commitments on an ongoing basis.

The Borrower shall make arrangements for NTPC to obtain, promptly as needed, and on terms and conditions acceptable to ADB, the funds, facilities, services, land and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Project and the operation and maintenance of the Project facilities.

Section 4.02

Complied with.

The Government provided arrangements for NTPC to obtain funds, facilities, services, land and other resources for operation and maintenance of the project.

The Borrower shall ensure that the activities of each Project Executing Agency and Project implementing agency and of the Borrower's other departments and agencies with respect to the carrying out of the Project and operation of the Project facilities are conducted and coordinated in accordance with sound administrative policies and procedures and environmental and utilities practices.

Section 4.03

Partially complied with.

Government agencies have been involved in various capacities with the implementation and monitoring of the project including MAF, MONRE, District Resettlement Working Groups, Village Resettlement Committees, and the WMPA. WMPA restructuring is ongoing due to past POE findings on its ineffectiveness. SEMFOP III is currently being implemented with the COTE providing technical assistance and expertise and adoption of a community engagement framework that emphasizes participatory planning.

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Loan Agreement Covenants Reference Status of Compliance

The Borrower shall take all action that shall be necessary on its part to enable NTPC to perform its obligations under the Project Agreement, the NTPC Agreements and the Environmental and Social Plans, and shall not take or permit any action which would interfere with the performance of such obligations.

Section 4.04

Complied with.

The Government and NTPC continue to work closely to enable the company to meet all obligations as set out in the Project Agreement and Environmental and Social Plans.

The Borrower shall exercise its rights under the LHSE Subsidiary Loan Agreement and the Tri-partite Agreement in such a manner as to protect the interests of the Borrower and ADB and to accomplish the purposes of the Loan.

Section 4.05 (a)

Complied with.

No rights or obligations under the LHSE Subsidiary Loan Agreement or the Tri-partite Agreement shall be assigned, amended, abrogated or waived without the prior concurrence of ADB.

Section 4.05 (b)

Complied with.

Procurement

The procedures applied in the procurement of goods and services to be financed by NTPC out of the proceeds of the Loan shall be subject to review by ADB. In the carrying out of such review, the Borrower shall be required to satisfy ADB that procurement procedures have been applied in a transparent manner, using competitive bidding procedures, and that the goods and works procured are from ADB member countries.

Schedule 4, Para. 1

Complied with.

Institutional and Implementation Arrangements

Joint Execution by Government and NTPC The Borrower and NTPC shall work in close partnership to implement the Project pursuant to the provisions of the Concession Agreement. The sharing of responsibilities between the Borrower and NTPC shall apply in the implementation of all activities including the environmental and social mitigation measures. NTPC shall assume full responsibility for implementing the infrastructure works and shall be jointly responsible with the Borrower for the implementation of the environmental and social program. The Borrower shall be responsible for policy

Schedule 5, Para. 1

Complied with.

NTPC took full responsibility for implementing infrastructure works, and NTPC and the Government shared responsibilities in the implementation of environmental and social mitigation measures throughout implementation as per the Concession Agreement requirements.

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and regulatory issues such as the transfer of land and the issuance of titles. On behalf of the Borrower, MIH shall act as Project Executing Agency, and Lao National Committee on Energy and WMPA as Project implementing agencies. For all other purposes, including purposes relating to the Project Agreement, NTPC shall act as Project Executing Agency.

Steering Committee The Borrower shall maintain a steering committee to coordinate the action of all ministries involved with the implementation of the Project. This committee, which shall report to the Prime Minister, shall be chaired by the Minister of MIH and shall include, among others, representatives of MOF, the MAF, STEA, the Ministry of Health, the Ministry of Labour, and the Ministry of Transport, and the Deputy Governors of Khammouane and Bolikhamsay Provinces.

Schedule 5, Para. 2

Complied with.

The Government set up a Steering Committee for the implementation of the project which reported to the Prime Minister.

Environmental Management under the EAMP The entities primarily responsible for implementation of the EAMP shall be the EMO of NTPC and the Head Construction Contractor. Responsibility for monitoring the activities of the EMO and the Head Construction Contractor on behalf of the Borrower shall rest with the EMU. The EMU shall comprise officials from all key central and provincial government agencies affected by the Project and shall be established under the direction of the STEA. The EMO shall be responsible for technical planning, implementation and monitoring of all environmental mitigation and compensation measures. The EMO shall also be responsible for ensuring that the Head Construction Contractor fully meets its contractual and environmental management obligations. The EMO shall report to the EMU on a monthly basis and shall work in close cooperation with all involved agencies. The work of the Head Construction Contractor and overall implementation of the EAMP will also be subject to monitoring by the POE and an independent

Schedule 5, Para. 3

Complied with.

NTPC established an EMO, which became their Environmental and Social Division, and a laboratory for water quality and hydrobiological monitoring. The office oversaw environmental management by the Head Construction Contractor during construction and undertook all other activities to meet NTPC’s environmental and obligations in the Concession Agreement. NTPC has now restructured the department for ongoing operations.

The Government established and maintained an EMU to oversee and monitor activities in respect of the EAMP until COD plus 5 years. The responsibility for routine monitoring of the environmental impacts of NT2 has now been handed over to the DONREs with quarterly follow up by PONRE. Refer to Schedule 5, Para. 6 below.

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monitoring agency, both engaged by the Borrower, and the Lenders' Technical Advisor.

Social Development under the SDP The entities responsible for implementation of the SDP shall be the Resettlement Office of NTPC and the RMU of the Borrower. The Resettlement Committee, of which NTPC is co-director, has overall responsibility for all resettlement and compensation activities. The RMU, under the direction of the Resettlement Committee, and in close coordination with the RO, shall be responsible for jointly planning and implementing the resettlement process to achieve the targeted objectives of the SDP.

Schedule 5, Para. 4

Complied with.

The Government established a Resettlement Committee for the overall direction of resettlement, compensation and other activities. The Government also set up an RMU to work in conjunction with the NTPC Resettlement Office and other NTPC entities (Downsteam Office and Project Lands Office) which jointly implemented the resettlement, compensation and livelihood development processes and achieved the targeted objectives of the SDP.

Biodiversity Offset and Conservation under the SEMFOP The entity responsible for implementation of the SEMFOP shall be the Nakai Nam Theun WMPA under the direction of the Ministry of Agriculture and Forestry.

Schedule 5, Para. 5

Complied with. WMPA was created and was responsible for implementation of SEMFOP I and II. Refer also to Section 4.03 above.

Management of Environmental and Social Impacts

Environmental Management Unit The Borrower shall maintain the EMU under STEA, under the direction of qualified managers and staffed with competent personnel in sufficient numbers, with qualifications and experience and under terms of reference acceptable to ADB, and provided with adequate facilities and resources, having regard amongst other things to the funding provided by NTPC, all in a manner satisfactory to ADB; said Unit to be responsible, inter alia, for the activities set forth in Part 2, Section 5.1 and Part 4 of Schedule 4 to the Concession Agreement.

Schedule 5, Para. 6

Complied with. STEA was reorganized and known as WREA was restructured into MONRE in 2007. MONRE established EMU at the national and district level. After COD plus 5 years, responsibilities were delegated to the Province (PONRE), as per the Concession Agreement. PONRE undertakes monitoring in line with statutory requirements, as needed.

Resettlement Management Unit The Borrower shall maintain the RMU, including the Coordinating and Management Office for the Nam Theun 2 Reservoir, under the Resettlement Committee, under the direction of qualified managers and staffed with competent personnel in sufficient

Schedule 5, Para. 7

Complied with.

Part 1, Section 4.3 - the Government established and maintained an RMU, that was staffed and supported to a satisfactory level throughout the RIP. A total of 1,310 household were resettled to new villages on

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numbers, with qualifications and experience and under terms of reference acceptable to ADB, and provided with adequate facilities and resources, having regard amongst other things to the funding provided by NTPC, all in a manner satisfactory to ADB; said Unit to be responsible, inter alia, for the activities set forth in Part 1, Section 4.3 and Part 4 of Schedule 4 to the Concession Agreement.

the Nakai Plateau and Nakai Plateau resettlement implementation period was closed in July 2018 on the recommendation of the independent POE. The closure process included the development of a CAP which sets out medium term development priorities for Nakai Plateau and a Transition Plan which sets out the Government responsibilities after closure. The Borrower also established RMUs to work in conjunction with the NTPC Downstream Program and to undertake the activities described in Part 4 of Schedule 4 (Social Component, Downstream Areas) of the Concession Agreement. The Downstream Program was limited by cost and was closed in December 2012

District Resettlement Working Groups

The Borrower shall maintain district resettlement

working groups under the direction of the RMU, to be

responsible, inter alia, for the activities set forth in Part

1, Section 4.4 and Part 4 of Schedule 4 to the

Concession Agreement.

Schedule 5, Para. 8

Complied with.

The Government established DWGs in each District affected by the project within Khammouane and Bolikhamxai Provinces. DWGs coordinated with relevant programs with NTPC (Resettlement Office, Project Lands, and Downstream Program) for the duration of the RIPs as described in Part 1, Section 4.4 and Part 4 of Schedule 4 to the Concession Agreement.

Village Resettlement Committees The Borrower shall maintain village resettlement committees to implement the activities set forth in Part 1, Section 4.5 of Schedule 4 to the Concession Agreement.

Schedule 5, Para. 9

Complied with. The Government established Village Resettlement Committees in affected villages on the Nakai Plateau and these committees have been operational throughout the RIP representing the interests of the villagers, coordinating resettlement activities, developing village plans, and participating in the grievance procedures and undertaking other activities as described in Part 1, Section 4.5 of Schedule 4 of the Concession Agreement.

Environmental and Social Plans; Government Letter of Implementation Policy

The Borrower shall:

(a) carry out, in a manner satisfactory to ADB, all of

its obligations under the Concession Agreement,

including Schedule 4 thereto, with due regard to

Schedule 5, Para. 10

Partially complied with.

The Borrower has carried out its social and environmental obligations under the Concession Agreement in a manner satisfactory to ADB. The EMP included requirements for compensatory forestry, which is currently under implementation.

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the findings, reports and recommendations of the

Environmental Assessment and Management

Plan, the Social Development Plan and the Social

and Environmental Framework and the First

Operational Plan and the Government Letter of

Implementation Policy; and

in order for ADB to determine that the provisions set forth in sub-paragraph (a) of this paragraph 10 are carried out satisfactorily, the Borrower shall:

(i) maintain policies and procedures

adequate to enable it to monitor and

evaluate, in accordance with guidelines

and indicators acceptable to ADB, the

implementation of the Concession

Agreement, the Government Letter of

Implementation Policy, the Additional

Plans, and the Annual Implementation

Plans, and the achievement of their

respective objectives; and

(ii) to this end, by no later than 30 June

2005, engage the services of an

Independent Monitoring Agency or

Independent Monitoring Agencies with

qualifications and experience and under

terms of reference acceptable to ADB.

The Borrower-appointed POE and IMA have provided comprehensive monitoring and evaluation of the performance of the Borrower, NTPC and HCC in respect of Concession Agreement, Government Letter of Implementation Policy, AIP and Additional Plans. The IMA has undertaken regular monitoring and reporting on compliance with the environmental and social obligations of NTPC and the Borrower and WMPA’s implementation of the SEMFOP.

Resettlement Area Without limitation on the other provisions of this Schedule 5, the Borrower shall:

Schedule 5, Para. 11

Complied with.

There has been no significant influx of outsiders into the Resettler Communities. Government District and Village Authorities have taken

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(a) take all such steps as are reasonably necessary to ensure that no persons other than PAPs are permitted to occupy the resettlement area except in accordance with the provisions of Part 1, Sections 8.7.3 and 8.7.4 of Schedule 4 to the Concession Agreement; and (b) revise, by no later than 1 May 2006, the urban plans of Gnommalat and Oudomsouk Towns and any other towns in the Nakai Plateau likely to receive a significant influx of population arising out of construction activities under the Project.

reasonable steps to ensure that no persons other than PAPs occupy the resettlement area. Population influx was managed by construction of fully self-sufficient workers camps located at Gnommalath, Oudomsouk and near the main dam site. The Health Impact Plan evaluated potential impacts from workers camp. The Government and NTPC carried out a Public Health Program minimizing impacts from the construction and camp-follower communities.

Downstream Areas The Borrower shall: (a) by no later than 30 June 2005, cause to be contracted by NTPC qualified consultants for designing the downstream activities in accordance with Part 4 of Schedule 4 to the Concession Agreement and the SOP, and in a manner satisfactory to ADB; and (b) by no later than 30 June 2006, cause NTPC to provide to ADB for its review and comment a detailed downstream mitigation/compensation plan, in compliance with Part 4 of Schedule 4 to the Concession Agreement, and thereafter implement such plan as shall have been agreed with ADB, in a manner satisfactory to ADB.

Schedule 5, Para. 12

Complied with.

Qualified staff and consultants were contracted by NTPC and downstream activities were designed and presented in the Downstream Implementation Plan (April 2008). Downstream Implementation Plan was submitted, reviewed and uploaded on NTPC website in April 2008, and thereafter implemented in a satisfactory manner.

Additional Land In the event that any additional land is required either permanently or temporarily during Project implementation for construction and/or operation of the NT2 Hydroelectric Power Facility under Part A of the Project or under any other Part of the Project, the

Schedule 5, Para. 13

Complied with.

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Borrower shall take all such action as shall be necessary to cause NTPC to: (a) apply the mitigation principles and measures and provide to the Project Affected Persons compensation, resettlement and rehabilitation entitlements in accordance with the principles and objectives set forth in Part 1 of Schedule 4 to the Concession Agreement and the relevant Additional Plan; (b) undertake timely informed consultation with the Project Affected Persons and make publicly available the plans designed to provide the required compensation and entitlements; and (c) promptly notify ADB of such occurrences and furnish the plans prepared to ADB.

Following very high in-flows in 2011, NTPC reevaluated the discharge capacity of the Regulating Dam and concluded that the spillway needed to be enlarged to safely discharge large floods. NTPC undertook an Initial Environmental Assessment which included an analysis of alternatives, social and environmental impact analysis, design of mitigation methods and community consultation and includes a RAP. There was no resettlement, but eight households were compensated for land acquisition as documented in the RAP completion report. Public consultations, and alternative access was provided for households affected by the extension of the Regulating Dam spillway. ADB was notified of the additional land required for the spillway and furnished with related plans and documents.

Project Affected Persons in Downstream Areas In the event that the compensation and mitigation program for the Downstream Areas exceeds the allocated budget provided for in Schedule 4 to the Concession Agreement, the Borrower shall take or cause to be taken such action as shall be necessary to: (a) apply the mitigation principles and measures and provide to the Project Affected Persons compensation and rehabilitation entitlements in accordance with the principles and objectives set forth in Part 1 of Schedule 4 to the Concession Agreement and the relevant Additional Plan; and to this end, shall (b) undertake informed consultation with the Project· Affected Persons and make publicly available

Schedule 5, Para. 14

Complied with.

The Downstream Program was implemented during 2006–2012. The Downstream Program provided compensation for loss of riverbank gardens, community compensation in the form of shares in the Village Income Restoration Fund, livelihood assistance, water supply and sanitation projects, as well as assistance to the government health systems in the Downstream Areas. An additional one-year transition with extra funding of $2.3 million allocated by NTPC was undertaken to provide cash compensation to hinterland villages with only minor impacts on income from the project.

Responsibility for downstream program has been handed over from NTPC to the Government. Impacts will be monitored on an ongoing basis through the Adaptive Management committee and grievance redress mechanism.

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the plans designed to provide the required entitlements; and (c) promptly notify ADB of such occurrences and furnish the plans prepared to ADB.

Extensive public consultation was undertaken prior to the project and documented in the SDP. Further public consultation was undertaken prior to cash compensation payments being made in 2012 as part of the extension to the Downstream Project. ADB was notified of the extension to DSP and participated in discussion relating to the design of the extension period.

SEMFOP and WMPA The Borrower shall: (a) carry out and/or cause to be carried out the Social and Environmental Management Framework and First Operational Plan in a manner satisfactory to ADB and designed to ensure that the Nam Theun 2 Watershed Area will be conserved, protected and maintained in accordance with Decree 25, as amended and re-stated by Decree 39, and to this end (i) by no later than 30 June 2005, engage or cause to be engaged technical assistance consultants for WMPA, and (ii) by no later than 30 June 2005, cause WMPA to provide to ADB a satisfactory time-bound plan to hire staff for all positions identified in the SEMFOP and thereafter appoint all such staff in accordance with said plan; (b) take all necessary action to maintain WMPA, with sufficient responsibility and authority, in accordance with Decree 25 as amended and re-stated by Decree 39, under the direction of qualified managers, staffed with competent personnel in sufficient numbers, and provided with adequate resources, to enable WMPA to manage the Nam Theun 2 Watershed Area and to implement the SEMFOP; (c) provide, and cause to be provided, to ADB for its prior concurrence any revision or amendment

Schedule 5, Para. 15

Partially complied with.

SEMFOP was issued in 2000, updated in 2003, 2004, and 2005 based on the updated Nakai Nam Theun National Biodiversity Conservation Area Management Plan and updated Operational Plan. SEMFOP I was not implemented in a satisfactory manner.

Watershed protection under SEMFOP I was an ambitious goal of the project, and SEMFOP I and II did not achieve their aims due to institutional weaknesses in WMPA which was formed for SEMFOP implementation. Ongoing discussions have led to the repositioning of WMPA under MAF and to a program of institutional reform as the first part of SEMFOP III. WMPA was required to appoint a technical consortium – the COTE. SEMFOP II was issued to ADB for review in 2011, and a third SEMFOP was developed in 2017 for implementation over 2018–2022. The Government recruited staff in accordance with Decree 25 and the subsequent Decree 39, however, the management were not suitably competent or qualified to achieve the objectives of SEMFOP for the NNT-PA and NT2 watershed. COTE and NGOs signed a contract with the new WMPA Board in October 2017 to strengthen the capacity and performance of WMPA through the joint delivery of the 5-year plan’s components and outcome indicators. Recruitment of additional WMPA staff is ongoing with IUCN assistance and is expected to be completed in June 2019.

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proposed to be introduced into the SEMFOP and/or Decree 39, in order to achieve its objectives, and thereafter introduce, and cause to be introduced, such revision or amendment into the SEMFOP and/or Decree 39, as shall have been agreed with ADB; (d) maintain policies and procedures adequate to enable it to monitor and evaluate, in accordance with guidelines and indicators acceptable to ADB, the implementation of the SEMFOP, and the achievement of its objectives, and to that end prepare and provide to ADB for its review a draft second Operational Plan, by no later than 31 December 2010, and promptly after receiving comments from ADB adopt and implement such second Operational Plan satisfactory to ADB; and (e) promptly (i) notify ADB of any material transgressions with respect to admissible land uses and activities as set forth in Decree 39 and (ii) take all actions as may be reasonably necessary to correct such transgressions.

The Borrower shall: (a) carry out the institutional strengthening program for WMPA, as contemplated by the SEMFOP, satisfactory to ADB; (b) cause WMPA to implement, with specific plans, budget and timetable, the compensatory forestry program introduced into the SEMFOP in accordance with the requirements of ADB's forestry policy; and (c) by no later than 1 May of each year, commencing in 2005, prepare, or cause to be prepared, and provide to ADB for its review and comment, an Annual Implementation Plan, and

Schedule 5, Para. 16

Complied with.

Following significant concerns with the performance of WMPA including its financial mismanagement, the Government terminated contracts with the majority of WMPA staff, and as part of SEMFOP III, significant improvements in administration and fiduciary management are being put in place. EAMP and SEMFOP included a requirement for 28,700 ha of compensatory forestry restoration and reforestation. It was envisaged that this would be carried out in degraded forest areas on the Nakai plateau or watershed areas, but suitable areas were not available in the project area. MAF undertook 300,000 ha of reforestation in Lao PDR since 2008, of this 38,960 ha (the majority financed by NT2 revenue, ADB or the Government) was assessed as meeting eligibility criteria under ADB Forestry Policy (1995), as originally set out in the NT2 EAMP (present crown cover less than 20%; potential for good regeneration – a mixture of

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thereafter implement said Annual Implementation Plan giving due regard to ADB's views thereon.

species is available on the ground; and low human pressure on the areas). This is comprised of 21,066 ha of reforestation activities that have already been completed and 17,894 ha where there is a realistic chance of achievement between 2018 and 2022. AIPs have been provided to ADB.

Social and Environmental Panel of Experts The Borrower shall maintain the Panel of Experts as a permanent standing body throughout the concession period, in accordance with the terms of the Concession Agreement.

Schedule 5, Para. 17

Complied with.

28 POE Reports have been prepared between 1997 and 2018.

Dam Safety Review Panel The Borrower shall maintain through the sixth anniversary of the Commercial Operations Date the Dam Safety Review Panel, in accordance with clause 29 of the Concession Agreement.

Schedule 5, Para. 18

Complied with.

The Dam Safety Review Panel reported through the 6th anniversary of the Commercial Operations Date in accordance with the Concession Agreement. A total of 11 reports were produced since 2006. The last and final report was prepared in May 2016 with the main conclusion that the project is safe both in design and operation and followed state-of-the-art Operations and Maintenance procedures and satisfactory records are maintained.

Reports of the POE and the DSRP The Borrower shall promptly provide to ADB a copy of each report prepared by the Panel of Experts and the Dam Safety Review Panel.

Schedule 5, Para. 19

Complied with.

All POE and DSRP reports have been provided to ADB.

Community Forestry Management Plan By no later than 15 May 2005, the Borrower shall cause NTPC to prepare and to provide to ADB for its review and comment a community forestry management plan for the Resettlement Area; and thereafter implement such plan as shall have been agreed with ADB, in a manner acceptable to ADB.

Schedule 5, Para. 20

Complied with.

The Community Forestry Management Plan was implemented but did not have the expected levels of revenue generation for resettlement communities. The Forestry Management Plan was updated in 2018, including hamlet-level community forest plans. The CAP includes medium term development plan actions for forestry livelihoods. POE and LTA have accepted this approach.

Salvage Logging Plan By no later than 31 October 2005, the Borrower shall prepare and provide to ADB for its review and comment a salvage logging plan, and thereafter implement such plan as shall have been agreed with ADB, in a manner acceptable to ADB.

Schedule 5, Para. 21

Complied with.

The survey of biomass was undertaken by the Government’s National Forest Inventory and Planning Department. The issue was closed out by IMA No. 5.

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Revenue Management

The Borrower shall: (a) maintain the NT2 Revenue Account described in the NT2 Revenue Management Program in accordance with its undertakings set forth therein; (b) take all such steps as are necessary to ensure that all NT2 Revenues are deposited into the NT2 Revenue Account; and (c) apply all resources in the NT2 Revenue Account exclusively for (i) additional funding for Eligible Programs as described in the NT2 Revenue Management Program, (ii) any repayments (principal and interest) and related charges arising out of loans and grants made to the Borrower and re-lent to LHSE to finance its equity in NTPC, and (iii) expenditures related to the exercise of the Borrower's rights and the performance of its obligations under the Concession Agreement and the Environmental and Social Plans.

Schedule 5, Para. 22

Complied with.

NT2 revenues maintained by MOF and allocated and utilized for poverty reduction and environment conservation programs.

The Borrower shall: (a) commencing with the State Budget for Fiscal Year 2008, and for each Fiscal Year thereafter, prepare a summary budget including therein details of projected NT2 Revenues, their allocation to Eligible Programs and total expenditures on Eligible Programs for such Fiscal year, and publish the summary budget within sixty days of its approval by the National Assembly; (b) commencing in Fiscal Year 2008 and thereafter, (i) prepare budget execution reports and annual financial statements and undertake audits of Eligible Programs; and (ii) make publicly available said reports, statements and audit reports in a manner and substance satisfactory to ADB;

Schedule 5, Para. 23

All requirements complied with: These activities did not commence in 2008 and were not being completed in a comprehensive manner until 2015. The Government initially did not identify and report all revenue streams over the period 2010–2017. By the end of 2017 the Government had allocated 100% of accumulative net revenues (approximately $180 million) from all revenue streams. The Borrower met its financial reporting obligations towards project completion with the assistance of the World Bank.

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(c) commencing in Fiscal Year 2006, and every second Fiscal Year thereafter, (i) jointly with the IDA and ADB carry out public expenditure reviews and public expenditure tracking surveys under terms of reference acceptable to IDA and ADB; and (ii) promptly upon completion of such reviews and surveys, make publicly available the results thereof in a manner and substance satisfactory to IDA and ADB; (d) undertake an audit peer review of the Borrower's State Audit Organization in accordance with INTOSAI standards in Fiscal Year 2006, in the fiscal year in which the Borrower first receives revenues from the NT2 Hydroelectric Power Facility, and every third year thereafter, by a supreme audit institution which is a member of the INTOSAI and acceptable to IDA and ADB, and make publicly available a summary report of said peer review in a manner and substance satisfactory to IDA and ADB; and (e) prepare: (i) commencing in September 2005 through September 2009, an annual PEMSP work plan for the forthcoming Fiscal Year, including therein a technical assistance plan and training plan; and (ii) commencing in September 2005, biannual PEMSP progress reports in a manner and substance satisfactory to IDA and ADB.

The Borrower shall: (a) (i) monitor and evaluate on an ongoing basis, in accordance with indicators satisfactory to ADB, progress in carrying out the Program and the Project and the achievement of their objectives; (ii) provide representatives of ADB access to data, personnel and documentation needed to assess progress in the implementation of the Program and the Project,

Schedule 5, Para. 24

All activities complied with.

There was a two-year delay in complying with items (a) (i) - (iv). Several of the semi-annual E&S reports were not all disclosed on NTPC website in a timely manner. Under the intensive monitoring that was undertaken by ADB during 2016–2018, ADB worked with NTPC to ensure that missing reports were uploaded.

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including the implementation of the revenue and expenditure management arrangements, the financial control environment and the performance of Eligible Programs; (iii) commencing in 2006, provide ADB with semi-annual reports on the progress achieved in carrying out the Program and the Project, in such detail as ADB shall reasonably request, and (iv) promptly thereafter, make publicly available each such report in a manner and substance satisfactory to ADB; (b) no later than six months prior to the expected Commercial Operations Date, review with ADB the progress achieved in the implementation of the Program and the Project; (c) commencing in 2006, hold an annual consultative review on the matters referred to in sub-paragraph (a) of this Section, with the participation of NTPC, international financial institutions participating in the financing of the NT2 Hydroelectric Power Facility, and local and international civil society; and (d) afford to representatives of ADB, and including the Lenders' Technical Adviser, all reasonable access to information needed to assess progress in implementing the Program and all reasonable opportunities to have access to the area of the Project.

ADB = Asian Development Bank; AIP = annual implementation plan; CAP = comprehensive action plan; COD = commercial operation date; COTE = consortium of technical experts; DONRE = District Office of Natural Resources and Environment; DSRP = dam safety review panel; DWG = district working group; EAMP = environmental assessment and management plan; EMO = Environmental Management Office; EMU = Environmental Management Unit; E&S = environment and social safeguards; HCC = head construction contractor; IDA = International Development Association; IMA = independent monitoring agent; INTOSAI = International Organization of Supreme Audit Institutions; IUCN = International Union for Conservation of Nature; LHSE = Lao Holding State Enterprise; LTA = lenders’ technical adviser; MAF = Ministry of Agriculture and Forestry; MIH = Ministry of Industry and Handicrafts; MOF = Ministry of Finance; MONRE = Ministry of Natural Resources and Environment; NT2 = Nam Theun 2; NTPC = Nam Theun 2 Power Company Limited; PAP = project affected persons; PEMSP = public expenditure management strengthening program; POE = panel of experts; PONRE = Provincial Office of Natural Resources and Environment; RAP = resettlement action plan; RIP = resettlement implementation period; RMU = Resettlement Management Unit; SDP = social development plan; SEMFOP = Social and Environmental Management Framework and First Operational Plan; STEA = Science, Technology and Environment Agency; WMPA = Watershed Management and Protection Authority; WREA = Water Resources and Environmental Agency.

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Financial Covenants

(a) NTPC shall establish and maintain a financial management system, including records and accounts, and prepare financial statements, in accordance with consistently applied accounting standards acceptable to ADB, adequate to reflect its operations and financial condition and to register separately the operations, resources and expenditures related to the Project. (b) NTPC shall: (i) have its financial statements (balance sheets, statements of income and expenses and related statements) audited for each fiscal year; (ii) furnish to ADB as soon as available, but in any case not later than six months after the end of each such year (or such other period agreed to by ADB, (A) certified copies of the financial statements referred to in paragraph (a) of this Section, for such year (or such other period agreed to by ADB), as so audited, and (B) an opinion on such statements by said auditors, in scope and detail satisfactory to ADB, said opinion to include confirmation that the Loan has been applied towards ADB Eligible Costs; and (iii) furnish to ADB such other information concerning such records and accounts and the audit of such financial statements, and concerning said auditors, as ADB may from time to time reasonably request. (c) NTPC shall enable ADB, upon ADB's request, to discuss NTPC's financial statements and its financial affairs from time to time with NTPC's auditors, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the

Section 4.01

All requirements complied with.

NTPC audited financial statements from 2005 to 2011 were furnished as required and discussed during IFI missions.

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presence of an authorized officer of NTPC unless NTPC shall otherwise agree.

(a) Without limiting NTPC's reporting obligations under the Common Terms Agreement and those set out in Part B of the Schedule to this Project Agreement, NTPC shall prepare and furnish to ADB a FMR, in form and substance satisfactory to ADB, which: (i) sets forth sources and uses of funds for those Parts of the Project for which NTPC is responsible both cumulatively and for the period covered by said report, showing separately funds provided under the Loan, and explains variances between the actual and planned uses of such funds; (ii) describes physical progress in Project implementation in those Parts of the Project for which NTPC is responsible, both cumulatively and for the period covered by said report, and explains variances between the actual and planned such Project implementation; and (iii) sets forth the status of procurement under those Parts of the Project for which NTPC is responsible, as at the end of the period covered by said report. (b) The first FMR shall be furnished to ADB not later than 45 days after the end of the first calendar quarter after the Effective Date, and shall cover the period from the incurrence of the first expenditure under the Project through the end of such first calendar quarter; thereafter, each FMR shall be furnished to ADB not later than 45 days after each subsequent calendar quarter until the date falling six (6) months after the Loan has been fully disbursed,

Section 4.02

All requirements complied with.

FMR information contained in NTPC’s monthly reports and discussed during IFI missions.

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and shall cover the period not covered by the previous FMR until the end of such calendar quarter.

A. Environmental and Social

NTPC shall implement all its obligations under (i) the Concession Agreement, including Schedule 4 Parts 1, 2 and 4, and (ii) the Common Terms Agreement, including Schedule 11, in each case in a manner consistent with the Social Development Plan and the Environmental Assessment and Management Plan, and having due regard to the findings, reports and recommendations of the Environmental and Social Plans referred to in clause 30.1(b)(i) of the Concession Agreement. To this end NTPC shall:

Schedule, Para. 1

Complied with. The plans were implemented as planned, with NTPC paying line-by-line attention to the concession agreement requirements. NTPC established an EMO, which became their Environmental and Social Division, and a laboratory for water quality and hydrobiological monitoring. The office oversaw environmental management by the Head Construction Contractor during construction and undertook all other activities to meet NTPC’s environmental and obligations in the Concession Agreement. NTPC has now restructured the department for ongoing operations. NTPC prepared a CEMMP in 2010 in accordance with the Concession Agreement requirements for operating the plant, updated the CEMMP in 2014, and has adopted an Environment Management System, which is certified to ISO-14001 and annually reviewed. NTPC established the Nakai Resettlement Office, Project Lands Program and Downstream Program and undertook all necessary activities to fulfil its obligations under the Concession Agreement to the satisfaction of the POE which recommended closure of the Resettlement Implementation Period in June 2018. The closure process included the development of The Comprehensive Action Plan which sets out medium term development priorities for Nakai Plateau and the Transition Plan which sets out the Government responsibilities after closure.

(a) ensure that the Head Construction Contractor implements the Head Construction Contract Environmental Mitigation and Management Plan in compliance with the Concession Agreement, including Schedule 4 to said Concession Agreement;

Schedule, Para. 1

Complied with.

Regular monitoring of Head Contractor activities was undertaken by NTPC EMO up to COD, documented through regular inspection reports and in the environment section of the NTPC quarterly progress reports. This was checked by the LTA throughout the construction period. There were challenges with the HCC and subcontractor performance relating to environmental, health and safety management in the early stages of

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construction, erosion around sites, biomass clearance in the reservoir area, and solid waste management. Ongoing impacts from site effluents dissipated with the completion of construction.

(b) prepare and provide to ADB a PIP satisfactory to ADB and, thereafter, implement said PIP in accordance with its terms;

Schedule, Para. 1

Complied with. The Project Implementation Plan (2005) documents how NTPC will implement its environmental and social obligations. Plans are updated annually through an AIP.

(c) prepare and provide to ADB the Additional Plans, and thereafter implement said Additional Plans in accordance with their Terms.

Schedule, Para. 1

Complied with. 5 Social Additional Plans (RAPs) were prepared: updated project lands resettlement plans for areas of impact or compensation within each type of Project Lands, Oudomsouk updated project lands resettlement plans, Downstream Channel updated project lands resettlement plan, Transmission Lines updated project lands resettlement plans, Downstream areas implementation plan. An additional RAP (incorporated within the Initial Environmental Impact

Assessment) was prepared for the expansion of the spillway for the

Regulating Dam following the 2011 floods.

6 Environmental Additional Plans were prepared: Fish impacts in upstream and downstream rivers plan, Terrestrial animals in the inundation area plan, Asian elephant program plan, Transitional strategy for reservoir impoundment plan, Wetland conversion and formation plan, Optimization of reservoir operations, including consideration of biomass removal in addition to salvage logging.

(d) on or before 1 March of each year, prepare. and provide to ADB an Annual Implementation Plan, incorporating therein the provisions of any applicable Additional Plan, and thereafter implement each such Annual Implementation Plan in accordance with its terms;

Schedule, Para. 1

Complied with. AIPs have been issued annually, 2005 to 2016, setting out key activities and environmental and social programs for the year. LTA reviews and provides comments on the draft AIP prior to issuance.

(e) not amend, suspend, waive or abrogate the PIP, any Additional Plan, any Annual Implementation Plan, or any provision thereof, if such amendment,

Schedule, Para. 1

Complied with.

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suspension, waiver or abrogation would result in a breach of NTPC's obligations under the Concession Agreement, including Schedule 4 to said Concession Agreement, and the Common Terms Agreement, including Schedule 11 to said Common Terms Agreement, without the prior concurrence of ADB;

There have been no breaches of NTPC’s obligations without the prior concurrence of IFIs.

(f) for the purposes of managing its social and environmental obligations under the Project, establish and maintain a Resettlement Office and an EMO, each of said Offices to be under the direction of qualified managers, staffed with competent and experienced personnel in sufficient numbers and provided with adequate resources, consistent with the terms of the Concession Agreement;

Schedule, Para. 1

Complied with. As reported in the AIPs and the progress reports, NTPC established and maintained a Resettlement Office and an EMO. The staffing of these offices evolved, as indicated in the progress reports, over the course of the project. This is also confirmed in the IMA compliance review reports. NTPC maintained the Resettlement Office and EMO until June 2018 to ensure a smooth transition period.

(g) prepare and make publicly available semi-annual social and environmental reports on the Project;

Schedule, Para. 1

Complied late. NTPC prepared semi-annual and annual E&S monitoring reports. Initially these reports were not made publicly available. ADB raised the matter in 2017 and received all reports for disclosure. E&S reports are now routinely uploaded to ADB and NTPC websites, and all previous reports are publicly available except for semi-annual reports for the period July 2007 to June 2010.

(h) take all such action as may be necessary to acquire as and when needed all such land and rights in respect of land as shall be required for carrying out its obligations under the Project;

Schedule, Para. 1

Complied with. All land requirements identified and met in line with Concession Agreement.

(i) prepare RAPs for all Project lands, including baseline studies, and, jointly with the Borrower, conclude compensation agreements prior to the handover of said land;

Schedule, Para. 1

Complied with. 5 RAPs were prepared covering all land requirements for the Project. RAP preparation included baseline studies. Extensive consultations were undertaken with Nakai Resettlers and households affected by land acquisition for construction. Compensation agreements, including unit rates for land acquisition, were agreed prior to land acquisition.

(j) take all such action as may be necessary in accordance with the Concession Agreement to

Schedule, Para. 1

Complied with.

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Project Agreement Covenants Reference Status of Compliance

provide compensation and assistance to restore or improve income levels and living standards of Project Affected Persons;

The Nakai Resettlement Office, Project Lands Office and the Downstream Program provided agreed compensation to all PAP households affected by land acquisition and undertook livelihood development programs to restore incomes to pre-project levels. Nakai- POE accepted that Nakai Resettler Households had restored their livelihoods above pre-project levels and had reached both village and household income targets when they recommended RIP closure in June 2018. NT2DF will continue to provide support to livelihoods, education and vulnerable households. Project Lands- RAPs were completed and closed by November 2017 (spillway extension). Spillway RAP Closure Report publicly available on the NTPC web site (2109). Downstream- Compliant and closed. Comparison of 2001 baseline data against 2014 data shows incomes are restored to pre-project level Watershed- 5000 AHs (ethnic minorities) have had limited benefits from the project in which alternative livelihoods were supposed to be provided. Actions have been identified in SEMFOP III’s community engagement framework, with a specified budget. The Lao Expenditure and Consumption Survey V – Poverty Analysis indicates poverty levels in Nakai Plateau decreased between 2002/03 and 2012/13

(k) jointly with the Borrower take all measures necessary to implement the RAPs developed for the Project, and ensure that all Project Affected Persons are compensated and resettled in accordance with the requirements of said RAPs;

Schedule, Para. 1

Complied with. NTPC, in association with the Government undertook all measures to implement each of the RAPs, as described above. All Project Affected Persons were compensated and successfully resettled. All RAP closure reports available on the NTPC web site. The Lao Expenditure and Consumption Survey V – Poverty Analysis indicates poverty levels in Nakai Plateau decreased between 2002/03 and 2012/13.

(l) cause any update of a RAP to be prepared in full consultation with Project Affected Persons and disclosed to those Project Affected Persons prior to it being presented to ADB for approval;

Schedule, Para. 1

Complied with.

An additional RAP was included in the Initial Environmental Assessment for the redesign of the spillway for the Regulating Dam in full consultation with affected communities. Eight households were provided

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Project Agreement Covenants Reference Status of Compliance

cash compensation payments as described in the RAP Closure Report which is publicly available on the NTPC web site.

(m) cause appropriate livelihood restoration plans to be prepared for non-land-based options in those cases where sufficient land is not available for displaced persons whose livelihoods are land-based and for whom a land-based resettlement strategy is the preferred option, such livelihood restoration plans to be adequately financed and to include adequate support and technical assistance and monitoring;

Schedule, Para. 1

Complied with.

Livelihood restoration programs included non-land-based options for all households (Nakai Resettlers, Project Lands, Downstream). These options included fishing (Nakai Resettlers), small livestock, vocational training, business development, aquaculture, frog-raising etc. No replacement land was available for households affected by land acquisition for construction purposes (Project Lands). Project Lands households with minor impacts were provided with cash compensation, household with greater impacts were provided with a combination of livelihood assistance and final cash compensation.

(n) cause the arrangements to establish and maintain the SERF to be developed by NTPC and the Borrower in accordance with the Concession Agreement by the Commercial Operations Date;

Schedule, Para. 1

Complied with. SERF was established in 2011. An Executive Committee was put in place to manage the SERF and operational procedures developed by the Resettlement Committee. Support has been provided by NTPC and the World Bank Khammoune Development Program to develop the required capacities to manage the fund.

(o) prepare, jointly with the RMU and the Resettlement Committee and working through district resettlement working groups, village development plans, including location options, through a consultative and participatory approach;

Schedule, Para. 1

Complied with. Village Development Plans were prepared in 2013 and were implemented from 2014. The VDP Planning process has been updated and will be utilized for the French Development Agency/NT2DF Program.

(p) cause, in accordance with the Concession Agreement, fully serviced resettlement sites to be prepared prior to relocation with civic infrastructure, domestic and irrigation water supply, electricity supply, and village consolidation plans which incorporate soil capability assessments;

Schedule, Para. 1

Complied with. The project constructed 16 fully serviced resettlement villages on the Nakai Plateau. Each village was supplied with all community infrastructure described in the Concession Agreement, including all-weather access roads, markets, village hall, electricity supply, domestic water, farm plots with road access, and irrigation water supply. Irrigation water has been supplied in accordance with the Concession Agreement though the farm plots on the Nakai Plateau are not well suited to irrigation, due to poor quality of soils, topographic relief, limited supply of groundwater, and cost of pumping. Gulley dams were constructed in

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Project Agreement Covenants Reference Status of Compliance

2013 and 2014 to provide an alternative source of irrigation water but were not yet in use in 2014. In 2016, all villages had not been provided with gulley dams as per the Concession Agreement obligation.

(q) prepare, not later than 18 months after the Effective Date and in accordance with the Concession Agreement, an updated RAP for (i) non­ fisheries impacts along the Xe Bang Fai, and (ii) fisheries impacts in the Downstream Areas, said Plan to be approved by the Borrower and ADB. NTPC, jointly with the Borrower, shall begin implementation of said Plan promptly after approval; after the Commercial Operations Date, the updated Plan shall be further updated after actual impacts become known through monitoring;

Schedule, Para. 1

Complied with. The Downstream Implementation Plan was finalized in2008. Updates to the plan were provided within the Annual Implementation Plan until closure of the program in 2012.

(r) provide adequate resources for the establishment, maintenance and operation of the Panel of Experts and the Dam Safety Review Panel in accordance with the provisions of the Concession Agreement, and for the Lenders' Technical Adviser in accordance with the provisions of the Common Terms Agreement;

Schedule, Para. 1

Complied with.

NTPC has provided these resources. There have been numerous visits, financed by NTPC, to the project areas and features as follows:

• The E&S Panel of Experts undertook 28 missions from 2005 to 2018, and will not continue to report, though the Government has the option to call for a POE review at any time.

• The DSRP undertook annual missions from 2006 to 2016 and has now disbanded.

• The LTA visited 39 times from 2005 to 2018 and will continue to report to the commercial lenders through the concession period.

(s) provide annual funding, in accordance with the provisions of Schedule 4 to the Concession Agreement, for (i) the institutional development program, (ii) the operation of the Watershed Management and Protection Authority, and (iii) monitoring and evaluation, all in accordance with the provisions laid down under the Project;

Schedule, Para. 1

Complied with. NTPC has provided annual funding to the WMPA as per Schedule 4 of the Concession Agreement. Independent monitoring was undertaken, and funded by NTPC, for the environment program, the project lands, the downstream program, the Nakai plateau resettlement and the WMPA.

(t) provide funding, in accordance with the provisions of Schedule 4 to the Concession Agreement, for the program of activities designed to strengthen

Schedule, Para. 1

Complied with.

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Project Agreement Covenants Reference Status of Compliance

the capacity of the Resettlement Management Unit; and

NTPC provided funding for the RMU to fully operate in accordance with the terms of the Concession Agreement including programs designed to strengthen the capacity of the RMU.

(u) not take any action which would prevent or interfere with the performance by the Borrower of its obligations under the Concession Agreement including Schedule 4 to the Concession Agreement, the Project Implementation Plan, any Additional Plan or any Annual Implementation Plan.

Schedule, Para. 1

Complied with. Monitoring of compliance with the Concession Agreement obligations was undertaken by the IMAs and the LTAs.

B. Monitoring and Evaluation

NTPC shall provide all required assistance to the Lenders' Technical Adviser within the scope of the Lenders' Technical Adviser's mandate to prepare reports for the benefit of ADB, through the party engaged as an intercreditor agent pursuant to the terms of the Common Terms Agreement. Such reports shall analyze and comment on all reports and information provided to the Lender's Technical Adviser by NTPC, and in particular shall:(i) monitor NTPC's environmental and social obligations, and (ii) audit reports in respect of the Borrower's obligations submitted by the Independent Monitoring Agency contracted by NTPC in respect of the Borrower's obligations to manage those parts of the Watershed Areas funded by NTPC pursuant to clauses 5.4 and 5.5 of Part 3 of Schedule 4 to the Concession Agreement.

Schedule, Para. 2

Complied with. LTA was contracted and provided reports on an ongoing basis and will continue to do so. The Lenders’ Technical advisor undertook 28 site visits with associated reports. The LTA were provided with all relevant social and environmental monitoring reports which are further summarized and reported in the semi-annual social and environmental reports prepared by NTPC

NTPC shall: (a) maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with appropriate indicators, the carrying out of the Project and the achievement of the objectives thereof;

Schedule, Para. 3

Complied with. Environmental: NTPC established and maintains comprehensive monitoring, for example of water quality, and will continue to monitor its environmental commitments through its Quarterly Socio-Economic Monitoring Survey system, semi-annual reports, and LTA reports. Social – NTPC undertook internal monitoring of activities undertaken by the Nakai Resettlement Office, the Downstream Program and Project

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Project Agreement Covenants Reference Status of Compliance

Lands. Activities and outputs were reported in the semi-annual social and environmental reports. NTPC also undertook monitoring of socio-economic outcomes (household income, consumption and other proxy indicators of wellbeing) for Nakai Resettlers, Project Land and the Downstream Program.

(b) prepare and furnish to ADB the various reports required under the Common Terms Agreement integrating the results of the monitoring and evaluation activities performed pursuant to sub-paragraph (a) above, on the progress achieved in the carrying out of the Project during the period preceding the date of said report (s), and setting out the measures recommended to ensure the efficient carrying out of the Project and the achievement of the objectives thereof during the period following such date;

Schedule, Para. 3

Complied with. NTPC produced Annual Implementation Plans, monthly construction reports including construction progress, environmental and social reports during the construction period to the satisfaction of the ADB. NTPC is currently producing quarterly, semi-annual and annual environmental and social reports that summarize the results of monitoring undertaken, to the satisfaction of the ADB.

(c) maintain an internal resettlement monitoring system, with suitably qualified staff in established cells for each impact zone, and with suitable logistical arrangements; and

Schedule, Para. 3

Complied with. Monitoring team established for each impact zone for key components (fish catch monitoring, livelihood program monitoring, GRM, etc) in line with DSIP and RAPs were maintained. A database system and document control system were established.

(d) prepare, on the basis of guidelines acceptable to ADB and furnish to ADB not later than 30 November 2016, or such later date as may be agreed for this purpose between ADB and NTPC, a plan for the future operation of the Project and afford ADB a reasonable opportunity to exchange views with NTPC on said plan.

Schedule, Para. 3

Complied with.

For environmental management, NTPC prepared a CEMMP in 2010 in accordance with the Concession Agreement requirements for operating the plant, updated the CEMMP in 2014, and has adopted an Environment Management System, which is certified to ISO-14001 and annually reviewed.

ADB = Asian Development Bank; AIP = annual implementation plan; CEMMP = company environmental management and monitoring plan; COD = commercial operation date; DSIP = downstream implementation program; EMO = Environment Management Office; E&S = environment and social safeguards; FMR = financial monitoring report; GRM = grievance redress mechanism; HCC = head construction contractor; IFI = international financial institution; IMA = independent monitoring agent; LTA = lender’s technical adviser; NT2DF = Nam Theun 2 Development Fund; NTPC = Nam Theun 2 Power Company Limited; PIP = project implementation plan; POE = panel of experts; RAP = resettlement action plan; RIP = resettlement implementation period; RMU = Resettlement Management Unit; SEMFOP = Social and Environmental Management Framework and First Operational Plan; SERF = Social and Environmental Remediation Fund; VDP = village development plan; WMPA = Watershed Management and Protection Authority.

Appendix 11 105

PROJECT DESCRIPTION 1. The Nam Theun 2 Hydroelectric Power Project has a capacity of 1,070 megawatt (MW). It is located on the Nam Theun River in the central region of the Lao People’s Democratic Republic (Lao PDR), and is a transbasin project, diverting waters into the Xe Bang Fai River. Both rivers are tributaries of the Mekong River. Four turbines provide about 995 MW of capacity for export to Thailand, and two turbines provide 75 MW capacity for domestic use. Table 1 lists key data, Figure 1 shows the project in cross-section, Figure 2 depicts the geographic distribution of impact areas, and Figure 3 shows the hydraulic scheme of the project. 2. The main components are: (i) a dam on the Nam Theun River 39 meters (m) in height; (ii) 13 saddle dams; (iii) the 489 square kilometer (km2) Nakai Reservoir; (iv) a 4.25 kilometer (km) headrace channel and intake structure to divert water from the Nakai Reservoir to the power station; (v) a power station with 6 electricity-generating units and administration, operating, and control rooms; (vi) a regulating reservoir to regulate the release of flows into the downstream channel; (vii) a 27 km downstream channel (including excavated channel, tunnel, and entrained Nam Phit river) to direct the diverted flows from the power station to the Xe Bang Fai near the town of Mahaxai; (viii) 500 kilovolt (kV), 115 kV and 22 kV transmission lines to evacuate power to the distribution networks of the Electricity Generating Authority of Thailand and Électricité du Laos; and (ix) ancillary works such as access roads, bridges, and residences to enable construction, operation, and maintenance of the project. 3. At the time of appraisal, the Italian Thai Development Public Company Limited of Thailand (ITD) held 15%, which has been sold to Electricité de France (5%) and the Electricity Generating Public Company of Thailand (10%). The Government of Lao PDR and the Nam Theun 2 Power Company Limited (NTPC) agreed to a concession agreement of 31 years, of which the operating period is 25 years, on a build-own-operate-transfer basis. At the end of the concession period, the project facilities will be transferred to the government free of charge. 4. In 2005, NTPC appointed a head construction contractor (HCC) to construct the project, as planned in the concession agreement. The HCC was led by EDF, which oversaw 5 main contracts, 3 related to civil works (CW1, CW2 and CW3) and 2 related to electromechanical equipment (EM1 and EM2):

i) CW1: an ITD and NCC (Nishimatsu Construction Company) Joint Venture, to

construct the main dam, saddle dams, headrace channel, roads, camps, and Residence Nam Theun;

ii) CW2: NCC, to construct the water intake, underground works, and power plant; iii) CW3: ITD-NCC Joint Venture, to construct the regulating pond and dam, tailrace

channel and downstream channel; iv) EM1: General Electric Consortium, for the turbines, power plant electromechanical

equipment, 500 kV and 115 kV substations, telecommunications v) EM2: Mitsubishi & J-Power, for 500 kV and 115 kV transmission lines.

Table 1. Key Data on the Nam Theun 2 Plant

Installed capacity (MW) 1070 MW

Annual average generation (GWh/year) 6000 GWh/yr

Reservoir area (km2) 489 km2 at FSL and 86 km2 at MOL

Power density 2.2 W / m2

Average net head (m) 360 m

Dam height (m) Nakai Dam: 39 m high, 439 m long.

106 Appendix 11

Regulating pond dam: 531 m long 13 saddle dams with total length of 4.4 km

Units (number, type, MW) Four Francis (total of 996.5 MW) and two Pelton turbines (total of 75 MW)

Headrace length (m) Headrace channel 4 km, headrace tunnel 1.5 km, pressure shaft 220 m (vertical drop), pressure tunnel 1142 m.

Headrace width (m) Headrace tunnel 9.2.m, pressure shaft 8.8 m, pressure tunnel 7.15 m.

Associated infrastructure: road(s) (length) Upgrade of c. 106 km of existing public roads, construction of 56 km of new public roads, and project access roads.

Associated infrastructure: transmission line(s) 500 kV to the Thai grid (138 km within Laos and 166 km in Thailand). 70 km 115 kV to the Lao grid.

Total cost $1250 million

Reservoir length (km) 80 km long and 5 km wide

Minimum operating level MOL (masl) 525.5 m

Full supply level FSL (masl) 538 m

Volume at FSL (million m3) 3.9 billion m3

Volume at MOL (million m3) 0.3 billion

Area of catchment At Nakai Dam, the Nam Theun watershed is about 4039 km2

GWh/y = gigawatt hours per year.

Figure 1. The Nam Theun 2 Hydroelectric Power Project in Cross-section

Appendix 11 107

Figure 2. Main areas of project impact

108 Appendix 11

Figure 3. Hydraulic Scheme of the Nam Theun 2 Hydroelectric Power Project

Note: Reproduced from Declaux et al, 2014, Main features of the Nam Theun 2 hydroelectric project (Lao PDR) and the associated environmental monitoring programmes. Hydroecol. Appl. http://www.hydroecologie.org © EDF, 2014

Appendix 12 109

ECONOMIC REEVALUATION A. General

1. This economic reevaluation updates the estimated costs and benefit streams of the Nam Theun 2 (NT2) hydropower project identified at appraisal and considers the project’s economic performance against outputs included in the project’s Design and Monitoring Framework. Because the hydropower station commenced commercial operations in 2010 and for consistency with the financial analysis, all costs and benefits have been adjusted to a constant 2010 price level for the purposes of this analysis (compared to 2005 constant priced used for project appraisal). The economic reevaluation was carried out in accordance with ADB’s guidelines for appraisal of projects.1 2. The economic analysis conducted at appraisal separately considered and analyzed the project from a regional perspective (that is, Lao People’s Democratic Republic [Lao PDR] and Thailand together) and from the perspective of Lao PDR alone. These separate analyses have been repeated for this reevaluation. Analysis was conducted over the period 2004 (the start of main construction activities) to April 2035 (the end of the term of the Concession Agreement between the government and Nam Theun 2 Power Company Limited). Expenditure prior to 2004 was included in 2004 net benefits, ignoring any present value adjustments. Reflecting the approach adopted at appraisal, residual economic value of the plant at the end of the concession period (at which point the government assumes ownership) was ignored given the uncertainty of plant dispatch and its minimal impact of overall project returns. B. Demand for Electricity 3. An expectation of continued strong growth in demand for electricity in Thailand was noted at appraisal, with an indicative requirement for an additional 1,500 megawatts (MW) of capacity and 9,500 gigawatt-hours (GWh) of energy annually forecast over the period 2005–2010. Actual demand growth has been lower than this; between 2005 and 2010 installed capacity increased by 811 MW per annum and total generation increased by 5,700 GWh per annum over the same period. Regardless and as highlighted at appraisal, the output of NT2 sold to Thailand represents only around one year of demand growth in the country and therefore demand growth in Thailand is largely irrelevant to the project’s economic performance. The National Growth and Poverty Eradication Strategy identifies the power sector, specifically hydroelectric power resources, as strategically important for earning revenue to finance poverty reduction and environmental and social programs. 4. The Lao PDR power system is significantly smaller than the Thai system and is only partially interconnected. Electricity consumption at appraisal was around 211 kilowatt-hours (kWh) per capita per year and household electricity access was among the lowest in Asia. Total consumption of electricity in the country was 1,011 GWh in 2005. By 2016, total domestic consumption had increased to 5,050 GWh, a compounding average annual growth rate in excess of 15% for the period. At appraisal, Lao PDR committed to purchase 200 GWh per year from the project with an option to buy up to 300 GWh and it has in fact taken more than 300 GWh in every year since the year of commissioning. Even so, the contribution of NT2 as a percentage of domestic consumption has reduced from 16% in 2011 (the first full year of production) to 8% in 2016.

1 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila.

110 Appendix 12

5. Lao PDR’s imports of electricity have risen from 1,200 GWh in 2010 to approximately 2,000 GWh in 2015. Analysis shows a temporary reduction in Lao PDR imports following commissioning, with magnitude approximately matching the NT2 output. In aggregate, Lao PDR has growing electricity demand, serviced by growing domestic production and growing electricity imports. Commissioning of NT2 may have resulted in a temporary reduction in imports (and in that sense, the project output could be considered as non-incremental import substitution at that instant). However, a preferred characterization is that over the timescale of the project, both increased domestic production (such as NT2) and increased imports satisfy increasing (i.e. incremental) demand. 6. Table A12.1 summarizes electricity generation and consumption growth in Thailand and Lao PDR.

Table A12.1: Electricity Generation and Consumption in Lao PDR and Thailand

(terawatt-hours)

Year 2010 2011 2012 2013 2014 2015 2016 2017

Lao PDR Generation 8.45 12.97 13.06 15.51 15.28 16.30 … …

Imports 1.21 0.90 1.33 1.27 1.56 2.05 … …

Total domestic availability 9.66 13.87 14.39 16.78 16.83 18.35 … …

Consumption 2.44 2.56 3.07 3.38 3.79 4.24 5.05 …

Exports 6.65 10.67 10.36 12.49 11.94 11.55 1.54 …

Losses 0.57 0.65 0.95 0.91 1.11 2.56 … …

Total uses 9.66 13.87 14.39 16.78 16.83 18.35 6.59 …

Thailand Generation 160.15 158.94 173.32 173.38 177.26 183.19 188.94 188.97

Imports 7.25 10.77 10.53 12.57 12.26 14.41 19.83 24.43

Total domestic availability 167.41 169.71 183.85 185.95 189.52 197.60 208.76 213.40

Consumption 149.30 148.86 161.78 164.34 168.69 174.83 182.85 185.12

Exports 1.31 1.34 1.91 1.79 2.07 2.27 1.38 1.11

Losses1 16.79 19.52 20.16 19.81 18.77 20.50 24.53 27.17

Total uses 167.41 169.71 183.85 185.95 189.52 197.60 208.76 213.40

Lao PDR = Lao People’s Democratic Republic. 1/ Losses in Thailand are derived from other data. Source: The Energy Planning and Policy Office of Thailand’s Ministry of Energy, Electricite du Laos Electricity Statistics Report 2016.

C. Economic Costs 7. Project investments. The domestic price numeraire was used for this reevaluation, reflecting the approach adopted at appraisal. Because the project was executed through several major turnkey contracts, no detailed breakdown was available that would allow an informed disaggregation of the project cost statement into traded and non-traded inputs and labor components. Therefore, the specific conversion factors estimated at appraisal for each construction contract, which were calculated using detailed breakdowns from project cost estimates, were adopted and applied to actual project financial costs. The shadow exchange rate

Appendix 12 111

factor (SERF) calculated at appraisal (1.05) was also adopted unchanged2, as was the shadow wage rate factor of 0.71 which was derived on the basis of an estimate of the average income (cash and non-cash income) in the project area and an estimate of project wage for unskilled labor. Taxes and financing charges were excluded. The cost of the 500 kilovolt (kV) transmission line constructed by the Electricity Generating Authority of Thailand (EGAT) to connect from the border crossing to the Thai grid was added. Overall, an economic capital cost of $1,038 million (in current terms) was estimated, compared to $1,031 million at appraisal. The economic costs used in the economic reevaluation are summarized in Table A12.2.

Table A12.2: Financial to Economic Cost Conversion ($ million)

Component Financial Cost

Conversion Factor

Economic Cost

A. Construction Costs

Head Construction Contract 127.1 0.97 122.6

Civil Works 368.2 0.96 355.0

Electro-Mechanical 226.1 0.97 218.7

Project Implementation and Management 0.0 0.96 0.0

Construction insurance 12.6 0.98 12.4

Subtotal (A) 734.1 0.97 708.7

B. Development Costs 303.7 0.78 236.9

Total Project Cost (for FIRR calculation) 1,037.7 0.91 945.5

C. Thai Transmission Line 135.0 0.98 132.3

Total Regional Cost (for EIRR calculation) 1,172.7 0.81 945.5

EIRR = economic internal rate of return, FIRR = financial internal rate of return. Source: Asian Development Bank estimates.

8. Operation and maintenance costs. A detailed year-by-year assessment of operating costs expected to be incurred by NTPC was prepared at appraisal, averaging about 2% (in current terms) of the project’s overall capital cost. Actual costs to date have been closer to 3%. For the purposes of this reevaluation, future operating costs have been re-estimated using the forecast supplied by NTPC and NTPC’s budgeted costs for 2018 and 2019. These financial operating costs were converted to equivalent economic costs by multiplying by the same overall conversion factor estimated for capital costs (0.91). 9. At appraisal, the Project resource statement did not include any separate dis-benefits resulting from environmental or social costs. The assumption made at appraisal was that these costs were included in the Project direct capital and operating costs. Specifically, a total of $130 million (at current market prices) was allocated to environmental and social programs (including $49 million for pre-operations programs, $22 million for loss of future eco-tourism potential, and $59 million for annual operating costs related to environmental and social programs). Only a small area (approximately 250 hectares) of actively cultivated land was forecast to be removed from agricultural production, and relocated households were forecast to be given replacement land with greater agricultural potential. For the purposes of this reevaluation the same approach has been followed (that is, the cash expenditure associated with mitigation and safeguarding was adopted as a proxy for environmental and social economic costs. However, arguably more effort

2 Separate values for SERF were derived at appraisal for Lao PDR and Thailand, using a range of assumptions with

regard to balanced trade and elasticities. SERF ranged from 1.01-1.08 for Lao PDR and between 1.00 and 1.02 for Thailand. However, because the major part of the economic analysis adopted a regional perspective (that is, the perspective of Lao PDR and Thailand collectively), a blended SERF of 1.05 was selected from the derived values. This Completion Report did not have access to sufficient detailed information to improve upon this estimate. However, it was confirmed that the analysis is not sensitive to the value of SERF.

112 Appendix 12

should have been made at appraisal to develop an estimate of the economic cost of depletion of biodiversity in Nakai Nam Theun national protected area (in particular). D. Economic Benefits 10. The electricity generated from the NT2 project produces economic benefits in Lao PDR and in Thailand. To date, total annual generation has exceeded appraisal estimates in all years except for 2009 and 2010 (a part year of generation was assumed at appraisal for 2009 and a full year in 2010, whereas in practice commercial operations didn’t commence until April 2010). Electricity sales to Thailand and Lao PDR have similarly exceeded appraisal estimates. For the purposes of projecting future generating and in the absence of any advice from NTPC to the contrary, the average of the last three years of generation was used. 11. As noted above, separate analyses were undertaken for the project in a regional (Lao PDR and Thailand) context and in a domestic (Lao PDR only) context. 12. Regional perspective. For the regional analysis, at appraisal, benefits were evaluated on the basis of defining electricity consumption from the project as non-incremental for replacing existing supply of energy, and incremental for induced demand. Project sales to Thailand go to the national grid. The grid serves the entire country, and Thailand is nearly 100% electrified. Load growth for all customer segments is characterized by incremental growth in consumption of existing customers, new household formation and non-household economic expansion. Therefore, at appraisal, all project output sold to Thailand was assumed to be incremental (representing around 95% of output) and it was noted that incremental benefits are valued at the average willingness to pay for electricity estimated as the weighted average of the cost of the alternative energy source and the anticipated electricity tariff. Benefits from electricity sales to the Lao PDR were defined as non-incremental since it was argued that they replace imports from Thailand, and it was noted that non-incremental benefits of electricity are valued based on the economic cost of supply without the project. 13. At appraisal, willingness to pay was estimated as the average of the levelized financial costs of the project and of a new combined cycle gas turbine (CCGT) power plant.3 A value of 4.6 cents per kWh was calculated and adopted at the time. 14. This reevaluation concurs that sale of primary energy to Thailand is incremental output, that willingness to pay is the correct metric with which to value this output, and that willingness to pay can sometimes be estimated as the weighted average of the cost of the alternative energy source and the anticipated electricity tariff. However, the actual method of calculation of willingness to pay used at appraisal was incorrect and the value thereby ascribed is considered incorrect, resulting in a material underestimation of the project’s economic value. Firstly, willingness to pay should be evaluated at the consumer level in this analysis, not at a notional country level. Consumers do not directly “see” the levelized cost of NT2 in the with-project case, nor would they “see” the levelized cost of a CCGT plant in the “without project” case. These costs would only be a small part of the cost components in the end use tariff (which would include transmission, distribution and retail costs too). Secondly, the NT2 plant (and the notional CCGT

3 At appraisal, it was assessed that the next best alternative to the project would be a CCGT generation in Thailand.

This assessment was based on studies carried out by the World Bank with EGAT. Therefore, at appraisal, the economic benefit of the supply to Thailand was calculated with reference to the cost of energy and capacity from

CCGT plant. Indeed, Thailand is still adding CCGT capacity, although renewables are expected to receive

increasing focus in the medium term.

Appendix 12 113

plant adopted in the without-project analysis at appraisal) would only represent a very small fraction of Thailand’s generating capacity and therefore much less than 1% of the end-use tariff. In practical terms, there would be no difference in the end-use tariff under this “with” and “without project” framework. Thirdly, CCGT is the next lowest cost option after NT2 (based on studies carried out at the time by the World Bank and EGAT) and therefore has no relevance to the economic evaluation (although the energy cost of an existing CCGT plant might be relevant in valuing non-incremental output). 15. Thailand has close to full electrification and reliable electricity is supplied to consumers with few supply constraints. In this context, the marginal tariff faced by consumers, which is a regulated price, provides a reasonable proxy for consumers’ willingness to pay for incremental consumption (in the absence of supply constraints, if willingness to pay was significantly lower than the tariff, consumers would reduce demand and if willingness to pay was significantly higher than the tariff consumers would increase demand). Therefore, for this reevaluation the 2010 weighted average per unit revenue realization of Thailand’s two main electricity suppliers (the Provisional Electricity Authority and the Metropolitan Electricity Authority) was adopted as a minimum estimate of willingness to pay. This value (11.2 cents per kWh) was adjusted for distribution and transmission losses to the Thai border (a total of 6% of input electricity), giving a per unit value of 10.8 cents per kWh (compared to 4.6 cents per kWh at appraisal).4 This has a significant impact of the overall evaluation as discussed below. 16. The sale of secondary energy to Thailand was also assumed to represent incremental output at appraisal and was valued accordingly. The view of this reevaluation is that secondary energy, which is energy available during off-peak hours and during Sunday (when offices are typically closed throughout the country), is unlikely to be serving incremental capacity and energy needs. Rather it displaces energy that would otherwise be produced from existing capacity serving existing demand – that is, non-incremental output. On this basis, secondary energy was valued at the variable cost of CCGT plant, using the World Bank’s historical data and forecasts for liquefied natural gas ex Japan. 17. As noted above, Commissioning of NT2 may have resulted in a temporary reduction in imports (i.e. non-incremental output), however over the timescale of the project at in the context of 15% demand growth in Lao PDR, both increased domestic production (such as NT2) and increased imports satisfy increasing (i.e. incremental) demand. But given that consumption in Lao PDR has minimal impact on the project economic internal rate of return, the appraisal approach of treating Lao PDR as 100% non-incremental has been replicated for this reevaluation. The appraisal unit value of 6.4 cents per kWh was calculated as the weighted average of avoided cost of imports from Thailand, including the capacity and energy cost of CCGT generation plus direct sales from Thailand’s Provincial Electricity Authority. For this reevaluation of the regional economic internal rate of return (EIRR), only the energy cost of CCGT generation was used (fueled by imported LNG, as discussed in the preceding paragraph), adjusted for transmission losses to Lao PDR and distribution losses within Lao PDR (a total unit value of 7.7 cents per kWh). 18. At appraisal, it was noted that the project will result in an annual reduction of 275 GWh for the existing Theun Hinboun IPP hydro project (THH), which shares the catchment area with NT2.

4 The imperfection of this approach is recognized; average per unit revenue realization is not the same as marginal

tariff, and any requirement for reinforcement of transmission and distribution networks to deliver NT2 electricity to consumers is ignored. However, these simplifications are considered to have minimal impact on the evaluation overall.

114 Appendix 12

This cost was included as a negative benefit in the project resource statement at appraisal, valued at the energy cost of generation from CCGT in Thailand. For this reevaluation, total generation sold to Thailand was simply reduced by 275 GWh. 19. The expected reduction in greenhouse gas (GHG) emissions in Thailand attributable to NT2 was not considered at appraisal but has been included in this reevaluation. A grid emission factor for Thailand of 0.439 tons of carbon dioxide per megawatt-hour (tCO2/MWh) was used in accordance with Asian Development Bank’s (ADB’s) guidelines, giving annual avoided emissions of around 2.5 million tons.5 It is noted that this emission factor is lower than other recognized estimates (such as the one produced by the Institute for Global Environmental Strategies), however this more conservative value is warranted given that no emissions are ascribed to the NT2 reservoir in this reevaluation.6 Avoided emissions were valued at $36.3 per tonne (in constant 2016 terms), increasing at 2% per annum in real terms (footnote 5). 20. As noted, Thailand was essentially fully electrified and with very few supply constraints at the time of commissioning of NT2. Therefore, in practical terms the project did not provide any energy access benefits or economic growth benefits. 21. Lao PDR perspective. In order to evaluate the project from the Lao PDR point of view, the regional project resource statement was adjusted at appraisal as follows:

i) sales to Thailand were valued at the power purchase agreement tariff (because the direct revenue is the only benefit to Lao PDR), multiplied by the average shadow exchange rate factor;

ii) avoided imports from Thailand were valued at the import tariff, multiplied by the average shadow exchange rate factor;

iii) reduced sales from THH were also valued at the NT2 tariff, multiplied by the average shadow exchange rate factor; and

iv) the cost of the Thailand transmission line (i.e., the line within Thailand being constructed to connect with the existing network), associated operations and maintenance, and associated line losses, were removed from the calculation (because these costs are not incurred by Lao PDR).

22. This approach has been replicated for this reevaluation. Additionally, GHG reduction benefits, which arguably accrue to Thailand, were excluded from this Lao PDR analysis. E. Economic Reevaluation 23. Based on the estimates of economic costs and benefits described above, EIRR for the project was reevaluated as 29.7% from the regional perspective and 15.0% from the national (Lao PDR) perspective. These values compare with the appraisal EIRR estimates of 15.9% and 15.5% for the regional and national perspectives respectively. The regional EIRR is materially higher because the unit value ascribed to incremental consumption of electricity in Thailand at appraisal was erroneous and significantly understated the value. The addition of the environmental benefit to the region of a reduction in GHG emissions from avoided thermal generation further increases the regional EIRR of the project. EIRR calculations are shown in Table A12.3 and Table A12.4.

5 ADB. 2017. Guidelines for Estimating Greenhouse Gas Emissions of Asian Development Bank Projects - Additional

Guidance for Clean Energy Projects. Manila. 6 Institute for Global Environmental Strategies. IGES List of Grid Emission Factors. https://pub.iges.or.jp/pub/iges-

list-grid-emission-factors (accessed 6 December 2018).

Appendix 12 115

The economic net present values shown in the tables were calculated at a discount rate of 12%, as used at appraisal. Operational risks remain, for example relating to a reduction in plant output due to a change in rainfall patterns; however, analysis shows that the potential impact on EIRRs of these risks is not material.

Table A12.3: Reevaluation of Regional Economic Internal Rate of Return (2010 $ million)

Year Benefits Costs Net

Incremental Output 1

Non-Incremental

Output 2

Avoided Emissions

Capital Operating Benefits

2004 0 0 0

82.3 0 (82.3)

2005 0 0 0

136.7 2.7 (139.5)

2006 0 0 0

168.6 3.6 (172.3)

2007 0 0 0

265.7 4.2 (269.8)

2008 0 0 0

254.3 7.6 (261.9)

2009 0 0 0

195.2 (14.7) (180.4)

2010 404.4 74.8 67.1

32.5 31.2 482.5

2011 475.9 105.5 83.8

0 25.9 639.3

2012 474.7 97.2 83.8

0 27.5 628.2

2013 480.4 102.9 87.3

0 26.6 644.1

2014 503.6 98.8 91.5

0 27.0 666.9

2015 475.1 95.2 88.5

0 30.1 628.6

2016 474.1 102.5 91.6

0 24.2 644.0

2017 484.0 118.6 98.4

0 24.5 676.6

2018 441.8 150.6 96.3

0 28.9 659.9

2019 444.8 152.0 99.0

0 28.4 667.4

2020 449.1 152.8 101.9

0 26.7 677.0

2021 445.3 152.0 103.1

0 25.6 674.9

2022 446.4 152.2 105.4

0 25.2 678.9

2023 446.9 152.3 107.6

0 25.5 681.4

2024 446.2 152.2 109.6

0 24.5 683.6

2025 446.5 152.3 111.9

0 25.5 685.2

2026 446.5 152.3 114.1

0 26.5 686.5

2027 446.4 152.3 116.4

0 26.8 688.3

2028 446.5 152.3 118.7

0 26.4 691.1

2029 446.5 152.3 121.1

0 27.9 691.9

2030 446.5 152.3 123.5

0 28.2 694.1

2031 446.5 152.3 126.0

0 29.0 695.7

2032 446.5 152.3 128.5

0 29.2 698.1

2033 446.5 152.3 131.1

0 31.2 698.6

2034 446.5 152.3 133.7

0 31.3 701.1

2035 133.2 75.7 45.5

0 15.5 238.8

EIRR: 29.7%

ENPV:3 1,827.2

EIRR = economic internal rate of return, ENPV = economic net present value 1 Sale of primary energy to Thailand. 2 Sale of secondary energy to Thailand and all energy to Lao PDR. 3 Discounted to 2004. Source: NTPC and Asian Development Bank estimates.

116 Appendix 12

Table A12.4: Reevaluation of National (Lao PDR) Economic Internal Rate of Return (2010 $ million)

Year Benefits Costs Net

Incremental Output (sales to Thailand)

Non-Incremental

Output (sales to Lao PDR)

Avoided Emissions

Capital Operating Benefits

2004 0 0 0

82.3 0 (82.3)

2005 0 0 0

136.7 2.7 (139.5)

2006 0 0 0

168.6 3.6 (172.3)

2007 0 0 0

265.7 4.2 (269.8)

2008 0 0 0

254.3 7.6 (261.9)

2009 0 0 0

195.2 (14.7) (180.4)

2010 196.1 20.7 0

32.5 31.2 153.1

2011 239.7 31.0 0

0 23.9 246.8

2012 238.8 23.6 0

0 25.5 236.8

2013 241.4 29.0 0

0 24.6 245.7

2014 251.6 24.6 0

0 25.0 251.1

2015 237.9 23.2 0

0 28.2 232.9

2016 237.4 30.5 0

0 22.2 245.7

2017 253.1 28.2 0

0 22.5 258.8

2018 242.8 26.2 0

0 26.9 242.2

2019 244.5 27.0 0

0 26.4 245.0

2020 246.8 27.0 0

0 24.7 249.1

2021 244.7 27.0 0

0 23.6 248.1

2022 245.3 27.0 0

0 23.2 249.1

2023 245.6 27.0 0

0 23.5 249.1

2024 245.2 27.0 0

0 22.5 249.7

2025 245.4 27.0 0

0 23.5 248.9

2026 245.4 27.0 0

0 24.5 247.9

2027 245.3 27.0 0

0 24.8 247.6

2028 245.4 27.0 0

0 24.4 248.0

2029 245.4 27.0 0

0 25.9 246.4

2030 245.3 27.0 0

0 26.2 246.2

2031 245.3 27.0 0

0 27.0 245.3

2032 245.3 27.0 0

0 27.2 245.1

2033 245.3 27.0 0

0 29.2 243.1

2034 245.3 27.0 0

0 29.4 243.0

2035 73.2 9.0 0

0 13.6 68.7

EIRR: 15.0%

ENPV:1 217.4

EIRR = economic internal rate of return, ENPV = economic net present value 1 Discounted to 2004. Source: NTPC and Asian Development Bank estimates.

F. Sensitivity Analysis 24. Typically for a hydropower project, most of the financial and economic performance risk occurs during the construction period. However operational risks remain, particularly those relating to a reduction in plant output due to a change in rainfall patterns or silting problems. For this reevaluation, the impact of a gradual decline in plant output was examined (1% per annum

Appendix 12 117

on average from 2020), and also a gradual increase in plant operating costs (2% per annum in real terms from 2020). In both cases the impact on EIRR was negligible. Given the robust growth in electricity demand in the region, there is negligible risk relating to demand for the plant’s output. Similarly, benefits have been conservatively valued; incremental consumption in Thailand, which represents most of the project’s economic value in the regional analysis, has been valued at the prevailing tariff in 2010 (as consumers have demonstrated that they are willing to pay at least that much for each unit of electricity that they consumer). The impact on the EIRR of avoided GHG emissions was also tested in the regional analysis; its removal as a benefit reduced the regional EIRR to 27.0% (from 29.7%). It is clear from this reevaluation that the decision to construct the project was appropriate from an economic perspective. G. Performance Against Design and Monitoring Framework

25. The project design and monitoring framework prepared during appraisal included the following outcomes relevant to the project’s economic (and financial) performance:

i) Provide stable and affordable electricity to Thailand and the Lao PDR in an environmentally and socially sustainable way; and

ii) Generate revenue for the Government through the Project for its poverty reduction programs.

26. The performance target for the first outcome was the export of 5,354 GWh of electricity to Thailand and provision of 200 GWh of electricity to Lao PDR consumers by 2010. This target has been easily achieved for every full year of commercial operation of the plant (i.e. since 2011), although in the absence of targets or indicators for affordability and stability of supply it cannot be concluded that this outcome was fully achieved. However, the low financial cost of NT2 electricity compared to other generation options, the rapid growth in electricity demand in both countries and the low occurrence of unscheduled outages reported by NTPC suggest that the electricity (from the plant) has been stable and affordable.7 27. The performance indicators for the second outcome were that revenues are clearly reflected in annual budget allocations for eligible priority poverty and environment programs from 2010, and that actual spending on eligible priority programs is clearly reflected in quarterly budget execution reports and financial statements by 2010.8 The NT2 Revenue Management Program was developed to ensure the achievement of this objective and to enable progress to be monitored. As part of this Revenue Management Program, it was agreed that financial statements of NT2 revenues were to be published, as were audit reports for eligible programs financed with NT2 revenues, and that the Ministry of Finance was to report regularly on implementation and meet regularly with NT2 partners. The project design and monitoring framework targets budget

7 Between 2000 and October 2017, the rate of electrification increased from 36% to 94%, surpassing Lao PDR’s

previous target of 90% electrification by 2020 ahead of schedule. The target of 90% by 2020 was set under the Lao PDR Energy Policy 2015.

8 Eligible projects are public investment projects selected by the Ministry of Planning and Investment and implemented by sector specific ministries, such as Education, Health, and Energy and Mining. Examples include reforestation, school and dormitory construction, supply of medical equipment to health centers, and rural access road construction, among others. Eligible programs include poverty programs such as School Block Grants, Free Maternal and Child Health Scheme, Poverty Reduction Fund, and Health Equity Fund, which are under the oversight of the Ministry of Finance, Ministry of Health, and Ministry of Education and Sports. By the end of 2015, approximately 36% of expenditure was allocated to education, 15% to health, 13% to public works and transport, 8% for implantation by the provinces, 9% to a poverty reduction fund, 1% to natural resources and environment and 18% to energy, mining and agriculture.

118 Appendix 12

and expenditure reporting by 2010. In terms of the performance indicators, the outcome was achieved – the government has reflected revenues received and allocated expenditure in its annual budgets. A problem, however, has been the persistent gap between revenue received and allocation to eligible programs, and this has been a significant concern since 2010. Substantial progress has been made in recent years, and this gap has now been eliminated. In the 2017 Budget, the government allocated a total of $66.3 million—more than what was needed to “close the gap.” In summary, the total net revenues from NT2 received during the lifetime of the project is estimated to amount to $180.4 million by the end of 2017, whilst, a total of $195.2 million have been allocated to eligible programs and projects, resulting in a positive difference of $13 million more allocations than revenues received. According to the World Bank, disbursement audits were completed and published for the period 2009–2015, as were project disbursements for 2015 and 2016 representing over 80% of audit requirements. Program disbursements for 2015 and 2016 are pending, as is the full audit for 2017. Reporting by the Ministry of Finance on implementation and consultation has been carried out since 2012. Publication and posting of audits on websites represented an innovation in budget reporting for the government.

H. Sector Context

28. At the time of appraisal, Lao PDR had approximately 660 MW of installed hydropower capacity, generating approximately 1,500 GWh for the domestic market and 1,600 GWh for export (the latter from two independent power producers exclusively generating electricity for export). By the end of 2016, installed capacity had increased to in excess of 1,800 MW with most of the incremental capacity attributable to NT2. However, there was also a further 2,850 MW under construction and an additional 2,600 MW anticipated to be in operation by 2025, the vast majority of which is being developed by private companies for the export market. Although a multitude of factors have spurred this surge in export-oriented IPPs, the commercial success of NT2 likely was a significant catalyst to this growth, owing to its on-time and on-budget construction, security of offtake, and effectiveness of the public-private partnership. 29. It is also worth considering the NT2 power station in the context of the domestic and regional power sectors, and in particular the changes evident since Project appraisal. When the Project was appraised it was noted that the power sector in the Lao PDR (i) promotes economic and social development by providing reliable and affordable domestic power supply, and (ii) earns foreign exchange from electricity exports by developing its hydroelectric power potential. It was also noted that the domestic power system was in the early stages of development and had per capita electricity consumption that was among the lowest in Asia. Major constraints in grid interconnection were noted and a least-cost expansion strategy to add (generating) capacity only when it can be absorbed by the system was outlined. Because the Project was almost entirely export-focused, a strategy for development of domestic power facilities and capacity was not articulated in project appraisal documentation. 30. At the regional level, it was noted that the power market in the Greater Mekong Subregion (GMS) was changing toward effective regional cooperation and bilateral power trade. Power trade flows between the GMS countries is as follows: (i) Cambodia has been importing from the Lao PDR (south) since 2010, Thailand since 2009, and Viet Nam (south) since 2008; (ii) the Lao PDR (north) has been importing from Thailand since late 1990s and the Yunnan Province since 2009; (iii) Thailand has been importing from the Lao PDR since 1971; (iv) Viet Nam (north) has been importing from the Yunnan Province since 2004; and (v) the Yunnan Province has been importing from Myanmar since 2008. However, as discussed below, much of this activity is best described as dedicated cross-border flows, rather than dynamic trading to improve the efficiency of domestic electricity markets.

Appendix 12 119

31. Despite significant potential benefits of regional electricity trading, there is currently limited trading activity in the GMS. Operation of a regional power market requires (i) surplus generation at certain times of day or year, (ii) a reliable transmission network so that surplus energy can be effectively delivered to purchasers, and (iii) a system of common rules or a market mechanism to allow efficient trading. 32. In the GMS, many high-voltage transmission lines simply connect power stations in host countries to substations in importing countries. The grid of the importing country is effectively extended into the host territory. A consequence of this form of development is that the transmission line makes relatively little contribution to the national grid of the host country. This is the case with the NT2 Project. The potential to improve regional economic outcomes through electricity trading is reflected in ADB’s investment program, including funding of transmission interconnections between Lao PDR, Viet Nam and the People’s Republic of China.

33. In summary, the government of Lao PDR considers development of the country’s hydropower resources (with export of surplus electrical energy to the neighboring countries of Thailand, Viet Nam, Cambodia and the People’s Republic of China) to be a mechanism for achieving sustainable economic growth. Whilst this policy provides financial benefits for Lao PDR, additional economic and development value could be realized through investment in the domestic and regional transmission system, to facilitate domestic access to electricity and efficient regional electricity trading.

120 Appendix 13

FINANCIAL REEVALUATION A. Background 1. At appraisal, a financial analysis of the Nam Theun 2 (NT2) Hydroelectric Project (the Project) and Government of Lao People’s Democratic Republic (Lao PDR) (the Government) equity investment was completed in three parts: (i) financial projections of the Lao Holding State Enterprise (LHSE), the Government equity shareholder of the Project, to assess its financial viability and sustainability; (ii) a financial evaluation of the Project (as a financial internal rate of return or FIRR calculation) to assess the financial viability of the overall Project investment; and (iii) the return on Government’s investment in Nam Theun 2 Power Company Limited (NTPC) to assess the viability of investment from the Government’s perspective. The appraisal financial analysis was calculated over the Project’s economic useful life, which included the Project construction period (then assumed to be May 2005 to November 2009) and the 25-year operating period of the concession agreement (then assumed to be November 2009–November 2034). 2. This financial reevaluation re-calculates the FIRR for the standalone Project (represented by NTPC), compares historical financial performance of NTPC with projections prepared during appraisal, and re-calculates FIRR for the government’s investment in NTPC. The government’s holding company LHSE now contains a number of investments and dividends from NTPC represents only around 50% of the LHSE’s 2016 and 2017 gross revenue and approximately 25% of its total investment holdings, and therefore analysis of its financial statements extends beyond the scope of this Project Completion Report. However, actual dividend flows from NTPC to LHSE are compared to dividends estimated at appraisal as part of the FIRR re-calculation. 3. The unit of account selected for this reevaluation was the US dollar ($), reflecting the currency used at appraisal at NTPC’s functional and reporting currency. At appraisal, a fixed Thai baht to dollar exchange rate of 40 was adopted. At the time, a purchasing-power-parity-based exchange rate projection would have resulted in a weakening baht to the dollar, whereas in practice the baht has strengthened considerably. For the purpose of this reevaluation, an exchange rate trajectory based on an assumption of purchasing power parity has been adopted. ADB’s forecast of international escalation rates was adopted and historical inflation was based on manufacturing unit value index values. 4. The NT2 plant was developed and is operated by a private company, the Nam Theun 2 Power Company Limited (NTPC), which is owned by a consortium comprised of Electricite de France (EDF) (40%), the Electricity Generating Public Company of Thailand (35%), and the Government of the Lao PDR (25%). At the time of appraisal, the Italian Thai Development Public Company Limited of Thailand held 15%, which has been sold to EDF (5%) and the Electricity Generating Public Company of Thailand (10%). The Government and NTPC agreed to a concession agreement of 31 years, of which the operating period is 25 years, on a build-own-operate-transfer basis. At the end of the concession period, the project facilities will be transferred to the Government free of charge. B. Project/ Nam Theun 2 Power Company Limited Financial Internal Rate of Return 5. Revenue. NTPC earns revenue through sales of electricity to the Electricity Generating Authority of Thailand (EGAT) and to Electricité du Laos (EDL) under separate power purchase agreements (PPAs). Reflecting the cost structure of the Project and the requirements of its debt funders, the PPAs are structured with a requirement for EGAT and EDL to pay for at least 95% of the electrical energy declared and made available to them by NTPC, regardless of whether or

Appendix 13 121

not the energy is taken (that is, a take-or-pay provision). Different rates are payable for the energy sold: a) a “primary energy” rate for take-or-pay energy during normal working hours; b) a “secondary energy” rate for take-or-pay energy at other times; and c) a rate for “excess energy” above the 95% take-or-pay threshold. Tariffs for primary and secondary energy are denominated and paid in US dollars and in Thai baht; tariff rates in the PPA were 50% dollar and 50% baht at an exchange rate of 38 baht per dollar, however the baht has strengthened against the dollar since the PPA was signed and therefore the income denominated in baht from the sale of primary and secondary energy is now a greater proportion of NTPC’s income. The excess energy tariff is entirely denominated in Thai baht. EDL only takes primary energy but at a different rate to EGAT. All applicable tariffs are shown in Table A13.1

Table A13.1: Offtake Tariffs

Year EGAT EDL

Primary Energy

Secondary Energy

Excess Energy All Energy

cents /kWh

baht /kWh

cents /kWh

baht /kWh

cents /kWh

baht /kWh

cents /kWh

baht /kWh

2010 2.118 0.805 0.975 0.370 0 0.570 1.765 0.698

2011 2.120 0.806 0.976 0.371 0 0.570 1.767 0.699

2012 2.149 0.817 0.990 0.376 0 0.570 1.791 0.709

2013 2.179 0.828 1.004 0.381 0 0.570 1.816 0.718

2014 2.209 0.840 1.018 0.387 0 0.570 1.841 0.728

2015 2.240 0.851 1.032 0.392 0 0.570 1.867 0.737

2016 2.271 0.863 1.046 0.397 0 0.570 1.893 0.747

2017 2.302 0.875 1.060 0.403 0 0.570 1.919 0.757

2018 2.334 0.887 1.075 0.408 0 0.570 1.945 0.767

2019 2.366 0.899 1.090 0.415 0 0.570 1.972 0.777

2020 2.399 0.912 1.105 0.420 0 0.570 1.999 0.788

2021 2.432 0.924 1.120 0.425 0 0.570 2.027 0.798

2022 2.466 0.937 1.136 0.432 0 0.570 2.055 0.809

2023 2.500 0.950 1.152 0.437 0 0.570 2.084 0.819

2024 2.535 0.963 1.167 0.444 0 0.570 2.113 0.830

2025 2.570 0.976 1.184 0.450 0 0.570 2.142 0.841

2026 2.605 0.990 1.200 0.456 0 0.570 2.171 0.853

2027 2.641 1.004 1.217 0.462 0 0.570 2.201 0.864

2028 2.678 1.018 1.234 0.469 0 0.570 2.232 0.876

2029 2.715 1.032 1.250 0.475 0 0.570 2.263 0.888

2030 2.752 1.046 1.267 0.482 0 0.570 2.294 0.899

2031 2.790 1.060 1.285 0.488 0 0.570 2.325 0.911

2032 2.829 1.075 1.303 0.495 0 0.570 2.358 0.924

2033 2.868 1.090 1.321 0.502 0 0.570 2.390 0.936

2034 2.908 1.105 1.339 0.509 0 0.570 2.424 0.949

2035 2.948 1.120 1.358 0.516 0 0.570 2.457 0.961

EDL = Electricité du Laos, EGAT = Electricity Generating Authority of Thailand, kWh = kilowatt-hour

122 Appendix 13

EGAT tariffs roll over on 1 June (for example, the dollar-denominated tariff of 2.12 c/kWh shown for 2011 actually only covers the year to 31 May 2011). EDL tariffs apply for the full calendar year. Source: EGAT and EDL power purchase agreements.

6. At appraisal, electricity sales for the purposes of financial analysis were taken as the minimum guaranteed generating capacity to be made available to EGAT and EDL as provided for under their respective PPAs over the commercial operating period beginning in November 2009. Actual sales did not commence until April 2010 due to late commissioning of the plant, but since then sales have exceeded appraisal estimates and NTPC’s annual budgets in every year. Table A13.2 summarizes this performance. For the purposes of projecting revenue, a rolling average of the last three years of cash income from electricity sales was adopted.

Table A13.2: Plant Generation (gigawatt-hours)

Electricity Purchaser 2010 2011 2012 2013 2014 2015 2016 2017

EGAT Appraisal estimate 5,438 5,354 5,354 5,354 5,354 5,354 5,354 5,354

NTPC budget 4,221 5,354 5,354 5,636 5,636 5,636 5,636 5,354

Actual 4,470 5,403 5,382 5,438 5,657 5,363 5,354 5,689

EDL

Appraisal estimate 165 178 192 200 200 200 200 200

NTPC budget 255 300 300 300 300 300 300 300

Actual 270 404 307 378 320 302 397 367

EDL = Electricité du Laos; EGAT = Electricity Generating Authority of Thailand, NTPC = Nam Theun 2 Power Company Limited. Source: NTPC and Asian Development Bank estimates

7. Capital costs. NTPC provided a summary of actual project capital costs, broken down by construction activities, development costs, advisory costs, environmental and social costs, technical activities, operations and maintenance costs, financing charges during construction, and miscellaneous costs and charges. The total project capital cost was $1,304.8 million, compared to $1,250 million estimated at appraisal.1 Overall, a 7% capital cost overrun is considered to be minor in the context of a complex hydropower project, and was well within the allowance for contingent financing in the project’s financing plan. Table A13.3 summarizes the project’s capital cost versus appraisal estimates. For the purposes of reevaluating the project’s FIRR, financial charges during construction were omitted and all monetary values were converted to 2010 constant values (reflecting the year of commissioning) in accordance with ADB guidelines, as summarized in Table A13.4.

1 (i) The capital cost summary provided by NTPC nets off revenue earned during construction from the sale of test run

energy to EGAT. For the purposes of this reevaluation, sale of test run energy is treated as income and therefore it is not netted off the capital cost. (ii) The World Bank Implementation Completion and Results Report assessed the actual capital cost to be $1.308 million. The difference of approximately $3 million is attributable to an item of capital expenditure that was indicated by NTPC to be a residual budgetary allocation rather than actual expenditure. The World Bank included this item in its capital cost assessment, but it was not included in this Completion Report’s assessment.

Appendix 13 123

Table A13.3: Project Capital Costs1 ($ million)

Component Appraisal Estimate

Actual

A. Construction Costs

Head Construction Contract 123.2 127.1

Civil Works 352.0 368.2

Electro-Mechanical 226.1 226.1

Project Implementation and Management 10.2 0.0

Construction insurance 0 12.6

Subtotal (A) 711.5 734.1

B. Development Costs

Pre-Operating and Working Capital 24.6 21.4

Environment & Social Mitigation 48.8 78.6

Compensation to Gov’t. and Gov’t. Works 32.2 65.5

NTPC Administration 33.6 65.3

Project Preparation 74.2 72.8

Subtotal (B) 213.4 303.7

C. Financing Costs

Interest During Construction 196.4 194.6

Insurance and Bonding 30.1 42.3

Other Financing Charges 52.8 30.2

Subtotal (C) 279.3 267.1

D. Contingencies

Head Contract 11.9 0.0

Financial 33.9 0.0

Subtotal (D) 45.8 0.0

Total Project Cost 1,250.00 1,304.8

NTPC = Nam Theun 2 Power Company Limited. 1 Some differences between appraisal estimates and actual costs in line items may be

due to differences in cost allocations, rather than cost over- and/or underruns. 2 The total actual project cost does not include a contingency of c. USD 3 million USD,

explaining a discrepancy with the total cost reported elsewhere.

Table A13.4: Conversion of Project Costs to 2010 Price Levels

Year Total Expenditure ($ million)

Foreign Price Index

(2010=100)

Total Expenditure

(2010 $ million)

2004 76.8 85.03 90.29 2005 131.6 87.70 150.06

2006 166.5 89.93 185.09

2007 278.2 95.43 291.57

2008 212.3 102.83 206.50

2009 136.6 96.46 141.61

2010 35.7 100.00 35.72

Totals 1037.7 1,010.6 1 Foreign price index is based on manufactured unit value index published

by the World Bank dollars compared with a basket of currencies

124 Appendix 13

(https://knoema.com/WBCPD2015Oct/world-bank-commodity-price-data-pink-sheet-monthly-update?tsId=1002450)

2 NTPC was unable to provide expenditure by currency. Because much of the "local currency" expenditure was likely made in Thai baht, a currency that has been broadly stable against a basket of foreign currencies, the MUV index was used to bring all expenditure to a 2010 base.

8. Operation and maintenance costs. A detailed year-by-year assessment of operating costs expected to be incurred by the NTPC was prepared at appraisal, averaging about 2% (in current terms) of the project’s overall capital cost (excluding royalties, loan guarantee and bonding fees, and depreciation). Actual costs to date have been closer to 3%. For the purposes of this reevaluation, future operating costs have been re-estimated using the forecast supplied by NTPC and NTPC’s budgeted costs for 2018 and 2019. 9. Royalties and taxes. Royalties paid to the government are calculated based on NTPC’s accounting revenues, at percentage rates predefined in the Concession Agreement. Accounting revenues are, in turn, calculated at the average PPA tariff rate, rather than the tariff rate applicable in each year. For this reason, royalties calculated in this reevaluation differ from those calculated at appraisal (which were based on cash income rather than accounting revenue). Similarly, income taxes are payable to the government based on net earnings and at progressive rates defined in the Concession Agreement. Income taxes paid to date as reported by NTPC were restated to remove the effect of the interest tax shield so that a true pre-financing cash flow could be calculated (as required for ADB’s FIRR evaluation framework). 10. Working capital. Working capital increases and decreases to date were included in the cash flow reevaluation. The cumulative value of working capital at the end of 2017 (approximately $67 million) was added as a cash inflow at the end of the concession period. 11. Evaluation basis, period and residual value. NTPC’s nominal cash flows were estimated based on the methodology and assumptions described above. Other than noted above for working capital and short-term investments, residual value of the plant from NTPC’s perspective is zero as the company will hand over the plant to the government at the end of the concession period. For simplicity, release of debt service and maintenance cash reserves, created from initial project cash flows as required by lenders, have been ignored for the purposes of this reevaluation. Analysis was conducted over the period 2004 (the start of main construction activities) to 2035 (the end of the term of the Concession Agreement between the government and NTPC). Expenditure prior to 2004 was included in 2004 net benefits, ignoring any present value adjustments. 12. Financial internal rate of return. The real, pre-finance and post-tax FIRR was calculated as 10.4%, compared to 12.4% at appraisal. This minimal difference in FIRRs is attributable to higher capital costs and a revision to the interest tax shield determined in the appraisal analysis. Table A13.5 shows the reevaluation of the FIRR.

Table A13.5: Reevaluation of Project Financial Internal Rate of Return (2010 $ million)

Year Revenue Costs Net

Capital O&M Tax & Royalties

Working Capital

Cash Flow

2004 0.0 90.3 0.0 0.0 0.0 (90.3)

2005 0.0 150.1 3.0 0.0 0.4 (153.5)

Appendix 13 125

Year Revenue Costs Net

Capital O&M Tax & Royalties

Working Capital

Cash Flow

2006 0.0 185.1 4.0 0.0 (0.0) (189.1)

2007 0.0 291.6 4.6 0.0 (0.6) (295.6)

2008 0.0 206.5 8.4 0.0 (0.3) (214.5)

2009 40.4 141.6 11.5 0.2 (2.8) (110.1)

2010 210.7 35.7 33.2 18.2 21.9 101.7

2011 232.0 0.0 26.2 20.7 22.4 162.6

2012 231.1 0.0 28.0 20.6 (3.1) 185.6

2013 245.6 0.0 27.0 21.9 31.5 165.1

2014 232.6 0.0 27.5 20.5 (15.3) 200.0

2015 225.1 0.0 30.9 19.6 25.9 148.7

2016 225.8 0.0 24.4 19.5 30.6 151.4

2017 225.1 0.0 24.7 19.3 (13.8) 194.9

2018 222.6 0.0 29.5 19.0 0.0 174.1

2019 223.6 0.0 29.0 18.8 0.0 175.8

2020 223.2 0.0 27.1 39.5 0.0 156.6

2021 222.1 0.0 25.9 39.2 0.0 157.1

2022 221.0 0.0 25.5 50.2 0.0 145.4

2023 219.8 0.0 25.8 49.6 0.0 144.4

2024 218.7 0.0 24.7 49.0 0.0 145.0

2025 217.5 0.0 25.8 76.1 0.0 115.6

2026 216.4 0.0 26.9 75.4 0.0 114.1

2027 215.3 0.0 27.2 74.7 0.0 113.4

2028 214.2 0.0 26.8 83.6 0.0 103.8

2029 213.1 0.0 28.5 82.5 0.0 102.1

2030 211.9 0.0 28.7 81.4 0.0 101.8

2031 210.8 0.0 29.7 80.3 0.0 100.8

2032 209.7 0.0 29.9 79.2 0.0 100.6

2033 208.6 0.0 32.1 78.2 0.0 98.4

2034 207.6 0.0 32.2 77.1 0.0 98.2

2035 68.8 0.0 14.9 25.4 (67.0) 95.6

FIRR 10.4%

FNPV 341.2

( ) = negative, FIRR = financial internal rate of return, FNPV = financial net present value, O&M = operations and maintenance. Source: NTPC financial statements, Asian Development Bank estimates.

13. Weighted average cost of capital. The assumed hurdle rate for this reevaluation is the overall real pre-tax weighted average cost of capital (WACC) for the project. Table A13.6 shows that the actual financing structure of the project (and of NTPC) was more-or-less the same as the structure assumed at appraisal. Given the complexity of the debt part of the financing structure and reflecting the approach (understandably) adopted at appraisal, the cost of debt was estimated using the internal rate of return of actual and forecast debt service cash flows. These cash flows included interest costs, guarantee and commitment fees, and principal repayments. For projected interest costs, the effective interest rates as stated in the audited financial statements (5.99% and

126 Appendix 13

6.77% respectively for dollar-denominated and baht-denominated debt) were adopted.2 On this basis and after taking into account the tax shield on interest costs and guarantee and commitment fees, the cost of debt was calculated as 6.4% in nominal terms and 4.2% in real terms. This compares to the cost of debt calculated at appraisal of 9.5% (against average all-in rates of 6.8% for dollar-denominated debt and 8.6% for baht-denominated debt forecast at the time).

Table A13.6: Project Financing Structure ($ million)

Source At Appraisal Actual

A. Equity

Government 87.5 87.5

Electricite de France International 122.5 122.5

Electricity Generating Public Company of Thailand 87.5 87.5

Italian Thai Development Public Company Limited 52.5 52.5

Total Base Equity 350 350

B. Debt

ADB Direct Loan 45.0 45.0

USD Commercial Lenders (ADB-guaranteed loan) 45.0 37.8

USD Commercial Lenders (IDA-guaranteed loan) 45.0 37.8

USD Commercial Lenders (MIGA-guaranteed loan) 45.0 37.8

Export Finance Lenders (Coface-guaranteed loan) 166.5 180.0

French Development Agency 27.0 27.0

PROPARCO1 27.0 27.0

Thai Exim Bank 22.5 27.0

NIB 0.0 30.6

Thai commercial lenders ($ equivalent in baht) 450.0 450.0

Total Base Debt 900.0 900.0

Total Base Financing 1,250.0 1250.0

C. Contingent Equity 100.0 31.5

D. Contingent Debt, of which: 100.0 23.4

ADB Direct Loan 1.1

ADB Guaranteed Loan 1.0

Total Contingent Financing 200.0 57.0

Total Financing 1,450.0 1,304.8

ADB = Asian Development Bank, IDA = International Development Association, NIB = Nordic Investment Bank. 1 A development financial institution partly owned by the French Development Agency. Source: NTPC financial statements and documents, Asian Development Bank estimates.

14. At appraisal, the required return on equity was estimated using the capital asset pricing model (CAPM). This reevaluation agrees with the use of the CAPM and with the CAPM input assumptions parameters used at the time. Therefore, the real required return on equity used at appraisal (13.6%) has been adopted for this reevaluation. 15. As shown in Table A13.7, the overall WACC estimated for this reevaluation is 7.0%. This compares favorably with the WACC of 10.1% at appraisal. This can be attributed to a higher cost of debt calculated at appraisal.

2 Because the dollar-denominated debt will be paid off in 2022 and the baht-denominated debt in 2020, the value of

the overall cost of debt is not particularly sensitive to these projected interest rates

Appendix 13 127

16. The project’s reevaluated FIRR comfortably exceeds the recalculated WACC, indicating that the project’s standalone financial performance is acceptable.

Table A13.7: Re-estimation of Project Weighted Average Cost of Capital

Item Equity Debt Total

Amount ($ million) 381.5 923.4 1,304.8

Weighting 29.2% 70.8% 100.0%

After-tax nominal rate (n.c.) 6.42%

After-tax real rate 13.6% 4.2%

Weighted real WACC 4.0% 3.0% 7.0%

WACC = weighted average cost of capital, n.c. = not calculated. Source: NTPC and Asian Development Bank estimates.

C. Nam Theun 2 Power Company Limited’s Financial Performance 17. As suggested by the FIRR reevaluation, NTPC is in a strong financial position and the company’s financial performance is generally ahead of its own operational budgets and of the financial projections made by ADB during its original appraisal of the project. The company has met its debt service obligations and has maintained acceptable balance sheet and operating ratios. It is has also maintained prudent cash reserves. Dividend payments to shareholders have averaged $73 million per annum since commercial operations commenced, well above appraisal estimates of approximately $56 million per annum. External audits have all been unqualified and very few audit issues have been identified over the company’s life. Although full projections for the company have not been re-evaluated, there is no reason to expect NTPC’s financial performance to decline in future years. 18. Table A13.8 summarizes key historical financial metrics for the company, and where relevant compares them to the performance forecast at appraisal. Table A13.8: Summarized Nam Theun 2 Power Company Limited Financial Performance

($ million)

Item 2010 2011 2012 2013 2014 2015 2016 2017

Audited Revenue 230.6 275.7 269.3 279.0 267.5 262.6 266.1 270.6

Net profit after tax 89.4 87.7 90.4 109.0 114.6 108.2 125.5 138.6

Operating cash flows 149.4 187.4 215.9 189.4 231.8 181.0 182.7 239.3

Financing cash flows 26.7 (175.4) (134.1) (152.1) (151.0) (137.7) (149.6) (178.6)

Investing cash flows (34.9) 24.5 (15.4) 21.9 (24.5) 3.4 7.6 (19.5)

Net cash flows 141.2 36.5 66.3 59.2 56.2 46.7 40.7 41.2

Long-term debt 981.9 916.6 882.8 786.4 715.6 608.3 530.1 456.5

Equity 282.4 274.5 292.8 385.4 433.5 522.8 588.8 634.5

Debt service coverage ratio 1.8 1.5 1.7 1.4 1.8 1.4 1.4 1.7

Debt-equity ratio 78:22 77:23 75:25 67:33 62:38 54:46 47:53 42:58

Current ratio 2.5 1.7 1.3 1.1 1.0 1.0 1.1 0.8 Return on capital employed 11.5% 14.3% 14.0% 15.5% 15.5% 14.9% 16.1% 18.2%

128 Appendix 13

Item 2010 2011 2012 2013 2014 2015 2016 2017

Appraisal Estimates Revenue 144.7 206.8 210.2 213.5 216.5 219.5 222.5 225.6

Net profit after tax 47.2 51.0 61.2 69.5 77.4 80.9 88.9 100.9

Long-term debt 910.4 861.5 806.3 744.0 672.9 598.2 516.2 423.1

Equity 445.2 443.8 450.1 464.8 486.6 509.9 538.6 582.5

Debt service coverage ratio 1.0 1.6 1.5 1.5 1.5 1.5 1.5 1.5

Debt-equity ratio 67:33 66:34 64:36 62:38 58:42 54:46 49:51 42:58

Current ratio 10.4 19.3 19.1 21.3 19.7 17.5 24.7 23.5 Return on capital employed 6.6% 9.8% 10.7% 11.4% 12.2% 12.8% 14.0% 15.3%

Source: NTPC annual reports and Asian Development Bank estimates.

D. Government’s Investment in NTPC 19. The financial viability of the Project from its perspective was also assessed. Because the government is both a shareholder in NTPC and the authority that taxes NTPC revenue and earnings, an assessment of financial returns must include income from shareholding in NTPC, taxation and royalty income. 20. Cash flow and financial internal rate of return. Cash outflows and inflows are limited to those directly incurred or received by government. Cash outflows consist of the equity injections made by the Government into NTPC (via LHSE). Cash inflows to the government consist of three components: (i) shareholder dividends paid by NTPC to the government through LHSE;3 (ii) the royalty paid by NTPC on its revenue; and (iii) income tax paid by NTPC on its profits. At the end of the concession (currently April 2035), the project assets will be transferred by NTPC at no cost to the government. Given that the economic life of the assets should extend well beyond 2035, the government could then use the facility to generate power for consumption within Lao and/or for sale to Thailand. Therefore, the project should generate net cash flows to the government beyond the end of the concession. However, given that the use and value of the power over this post-concession period are uncertain, the terminal value was conservatively estimated based on an assumption of a further 15 years of operations and an average offtake tariff at around half of the 2035 level. 21. Table A13.9 summarizes the historical and expected cash flows to the government (expressed in constant 2010 terms, ignoring any incremental administration costs in the government and/or in LHSE). The FIRR of these cash flows is calculated as 21.7%, compared to 21.1% estimated at appraisal. Over the concession period, nominal cash inflows to the government are forecast to total $2.6 billion.

3 It was assumed that dividend cash flow to LHSE are paid to the government on a back-to-back basis, although in

practice this might not be the case (for example, if LHSE uses this cash to reinvest in other projects).

Appendix 13 129

Table A13.9: Reevaluation of Financial Internal Rate of Return of Government’s Investment

(2010 $ million)

Year Investment Revenue Net

Royalties Dividends Income Tax1 Cash Flow

2004 0.0 0.0 0.0 0.0 0.0

2005 30.8 0.0 0.0 0.0 (30.8)

2006 10.4 0.0 0.0 0.0 (10.4)

2007 1.7 0.0 0.0 0.0 (1.7)

2008 24.6 0.0 0.0 0.0 (24.6)

2009 33.3 0.2 0.0 0.0 (33.1)

2010 5.1 11.3 0.0 0.0 6.2

2011 0.0 12.5 13.9 0.0 26.3

2012 0.0 12.0 14.1 0.0 26.1

2013 0.0 12.3 27.5 0.0 39.8

2014 0.0 11.5 15.9 0.0 27.4

2015 0.0 11.1 12.2 2.0 25.4

2016 0.0 11.0 12.8 4.7 28.5

2017 0.0 11.0 15.5 5.6 32.1

2018 0.0 10.9 14.5 6.1 31.5

2019 0.0 10.7 12.5 6.6 29.8

2020 0.0 31.2 11.3 7.1 49.6

2021 0.0 30.9 22.0 7.0 59.8

2022 0.0 30.6 33.0 20.4 84.1

2023 0.0 30.5 31.5 19.9 81.9

2024 0.0 30.3 31.6 19.4 81.4

2025 0.0 60.2 30.5 19.0 109.7

2026 0.0 59.9 24.2 18.5 102.6

2027 0.0 59.5 24.2 18.0 101.8

2028 0.0 59.2 22.0 35.2 116.4

2029 0.0 58.8 19.9 34.3 113.0

2030 0.0 58.5 20.0 33.4 111.9

2031 0.0 58.1 20.1 32.6 110.8

2032 0.0 57.7 20.2 31.7 109.7

2033 0.0 57.4 20.3 30.9 108.6

2034 0.0 57.1 20.4 30.1 107.6

2035 0.0 18.9 23.3 9.8 52.0

Terminal value: 711.1

FIRR: 21.7%

FNPV:2 1,793.8

FIRR = financial internal rate of return, FNPV = financial net present value 1 Income tax shown here differs to the income tax expense in the FIRR reevaluation for the

project, as for the latter the interest tax shield has been removed. 2 Discounted to 2004. Source: Lao Holding State Enterprise financial statements and presentations, Asian Development Bank estimates.

22. Weighted average cost of government’s equity contribution. The government’s equity investment in NTPC was entirely funded by way of a loan from ADB’s ordinary capital resources,

130 Appendix 13

and concessional debt finance European Investment Bank, French Development Agency and the International Development Association. The weighted average cost of debt was calculated as an internal rate of return of debt servicing cash flows, based on actual debt service to date and forecast debt service payments.4 Table A13.10 shows the cost calculation for the government’s equity contribution to the project. This revised (real) WACC of 1.1% compares with the value of 6.9% calculated at appraisal, largely reflecting the fact that the government did not inject any of its own cash into the investment, whereas at appraisal it was assumed that approximately 30% of equity invested in the project would come from the government.

Table A13.10: Re-estimation of the Cost of the Government’s Equity Contribution

Item Equity Debt Total

Weighting 0.0% 100.0% 100.0% Nominal Rate (n.c.) 3.9% Real Rate 13.6% 1.1% Weighted Real WACC 0.0% 1.1% 1.1%

WACC = weighted average cost of capital, n.c. = not calculated (the real required return on equity from appraisal was adopted and the nominal rate was not required to be recalculated. Source: LHSE presentation and Asian Development Bank estimates.

23. However, this is not the WACC against which the government’s investment in NTPC should be benchmarked: the government’s required return on its equity investment is a (real) rate of 13.6%. This hurdle rate is significantly exceeded by the FIRR and therefore the government’s investment in NTPC considered to be a sound financial investment. 24. The low-cost public sector loans raised by the government to finance its equity contribution to the project (including the $20 million loan from ADB) generated significant dividend and net cash flow to the government from NTPC, and this review considers the use of these loans in this context to be a sensible strategic decision.

4 The European Investment Bank and French Development Agency loans have fixed interest rates. ADB and

International Development Association loans are US Libor-based.