middleton_regional urban-rural divide

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Regional Electricity Planning and Transboundary Rural-Urban Divide

Dr. Carl Middleton 1, Lecturer, Master of Arts in International Development Studies(MAIDS), Faculty of Political Science, Chulalongkorn University

Prepared for

“International Seminar on Rural-Urban Tensions, Violence, & Conflict Transformation:Thailand in Global Comparative Perspective”

26-27 August 2010, Chulalongkorn University, Bangkok, Thailand

Introduction

In the Mekong Region, demand for electricity is growing rapidly, especially in Thailandand Vietnam, driven by rapid industrialization, export-led industrial expansion, andexpanding domestic consumer markets. Whilst the extent of this growth and the best way

to meet it is increasingly contested between civil society and government agencies,exploitation of the region’s hydropower resources remains high on each Mekonggovernments’ agenda, including through developing a regional market for electricitytrade (Middleton et al , 2009).

Over the past five decades, numerous large hydropower projects in the Mekong Region,such as the World Bank-financed Pak Mun Dam in Thailand and the Asian DevelopmentBank (ADB) backed Theun Hinboun Dam in Laos, have often left affected localcommunities worse off to this day (Amornsakchai et al. , 2000; FIVAS, 2007). Mostrecently, the ADB and World Bank were instrumental in pushing through the Nam Thuen2 project in Lao, approved in 2005, after a fiercely contested decade-long project

preparation process that questioned the project’s consistency with the banks’ safeguardstandards (Lawrence, 2009).

Whilst Western governments, corporations and consultancies, backed by the ADB andthe World Bank, have been influential in promoting and financing major hydropowerschemes in the Mekong region in the past, in particular in Laos and Thailand, over thepast ten years a new generation of hydropower developers has emerged as the keyadvocates of hydropower development. These new developers, mainly from Thailand,Vietnam, China, and Malaysia, have picked up many projects that were abandoned byWestern corporations during the 1997 Asian financial crisis. In a complex interplay of political support, development aid, and entrepreneurial spirit, these new proponents have

led the revived push for widespread hydropower exploitation, often backed by exportcredit agencies and commercial financiers from their own countries. Yet, to date, thesedevelopers and their financiers have demonstrated little commitment to InternationalStandards or meaningful Corporate Social Responsibility (CSR).

1 Author’s email: [email protected]



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Securing a reliable and sufficient supply of electricity is important to many dimensions of development. Yet, in a region where millions of people depend on the natural resourcesthat rivers provide, many proposed dams pose risks for to the livelihoods of ruralcommunities and threaten to create conflicts with project developers, their financiers, thegovernments.

With a focus on hydropower development and regional power trade, this paper exploresthe trends towards regionalization in the Mekong region and its consequences, inparticular the externalization of environmental and social costs by Thailand and China,and increasingly Vietnam, to neighboring countries where governance is weak, namelyCambodia, Lao and Burma, that is creating new forms of transboundary urban-ruraldivide and potential conflict. Three power-export projects in Lao are examined in detail:Nam Theun 2 Dam; Theun Hinboun Dam; and the Nam Ngum 2 Dam. The causes andimplications of transboundary conflicts on transboundary rivers are also discussed,namely on the Sesan River shared between Cambodia and Vietnam, and on the Lancang-Mekong mainstream shared between China and the downstream Mekong countries. The

paper concludes by considering how electricity planning could be undertaken better toreduce costs and maximize benefits, and considers the appropriate role of governmentand the private sector.

Regionalization in the “Greater Mekong Subregion”

Since the early 1990s, the Asian Development Bank (ADB) has promoted regionaleconomic integration between Burma, Cambodia, Laos, Thailand, Vietnam, and Yunnanand Guangxi provinces of China through its Greater Mekong Subregion (GMS) program.Following the GMS’s 3C principles of “Competitiveness, Connectivity and Community,”and with a vision to create a single, borderless economy, an important focus of the GMSprogram has been building large-scale infrastructure to physically interconnect the region,such as roads, railways, high-voltage transmission lines and hydropower dams. The GMSframework promotes private sector investment as the principle engine of development,including the privatization of public services such as water, gas and electricity (ADB,2008).

Economic regional integration has undoubtedly brought benefits to some. The region’srising GDP, which has increased significantly since the early 1990s, is cited by the ADBas the key measure of the GMS’s success. Furthermore, by the ADB’s measurement theproportion of people living in extreme poverty (on less than $1 a day) has also droppedsignificantly; between 1990 and 2003, the proportion of people living on less than $1 aday fell from 46% to 34% in Cambodia, 33% to 13% in the People’s Republic of China,53% to 29% in the Lao People’s Democratic Republic, 10% to less than 1% in Thailand,and 51% to 10% in Viet Nam.

Yet, whilst conventional economic indicators such as GDP may show growth, statisticssuch as these say little about whether quality of life is actually improving or inequalitiesnarrowing. Within the Mekong Region a large portion of the goods and services thatenrich people’s quality of life are found outside of the formal monetary economy and,



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unfortunately, there is a growing body of evidence indicating that life is getting harder, inparticular for those at the margins of the region’s new market-based economy. OxfamAustralia, in a recent report, observe that “Most GMS projects focus on promotingeconomic growth or regional integration, with little explicit focus on targeted povertyinterventions” and suggest that growing inequality in the region and accelerating

environmental degradation is symptomatic of the regional integration and economicmodernization model (Cornford and Matthews, 2007).

The regionalization now underway in the Mekong region is establishing a “resourceextraction economy” which is increasingly integrated into the global economy and thatfacilitates regional and multinational investors to gain access to new markets and naturalresources (Guttal, 2006). This development path threatens to undermine the naturalresource base upon which the region’s majority rural populations depend for their foodsecurity and other basic needs (Peterson and Middleton, 2009).

Regional power trade in the Mekong region

The plans for regional electricity integration, first prepared by the ADB in the early1990s and now widely supported by the Mekong region’s governments, serves as apoignant case study to illustrate the potential for creating inequality and rural-urbandivide – including across borders – as a result of poorly-planned, large-scaleinfrastructure projects.

The ADB’s first regional electricity study, completed in 1994, was carried out byNorconsult International, one of Norway’s largest hydropower consulting companies(Norconsult, 1994). Reflecting both the study’s terms of reference and the consultants’own bias, the plan envisaged a network of high-voltage transmission lines linking theMekong countries and opening up mountainous regions mostly in Laos, Yunnan provinceof China, and Burma to hydropower development to export electricity to Thailand andVietnam. In 2002, a second study funded by the ADB filled out the details of this masterplan and in 2009 the plan’s logic was extended to the wider energy sector, including coaland gas, which was endorsed at the GMS Ministers’ Summit in June 2009 in Thailand(ADB 2009).

In many ways, these plans reflect the Mekong region’s governments’ own preconceivedideas for electricity generation and limited consultation with the public, and are a missedopportunity to assess all potential options to meet the region’s energy needs. These plansalso fail to take account of the cumulative social and environmental impacts, and havebeen prepared largely without the participation of diverse stakeholders. As such, theplanning process to date falls well short of international standards in energy planning,such as Integrated Resources Planning that is now common in many highly-industrializedcountries.

These regional power development plans have also been the root source of injustice to thetens of thousands of people who have already been affected by export-orientated



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hydropower projects, such as the Theun Hinboun, Nam Ngum 2, and Nam Theun 2 damsin Laos (see below).

Electricity Demand and Hydropower Potential in the Mekong Region

As all economies in the region continue to rapidly expand, demand for electricity issurging. Thailand’s government estimates that electricity demand in Thailand willapproximately double to 70,000 megawatts (MW) by 2030 (Permpongsacharoen, 2010).In Vietnam, one of the world’s fastest growing economies, according to Vietnam’sgovernment demand is predicted to triple by 2020 to 69,500 MW, requiring theconstruction of 50,000 MW of new generation capacity (Sinh, 2010). Burma, Cambodiaand Lao have more modest domestic demand growth predictions, although allgovernments have committed to urgently develop electricity infrastructure to supporteconomic growth.

Thailand, which has already developed much of its domestic hydropower potential and

faces stiff opposition to further projects at home, plans to import at least 14,000 MW of hydroelectricity from neighboring Burma, Lao and Yunnan Province, China over thecoming fifteen years. Vietnam plans to develop almost all of its viable hydropower overthe next twenty years, totaling at least 17,000 megawatts, as well as importing electricityfrom Cambodia, China, and Laos. Responding to this demand, the governments of Burma,Cambodia and Lao are keen to develop their relatively unexploited hydropower potentialfor both electricity export, which would earn these governments foreign currency, anddomestic demand. Laos, for example, has proclaimed its ambition to become the “batteryof Southeast Asia” and generating revenues from hydropower exports is a key policy of the government; as of March 2010, Laos had 8 hydropower dams in operation, 7officially under construction, 18 at a planning stage, and 51 at a feasibility stage, and thegovernment holds Memorandum of Understanding with Thailand to export 7000 MW by2015 and with Vietnam to export 3000 MW by 2020 (International Rivers, 2010).

Burma, Cambodia and Laos’ total hydropower potential is approximately 40,000 MW,10,000 MW, and 26,500 MW respectively. Not all of this capacity, however, iseconomically viable, and some planned hydropower schemes, such as those proposed onthe Mekong River and Salween River mainstreams, if developed would inevitably incurmassive environmental and social costs and have drawn significant controversy.

Hydropower development in the Mekong region is hotly contested – to the extent thatpolitical space permits - by affected communities, academics, and civil societyorganizations. i Many are concerned that plans for hydropower are moving forward in ahaphazard and unregulated fashion and without genuine consultation with localcommunities and other stakeholders. If developed in this way, they argue, hydropowerdams threaten the integrity of the Mekong river ecosystem through blocking themigration of fish and the transport of sediment, and through changing the natural flood-drought cycle of the rivers. In turn, this threatens the livelihoods of the millions of peoplethat depend on the Mekong River and its resources.



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Civil society groups have also questioned Thailand and Vietnam’s power developmentplans, which heavily promote the development of new large-scale electricity generationplants, such as fossil-fuel fired power stations and hydropower dams, and that areincreasingly locking the region into a centralized electricity supply model (Greacen andFootner, 2006; VUSTA, 2007). They claim that future electricity demands are

overestimated, and that the potential that investment in energy efficiency measures,renewable energy, and decentralized energy options could play are downplayed,especially in the more industrialized cities of the region in Thailand and Vietnam. Theyargue that existing plans mostly serve the interests of the state-owned electricity utilities,energy companies, and the construction industry, rather than the needs of the regions’electricity consumers (Gracen and Gracen, 2004).

Hydropower Development in Laos

In Laos, rivers provide for fish, drinking water, irrigation and transport for the majority of the rural population. As described above, Laos is now undergoing a dam-building boom,

with the majority of the generated hydroelectricity to be sold to neighboring Thailand,Cambodia and Vietnam. Laos is a one-party socialist state where press freedoms islimited, independent civil society organizations are restricted, and corruption is high(Stuart-Fox, 2006). These circumstances significantly enhance the risks associated withhydropower development – particularly for the hundreds of thousands of villagers whowould be affected by extensive hydropower development. Project developers fromThailand, Vietnam, Russia, Malaysia, China, Japan, and Korea, amongst others, arecompeting with each other in what threatens to become a race to the bottom in terms of environmental and social standards (International Rivers, 2008).

Many of the laws, regulations and policy developed in preparation for the Nam Theun 2project with support from the ADB and World Bank contain important provisions toensure participation, consultation, information disclosure, compensation and resettlementwith livelihood restoration for affected communities. However, whilst Nam Theun 2 hasstruggled to meet its environmental and social commitments, it is clear that subsequenthydropower projects by the new developers are not following these standards and theyare not being enforced by the government of Lao (International Rivers, 2008). Theseimplementation failures are most evident during the development and review of theenvironmental impact assessments (EIAs) and resettlement action plans (RAPs) forhydropower projects, for example the Nam Ngum 2 and Sekamen 3 projects that are nowalmost complete. EIAs and RAPs have generally not been disclosed to the general publicand are often of questionable quality, and there has been a general lack of progress tooperationalize the National Policy on the Environmental and Social Sustainability of theHydropower Sector (2005).

Power Exports to Thailand: The social and environmental costs of hydropowerdevelopment

Thailand’s power demand has been a key driver for hydropower development in Laos,with dam projects being built in Lao that would largely be unacceptable to local



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communities in Thailand nowadays. Consumers in Thailand’s urban centers have alsobenefited from the seemingly cheap electricity that hides these projects’ social andenvironmental liabilities. In other words, these costs are being externalized toneighboring countries.

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Nam Theun 2The 1,070 megawatt Nam Theun 2 Dam is located in Khammouane province, CentralLaos. The project is owned by Electricité de France International (35%), the ElectricityGenerating Company of Thailand (25%), Lao Holding State Enterprise (25%) and Ital-Thai Development (15%). Nam Theun 2 began generating power in March 2010,exporting more than 90% of the power to Thailand.

The Nam Theun 2 project has a complex financing arrangement, involving fivemultilateral agencies, four export credit agencies, two bilateral governmental agencies,nine international commercial banks and seven Thai commercial banks. At the time, NamTheun 2 was the largest internationally-financed Independent Power Producer (IPP) inAsia since 1997, and the largest single foreign investment ever in Lao PDR. The WorldBank and ADB were central players in brokering the agreement, because of the financingcomplexity and because the World Bank Group’s and ADB’s political risk guaranteeslowered the project’s risk profile to attract commercial bank financing, in particular forthe US dollar international lenders.

In supporting Nam Theun 2, the World Bank and Asian Development Bank (ADB) haveclaimed that the mistakes of their past hydropower projects would not be replicated. Yet,key questions remain around the project’s livelihood restoration programs and whetherthe project will really contribute towards poverty reduction in Laos (International Rivers,2008).

To make way for the Nam Theun 2 Dam, 6,200 indigenous peoples were forciblyresettled from the reservoir area on the Nakai Plateau. While they have received betterhouses, water supply, and electricity, the dam’s large reservoir leaves these people withonly one-third of the land they once used for farming, grazing and collecting forestproducts. Within these constraints, Nam Theun 2’s developers still have not yetdeveloped clear plans for how these resettled people will earn income and feed theirfamilies in their new villages.

Approximately 15,000 people have been affected by the project’s construction activities,losing land, assets, and access to resources. The World Bank and ADB’s resettlement anddisclosure policies have been violated on occasion, as well as the provisions of theproject’s Concession Agreement. Compensation payments and replacement land forvillagers affected by construction activities have been inadequate, unfair, or in somecases, non-existent.

Since its turbines started operating in March 2010, Nam Theun 2 has also affected asmany as 120,000 villagers living along the Xe Bang Fai River, the Mekong tributary intowhich Nam Theun’s waters is diverted. Over the past months, the Xe Bang Fai villagers



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have suffered frequent flooding, poor water quality that is mostly like causing skincomplaints now being experienced by villagers, and inundated riverbank gardens, theimpacts of which have been inadequately prepared for or addressed by the company(Mekong Watch and International Rivers, 2010).

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Nam Ngum 2The US$832 million, 615MW Nam Ngum 2 Hydropower Project broke ground in 2006.Its shareholders are primarily Thai construction and energy companies, including Ch.Karnchang and Ratchaburi. The Nam Ngum 2 Dam is wholly financed by three Thaicommercial banks, namely Krung Thai Bank, Siam City Bank, and the Thai MilitaryBank. Details on the financing arrangement are unclear, although it is known that theExport-Import Bank of Thailand guaranteed a baht-denominated bond issue by Electricitédu Laos totaling 1.5 billion baht for its 25% stake in the project, with the Lao Ministry of Finance acting as a counter-guarantor (Middleton, 2009)

Nam Ngum 2 is being developed within the context of chaotic development within theNam Ngum River Basin, home to 10% of Laos’ population, with competition betweenthe logging, mining and hydropower sectors that threaten the area’s fisheries, tourismpotential, and land and water quality, as well as the livelihoods and culture of tens of thousands of ethnic minority people.

Whilst Nam Ngum 2’s EIA has apparently been finalized, it has not been publiclydisclosed, in violation of National Hydropower Policy. Despite this, the project’stransmission line cuts through Phou Khao Khouay National Protected Area, fragmentingthe area and opening it up to timber and wildlife exploitation. The dam will block keyfish migration routes and affect the quality of water entering the Nam Ngum 1 reservoirdownstream, an important fishery for more than 9,000 people.

The future livelihoods of an estimated 6,100 mainly ethnic minorities resettled by theNam Ngum 2 dam remains uncertain. Viable alternative livelihood plans have not beenpresented as a Resettlement Action Plan has not been publicly released. The resettlementprocess itself has been widely criticized with villagers from different ethnic groups beinggrouped into three “focal sites” 120 km to the west of their present villages withinsufficient land to support their livelihoods and without their participation in theresettlement process (International Rivers, 2008).

In March 2010, the Nam Ngum 2 started impounding its reservoir creating a shortage of water in the Nam Ngum 1 reservoir downstream that generates electricity for Laos’capital, Vientiane (Vientiane Times, 6 July 2006). As a result, there were seriouselectricity shortages in Vientiane, which were partially met by importing expensiveelectricity from Thailand. Nam Ngum 2 dam had previously sought to increase itselectricity tariff to EGAT, facing increased construction costs from the 2008 oil crisis,although EGAT had refused but instead offered to buy electricity from the project early if construction could be accelerated. The original planned year of commission was 2013,according to the Lao government’s website. ii It appears, therefore, that Nam Ngum 2’s



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earlier completion represents the prioritization of private sector profit motives over Laos’national interest and securing the capital’s power needs.

• Theun Hinboun and the Theun Hinboun Expansion Project

The 210 MW Theun-Hinboun Hydropower Project (THHP), commissioned in 1998, isthe first build–operate–transfer (BOT) project in Laos. Partially funded by the AsianDevelopment Bank (ADB) and the Nordic Development Fund, the project is owned byElectricité du Laos (EdL) (60 per cent), Norway’s Statkraft (20 per cent) and Thailand’sGMS Power (20 per cent), and exports 95 per cent of its power to Thailand.

While initially lauded by the ADB as a project with ‘little for the environmental lobby tocriticize’, widespread impacts soon emerged that the ADB later reluctantly acknowledged(ADB, 1999). The project has reduced fishery catches between 30 and 90 per cent alongthe three rivers it affected, and has caused extensive river erosion and severe downstreamflooding, resulting in repeated loss of wet season rice crops, water contamination, skindiseases and death of livestock from drowning and disease. The net result has been asevere impact upon the livelihoods of 30,000 people living downstream and upstream of the dam (FIVAS, 2007).

After sustained pressure from non-governmental organizations (NGOs), the project’sowners released a Mitigation and Compensation Program in September 2000. While theprogram has been able to address some of the material needs of the villagers, such asbuilding wells, its efforts to replace lost livelihoods, such as encouraging villagers togrow dry season rice, cash crops and livestock, have been problematic and are mostlyfailing (Barney, 2007).

Although the project has made villagers poorer, it has generated windfall profits for itsshareholders. Located downstream from the Nam Theun 2 Dam, Theun-Hinboun'searnings were boosted by the long delays in Nam Theun 2's implementation. In April2008 the project’s operators reported strong profits (Vientiane Times, 2 July 2008). EdLalone had received total dividends of US$145 million since the project wascommissioned, which is greater than its initial investment. The Government of Lao hasearned about US$27 million as royalty fees and US$9 million in taxes.

To make up for the reduced water flows caused by Nam Theun 2, which started filling itsreservoir in 2008, in October 2008 the company started building a new dam called theTheun-Hinboun Expansion Project on the Nam Gnouang River, a tributary of the TheunRiver. The US$585.5 million Theun-Hinboun Expansion Project is financed by four Thaicommercial banks (Bank of Ayudhaya, Kasikorn Bank, Siam City Bank, and ThanachartBank) and three international commercial banks. Thailand’s Export-Import Bank contributed a further US$100 million. An earlier US$152 million refinancing deal inApril 2002 for the existing Theun-Hinboun project was covered entirely by Thai banks(Middleton, 2009).

The Theun-Hinboun Expansion Project is displacing 4,800 people and will effectivelydouble flows down the Hai and Hinboun rivers, causing more flooding, erosion, fisheries



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losses and resettlement. The project has been criticized for violating Lao law onresettlement and the Equator Principles, and failing to provide viable resettlement andlivelihood restoration plans (Banktrack et al , 2009).

Power Exports to Vietnam from Hydropower in Laos and Cambodia

To secure its electricity supply, Vietnam has also looked to its neighbours, partlyfacilitated by the ADB’s GMS programme. From Laos, by 2010, Vietnam will importpower from the 250MW Xekaman 3 Dam, the first of at least nine hydropower projects itis considering in Laos (LNCE, 2008). Furthermore, in June 2007, EVN agreed withCambodia’s government to undertake feasibility studies on the Lower Sesan 2, whichwould export some of its electricity to Vietnam.

The Viet Nam-Laos Joint Stock Electricity Investment and Development Company(VLEIDC), whose major shareholder is Song Da Corporation - Vietnam’s largestconstruction company -, commenced construction of the 250MW Xekaman 3

hydropower project in Southern Lao in 2006. Financing has largely been secured througha bonds issued by Vietnam’s Ministry of Finance and loans from Vietnamese commercialbanks. As with the Thai-backed Nam Ngum 2, the project’s EIA documents have notbeen publicly disclosed in violation of Laos’ National Hydropower Policy. The VLEIDCis presently studying a further 4 hydropower projects in the Xekong and Xekamen basinsthat, in combination with several other hydropower projects under study by Russian andKorean developers, threaten the livelihoods of ten of thousands of people in Lao anddownstream in Cambodia along the Srepok River (Hubble, 2007).

Bilateral transboundary tensions and urban-rural divide created by tributaryhydropower dams: Sesan River

Dam cascades are being built on two major Mekong tributaries in Vietnam, the Se Sanand Srepok Rivers, the impacts of which are being experienced by ethnic minoritiesliving in Vietnam and by Cambodian villagers living downstream. The electricity fromthese projects are delivered far away from the area of impact to Ho Chi Minh City.

Vietnam has paid no compensation to the tens of thousands of Cambodians livingdownstream who have been affected by the Yali Falls Dam, commissioned in 2001 butcausing major flooding since 1996, and four other projects on the Se San River inVietnam, although the trans-boundary environmental and socio-economic impacts arewell documented (Fisheries Office and NTFP 2000; Rutkow et al. 2005; 3SPN 2006).

Approximately 55,000 people from 16 ethnic groups living along and depending on theSesan River for their fishing and farming have experienced, to varying extent, dailyerratic water fluctuations, widespread flooding, illness due to poor water quality, loss of riverbank gardens, and diminished fish stocks. Dam-induced flooding has killed at least39 people. Whilst the downstream impacts were acknowledged by the VietnameseGovernment in 2000, there has been little progress in addressing downstream impacts.After years of protests from affected villagers, in 2008 the Vietnamese government



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agreed to participate in consultations with affected villagers over the impacts of planneddams on the Se San and Srepok Rivers, yet even to date it is unclear what impact theseconsultations have had on project plans or on villagers’ requests for compensation.

Instead, In June 2007, EVN agreed with Cambodia’s government to undertake feasibility

studies on the Lower Sesan 2, which would export some of its electricity to Vietnam.This project has also been heavily criticized for its potential environmental and socialimpacts (Rivers Coalition in Cambodia, 2009).

Bilateral transboundary tensions by mainstream hydropower dams: The Lancang -Mekong

China has plans to develop a cascade of eight dams on the Lancang (Upper Mekong)mainstream in Yunnan Province. Four of these projects have already been completed, andat least two more are under construction. China started operating its first dam - theManwan dam - on the Lancang mainstream in 1992. The second and third dams,

Dachaoshan and Jinghong, were completed in 2003 and 2008. In July 2009, the XiaowanDam, which has a capacity of at least 15 cubic kilometers of water, started filling itsreservoir. These dams are built under China’s West to East policy, that promotes thedevelopment of hydropower in Yunnan province to send power to cities and industrialcenters, such as Shanghai, on the Eastern seaboard (Magee, 2006).

These projects have been developed without any consultation with downstream countries.Limited environmental impact assessments have only recently been made publiclyavailable within China for some of these projects, although only after the dams have nowbeen built, and there has been no comprehensive assessment of the cumulative impacts of these projects on the ecology and hydrology of the Mekong River in downstreamcountries.

Academics have previously linked changes to the Mekong River’s daily hydrology andsediment load since the early 1990s to the operation of the Lancang dam cascade (Lu andSiew, 2006). As a result, communities downstream in Northern Thailand, Burma andLaos have suffered from a loss of fish and aquatic plant resources, which have impactedlocal economies and livelihoods (SEARIN, 2004); since the second project, Dachaoshan,was completed in 2003 local people were reporting a 50% decline in fish catch.

In 2010 the Mekong Region suffered its worse drought in decades. Fishers and farmerswho depend on the river for their livelihoods, especially in Northern Laos, Thailand,southwest China and Viet Nam, suffered from declining fish catches, reduced water forirrigated agriculture, livestock and drinking, and grounded river transportation affectingtrade and tourism.

While less rainfall was undoubtedly an important factor in the 2010 drought, the role thatChina’s Lancang (upper Mekong) dam cascade played in the drought came underscrutiny given the dams’ poor transparency on reservoir water-levels and dam operationdata, in particular because the filling of the Xiaowan Dam’s reservoir coincided with the



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period of reduced rainfall and then drought. The situation was covered extensively by themedia in Thailand and China, as well as internationally, creating significant tensionbetween rural river-dependent communities in Northern Thailand and the ChineseGovernment. To date, despite requests by civil society and local communities in April2010, definitive clarification on the role played by the dams in the drought, or if water

stored could have helped alleviate its impacts, has not been released.Thailand’s Electricity Demand and Hydropower Developers and Financiers:Exporting Urban-Rural Disparity Across Borders and the Failure of Corporate andSocial Responsibility

As Thailand’s economy and demand for power has grown, and the Thai public’sresistance to new large domestic power plants strengthened, Thailand’s electricity utility,EGAT, has increasingly favored importing power from neighboring countries wherehydropower potential is huge and community opposition is largely stifled. Now, inaddition to domestic power projects, Thailand’s Independent Power Producer (IPPs)

companies are conducting feasibility studies for tens of projects in Laos and Burma,including on the Mekong River and Salween River mainstreams.

The role of EGAT dominates power planning and development in Thailand (Gracen andGracen, 2004). EGAT owns just under half of Thailand’s total generation capacity withthe remainder provided by IPPs. However, EGAT is also a major shareholder in severalmajor IPPs, including the Electricity Generating Company of Thailand (EGCO) (25%)and Ratchaburi Electricity Generating Holding Company (45%). This creates acontradiction in the role of bureaucrats (civil servants), politicians, and state ownedenterprises that should act in the public interest, but are at risk of being influence by a“private sector incentive.” Whilst an independent electricity regulator, the EnergyRegulatory Commission, was established in 2007 it is yet to become fully empoweredand effective in its role of protecting the public interest and promoting better powerplanning processes with meaningful public participation. Whether it will successfullydecouple government from private sector interests and how it will respond toenvironmental and social issues on power import projects remains to be seen.

Several companies, for example EGCO and Ratchaburi, identify investing in regionalenergy projects as core to their business strategies (Middleton, 2009). Thailand’sconstruction industry is also increasingly looking towards foreign markets; Ch.Karnchang, Thailand’s second largest construction company, for example noted a slumpin domestic business in recent years necessitating greater effort seeking business in theMekong region (Wiriyapong, 2008). Furthermore, buoyed by Thailand’s powerdevelopment plans that support electricity imports from neighboring countries,Thailand’s commercial banks, including Bangkok Bank; Bank of Ayudhya; KasikornBank; Krung Thai Bank; Siam City Bank; Siam Commercial Bank; Thai Military Bank;and Thanachart Bank, have also proven to be willing backers of major regional energyprojects.



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Whilst most major Thai energy companies, such as EGCO and Ratchaburi, havestatements on Corporate and Social Responsibility (CSR) available on their website, inthe case of the regional hydropower projects that they are involved in there is littleevidence that they are seriously implementing these commitments in practice. In fact,Thai energy companies’ interpretation of CSR for their Thai projects is generally to

providing conservation and community programs to those affected by a project orelsewhere, rather than CSR functioning to act as a screening mechanism to eliminate poorprojects and minimize the impacts of those that do go ahead.

All of the above major Thai commercial banks also have some form of CorporateGovernance and Corporate Social Responsibility (CSR) commitment on paper(Middleton, 2009). These commitments vary between banks but include: fair treatment of stakeholders, including customers, investors, business partners, and wider society and theenvironment; compliance with relevant laws; transparency and information disclosure;and environmental conservation and support for local communities. Despite thesecommendable commitments, however, fundamental changes to the bank’s core business

practices have not occurred and therefore these policies are yet to be meaningfullyimplemented, as reflected in their lending to the Nam Theun 2, Theun HinbounExpansion Project and Nam Ngum 2 dams detailed above.

Conclusion: Towards Regional Urban-Rural Reconciliation

Private-sector led regional-scale investment in the Mekong Region is growing in scopeand ambition. It has been investors from the region’s wealthier countries of Thailand,China and Vietnam that have increasingly sought to invest in extraction-oriented largeprojects in their resource-rich, but less wealthy neighbors of Laos, Cambodia and Burma.Yet, all too often a form of frontier capitalism has emerged where investors, cooperating

with politically-connected elites, are developing projects such as hydropower dams (aswell as mines, plantations and agricultural concessions) that in the process underminerural livelihoods with seemingly little regard.

Reflecting on the track-record of the new regional hydropower proponents to date, theircommitment to international social and environment standards is dubious, and their lack of public accountability is worrisome. The risk that affected communities willdisproportionally bear project-associated risks is compounded by the current weak enforcement of national law, especially in Burma, Cambodia, and Lao. Skewedelectricity planning that is largely unaccountable to the public in Thailand andincreasingly in Vietnam, and that fails to take account of all potential options, as well as

consider environmental and social costs alongside economic criteria, has also resulted inthe current situation.

Whilst this situation may reflect favorably in macro-economic statistics such as GDP, theresult could seriously undermine the overall well-being of the majority rural populationdependent on the region’s river resources and contribute towards a growing disparitybetween urban and rural areas within and between the Mekong countries.



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How can regionalization become more focused on the region’s peoples’ well-being,rather than macroeconomic growth alone? And, how can the current situation whereenvironmental and social impacts of mega-projects are externalized be remedied?

In the case of regional-scale power projects, an additional level of complexity is added

when we try and identify where ultimate responsibility lies for these investments.Is it with the government of the power-purchasing country that should take responsibilityas the electricity buyer? Is it with the government of the power-exporting country thatshould enforce its national laws? Is it with the project developers or with the financiersthat, in the presence of conditions of weak governance, could opt to follow internationalstandards and best practices voluntarily?

The region’s river resources are central to food security, nutrition and economies, as wellas cultural heritage. Many large dams built to date have exacerbated rather than reducedpoverty for local people. Even the model project for the region, Nam Theun 2 in Lao, isrunning into serious problems as it begins operation. Given the difficulties in mitigating

the impacts of large dams and ensuring that affected communities are beneficiaries ratherthan victims, it is essential that a new planning process be undertaken: one that wouldobjectively analyze the social, environmental and economic impacts of planneddevelopments and come up with the best options for meeting the region’s energy needswhile protecting its ecosystems and the rights of its citizens. Implicit to this is the needfor genuine public participation in decision-making processes. For decision-making to beseen to be accountable and fair, there also needs to be a decoupling of the government’srole as planner and decision maker from its private sector interests. Despite the distanceand hidden nature of impacts of regional hydropower projects from the wider-publics eye,especially the power consumers in the region’s cities, civil society at the local, nationaland regional level must play a critical role in ensuring these responsibilities are takenseriously.

• Better electricity and water planning practices

Environmentally sustainable and socially desirable solutions to meeting the Mekongregion’s energy needs do exist, although, at present, they are not a part of any regionalenergy plan (Greacen and Footner, 2006; VUSTA, 2007). The planning processescurrently in place both at the national and regional levels falls well short of internationalstandards in electricity planning. For example, the financial incentive structure of powerutilities is a ‘rate-of-return’ structure. All utility costs are periodically submitted forreview to a regulator; if approved, the organization will be permitted to recover its costs,plus a profit margin, by passing them on to captive customers (Foran, 2008). Thisincentive structure rewards utilities for investing in power plants, not for saving energythrough energy efficiency programs.

Civil society groups in Thailand and increasingly regionally are calling for reform of thepower planning process towards integrated resources planning (IRP), a process thatconsiders a full range of feasible supply-and-demand-side options, as well as the full costto society – including social and environmental costs, as well as risk – rather than the



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lowest commercial cost to investors. Empowered and active regulators will be a keyfactor in seeing IRP successfully implemented. Furthering the IRP concept, the WorldCommission on Dams put forward a wider framework in the form of a ComprehensiveOptions Assessment that combines sustainable water and energy planning practices withpublic participation to prepare congruous, sustainable and publicly acceptable electricity-

and water-sector plans (WCD, 2000).• International Standards for Regional Investments

Many western-backed hydropower projects developed in the Mekong region over the pasttwo decades have inflicted serious impacts on communities living nearby that continue tothis day. Whilst Western donors, financiers, and multilateral banks’ have claimed to holdstrong environmental and social safeguard policies, in reality these have on the wholeproven inadequate (Middleton et al , 2009).

Of concern, however, there is little evidence that the new hydropower proponents from

Thailand, Vietnam, Malaysia, and China, are striving to attain even these deficientstandards of best-practice. To genuinely mainstream environmental and social issuesthroughout the companies’ decision-making process, CSR frameworks must reflectinternational best practice standards - such as the recommendations of the WorldCommission on Dams and the UN Norms on the Responsibility of TransnationalCorporations - and become embedded in the institutional culture of financiers andcompanies.

These frameworks could reduce the risk of developing poorly conceived projects. Giventhe massive interest in developing hydropower throughout the region, the region’sgovernments are in a strong position to only select those developers of sound reputation.

In general, best practices address issues of concern to wider society through eliminatingor minimizing externalities and sharing project benefits.

While, in principal, such practices also reduce project developer risk – for example, fromprotests or legal measures that could delay project construction or add unforeseenadditional cost – where the rule of law is weak, corruption high or local protest stifled,such risks appear smaller to project developers - therefore, they have less impetus toimplement best practices. Commercial or strategic short-term interests favor poorpractices that constantly override consideration or application of precautionary measuresor standards. Past dam projects in the Mekong Region, unfortunately, confirm that all thecompensation schemes and other concessions from dam builders and governments havebeen secured only after substantial controversy or protest.

• Green, sustainable financing

Commercial banks serve as important intermediaries that allocate resources from saversto investors across economic sectors. By adopting more sustainable banking policies andpractices, such as the Equator Principles or, even better, developing their own in-housestandards, commercial banks from China, Thailand and Vietnam could contribute



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substantially towards a prosperous, sustainable and peaceful Mekong Region for presentand future generations. This would have the added benefit of minimizing their lendingrisk and increasing their profits from lending to emerging lucrative ‘green’ businesses(Middleton, 2009; Banktrack, 2010).

In addition, amongst the new export credit agencies active in the Mekong region, onlyChina Exim Bank is known to have an environmental policy, publicly-released in May2007, and environmental guidelines that were released in August 2008, although there islittle evidence of their rigorous implementation on the ground. The Thai Exim Bank,while an increasingly keen supporter of large infrastructure projects in the region, doesnot have an environmental policy and its activities are generally unaccountable to civilsociety. Similar to commercial banks, export credit agencies should also develop andoperationalize responsible environmental and social safeguard standards.

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i For example, see www.searin.org , www.terraper.org , www.ngoforum.org.kh , www.salweenwatch.org ,www.mekong.es.usyd.edu.au/ and www.internationalrivers.org .ii www.poweringprogress.com

middleton_regional urban-rural divide

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