Dams on the Rocks
The Flawed Economics of Large Hydroelectric Dams

Corner House Briefing 08

by Nicholas Hildyard

first published 28 August 1998

Summary

Popular opposition and changing macro-economic policies have disproved the claim that large-scale hydrolectric dams provide a cheap, reliable and economic source of power.

Contents

Introduction

More than 40,000 large dams now regulate the world's rivers: some have been built to generate hydroelectricity, others to provide irrigation water, and others as part of flood control programmes. For a range of different interest groups -- from Northern-based construction companies to government bureaucracies and international development banks -- dam building has brought major benefits in the form either of lucrative contracts, opportunities for institution building -- or simply individual financial and career advancements. For those directly affected by these large construction projects, however, dams have spelled considerable human suffering. They have also inflicted an immense environmental toll: wildlife habitats have been destroyed, downstream wetlands adversely affected by reduced river flows and estuaries deprived of vital silt deposits.

Where dams have been built to generate electricity, the justification has been that they provide a cheap, reliable and economic source of power -- a claim long disputed by critics of large dams. Such critics point out that slippage in construction schedules and over-optimistic assessments of output have made many dams costly white elephants, saddling Southern countries in particular with unmanageable debts which poorer people invariably end up paying for through cuts in public expenditure on health, education and other public services. Despite powerful evidence of the dis-economies of large dam projects, however, vested institutional and financial interests have ensured that dam building programmes have continued apace over the past 30 years -- and the industry has boomed.

That boom now seems to be coming to an end. Since the early 1990s, three trends have substantially changed the prospects for building more large dams, justifying the long-held economic concerns of their critics and sending the industry spiralling into the financial doldrums:

  • Affected communities have become increasingly effective in blocking destructive hydropower projects, bringing the industry to a standstill in many Northern countries and delaying or stopping many projects in the South -- most recently the Bakun dam in Sarawak, Malaysia.
  • Mounting public concern over the environmental and social impacts of dams has resulted in many development agencies, such as the World Bank, cutting back on funding large dams or withdrawing from such funding altogether. As a consequence, the industry is increasingly bereft of public subsidies -- a trend reinforced by public expenditure cuts imposed on the South by neo-liberal policy makers.
  • The energy infrastructure sector is increasingly being opened up to private investors, few of whom have proved willing to invest in large hydropower projects, which are perceived to carry high financial risk for low financial returns. There is a growing consensus that hydropower is unlikely to attract the financial support it needs to survive in an increasingly competitive energy market.

Growth in the industry is expected to be just 4 per cent a year worldwide over the next 20 years -- much lower than for other power industries and in sharp contrast to renewables which are growing at 10-20 per cent a year. Indeed, without public support -- and a renewed flow of public funds -- many commentators now believe that the large dam industry could soon be obsolete.

Political Opposition

Key to the rapid demise of the industry has been growing public opposition worldwide to large dams.1 In Sweden, Switzerland and Norway, widespread public opposition has stopped construction of all but the smallest projects. In France, the proposed Serre de la Fare dam on the Loire River was scrapped in 1994. In Canada, a planned expansion of the massive James Bay project was cancelled after intense opposition, led by affected indigenous peoples.

In the South, opposition to dams has mushroomed, with several projects being cancelled or delayed. In India, the Sardar Sarovar dam on the Narmada River has been stalled: recently, opposition has been growing even to medium-sized dams. In Thailand, widespread protests by dam-affected communities led the Prime Minister's office to announce in 1995 that no more dams would be built for power production. Meanwhile, in Nepal, the Arun III dam was cancelled in 1996 after public opposition.

Such opposition reflects the huge numbers of people whose lives have been blighted through the building of dams: according to Patrick McCully of the International Rivers Network, some 30-60 million people worldwide have been relocated (often forcibly) as a result of hydro projects.2 The many problems associated with such resettlement -- the lack of available land for those evicted and inadequate or non-existent compensation -- have done much to tarnish the image of dams.

Corrupt and Unaccountable

As the experiences of those evicted to make way for large dams have been documented and publicised, so previously marginalised concerns about the ecological and social impacts of dams have become mainstream.

In addition, the industry is now increasingly perceived by the public as unaccountable. As Anthony Churchill, a senior advisor with the Washington Energy Group, trenchantly argued in a recent World Bank-sponsored paper on hydropower:

"Poorly-defined products, lack of discipline and political decision-making have combined to turn the industry into another fat sow elbowing its way to the public trough ... No one is really accountable for the mistakes or the lack of reality in the planning exercise. Many hydro projects, for example, were justified on the basis that oil would be $100 a barrel in the 1990s."3

The hydro industry's image has been further tarnished by a succession of corruption scandals. In Britain, for example, it was revealed that an aid package to build the Pergau dam on the Malaysian-Thai border was linked to an arms deal whereby the Malaysian government agreed to buy over £1,000 million worth of British military equipment. It later emerged, moreover, that companies with close links to Britain's then ruling Conservative party had profited substantially from the deal.4

Charges of "crony capitalism" have also been raised by Southern-based people's movements against dam developers in the South. In Malaysia, even supporters of the proposed Bakun dam in Sarawak, now shelved as a result of public opposition and lack of investor support, warned would-be private investors that the project was being pushed through by unaccountable political-corporate networks without due regard for rules and procedures.

Others pointed out that many of the contracts for the dam had been awarded not as a result of open tendering, but purely on the basis of personal contact and/or ethnic criteria. In a thinly-veiled critique of the Bakun tendering process, the Deputy Prime Minister of Malaysia publicly upbraided private sector project developers in general for monopolising the benefits of projects by awarding sub-contracts to their own subsidiaries and their corporate and political allies.5

In South America, the building of the Itaipú dam on the Paraná River has been described as "possibly the largest fraud in the history of capitalism".6 The dam was originally projected to cost some $3.4 billion, but skim-offs by military rulers in Paraguay and Brazil and their political allies contributed to the cost skyrocketing to around $20 billion. Yacyretá (projected cost $2.7 billion, final cost $11.5 billion), built downstream of Itaipú, was described by Argentinian President Carlos Menem in 1990 as "a monument to corruption".7

The Public Purse Tightens

Scandals and widespread protests by dam-affected peoples and their supporters internationally have all combined to put the large dam industry under intense pressure. Even many of its prominent supporters are increasingly disenchanted.

The World Bank, a major backer of dam projects until now, is showing signs of "donor fatigue". In the words of one World Bank official, involvement with dams has become "an inefficient and painful process".8 From funding an average of 26 dams a year between 1970 and 1985, the Bank has funded just four a year in the 1990s.9

The World Bank's Operations Evaluation Department (OED) acknowledges that:

"unfavourable experiences with resettlement, and the attendant public outcry, may lead governments to eschew investments in large-scale water storage."10

The OED's director-general, Roberto Picciotto, adds that "as a result of a growing public awareness of social and environmental impacts of large [hydropower] projects", the risk premia of such schemes have become "prohibitive".11 In addition, the Bank now concedes that the expected economic benefits have often not been forthcoming.12

Many in the Bank now believe that "a 'phased withdrawal' of official development assistance from the hydropower sector has started."13 As John Briscoe, Senior Water Advisor to the World Bank, notes in a 1998 report to the UN Commission on Sustainable Development:

"Although official development assistance still provides substantial financing to the power sector, the prognosis is not good. The World Bank's lending -- often a 'leading indicator' in the development business -- shows hydropower's share declining by 25 per cent over the past five years ... There is a general perception that official development assistance for power generation is a 'sunset sector' and that responsibility can be handed over to the private sector."14

Bilateral aid agencies are also re-evaluating their involvement in hydro projects, even in countries such as Norway where hydropower has historically been a major export earner. The Norwegian Minister for Development and Human Rights, Hilde Frafjord, recently announced a major review of tied aid programmes.15 Meanwhile, the UK's Department for International Development has recently adopted a policy of "avoiding large capital projects".16

Adding to the dam-building industry's woes are the restrictions on public expenditure imposed on Southern governments by the World Bank's and IMF's structural adjustment programmes, further curtailing the availability of public funds for infrastructure projects such as dams.

Turning to the Market

With public funds drying up, the industry has had to turn to private investors -- pension funds, banks and shareholders -- to finance hydroelectric projects, a trend reinforced by a shift in general towards private sector financing of infrastructure projects within both developed and developing countries.

At present, the private sector finances about 10-15 per cent of infrastructure investments in the South. The World Bank, however, predicts that private investors could soon be providing as much as 70 per cent of infrastructure investment.

Proposals for Independent Power Projects (IPPs) -- that is, private sector financed projects -- have mushroomed since the early 1990s, the number of "active" initiatives growing from 178 in 1992 to 2,800 in 1997. But only 11 per cent of these projects under development are dams -- and only a handful of these have raised the necessary private finance.17 In the Philippines, for example, the National Power Corporation (NPC) failed to find private sector developers for a number of hydro projects in Luzon when the projects were put up for tender in 1994.

Indeed, worldwide, only a handful of private sector hydroelectric projects have managed to attract the investment required, most relying on state involvement in one form or another. One reason is that hydropower is perceived as carrying a number of financial risks which make dams a less attractive investment than other power projects on offer -- nuclear excepted. In particular, dam projects are reknown for cost overruns and schedule slippages; in addition, their output is frequently unreliable.

Cost Overruns18

In some 70 World Bank-funded large dam projects, costs were, on average, 27 per cent above appraisal estimates (inflation adjusted), almost five times higher than the average cost overruns on coal and other thermal power stations. Significantly, cost overruns for hydro "showed a substantially larger average error than the average cost overrun for the totality of World Bank-supported projects."19

Another World Bank study reveals that, of 80 hydro projects completed in the 1970s and 1980s, three-quarters had costs in excess of budget. Final costs on half the projects were at least 25 per cent higher than estimated; costs exceeded estimates by 50 per cent or more on 30 per cent of the projects studied. Costs were less than estimated on just 25 per cent of the projects.20

Such cost overruns can partly be attributed to the fact that dams are not standardised products. In general, the larger a hydro project is, the larger its construction cost overrun in percentage terms.21 Unforeseen geological factors (which rarely come into play in other projects) are of particular concern. The World Bank states bluntly that:

"geological problems and the cost growth they cause are the norm, not the exception. This means that a large physical contingency should be included unless or until there is strong positive evidence to suggest that extraordinarily good geological conditions are present."22

Other surveys of dam construction have found similar or higher propensity for cost overruns.23 Examples include Brazil's 3,000MW Xingó dam which took seven years to build at a cost of US$3.2 billion, twice its original budget.24

Cost overruns are particularly damaging for the economics of dams: although their operating costs are very low, their construction costs are extremely high. According to John Besant-Jones, former principal energy economist at the World Bank, capital costs represent around 80 per cent of the total lifetime cost of hydro dams (excluding, as dam cost calculations always do, decommissioning costs -- see Box 1 below).25 By comparison, capital costs represent around half the lifetime costs of coal-fired plants. A 30 per cent cost construction overrun for a dam is thus much more expensive than an equivalent percentage cost overrun for a coal plant. High capital costs and the frequent need for foreign bank loans also mean that the economic viability of dam projects is extremely vulnerable to rises in interest rates and currency devaluations.26

Schedule Slippage27

Time overruns are also a common feature of large hydropower projects. Forty-nine hydro projects reviewed by the World Bank's Industry and Energy Department in 1990 took, on average, five years and eight months to build, 14 months longer than the average preconstruction estimate.28 Where resettlement is involved -- as is generally the case in large hydro-projects -- delays can be especially long, particularly if the dam is opposed by those evicted. In India, construction on the Sardar Sarovar dam has been held up in court since 1995 as a result of legal challenges brought by oustees. In Colombia, resettlement problems at the 560MW Guatape II hydro project delayed completion of the dam by three years.29

As with cost overruns, schedule slippage can have a damaging effect on project economics by delaying the time from which revenues from electricity sales and water supply can start to repay the costs of servicing debts. The World Bank notes that a one-year delay in revenue earnings will reduce the difference between the projected benefits and costs of some projects by almost a third; a two-year delay by more than half.30

In Argentina, where the Yacyretá dam was finally completed in 1994 -- eight years behind schedule -- the delay, combined with the project's huge cost overruns, means that the electricity generated by the dam is no longer competitive. The electricity is expected to cost 9.5 cents per kilowatt-hour (kWh), compared with the 4 cents per kWh currently paid in Argentina.31 At Guatape II in Colombia, delays cost the project owner the equivalent of an entire year of energy generation.

In Sri Lanka, time overruns on hydroelectric projects have led to major power shortages, prompting the government to reassess its dam programme. In 1996, the country faced a severe power crisis, in large part due to the repercussions of projects not being completed on time.32

Lower than Expected Output33

Worldwide, major hydroelectric projects have conspicuously failed to produce the amount of power originally forecast. Egypt's Aswan dam, for example, was predicted to generate 10,000 gigawatt hours per year (GWh/yr): its actual output is 7,161 GWh/yr. Itaipú on the Brazil/Paraguay border has achieved an average output of 63,839 GWh/yr, as against a predicted 79,000 GWh/yr, and Akosombo in Ghana 3,597 GWh/yr as against 5,400 GWh/yr.34

Factors which affect the output of dams include shutdowns for repairs and maintenance and, in particular, seasonal and annual variations in streamflow -- if there is not enough water to turn a dam's turbines, it cannot produce electricity. Indeed, hydrological factors are the most common reason why dams have failed to meet their capacity targets.35

In Thailand, for example, lower than expected rainfall and higher than expected leakage through its limestone bed have meant that the country's largest reservoir, Srinakharin, completed in 1977, has never filled. During 1991, Thailand's 25 largest dams contained a total of just under half their usable capacity: the following year, this figure fell to just over one third. Bhumibhol and Sirikit, both World Bank-funded dams which impounded the second and third largest reservoirs in Thailand, together contained only seven per cent of their total usable volume in March 1994.36

Reliable estimates of firm capacity depend critically on reliable information about streamflows. Unfortunately, streamflow data does not exist for most of the world's rivers. Rainfall figures alone, moreover, are no substitute. Especially in arid and semi-arid areas, rainfall and river discharge can vary so much over time that even "averages" based on many decades of reliable data may have little relevance in predicting future flows.

Global warming could exacerbate the difficulties for dam builders, since only modest changes in climate are enough to cause significant changes to rainfall patterns and hydrology, thus increasing the unpredictability of power supply.

Dam designers work on the assumption that historic hydrological variables such as average annual river flow, annual variability of flow and seasonal distribution of flow are a reliable guide to the future. As global warming takes hold, however, there are likely to be significant changes in seasonal and annual rainfall patterns and other factors affecting streamflow. Calculations of the amounts of water available to turn turbines, the maximum flood which spillways will have to discharge and the rate at which reservoirs fill with sediment will thus become increasingly unreliable.

Equally problematic are higher than expected rates of flow which could jeopardise the structure of the dam or lead to overspilling and floods. As the 1991 UN Intergovernmental Panel on Climate Change notes:

"Increased run-off due to climate change could potentially pose a severe threat to the safety of existing dams with design deficiencies. Design criteria for dams may require re-evaluation to incorporate the effects of climate change."37

Thus global warming is likely to render dams less safe and less likely to perform the way their builders claim they will.

A lack of reliable data, however, has not stopped dam promoters from making wild claims as to the energy output from dams. Although the World Bank estimates that the average plant factor -- the actual output in relationship to the planned output -- for dams in developing countries during the 1980s was around 49 per cent (compared to an average plant factor of 65 per cent for fossil fuel power stations in the US), many of the hydro projects currently being promoted assume far higher levels of firm output.38 The projected economic return from the Nam Theun 2 dam in Laos, for example, is based on the 681MW dam generating on average 4,864 GWh/yr, a plant factor of 81 per cent.39

High Risks, Low Returns

Where dams have been financed from the public purse, the economic losses incurred have been picked up by tax-payers -- or, more frequently, borne by poorer people through cuts in public expenditure. For private investors, however, cost overruns and schedule slippages translate into direct financial losses, as do overestimated power outputs -- unless the public sector can be persuaded to pick up the tab. Consequently, many private investors are strongly deterred from participating in dam projects. As Anthony Churchill notes:

"The industry's record of overruns is an embarrassment. Although not all projects have suffered from poor performance in this regard, enough have done so, and this in turn has resulted in a perception in the financial community that these are high-risk projects. Endless litigation between contractors, engineers and owners has added to this perception."40

Noting that firms are now increasingly expected to put up security bonds against cost overruns (in one recent case, the bond was set at $75 million), he adds: "No private investor or lender is prepared to risk capital in an industry unable to get its act together."

Failure to produce as much electricity as forecast had few legal implications when dams were financed from the public purse: with private sector projects, however, estimates of firm capacity form the basis of legal agreements with power takers. Overestimating the output of dams can therefore carry major financial risks for investors in dam projects.41 Investors are largely in the dark as to the validity of the claims made by project developers as to a dam's output, not least because of the lack of data available.

In addition, governments are increasingly reluctant (or unable) to guarantee the purchase of the energy produced by private sector projects. The credit-worthiness of the would-be power purchasers also poses a major stumbling block: in India, for example, all but a handful of the state electricity boards are bankrupt.

The problems are compounded in countries where currencies are weak, since overseas investors and bankers generally require payment in hard currency, whilst electricity bills are paid for in local currency. In Pakistan, foreign exchange problems have brought independent power projects to a grinding halt.

Although currency fluctuations and devaluations can be offset to some extent by government-backed political risk insurance, this adds to the costs and the time it takes to put together a deal. Many international projects are now taking four to seven years to finance -- compared to one to four years in the US market.

Not only is this forcing project developers to take on more of the up-front risks of independent power projects; it is also stretching the capacity of many banks and finance houses to manage the delays.

Resettlement and Public Opposition

Political opposition and the social problems associated with large dams (in particular, resettlement) only add to the difficulties dam developers face in putting together a project that is attractive to investors. Indeed, analysts such as Anthony Churchill argue that private developers will need to become more involved in resettlement planning to overcome such difficulties: "If private capital is to finance hydro projects, it will have to undertake greater responsibilities in dealing with resettlement issues."42

Mounting international opposition amongst human rights and environmental groups to large hydro dams adds yet another dimension to the financial risks associated with hydropower projects, with bankers wary of taking a stake in controversial projects. As Edmund Tan of the Banque Nationale de Paris in Singapore told International Water Power & Dam Construction in 1995:

"We are monitoring the hydropower market but we are not committed to any project yet. The influence of environmental and human rights pressure groups against large dam projects is important."43

Not only can opposition cause lengthy delays in project construction; it can also embroil investors with a high public profile in consumer boycott campaigns -- Lloyds Bank in Britain, for example, was threatened with such a boycott if it invested in the Bakun dam.

Opposition can also lead to adverse publicity for equipment suppliers, corporate investors and banks involved in hydropower projects, tying up senior management and damaging the image (and thus potentially the business prospects) of the company as a whole. In the case of the controversial Sardar Sarovar project in India, for example, the Japanese supplier of the dam's turbines found itself the target of an international campaign. Companies may also find that their institutional shareholders become subject to "secondary boycotts".

Back to the Public Purse?

As a result of all these difficulties, many analysts now believe that the future of privately-financed large dams is uncertain unless governments are prepared to give some guarantees. "The lenders cannot do it themselves on an uncovered basis," says Larry Bressler, vice president and area manager of the Sanwa Bank Ltd of New York. "There is a need for the export credit and multilateral agencies."44

Likewise, the Swedish-Swiss conglomerate ABB-Asea Brown Boveri, a major supplier of turbines to the dam building industry and a key player in the Bakun and Three Gorges dams, states that "governments must always be involved in big hydro projects".45 The emphasis is the company's. Similarly, Anthony Churchill warns that "In today's markets, it is unlikely that mega projects such as Bakun in Malaysia could be financed with purely private capital."46

Potential investors in private sector hydro projects are thus likely to seek risk mitigation through export credit agencies,47 credit insurers or Multilateral Development Banks (MDBs). Without the support of agencies like the World Bank, the International Finance Corporation (IFC), the US Export-Import Bank, the Export-Import Bank of Japan and others, many deals are unlikely to succeed -- the more so since several major banks are approaching their limits for taking on the country risks in specific markets.48 With the major MDBs increasingly wary of financing large dam projects, obtaining public funding will be particularly fraught for hydropower developers.49 Already, concerted international efforts by NGOs opposed to dams have successfully blocked US export credits for US companies seeking contracts for China's Three Gorges Project, widely viewed by environmental groups as possibly the most destructive and controversial hydropower project in history.

Unattractive -- and Dying?

Unsurprisingly, many analysts now conclude that the prospects for the hydro industry are dim -- and growing dimmer. Even the dam industry's house journal, International Water Power & Dam Construction, describes the industry as "embattled".50

Others warn that, without major restructuring, the large hydropower sector looks set to see its share of new capacity decline as a result of mounting public opposition, increased competition from alternative energy sources and the shrinking availability of public funds.51 Indeed, Roberto Picciotto of the World Bank recently told an industry conference: "Unless the industry responds promptly to the challenges it faces, it could become obsolete."52 Anthony Churchill is equally blunt:

"There are those who maintain that hydropower projects will only be built in the future with explicit public support. Some even go as far as to say private power will not build hydropower projects. Under the present way of doing business, they are right."53


Box 1: Dam Failure, Earthquakes and Decommissioning

Hydropower carries a number of unique risks that do not apply to most of its rival forms of power (except nuclear). These include the risk that the dam will collapse, the possibility of its reservoir inducing an earthquake, and problems involved in decommissioning, generally when the dam structure is no longer safe or when the reservoir has silted up.

  • Dam Failure

    Dams can fail and have failed -- that is, they have collapsed or ruptured. Estimates of the risks vary, but a typical figure is around one in 6,000 dam years -- approximately 0.5 per cent over the life of a concession. Large rockfill dams appear to carry the highest risks -- according to one study, 30 out of 2,000 large rockfill dams outside the US have failed. Overtopping (where the reservoir spills over the top of the dam), due to uncontrollable floods or due to freak waves from events such as landslides is the most common cause of failure. The risks of major landslides are high if there are steep sided valleys around the reservoir.

    Financially, dam failure causes direct loss of the capital value of the dam, consequential loss of revenues and the potential for major third party liabilities. Although these risks should be insurable, the need to obtain adequate insurance cover (particularly in the case of large projects) not only adds to the costs of the project but also to the difficulties of achieving quick financial closure. In some cases, the project may be so large that the capacity of even the global insurance market to absorb all the risks is likely to be limited.

  • Reservoir Induced Seismicity

    "The impounding of a reservoir sometimes results in an increase of earthquake activity at or near the reservoir," states the International Commission on Large Dams (ICOLD). In some cases, this is "enough to affect the dam itself". This threat is not limited to areas of high seismicity.

    Should an earthquake occur, there is inevitably a risk of dam failure both from the direct effect of the earthquake (although dams are generally designed to withstand a degree of earthquake activity) or indirectly -- for example, from flood waves caused by landslides. In the Philippines, the 75 MW Ambuklao project was knocked out of service by a major earthquake in 1990, which liquified sediment in the reservoir and blocked the power tunnel and intake. It took a considerable period before the dam could be brought back into service.

    Where local communities are affected, the attendant financial risks to project developers could increase considerably, particularly where it can be successfully argued that the dam's reservoir induced the earthquake. This could result in major liabilities to affected parties. Moreover, as the financial consultants Delphi International point out, "Even if liabilities are not proven, reservoir induced seismicity could still result in irresistible political pressure to empty the reservoir or limit operations."

  • Decommissioning Costs

    Once a dam has reached the end of its effective life, often due to the reservoir silting up, it cannot be abandoned, not least because of the possibilities of collapse. It must therefore be decom- missioned, a process that may require the dismantling of the dam itself. To date, only relatively small dams have ever been decommissioned and the industry has yet to disclose how it intends successfully to de-commission larger ones. According to the US-based Hydropower Reform Coalition, the costs of removing individual dams could be as high as the initial construction costs.

    With older dams in the US and elsewhere now coming up for decommissioning, the issue is likely to gain greater prominence -- as is the question of who pays for the costs. Although project developers will undoubtedly seek to pass the costs on to governments, there may be increasing political pressure for the developer to take on the liabilities. In future, independent operators and developers could be required to set aside payments from operating revenues into a decommissioning fund to cover future liabilities.


Source: McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1997; "Bakun: High Dam, High Risk", Delphi International, London, 1996.



Box 2: Bankers' Nightmare

South-East Asia was, until recently, seen as a major new source of contracts for the hydroelectricity industry. However, in the wake of the collapse of the South-East Asian "tiger" economies, Asian governments have cancelled a number of infrastructure projects. The power sector has been hit hardest. Indonesia has announced the cancellation of 14 out of 29 planned power projects and put others on hold.

In Thailand, the Electricity Generating Authority (EGAT) has lowered its five-year electricity demand growth forecast from 4,600MW to 3,600MW. The cut-back in Thailand is likely to have major impacts on planned expansion of hydroelectricity in neighbouring Laos, which had hoped to export some 3,000MW to Thailand by the year 2006.

Even in projects where all the finance has been raised, renegotiations are likely -- with the threat that the projects will collapse. Only those projects that are able to provide cheap electricity are likely to survive.

With many planned projects involving at least some degree of government participation, some may unravel if governments cannot honour previous guarantees.

Even seemingly secure private sector infrastructure development projects in South-East Asia may be at risk as a result of the recent financial crisis. The reason, as the Financial Times notes, is that many private sector schemes may soon be transformed into "a serious sovereign debt problem".

In order to attract private investors, many governments in the region have committed themselves to billions of dollars worth of insurance payments, all due in a lump sum, to protect investors and lenders against foreign exchange risks. The capital structure of these projects generally includes a high percentage of debt, with project lenders taking government-supported contracts (in addition to the assets of the project developer) as security. Comments the Financial Times:

"Combine this structure with significant current account deficits and the scene becomes reminiscent of the sovereign debt environment of the late 1970s and early 1980s."

In the worst case, project bankers could find themselves faced with defaults on project loans which cannot then be recouped from the host government.

"Multiply this situation by the large number of projects in the region and it begins to look like Latin America circa 1979 all over again."


Source: Rowey, K., "Project Pitfalls", Financial Times, 9 December 1997.


Notes and references

1 Examples drawn from Shripad Dharmadhikary, "Large Dams: The Beginning of the End?" PIRG Update, No.4, September 1997.

2 McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1996.

3 Churchill, A., "Hydropower: A New Business or an Obsolete Industry?", in World Bank/IUCN, Large Dams: Learning from the Past, Looking to the Future, Workshop Proceedings, IUCN and World Bank, Gland Switzerland, 1997, p.112.

4 The deal was in flagrant violation of the 1966 Overseas Aid Act which forbids British aid money being used for the purchase of arms. The affair also revealed the use of aid to fuel a corrupt and corrupting system of patronage politics within Britain itself. The contracts for the dam were awarded jointly to Balfour Beatty -- a company with close links to the Conservative Party -- and Cementation International, a company which employed Mark Thatcher, son of then Prime Minister Margaret Thatcher.

5 Bawe, L., "Private Profit at Public Expense: The Bakun Hydroelectric Project", The Ecologist, Vol. 26, No.5, September/October 1996.

6 Schilling, P.R. and Canese, R., Itaipú: Geopolítica e Corrupção, CEDI, São Paulo 1991, cited in McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1996.

7 Christian, S., "Billions Flow to Dam (and Billions Down the Drain?)", New York Times, 4 May 1990.

8 Andreas Liebenthal, principal evaluation officer in the World Bank's Operations Evaluation Department, quoted in Spence, A., "Finance and the Environment: ECAS prepare to mobilise Three Gorges Cover in Face of New Protests", International Trade Finance, Financial Times Business Reports, 29 Aug 1997, Section No.294, pp.8-10, ISSN1365 3512.

9 Liebenthal, A. et al., The World Bank's Experience with Dams: A Preliminary Review of Impacts, Operations Evaluation Department, World Bank, Washington DC, 1996; World Bank, Lending for Large Dams: A Preliminary Review of Impacts, OED Précis No.125, World Bank, Washington DC, 1996.

10 World Bank, Learning from Narmada, OED Precis, World Bank, Washington DC, May 1995.

11 Quoted in "Innovative Financing of Projects Involving Dams", Hydropower and Dams, 5, 1997, p.91

12 World Bank/IUCN, Large Dams: Learning from the Past, Looking to the Future, Workshop Proceedings, IUCN and World Bank, Gland Switzerland, 1997.

13 Briscoe, J., The Financing of Hydropower, Irrigation and Water Supply Infrastructure in Developing Countries: A Background Paper for the UN Commission on Sustainable Development, World Bank, Washington DC, 1998.

14 Briscoe, J., The Financing of Hydropower, Irrigation and Water Supply Infrastructure in Developing Countries: A Background Paper for the UN Commission on Sustainable Development, World Bank, Washington DC, 1998.

15 "No more second agenda in Norwegian aid, says new minister", Development Today, 18 Nov. 1997.

16 Briscoe, J., op. cit. 13.

17 "Global independent power tops 1,000 GW", Power in Asia, 3 Nov. 1997, 238/7.

18 This section is drawn from McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1997.

19 Bacon, R.W., Besant-Jones, J.E. and Heidarian, J., Estimating Construction Costs and Schedules: Experience with Power Generation Projects in Developing Countries, World Bank Technical paper No.325, Energy Series, Washington DC, 1996.

20 Figures cited in Churchill, A., "Meeting Hydro's Financing and Development Challenges", in World Bank/IUCN, Large Dams: Learning from the Past, Looking to the Future, Workshop Proceedings, IUCN and World Bank, Gland, Switzerland, 1997, p.107.

21 Besant-Jones, J., "A View of Multilateral Financing from a Funding Agency" in Financing Hydro Power Projects 1994, Procedings of Conference sponsored by International Water Power & Dam Construction, Frankfurt, 22-23 Sept. 1994; Besant Jones, J., interview with Patrick McCully, 23 Sept. 1994.

22 Cited in "Bakun: High Dam, High Risk", Delphi International, London, 1996.

23 Ibid. See also McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1996, Table 1, p.266.

24 "Brazil's Xingó power scheme is inaugurated", International Water Power & Dam Construction, February 1995, p.3.

25 Besant-Jones, J., "A View of Multilateral Financing from a Funding Agency" in Financing Hydro Power Projects 1994, Procedings of Conference Sponsored by International Water Power & Dam Construction, Frankfurt, 22-23 Sept. 1994; Besant Jones, J., interview with Patrick McCully, 23 Sept. 1994.

26 Moreira, J.R. and Poole, A.D., "Hydropower and its constraints" in Johansson, T.B. et al., (eds), Renewable Energy: Sources for Fuels and Electricity, Island Press, Washington DC, 1993, p.112.

27 This section is drawn from McCully, P., op. cit. 23.

28 Morrow, E.W. and Shangraw, R.F., Understanding the Costs and Schedules of World Bank Supported Hydroelectric Projects, World Bank Industry and Energy Department, 1990, pp.11, 41.

29 Churchill, A., "Hydropower: A New Business or an Obsolete Industry?" in World Bank/IUCN, Large Dams: Learning from the Past, Looking to the Future, Workshop Proceedings, IUCN and World Bank, Gland, Switzerland, 1997, p.112.

30 World Bank, Resettlement and Development: The Bankwide Review of Projects Involving Involuntary Resettlement, World Bank, Washington DC, 8 April 1994, p.5/22.

31 World Bank, PCR: Argentina -- Yacyretá Hudroelectric Project and Electric Power Sector Project, World Bank, Washington.

32 "Sri Lanka cuts dependence on hydropower development", International Water Power & Dam Construction, September 1997, p.3.

33 This section is drawn from McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1996.

34 McCully, P., op. cit. 33, p.138.

35 "Bakun: High Dam, High Risk", Delphi International, London, 1996.

36 "Major dams in Thailand and the Capacity of their Reservoirs", Thai Development Newsletter, 25, 1994.

37 Intergovernmental Panel on Climate Change, Climate Change: The IPPC Response Strategies, Island press, Washington DC, 1991.

38 See, for example, Hunt, R. and Hunt, J.M., "How does hydropower compare?", Independent Energy, November 1993; Bacon, R.W., Besant-Jones, J.E. and Heidarian, J., Estimating Construction Costs and Schedules: Experience with Power Generation Projects in Developing Countries, World Bank Technical paper No.325, Energy Series, Washington DC, 1996.

39 From leaked project documents, it appears that this remarkably optimistic prediction is based on just seven years of rainfall data for most of the Nam Theun basin. An economic analysis by the US-based management and environment consultants, SmithOBrien, estimates that if energy production were 20 per cent less than predicted, the project could lose US$7 million in its first year of operation. Over 30 years, a 20 per cent reduction in projected energy generation would reduce net project revenues by 80 per cent. See Government of Lao PDR, "Nam Theun 2 Hydroelectric project: Environmental Assessment and Management Plan, Report E2, Main Report", Vientiane, April 1995; "IRN reports highlight question marks over new Laos schemes", International Water Power & Dam Construction, September 1996.

40 Churchill, A., "Hydropower: A New Business or an Obsolete Industry?" in World Bank/IUCN, Large Dams: Learning from the Past, Looking to the Future, Workshop Proceedings, IUCN and World Bank, Gland, Switzerland, 1997, p.112.

41 "Bakun: High Dam, High Risk", Delphi International, London, 1996.

42 Churchill, A., "Hydropower: A New Business or an Obsolete Industry?", in World Bank/IUCN, Large Dams: Learning from the Past, Looking to the Future, Workshop Proceedings, IUCN and World Bank, Gland, Switzerland, 1997, p.116.

43 Dansie, J., "Bankable Assets?", International Water Power & Dam Construction, April 1995, p.37.

44 Quoted in Anderson, J., "Circumventing the Challenges", Independent Energy, October 1996.

45 ABB, "Hydropower Development", Chart prepared for Aspen Energy and Environment Rountable 1V, in ABB, Hydropower Planrs: Clean Energy from Water, 1997.

46 Churchill, A., "Hydropower: A New Business or an Obsolete Industry?", in World Bank/IUCN, Large Dams: Learning from the Past, Looking to the Future, Workshop Proceedings, IUCN and World Bank, Gland, Switzerland, 1997.

47 Export credits are government guarantees which provide exporters with protection against political risk, including foreign exchange and transfer risks, and, in some cases, commercial risk.

48 "Project Lending Techniques A-Changing", Power in Asia, May 1997; Anderson, J., "Circumventing the Challenge", Independent Energy, October 1996, p.8.

49 Dansie, J., "Orient Express or Slow Boat?" International Water Power and Dam Construction, March 1995.

50 Dansie, J., "1996 -- A Year of Change and Challenges", International Water Power & Dam Construction Year Book, 1996, London, 1996, p.2.

51 Churchill, A., "Meeting Hydro's Financing and Development Challenges", in World Bank/IUCN, Large Dams: Learning from the Past, Looking to the Future, Workshop Proceedings, IUCN and World Bank, Gland, Switzerland, 1997; Churchill, A., op. cit. 46.

52 "Innovative Financing of Projects Involving Dams", Hydropower and Dams, Issue 5, 1997, p.91.

53 Churchill, A., op. cit. 51, p.110.

End Note

This briefing was produced by The Corner House in conjunction with the Berne Declaration and the International Rivers Network. It is based on a longer paper, High Risk--Low Return? ABB's Hydropower Strategy under Review.