High Risk -- Low Return?
ABB’s Hydropower Strategy under Review

by Nicholas Hildyard

first published 25 February 1998

Summary

Swedish-Swiss engineering company Asea Brown Boveri (ABB) has supplied generators for hydroelectric dams around the world, accounting for one-fifth of the world’s hydropower capacity. This analysis provides financial reasons why ABB should not continue to be involved in the hydropower sector. It forecasts a shrinking market because of substantial and growing opposition to large dams and insufficient private and public finance to build them. Its findings were circulated to ABB shareholders and financial journalists. In March 2000, ABB decided to sell its hydropower division, mentioning shareholders’ sensitivity to the significant environmental, human rights and social impacts of large-scale dams. See also "Dams on the Rocks", Corner House Briefing No.8.

Executive Summary
Introduction
Part 1: In The Doldrums
Part 2: High Risks, Low Returns
Part 3: Alternatives to Hydro -- Is ABB being Left Behind?
Part 4: ABB under Scrutiny
Conclusion: Some Shareholder Demands
Notes and references
Box 1: ABB and Dams
Box 2: IPPs -- Tough and Getting Tougher
- More Problematic than Expected
- Withdrawing from the Market
Box 3: The Banker's Nightmare
Box 4: China and India: Risky Alternatives
Box 5: Solar Versus Bakun

Executive Summary

ABB is a company used to plaudits. But 1997 may be the year when the company's glorious summer turned to its winter of discontent as the company's focus on hydropower -- although a small part of its business -- started to lose it money and credibility.

This was brought to a head first by the collapse of ABB's contract for the Bakun dam in Malaysia -- the company's biggest ever order -- and, subsequently, the financial crisis in South East Asia. Both hit ABB badly -- psychologically and strategically.

Analysis of the hydro sector reveals that prospects for the industry as a whole are poor and, furthermore, conflict with ABB's strategy of being a high-growth, technology-driven company:

Growth in hydro is unlikely to be more than 4 per cent annually for the period 1990 to 2020 -- much lower than for other power industries and in sharp contrast to renewables which are growing at 10-20 per cent.
The industry is facing mounting public opposition, declining political support and the drying up of development subsidies for large dam projects.
Hydro is proving unable to compete in the increasingly competitive energy market. Private investors are reluctant to finance hydro projects, which are seen as high risk investments but with low rates of return.

While the industry as a whole is in crisis, for ABB the problems facing hydropower and the Bakun debacle raise fundamental questions about the company's strategy and its commitment to management excellence. Most obviously:

ABB's failure to heed warnings about the flimsy financial viability of Bakun casts serious doubts over senior management's corporate judgement;
pposition to dams in which ABB is currently involved is already having a negative impact on the company's image, with financial implications for investors;
The need to "manage" the adverse publicity caused by ABB's hydro portfolio is taking up considerable senior management time which might arguably be more productively spent elsewhere;
ABB's strategy of "chasing orders" in Asia may be exposing the company to unwarranted financial risks, often not recorded on the balance sheet; and
ABB is losing out to its rivals by missing opportunities in the renewable energy sector, which should be a natural market for the company.

Shareholders should call on the Board of ABB to review its commitment to hydro and to clearly justify any continuing involvement in the context of the company's overall business strategy.

Introduction

ABB: Europe's Premier Company

ABB is a company used to plaudits. Since its birth in 1988 -- the result of a merger between the European engineering giants Asea of Sweden and Brown Boveri of Switzerland¹ -- it has established itself as the dominant manufacturer of power generation equipment in several important Eastern European markets: moved aggressively into India, China and Indonesia; expanded in Latin America, the Middle East and Africa; and, through skilful acquisitions, become an increasingly important player in the US energy equipment market.

The process has been one that has transformed "ABB from a European to a Transatlantic company" -- and, increasingly, to a conglomerate with global reach.² In Asia, sales have quadrupled from $2 billion in 1988 to $8 billion in 1997, a figure the company hopes to double in the next four to five years, with orders passing the $15 billion mark by the end of the century.³ Meanwhile, in Europe, the company is preparing to capitalise on the planned expansion of the EU by integrating its Western operations with those in Central Eastern Europe, where the company now has an interest in 70 companies, with almost $2 billion in sales and some 30,000 employees.⁴

With divisions specialising in power generation, power transmission and distribution, financial services, transportation and industrial and building systems, ABB has carved out a global niche for itself that has consistently translated into healthy profits and a 5-fold increase in its share value since 1988 -- with shares rising by some 23 per cent a year, well above the stock exchange index in home base, Zurich.⁵ For 1996, the company reported orders of $36.3 billion (up by 5 per cent on 1995), a net income of $1,233 million (up 16 per cent), revenues of $34.6 billion (up 6 per cent) and a return on equity of 22.2 per cent. For the first half of 1997, the company reported orders up 14 per cent, increased operating earnings in all divisions, and net income up 2 per cent -- this despite low demand in Western Europe and adverse local currency exchange rates. Much of the growth in orders was accounted for by just one order: a $3 billion contract to supply six 420-megawatt hydro generators to the Bakun Hydroelectric Project in Malaysia. This order was the biggest ever received in ABB's history.⁶

Widely regarded within the business community as well-managed, thrusting, and at the cutting edge of technology and business thinking, ABB has earned an enviable reputation, not only in Europe (its original base) but now worldwide. In the process, it has picked up numerous awards. In 1995, it received Ernst and Young's Global Growth Award. The same year, ABB's then chair and chief executive, Percy Barnevik, was awarded the prestigious European "CEO of the Year Award".⁷ In 1997 -- for the fourth year running -- top European managers and investment analysts voted ABB "Europe's Most Respected Company" in a survey conducted by Price Waterhouse and the Financial Times. Among the qualities which they most admired in ABB were its "strong and well thought out business strategy", its "robust and human corporate culture" and its "imaginative approach to the process of innovation".⁸

Hold the Applause

Even as the Financial Times was announcing the results of its 1997 survey, however, ABB was running into trouble. Indeed, 1997 may prove the year that the company's glorious summer turned into its winter of discontent.

Ironically, it was one of the smallest sections of ABB -- hydropower, accounting for less than 8 per cent of orders in the power generation division in 19969 -- which cast the shadow. As predicted by a number of analysts, its flagship contract -- the Bakun Dam -- failed to attract the necessary finance to go ahead. Matters became worse when a row developed between ABB and Ekran Berhad, the project promoter, with Ekran eventually cancelling its contract with ABB. The same day, with the Malaysian ringgit crumbling and the region's stock exchanges in crisis, the Malaysian government announced the "indefinite postponement" of the whole project.

The immediate impact of the loss of the Bakun project was a write-off of $100 million in the company's third quarter results for 1997. In terms of market share, ABB also slipped from first to third place in the hydro generator market for the world's largest projects, behind its rivals General Electric and Siemens.¹⁰ ABB has since recovered some ground by winning the contract to supply generators to the Three Gorges Dam in China, but the respite is likely to be short-lived. For many within the financial community, the Bakun debacle has confirmed long-brewing doubts over the general health of the large dam industry as a whole, prompting questions as to the wisdom of ABB's strategy of pursuing large hydropower orders. Inevitably, given the strong presence of ABB in South East Asia, the recent financial crisis within the tiger economies has added further weight to those concerns.

Some Questions ...

Shareholders and others, such as trade unionists, with an interest in the long-term future of ABB may thus feel that the time is ripe to re-evaluate ABB's commitment to the hydro industry and to ask some hard questions of the company:

Was Bakun a one-off, temporary hiccup -- or evidence of a broader trend in the hydro industry that could damage ABB's overall future performance?
Is ABB's continued involvement in hydropower likely to have a negative impact on its other sectors?
Do the low growth prospects for hydro -- and the increasing financial risks of doing business in the sector -- justify ABB's continued involvement in the industry?
Where does hydro fit into the company's overall business strategy?
Would the interests of shareholders and employees alike be better served by a shift from hydropower to more promising energy technologies?

... And Some Answers

This report attempts to point to some answers to those questions. It does not present an exhaustive financial analysis of ABB's current hydropower strategy, but rather seeks to set that strategy in context. It is hoped that, by doing so, shareholders will be in a better position to judge the strengths and weaknesses of ABB's hydropower strategy and to raise pertinent questions with management.

PART ONE considers the outlook for the hydro industry. It argues that projected orders, based on the theoretical potential of hydropower of meeting future energy needs, gives a highly misleading impression of the health of the industry. Growth is unlikely to be more than 4 per cent annually for the period 1990 to 2020 -- much lower than for other power industries and in sharp contrast to renewables which are growing at 10-20 per cent.

The hydro industry is also facing significant challenges in the form of mounting public opposition, declining political support and the drying up of bilateral and multilateral development funds for large dam projects, particularly where they involve resettlement. Host governments are also cutting public expenditure, curtailing the availability of funds for infrastructure projects.

The move towards private sector financing of energy projects has also hit the hydro sector badly. The private sector has shown itself extremely reluctant to invest in new hydro projects, which are perceived as high risk investments with low rates of return for the risks involved.

The prospects for the industry are further dimmed by the South East Asia financial crisis, which has already led to a number of projects (notably Bakun) being cancelled or reassessed. In addition, project developers are likely to be increasingly reliant on projects obtaining public funding or government guarantees -- both of which the industry is ill-placed to win.

PART TWO analyses the financial risks of hydro that are deterring investors. It points out that hydro projects are particularly prone to cost overruns, schedule slippage and lower than expected power output -- all of which have deterred private investors. In addition, hydro carries a number of unique risks -- from dam collapse to reservoir induced seismicity and high decommissioning costs -- that do not apply to most of its rival forms of power. Resettlement problems and increasing public opposition add to the difficulties that project developers face in attracting finance and reaching financial close.

It concludes that in an increasingly competitive energy market, hydro power is unlikely to attract the financial support it needs to prosper -- and that, without major changes, the industry could become increasingly obsolete. If dam suppliers are to make headway in developing dams, it is argued, they will need to provide more complete packages: turnkey contracts, guaranteed performance and help in securing finance. However such packages do not eliminate risk, they merely transfer it to the supplier. Those investing in suppliers, such as ABB, should question whether or not the supplier, and thus the investors, are right to accept risk that the financial markets cannot manage.

PART THREE briefly looks at alternatives to hydropower and the prospects for future markets. It argues that the hydro industry's hopes that concern over global warming will revive the industry's fortunes are misplaced. It reviews alternative forms of energy supply and concludes that other technologies -- from small dams to solar -- are substantially more attractive than large hydropower. While ABB has become a major player in energy efficiency and gas power markets, it is conspicuous by its absence from the fast growing markets in renewables and is losing out to its rivals. ABB is well placed to capitalise on these technologies but its current strategy on alternatives is inconsistent. On the demand side it is pushing eco-efficiency, whilst on the supply side, it is pushing increased generation.

In PART FOUR, the paperassesses the implications for ABB of continued involvement in the hydro industry. It concludes that:

ABB's failure to heed warnings about the flimsy financial viability of Bakun raises a major question mark over senior management's corporate judgement;
pposition to dams in which ABB is currently involved is already having a negative impact on the company's image, with financial implications for investors;
The need to "manage" the adverse publicity caused by ABB's hydro portfolio is taking up considerable senior management time which might arguably be more productively spent elsewhere;
ABB's strategy of "chasing orders" in Asia may have exposed the company to unwarranted financial risks;
ABB's continued commitment to large dams fails to play to its corporate strengths -- in particular, its much praised R&D capabilities, its innovativeness and its devolved structure. The scope for exploiting these strengths would be greatly enhanced were the company to invest more heavily in alternative forms of energy; and finally
Shareholders should call on the Board of ABB to review its commitment to hydro and to clearly justify any continuing involvement in the context of the company's overall business strategy.

The report concludes with a list of questions that shareholders might ask of the company.

Part 1: In The Doldrums

The Hydro Industry Today

ABB -- and its original parent companies, Asea and Brown Boveri -- has a long history of involvement in large hydroelectric dams (see Box: "ABB and Dams").¹ The commercial rewards have been high: orders from hydropower from 1994-1996 have totalled $1,890 million. No figures are publicly available for the profits made by the company's hydropower division.

On the face of it, continued involvement in the hydro industry would appear to make sound financial sense. Energy demand is growing worldwide and hydropower could make a major contribution to meeting that demand. Indeed, were the technically feasible potential of hydropower to be fully exploited, it could (in theory) supply the current electricity demands of the entire world.²

Such projections, however, give a misleading impression of the health of the hydro industry. Even the most optimistic forecasts of future growth for the sector compare badly with those for other energy sources and many power developers are abandoning hydropower. Increasingly hydropower is perceived as a low growth industry, with high financial risks and low rates of return of investments.

Underlying the decline in hydro's fortunes is an increasing erosion of public and political support and the difficulties which the industry is experiencing in meeting the challenges of recent trends in the energy market towards private sector financing.

A Low Growth Sector

Energy demand is growing worldwide. Even if more efficient use were made of the energy currently generated, it is expected to continue growing, particularly in the South, despite the economic slump in South East Asia. A UK research group, Marketline International, predicts that electricity demand in Asia as a whole will double between 1995 and 2010, requiring installed capacity to rise from 650,000 MW to 1,344,000 MW.³ To meet that demand, it is estimated that Asian countries need to invest more than $50 billion a year in new power plants to the end of the century.⁴ ⁵

Potentially, the contribution that hydropower could make towards meeting such projected increases in energy requirements is considerable. Current facilities, however, tap less than 6.2 per cent of the 40,000 Terawatt/hours (TWh)/year of energy theoretically obtainable through hydropower.⁶

Unsurprisingly, many countries are looking to hydropower to meet their projected energy needs. Hydro schemes are planned in some 134 countries, promising rich pickings for industry -- ABB estimates that, worldwide, some 60,000 MW of orders will be placed from 1997 to the end of the century,⁷ whilst Siemens is expecting potential orders totalling 12,500 MW per year to 2000 in Asia alone.⁸

Such forecasts, however, provide a highly misleading picture of the health of the industry. For all the official enthusiasm for hydro, the industry is floundering, with many in the power sector increasingly turning their backs on hydropower. In Europe, for example, the emergence of an open, competitive power market and the advances in other power generating options, notably gas combined-cycle technology, have meant that hydro projects are no longer regarded as the most valuable assets of utilities and power companies.

Indeed, when compared to other power sources, the outlook for growth in hydro is poor -- just 4 per cent a year worldwide for the period 1990 to 2020.⁹ This is much lower than for other power industries and stands in sharp contrast to renewables which are growing at 10-20 per cent a year.

Political Opposition

Increased public opposition to the social and environmental impacts of large hydro projects is already adversely affecting the growth of the industry. This is true for all parts of the world.

In Sweden, Switzerland and Norway, widespread public opposition to dams has stopped construction of all but the smallest projects. Sweden's 1987 Natural Resources Act prohibits any hydropower exploitation of the country's last four free-flowing rivers -- the Torne, Kalix, Pite and Vindel. In Norway, the Alta dam was built only on condition that it would be the last of its kind, whilst, in France, after a fierce 6-year struggle, the proposed Serre de la Fare dam on the Loire River was scrapped in 1994. Outside Europe, opposition to dams is also growing:¹⁰

In Canada, a planned expansion of the massive James Bay project was cancelled after intense opposition, led by affected indigenous peoples.
In Japan, resistance to the Nagara dam emerged as the biggest environmental campaign of the 1990s, although the opposition failed to halt the project.
In Brazil, protests against dams have been spreading, leading to the emergence of a powerful national movement against large hydro projects, the Movimento dos Atingidos por Barragens (MAB).
In India, opposition to dams has mushroomed, with several projects cancelled or delayed, including the controversial Silent Valley project in Kerala and the Sardar Sarovar Dam on the Narmada River; recently, opposition has been growing even to medium-sized dams.
In Nepal, the Arun III dam was cancelled after public opposition;.
Meanwhile, in Thailand, a 6-year campaign by environmentalists, human rights groups and affected peoples against the proposed Nam Choan dam culminated in 1988 in the indefinite postponement of the project. In 1995 -- following further intense opposition to other hydro projects, notably the Pak Mun dam -- the Prime Minister's office announced that Thailand would no longer build dams for power production.

The extent of international opposition to large dams can be gauged by the worldwide support given to the 1994 Manibeli Declaration. The document calls for a moratorium on World Bank funding of large dams until a number of conditions are met, including the establishment of a fund to provide reparations to people forcibly evicted without compensation, improved practices on information disclosure and project appraisal, and an independent review of the performance of all dams built with World Bank support. The Declaration was endorsed by 326 groups and coalitions in 44 countries. If the member groups of coalitions and networks are counted individually, the number of endorsements rises to more than 2,000.¹¹

Such opposition reflects the growing numbers of people whose lives have been blighted through the building of dams: millions have been forcibly evicted to make way for reservoirs, frequently without adequate compensation, and their livelihoods severely undermined or destroyed. As their experiences have been documented and publicised, so previously marginalised concerns about the ecological and social impacts of dams have become mainstream. Furthermore, the evidence is steadily mounting to show "expected economic benefits were not being produced and that environmental, economic and social costs were not being taken into account."¹²

Destructive and Unaccountable

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 [sic] 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."¹³

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 £1000 million worth of British military equipment: subsequently, it also emerged that companies with close links to the then ruling Conservative party had profited substantially from the deal.¹⁴

Charges of "crony capitalism" have also been raised by Southern-based movements against dam developers in the South. In Malaysia, even supporters of the Bakun dam warned would-be 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 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.¹⁵

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". 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.¹⁶ Yacyretá (projected cost $2.7 billion, final cost $11.5 billion), built downstream of Itaipú, was described by Argentinean President Carlos Menem in 1990 as "a monument to corruption".¹⁷

The Public Purse Closes

Such scandals, together with widespread protests by dam affected peoples and their supporters internationally, have combined to put the industry under intense pressure. Even many prominent previous supporters of the industry are now increasingly disenchanted.¹⁸

The World Bank, another major backer of dam projects, is also showing signs of "donor fatigue". In the words of one World Bank official, involvement with dams has become "an inefficient and painful process".¹⁹ From funding an average of 26 dams a year between 1970 and 1985, the Bank is now a minor player, funding just four dams a year in the 1990s.²⁰ ²¹ Recently, the Bank has collaborated with the International Union for the Conservation of Nature to set up a World Commission on Dams to review the record of the industry.

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. Recently, for example, the Norwegian Minister for Development and Human Rights, Hilde Frafjord, announced a major review of tied aid programmes.²²

Adding to the industry's woes are the restrictions on public expenditure imposed on Southern governments by the World Bank and the IMF through structural adjustment programmes, further curtailing the availability of public funds for infrastructure projects such as dams. The current push to privatise hydro stations -- with the Brazilian government inviting private participation in the construction of 22 incomplete public sector projects -- gives an indication of the shortage of funds that many Southern countries now face.²³

The shortage of cash has not only resulted in the cancellation or delaying of projects but also in a general demoralisation within the industry. As International Water Power & Dam Construction reports for Brazil, the debt crisis of the 1980s has spawned an "institutional crisis" within the hydro industry as utilities (both generators and distributors) find themselves unable to pay their debts to suppliers and lenders.²⁴

Moving to the Market

With public funds drying up due to public opposition, the industry is increasingly reliant on private sector financing. This trend has been reinforced by a broader shift towards private sector financing of infrastructure projects within both developed and developing markets, as a result of the liberalisation of economic policies. Since the early 1990s, private sector flows have overtaken public transfers as the driving force of economic change in the countries of Asia, Latin America and (to a lesser extent) Africa.

In close parallel, the provision of infrastructure is increasingly being opened up for private investments. 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 be providing as much as 70 per cent of infrastructure investment.

In the power sector, the result is an increasingly competitive independent power market, which is getting tougher by the day (see Box: "IPPs -- Tough and Getting Tougher"). Yet, as Roberto Picciotto, Director-General, Operations Evaluation, at the World Bank, points out, hydro project developers have proved themselves slow to face up to the changing political, economic and financial landscape in which the industry now finds itself.

Although proposals for Independent Power Projects (IPPs) have mushroomed since the early 1990s -- the number of "active" initiatives growing from 178 in 1992 to 2,800 in 1997 -- only 11 per cent of the "greenfield" IPPs under development are dams -- and only a handful of these have reached financial closure.²⁵

In the Philippines, for example, the National Power Corporation (NPC) attempted to find private sector developers for a number of hydro projects in Luzon but failed to do so when the projects were put up for tender in 1994. After two rounds, NPC declared that bidding for the projects (which included Kanan B1, Illaguen, Saltan B, and Addalam) had been a failure, either because not enough responsive bids were received, or because unacceptably high bid prices were proposed.²⁶ Other examples abound.

Indeed, very few hydropower IPPs are entirely financed by the private sector, most relying on state involvement in one form or another.²⁷ One reason is that hydropower carries a number of unique risks, explored in more detail in the next section, which make it the least attractive -- after nuclear -- of the IPPs on offer.

This is apparently acknowledged by ABB which states that "governments must always be involved in big hydro projects".²⁸ The emphasis is the company's. Likewise, Anthony Churchill, senior advisor with the Washington International Energy Group, states, "In today's markets, it is unlikely that mega projects such as Bakun in Malaysia could be financed with purely private capital."²⁹

The South East Asia Crisis

The collapse of the South East Asian "tiger" economies has inevitably cast further shadows over the industry's future.³⁰ Most obviously:

The crisis has resulted in reduced growth in demand for power. In Thailand, the growth in electricity demand has already slowed, with figures for 1997 showing a one per cent fall in growth over the previous year's figures.³¹
With private and public funds squeezed, there is likely to be an increased focus on the cost-effectiveness of any proposed project. Projects, such as dams, which require large amounts of capital up-front, are likely to be put on the back burner.
Investors are likely to favour projects which have moderate development risks, ruling out many of the dam projects on offer.
Lower growth will make risk sharing more problematic for project developers. Not only will the private sector be more reluctant to invest in risky projects, so will governments -- particularly given the public expenditure cuts imposed as part of the IMF's rescue packages.
There is a growing recognition that future projects will rely on significant political change in the region, in particular a shift towards greater transparency in the private sector. As Walden Bello of Focus on the Global South, a Bangkok-based policy group, notes: "The crying need ... is for the more effective regulation of the private sector and, in particular, the breaking up of corrupt particularistic patronage networks linking the public and the private sectors."³² Many of the megaprojects which companies like ABB have profited from would not have come about had it not been for their benefiting from such networks.

Already, Asian governments are cancelling projects. The power sector has been hit hardest. Indonesia has announced the cancellation of 14 out of 29 planned power projects. Others, such as the $450 million Asahan 1 hydro project -- the first in Indonesia to be privately developed and financed -- are undergoing review. On November 1st 1997, the Indonesian government announced that the project, which is being developed by PT Bajiradaya Sentranusa BSDN with Spies Batignolles of France, Voest-Alpine and ELIN of Austria, was to proceed.³³ Since then, however, the financial situation in Indonesian has considerably worsened, increasing the uncertainties over the project.

In Thailand, the Electricity Generating Authority (EGAT) has revised its five-year electricity demand growth forecast to 3,600MW from 4,600MW. The cut-back in Thailand is likely to have major impacts on neighbouring Laos's planned expansion of hydro power, since Laos had hoped to export some 3,000MW to Thailand by the year 2006. One project which looks set to hit the rocks is the Nam Theun 2 dam, to be built and operated by a joint venture of the Laotian government, an Australian builder, Transfield, Electricité de France and three Thai companies.³⁴

Even in projects where financial closure has been achieved, renegotiations are likely -- with the threat that the projects will collapse.³⁵ As Bill Voge, co-head of project finance at Latham and Watkins in New York, recently put it to Project Finance: "All power deals in Indonesia will be threatened with renegotiation. The Ministry of Mines and Energy has told state power company PLN to go back and renegotiate with project sponsors and developers."³⁶ Only those projects that are able to provide cheap electricity are likely to survive. Indeed, a number of Indonesia's most prestigious IPPs have already had their credit rating downgraded. Both the $2.5 billion Paiton 1 power plant and the $434 million Dayabumi geothermal plant are on creditwatch.

With many planned projects involving at least some degree of government participation, there is also the possibility of projects unravelling as governments find themselves unable to honour previous guarantees, (see Box: "The Banker's Nightmare").

Potential investors in Asian hydro IPPs are thus likely to seek risk mitigation through export credit agencies, credit insurers or multilateral development banks. Here new hydropower projects are at a distinct disadvantage compared with fossil-fuel power stations. 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.³⁷

Obtaining the support of such agencies, however, will be particularly fraught for hydropower developers. Already, the World Bank is under intense pressure from opponents of large dams to cease funding major hydro projects. The IFC (the Bank's private sector arm) is also under pressure to withdraw -- or, at the very least, to tighten its rules on hydro lending. Export credits may also be difficult to obtain for hydro projects due to pressure from environmental and human rights groups.³⁸

Part 2: High Risks, Low Returns

The failure of hydro to thrive in the new world of IPPs reflects the reluctance of investors to commit themselves to financing what are perceived as high risk projects offering low rates of return.

In particular, hydro projects have a reputation for being prone to severe cost overruns and costly schedule slippages. Power output is frequently difficult to predict with the accuracy that investors have a right to expect -- and is often overestimated, with consequent financial costs. In addition, hydro carries a number of unique risks -- from dam collapse to reservoir induced seismicity and high decommissioning costs -- that do not apply to most of its rival forms of power. Resettlement problems and increasing public opposition add to the difficulties that project developers face in attracting finance and reaching financial close.

Indeed, there is a growing consensus that hydro power is unlikely to attract the financial support it needs to survive in what is becoming an increasingly competitive energy market. Without major changes, the industry could become obsolete.

Cost Overruns

Research by the World Bank has documented a clear tendency to underestimate the cost of hydroelectric projects -- of some 70 World Bank funded projects, costs were, on average, 27 per cent above appraisal estimates (inflation adjusted), almost 5 times higher than the average cost overruns on 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."¹

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.²

Such cost overruns can largely be attributed to dams not being standardised products to which engineering companies (like ABB) can bring their management skills to bear. In general, the larger a hydro project is, the larger its construction cost overrun in percentage terms.³ 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."⁴

Other surveys of dam construction have found similar or higher propensity for cost overruns.⁵ Examples include Brazil's 3000MW Xingó dam -- for which ABB was an equipment supplier -- which took seven years to build at a cost of US$3.2 billion, twice its original budget.⁶

Cost overruns are particularly damaging for the economics of dams because, 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). By comparison, capital costs represent around half the lifetime costs of coal-fired plants.⁷ 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.⁸

Commenting on the reluctance of investors to finance hydro projects, 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."⁹

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."

Schedule Slippage

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, fourteen months longer than the average preconstruction estimate.¹⁰ Where resettlement is involved -- as is generally the case in large hydro-projects -- delays can be considerable, 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.

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 heavy debt servicing costs which large dams entail. 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.¹¹

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 which is currently paid in Argentina.¹²

In Sri Lanka, time overruns on hydro projects have led to major power shortages, prompting the government to reassess its hydro programme. In 1996, the country faced a severe power crisis, in large part due to the repercussions of projects not being completed on time.¹³

Lower than Expected Output

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 Akasombo in Ghana 3597 GWh/yr as against 5,400 GWh/yr.¹⁴

Where dams were financed from the public purse, this failure to produce as much electricity as forecast had few legal implications: with IPPs, 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.¹⁵

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.¹⁶

In Thailand, for example, lower than expected rainfall and higher than expected leakage through its limestone bed have meant that the country's largest volume reservoir, Srinakharin, completed in 1977, has never filled. During 1991, Thailand's 25 largest dams contained a total of just under half of 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 7 per cent of their total usable volume in March 1994.¹⁷

Reliable estimates of firm capacity thus depend critically on reliable information about streamflows. Unfortunately, streamflow data does not exist for most of the world's rivers -- with the result that investors are largely in the dark as to the validity of the claims made by project developers as to a dam's output.

Although rainfall figures are usually used in the absence of streamflow data, these can present a misleading picture. 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.

A lack of reliable data, however, has not stopped dam promoters from making wild claims as to the output from dams. Although the World Bank estimates that the average plant factor 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.¹⁸

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.¹⁹

Global warming and/or the El Niño phenomenon (see Box: "Global Warming and Dams") 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 Failure, Earthquakes and Decommissioning²⁰

Hydropower also carries a number of unique risks -- all of which carry financial costs -- that do not apply to most of its rival forms of power (nuclear excepted). 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 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, or 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.²¹ 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. Other reasons for dam failure include subsidence, undermining through seepage and earthquakes.

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 -- as with Bakun -- 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, placing a substantial burden on the project developer.
Reservoir Induced Seismicity

There is increasing recognition that dams can induce seismic events such as earthquakes. In the words of the International Commission on Large Dams (ICOLD): "There is sufficient documentation to prove that the impounding of a reservoir sometimes results in an increase of earthquake activity at or near the reservoir -- in some cases enough to affect the dam itself."²² 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. Even where earthquakes do not destroy a dam, they can still have grave financial implications for a project developer. 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.²³

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."²⁴
Decommissioning Costs

Once a dam has reached the end of its effective life, often due to the reservoir silting up, it must be decommissioned, 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 decommission 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,²⁵ 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.

Project Development Risks

Political opposition and the social problems associated with large dams (in particular, resettlement) add to the difficulties which dam developers face in putting together a project that is attractive to investors.

In contrast to other energy plants, dams frequently necessitate the forced relocation of large numbers of people. 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. The many problems associated with such resettlement have proved a major source of conflict and have done much to tarnish the image of dams.

From a project-finance perspective, projects which involve resettlement are unattractive investments. One reason is that resettlement is a major cause of time and cost overruns. In Colombia, resettlement problems at the 560MW Guatape II hydro project delayed completion by three years. The delay, which in turn forced postponement of filling of the reservoir, effectively cost the project owner -- Empresa Pública de Medellín -- the equivalent of an entire year of energy generation.²⁶

Although the costs of resettlement are generally borne by governments, often through loans from multilateral development banks, such loans are likely to be fiercely challenged by oustees who do not wish to be forcibly relocated, adding to the uncertainties -- and thus the risks -- of the project. Indeed, as the World Bank's Operations Evaluation Department (OED) acknowledges, "unfavourable experiences with resettlement, and the attendant public outcry, may lead governments to eschew investments in large-scale water storage."²⁷ 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".

To overcome such difficulties -- and to ensure better treatment of oustees -- analysts such as Anthony Churchill argue that private developers will need to become more involved in resettlement planning: "If private capital is to finance hydro projects, it will have to undertake greater responsibilities in dealing with resettlement issues."²⁸ Should this become a trend, smaller projects, involving less resettlement, are likely to prove more attractive to project financiers than large projects.

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."²⁹

Not only can opposition cause lengthy delays in project construction (see above) but 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 had it invested in the Bakun Dam.

The strength of opposition to hydro projects also increases the risk that controversial projects will fail to gain the export credit and other government-backed guarantees that many suppliers and project bankers require. Already concerted international efforts by NGOs opposed to dams 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. The dam's reservoir will drown three cities and force the relocation of 1.8 million people. Critics charge that the land available for resettlement has been underestimated by the Chinese authorities.

In addition, opposition can 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".

Unattractive -- and Dying?

The high risks associated with hydropower projects make them generally unattractive investments unless there is a strong likelihood of a high rate of return on money invested. Typically, equity investors will therefore be looking for rates of return of the order of 15-20 per cent. Very few projects are able to offer such high returns, one reason being that debt investors typically find the projects too risky, with the result that equity investors receive lower returns.

Unsurprisingly, many analysts now conclude that the prospects for the hydro industry are dim -- and growing dimmer, with even the dam industry's house journal, International Water Power & Dam Construction, describing the industry as "embattled".³⁰

Others warn that, without major restructuring, large hydropower 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.³¹ 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."³² Anthony Churchill of the Washington Energy Group 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."³³

Many now argue that, if dam suppliers (such as ABB) are to make headway in developing dams, they will need to provide more complete packages; turnkey contracts, guaranteed performance and help in risk reduction and financing. However, such packages do not eliminate risk, they merely transfer it to suppliers. Those investing in suppliers may well question whether the supplier, and thus its shareholders, are right to accept risks which the financial market cannot manage.

Part 3: Alternatives to Hydro -- Is ABB being Left Behind?

Many in the hydro industry acknowledge the problems that the industry faces but argue that global warming and the need to shift away from fossil fuels to sustainable, less polluting energy technologies will give hydro a new boost, since hydro is a "clean energy, producing no toxic gases like coal."¹

Such claims, however, are highly misleading. In the words of the World Bank's senior environmental advisor, they display an "ignorance [which] further tarnishes hydro's reputation."²

Contrary to the industry's assertions, hydropower reservoirs, particularly in tropical areas, can be a significant source of greenhouse gases, largely due to the rotting of submerged vegetation and soils. Although dams generally produce lower emissions than their coal-fired equivalents, some are more polluting.³ It is estimated that greenhouse gas emissions from the reservoir of Brazil's 250MW Balbina dam, for example, will be substantially higher than from a coal-fired equivalent.⁴ Researchers in Canada have also revealed substantial emissions of carbon dioxide and methane (another greenhouse gas) from reservoirs in Canada.

The hydro industry's claims as to the bright future for hydro are suspect on other grounds too. In particular, the future contribution of hydro is likely to be severely affected by the increased vulnerability of large dams to climate change. 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.

For private sector developers of dams, the implications are likely to be severe, particularly if periods of drought occur during the early stages of power generation, when initial construction costs are still being repaid. In effect, the dam becomes an extremely costly, stranded investment.

Equally problematic, higher than expected rates of flow 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."⁵

In effect, far from being the godsend to save an ailing industry which many hydro backers hope, global warming is likely to render dams less safe and less likely to perform as their builders claim.

Environmental and human rights groups may also question whether increased use of hydropower is a politically and ethically appropriate response to global warming. The Rio Declaration of 1992, for example, stipulates that Northern and Southern countries have "shared but differentiated" responsibilities for addressing global environmental problems. A strategy for reducing greenhouse gas emissions based on hydropower would require the peoples of the South to bear more than their fair share of the costs of responding to global warming, since it is in the South that the majority of suitable dam sites are to be found. Why should thousands in the South face the hardship of forcible evictions and environmental disruption caused by dams, whilst the North, which is primarily responsible for the emissions which have caused global warming, remains committed to highly wasteful ways of living.

New Opportunities⁶

If hydro is an inappropriate technology both now and for the future, are there alternatives which offer a better investment opportunity, given the shift in energy priorities? The answer appears to be a clear "Yes".

The exciting new energy opportunities range from energy efficiency technologies, through high-efficiency gas energy generation to truly renewable technologies, such as wind and solar. While ABB has become a major player in energy efficiency and gas power markets, it is conspicuous by its absence from the fast growing markets in renewables.

Renewable methods of generating electricity have until recently been regarded by most mainstream economists and energy analysts as largely a passion of eco-freaks. But this is fast changing. A 1995 survey of "the future of energy" in The Economist states:

"Little noticed, the costs of many renewables have recently been tumbling. Fossil fuels are still almost always cheaper. But a battle has begun on the fringes of the mighty $1-trillion-a-year fossil-fuel industry that could force it into retreat early in the coming century."⁷

Wind Energy:

Windpower is, in the short term, by far the most promising of the renewables. Technological advances have caused the price of wind-generated electricity in favourable locations to plummet by more than half in the past decade. By 1993, the cost of installing wind turbines had fallen to under $1,200 a kilowatt (compared to somewhere between $2,000 to $3,000 per installed kilowatt for a large hydro facility),⁸ and forecasts indicate that this could tumble to under $800/kW by the year 2000. In 1995, installed wind generating capacity around the world soared by 33 per cent from the previous year, to reach a total of some 4,800MW.⁹ Even when environmentally-sensitive landscapes are excluded, global wind potential is roughly five times total present electricity production. According to various estimates, windpower could be producing 10-20 per cent of the world's electricity by the middle of the next century, even without significant advances in energy efficiency and conservation.
Solar:

Solar energy also offers significant prospects for growth. Photovoltaic cells (PVs) were first developed in the 1950s but their use was constrained by low efficiencies. Recent advances, however, enable PVs to generate electricity even on overcast days and have brought costs down precipitously. The cost of 1 kilowatt of PV capacity plummeted from $3 million in the 1950s, to $4000 in 1994 (in constant 1993 dollars). Recent breakthroughs suggest that the costs could tumble still further -- perhaps by as much as 80 per cent by the end of the century, making solar electricity cheaper than coal-fuelled power.¹⁰

A major advantage of PVs is their flexibility: quick to install and easy to upgrade, they can be built into any surface facing the sun. Even windows can now be coated with transparent solar cells. In the UK, the total solar glazing potential is estimated at 68,000MW -- equivalent to half the country's 1993 power supply.

Sales of PVs rose by more than 17 per cent in 1995. The biggest market is currently in rural areas of developing countries, where around a quarter of a million households now use solar cells for lighting, televisions and radios, and water pumps. Major markets are also emerging in the North, often under government initiatives. Switzerland has a programme to install at least one PV system in each of the country's villages by the year 2000; the Netherlands plans to install 250MW of photovoltaics by 2010.¹¹
Small Hydro:

Unlike large dams, small hydro schemes are seen by many as having a potentially important role to play in any future, sustainable energy strategy. By definition, small hydro has a relatively low power output. Nonetheless, it is particularly well suited to rural areas and remote settlements where electricity demand is relatively low and the costs for connecting villages to national distribution systems high (and, of course, where there are fast flowing, perennial rivers and streams).

Small hydro is proving a growth market in many countries, not least as a result of regulatory changes which encourage independent power producers to sell electricity to the big power generation and distribution utilities.¹² In sharp contrast to large hydro projects, such small schemes are not perceived by investors as carrying major financial risks and have attracted considerable interest. Comments Anil K. Malhotra, a Regional Energy Advisor in the Asia Infrastructure Unit of the World Bank's Asia Technical Department:

"Current technology used to generate power can be economic at around 50MW. When projects are small scale, it is easier to secure financing for them; quicker execution is possible; and social and environmental dislocations may be more easily handled. Rather than constructing a single large project, developers may wish to consider building a portfolio of smaller projects in a country or across the region."¹³

Market Trends

The promise held out by energy alternatives such as solar and wind is reflected in the market.

Without particular support from governments, cumulative investment in renewable energy is expected to be $169 billion in 2000, rising to $889 billion in 2020. The renewable energy industry would probably regard these figures as conservative.¹⁴

In 1995, investment was running at around $10-15 billion a year. According to Mark Mansley, a financial analyst at Delphi International,

"With support, [investment] could rise to something like $50 billion for renewable energy alone. The energy efficiency sector is significantly larger -- perhaps two to three times as big ... Thus, the total sustainable energy market could soon be of the order of $200 billion a year."¹⁵

Mansley concludes: "Sustainable energy is a big, serious industry and it is growing fast. Indeed, there are few other industries that have the same long-term growth prospects as the sustainable energy industry."¹⁶

Already, a number of major companies have thrown their hats into the ring and are making major investments in renewables. In 1995, Amoco and Enron, two US energy majors, formed a joint venture -- Amoco-Enron Solar US -- to manufacture and sell photovoltaics and to develop solar powered electricity generation facilities. The company is building a 100MW solar thermal plant in the Nevada Desert and the executive vice-president of Enron, Bob Kelly, recently announced that the price of electricity from the plant -- at 5.5 cents per kilowatt hour -- would be competitive with fossil fuels. Kelly is in no doubts about where Enron -- the largest gas company in the world -- sees the future:

"We think the multi-megawatt solar industry is ready to take off ... We think there is a great big market out there, and we are going for it."¹⁷

Other companies such as Siemens, Shell and BP are also investing heavily in renewables.

ABB: Out in the Cold?

By contrast, ABB appears to have rejected renewables. According to its Environment Management Report 1996, the company "at present conducts no active research or development in solar power."

Such an omission should be of concern to shareholders. Indeed, the thrust of ABB's corporate strategy on energy would appear deeply contradictory. On the one hand, it is a leader in developing energy efficiency technologies. On the other, it is deeply involved in pushing up energy demand through developing large-scale energy projects which require increased energy growth in order to be commercially viable.

Moreover, although supremely well-placed to develop a new generation of efficient, flexible and environmentally sustainable forms of power generation, the company remains wedded to technologies that are increasingly viewed as outdated and environmentally inappropriate -- hydro and nuclear being the prime examples. Shareholders may ask: why are ABB's R & D assets not being put to better use? The more so when rivals are apparently stealing a march on the company, with long-term implications for its profitability.

Part 4: ABB under Scrutiny

In light of the difficulties facing the hydro industry and their likely intensification as a result of the South East Asia financial collapse, ABB shareholders have good cause to question the continued commitment of the company to large-scale hydro projects. Although firm conclusions would need to wait on a more detailed investigation, the company's hydro strategy is potentially open to criticism on a number of counts.

1. Tarnishing the Company's Reputation

Shareholders may question the wisdom of a hydro strategy that has repeatedly brought the company into conflict with the public -- conflicts which are already damaging the company's reputation and which threaten severe financial damage to the group as a whole.

Years of assiduous public relations work can be undone with a single signature. ABB's involvement in the Three Gorges Project, for example, has led to a sustained campaign by NGOs in Switzerland and internationally. The company's failure to consult its environmental advisors before bidding for the work; its refusal to meet with prominent dam critics such as Dai Qing from China; and its failure to answer press, radio and TV enquiries have all contributed to ABB gaining an increasingly negative image in the Swiss press.

Since the summer of 1997, over 25,000 people have sent postcards to the company protesting against its involvement in the project. The company has not replied to these 25,000 citizens. Similarly, the announcement that ABB was bidding for the Bakun dam contract led to widespread international protests, including demonstrations outside ABB's London offices. In a series of letters to Percy Barnevik, then chief executive of ABB, representatives of the communities affected by the dam, Malaysian NGOs and over 200 international environmental and human rights groups expressed their "strongest objection against the involvement [of ABB] in the implementation of Bakun dam" and urged the company to withdraw.¹ The letters variously charged ABB with double standards (building a project which would not be permitted in their home country) and with breaking its own commitments to sustainable development and transparency.

Already concerns over ABB's involvement in dams has led to ABB being excluded from the portfolios of almost all ethical investment funds, which is unusual for an ISO 14000 company. At present, only one of the eleven ethical funds in Switzerland holds ABB shares -- and it reduced its holdings following ABB's involvement in Bakun. Although rated positively in a January 1998 Ethical Performance Report by a Swiss financial institution, ABB's overall rating was dragged down by its record on dams. The report was particularly critical of ABB's failure to meet with NGO critics of Bakun, charging ABB with showing "an inflexible and patronising attitude", especially to the dam-affected peoples.²

The company's involvement in large dams -- and its high public profile -- have now made it a prime target for environmental and human rights groups campaigning on dam and development issues. Already, such groups have shown their ability to affect the outcome of a number of projects in which ABB is involved or was bidding to become involved. Lobbying of potential investors by opponents of Bakun, for example, is widely credited with having played a major role in turning the financial community against Bakun.³

More recently, a construction site occupation and subsequent hunger strike by opponents of the Maheshwar Dam in India -- for which ABB has reportedly received the generator contract -- led to the work on the site being stopped and the state government agreeing to a total review of the project. The $3 billion project, to be developed by S. Kumars Power Corporation Limited (an Indian industrial house with no previous experience in dam building) threatened to evict 11,000 people. Letters of protest were sent to ABB from groups around the world.

The danger for the ABB group as a whole is that opposition to its hydro activities will have a spill-over affect on its other business. Investors in the company may also find themselves the targets of secondary boycotts -- particularly where they have a "household name". As opposition groups turn their attention to lobbying export credit agencies and bilateral funders for stricter guidelines on hydro funding, ABB's hydro business could find access to public funding increasingly difficult.

The implications for the company's hydro activities are potentially serious. Already the decision by the Norwegian government to review its tied aid programme is likely to have major ramifications for the ABB group, which is involved in several Norwegian aid-financed projects, including the Nam Theun-Hinboun dam in Laos and a number of other hydro-projects. The group's Norwegian subsidiary, ABB Kraft, is one of the companies that has benefited most from Norwegian aid.
2. Unwarranted Management Time

As a result of the controversies that have surrounded the dams in which ABB is or would like to be involved, an increasing amount of senior management time appears to be taken up with hydro issues. For the next two years, for example, Göran Lindahl, the company's current Chief Executive Officer (CEO), has been appointed as a commissioner on the recently announced World Commission on Dams (WCD). His willingness to engage with NGO critics of dams is to be welcomed. On the other hand, the 4-6 weeks of each year which Lindahl will be expected to put into the WCD indicates just how much of ABB's senior management time is taken up dealing with the problems of hydropower, despite it being a relatively small business sector for the group as a whole.

Indeed, hydropower would seem to be one area where ABB's strategy of decentralisation and local management has been abandoned in favour of a high level commitment from the CEO. Just as the prestige value of large-scale dam projects has diverted the attention of politicians the world over until financial realities have brought them down to earth, so there is cause for concern that ABB's senior management is being similarly seduced by dams without concern for the bottom line.
3. Underestimating Risk

Given the high risks of projects such as Bakun and Three Gorges, ABB's involvement inevitably raises question marks over senior management's corporate judgement -- and in particular its assessment of what constitutes acceptable commercial risk.

In the case of Bakun, the wonder was not that the project collapsed, but that ABB's senior management persisted in bidding for the contract despite mounting evidence that the project's finances were far from secure and that the dam was a far from sound investment. Three months before the contract was signed, for example, a widely-publicised report by the London-based financial analysts, Delphi International, presented a detailed analysis of the project's financial risks. It concluded that Bakun's predicted rate of return of just 11.5 per cent was significantly less attractive than many less risky alternatives -- and that even this figure was unachievable. Using more conservative estimates for output, construction time and cost overruns than those used by Ekran, Delphi argued that a more realistic pre-tax rate of return on equity would be "a very low 8.2 per cent -- barely that on government debt" and that, in the worse case scenario, the return to investors could fall to 3.9 per cent or lower.⁴ Delphi concluded in 1996:

"Bakun does not appear to offer a good investment opportunity. Initial estimates suggest returns will be inadequate, particularly given the long term nature of the project and the risks involved. Many more exciting investment opportunities exist in the fast growing Malaysian economy. The risks surrounding the project are substantial, including the likelihood of cost overruns and the probability that the project will not produce the power forecast."

More generally, the Delphi report warned that dam building internationally was "going through troubled times" and that "most hydro-projects are unable to withstand the sort of rigorous due diligence that ... private sector financiers require."⁵

The report is widely acknowledged to have played a major role in alerting investors to the high risks and inadequate returns of Bakun. Two questions that shareholders may wish to ask are:
- Why ABB rejected Delphi's conclusions? and
- What is ABB's approach to financial risk assessment in other projects?
4. Some Answers on South East Asia?

The same question may be asked about senior management's apparent failure to heed warnings from respected analysts and financial journalists (notably in The Economist) that the economy in such tiger countries as Malaysia was overheating; that the focus on megaprojects was endangering the financial stability of the region; and that local currencies were overvalued.

Yet, in mid-January 1998, Alexis Fries, ABB's Executive Vice-President for Asia and the Pacific, admitted that for the company, the Asian crisis was "as surprising as a typhoon".⁶ Such a statement is disturbing for a company which boasts a strong presence in the region, and which had been warned about the unsustainability of government policies by many independent voices.

Many analysts now forecast a stormy time ahead for the company. In August 1997, merchant bankers Flemings predicted, "If there is a real economic crisis in the Asian emerging markets, ABB could prove very sensitive to this".⁷ A month later, following the collapse of the Malaysian ringgit, Reuters commented: "Analysts fear Malaysia's decision to delay infrastructure projects, such as the Bakun dam, is only the tip of the iceberg and ABB-Asea Brown Boveri AG will face lower growth throughout South East Asia [as other projects in the region are delayed or cancelled]."⁸

In Thailand, ABB Ltd reports that its revenue for 1998 is expected to drop by 30 per cent as a direct result of the economic turmoil caused by the country's currency crisis.⁹ The company forecasts that some $200 million worth of orders will be cancelled. ABB country manager Terawat Tishabhiramya reports that the company has launched a crisis management programme, which includes major job lay offs. The company is also hoping to recoup losses through an export drive to other Asian countries, including Malaysia, South Korea, Vietnam and Laos.

Göran Lindahl, ABB's CEO, also insists that the company's strategy of strengthening its position in Asia will not be adversely affected by the region's weakening currencies and rising interest rates. On the contrary, he argues, the company's presence in Asia gives it "more possibilities" than its North American and European competitors since weaker Asian currencies will reduce production and wage costs.¹⁰

Whilst this may be true for ABB as a manufacturer of power equipment for export, it does little to reassure those concerned about its involvement in risky large projects, or to assuage fears that Bakun may be the first in a cascade of dam project cancellations. Indeed, Lindahl's upbeat response may be misplaced. Rather than chase new orders, the more prudent approach might be to analyze the reasons for the current economic crisis in South East Asia, and to reassess the company's current hydro strategy altogether.
5. The Big Dam Treadmill

Although ABB has a strong presence in refurbishing hydro, an analysis of recent bids made by the company indicates a strategic preference for new capacity involving large scale projects. Although such a strategy plays to the company's strengths as a provider not only of equipment but also of financial services, the dangers are clear. As Frederick Hasslauer, an analyst at Bank Sal. Openheimer, told the Wall Street Journal in the immediate aftermath of the Bakun debacle,

"[Bakun raises] questions about whether ABB is following the right strategy in concentrating on large projects. If it loses one, it makes a noticeable hole in orders, particularly in light of financing problems for large Asian projects."¹¹

It is a treadmill, however, on which ABB has apparently become trapped. Where a project fails, as with Bakun, it leaves such a large gap in revenues that it can only be plugged easily by other large (high risk) projects. Not only does this make the company particularly vulnerable to downturns in regional economies -- the South East Asian financial collapse, for example -- but it requires it to pursue projects which, in today's business climate, are hardest of all to finance and most controversial from an environmental and human rights point of view.

Thus, the failure of Bakun was followed by the signing of a contract for another equally controversial project -- the Three Gorges dam in China. Moreover, ABB's hope that Three Gorges will lead to other large dam contracts in China and elsewhere in the region -- Paul Chan, ABB's Senior Vice-President for China has described the Three Gorges contract as "a worldwide entry ticket for the next two decades to larg-scale hydropower projects"¹² -- suggests that the lessons of both Bakun and the South East Asia currency collapse have yet to be learnt.

Significantly, whilst ABB plunges into hydropower in China, many other investors have long since decided to withdraw from the market, deterred by constantly changing rules, limits on the return on equity, and doubts over the government's ability to pay its foreign debt of nearly US$100 billion (in 1995 dollars). Concerns have also arisen over the non-payment of bills by state-owned companies.¹³
6. Little Innovation

Finally, shareholders may question whether continued involvement in hydropower plays to the company's greatest strength -- its proven ability to innovate. Although there are undoubted opportunities to develop new technologies in hydropower -- and the company is to be congratulated for the contribution it has made to high temperature superconductor technology -- they are limited compared to the opportunities that exist in solar and other alternatives. Yet, as one Swiss financial institution points out, the company apparently attaches "low priority to developing renewable energy sources (especially photovoltaics and tidal energy)."¹⁴ Indeed, the company has stated that it is not currently carrying out active research into photovoltaics.

Such antagonism to photovoltaics -- given their potential -- sits uneasily with Göran Lindahl's dictum that "innovation must be a core competence". Indeed, shareholders may ask whether ABB's continued commitment to large hydro is not at odds with the President's view that the company's future lies in "[shifting] away from just reacting to the present and [working] harder to shape the future, creating tomorrow's markets, not just competing for today's".¹⁵

In that respect, shareholders may agree with the recent assessment of a Swiss financial institution that

"90 per cent of what ABB does with regards to its manufacturing processes, products and management philosophy is right, but it is the 10 per cent which attracts the most concern. The company could transform itself into a sustainable growth entity by jettisoning these activities, but for the present remains unwilling to do so."¹⁶

It is surely time to take seriously the case for moving out of hydro and into more socially acceptable forms of energy production.

Conclusion: Some Shareholder Demands

Large hydropower projects have for decades been criticized as being uneconomic and socially and environmentally destructive sources of energy. Since the early 1990s, the following trends have added to the problems of the hydropower industry:

The opposition of affected people and non-governmental organizations have embroiled many projects in time-consuming legal and political battles, and have made dam construction more difficult and risky generally. According to Roberto Picciotto, Director-General of Operations Evaluation at the World Bank, hydropower schemes have become "increasingly contested by local communities, as a result of a growing public awareness of social and environmental impacts of large projects". Picciotto adds that the risk premia of such schemes have become "prohibitive".
Due to public image problems or to a shortage of funds, multilateral and bilateral donor institutions have cut their support for large hydro projects. The World Bank, for example, funded 26 dams a year between 1970 and 1985, but only four dams a year in the 1990s. Internal documents reveal a "negative selection" by the Bank management against projects involving large-scale resettlement.
Since the early 1990s, many governments have opened their energy sectors for the participation of private power producers. Private project developers and operators are less prepared than governments to accept the schedule slippages and cost overruns which have become associated with the hydropower industry. According to Anthony Churchill, Senior Advisor with the Washington International Energy Group, "In today's markets, it is unlikely mega projects such as Bakun in Malaysia could be financed with purely private capital". "Some even go as far as to say private power will not build hydropower projects", Churchill concludes. "Under the present way of doing business, they are right."
Governments, North and South, have so far favoured large projects in order to reward business associates and to gain prestige. With the economic collapse of South East Asia, where such pork barrel politics have been a major force behind dam construction, they will no longer have the means to do so. With 66 per cent of future hydro construction earmarked for Asia, this will have a major impact on the industry.

Public opposition, the drying up of official funds and the concern of privatized energy markets for cost efficiency have reduced the market potential of large hydropower projects. "Unless the industry responds promptly to the challenges it faces, it could become obsolete", the World Bank's Roberto Picciotto warns. The lack of demand has already caused oversupply in the hydropower industry and has driven down the profit margins of large hydro contracts.

Given the economic, environmental and social problems of the hydropower industry, we recommend the following:

ABB's hydropower sector is beset by growing risks, and most likely by decreasing profit margins. We recommend that ABB undertake a comprehensive review of the implications which the growing social and environmental concerns, the reduction of public funds and the privatization of energy markets have for the risks and profits of its hydropower sector; and that ABB justify any continuing involvement in hydropower in the context of its overall business strategy. We recommend that company make this study publicly available, and that the conclusions be summarized in ABB's annual report for 1998.
ABB's CEO Göran Lindahl has been appointed as one of the commissioner of the recently announced World Commission on Dams, an initiative developed by the World Bank, governments, the dam building industry, non-governmental organizations and academics. The WCD has been mandated to review the costs, benefits, impacts and development effectiveness of large dams within two years. The interest of ABB in supporting the work of the new commission is appreciated. We recommend that ABB provide the WCD with all relevant data on past and present hydropower projects in which it has been involved.
Over the medium term, alternative renewable sources such as wind and solar power will have to provide the bulk of global energy consumption. ABB has so far invested negligible amounts in the development of these technologies. According to its Environmental Management Report 1996, the company "at present conducts no active research or development in solar power". We recommend that ABB shift R&D resources from hydropower to alternative technologies in order to strengthen its presence in energy markets which are sustainable over the longer term.

Box 1: ABB and Dams

Since its inception, ABB has supplied equipment for:

Brazil: Itaipú, Tucuruí and Xingó
Chile: Pangue
Colombia: Guavio
India: Uri
Laos: Nam Theun-Hinboun and Houay Ho
Lesotho: Muela
Malaysia: Batang Ai
Mexico: Chicoasén and Zimapán
Mozambique: Cabora Bassa
Pakistan: Tarbela
Peru: Carhuaquero
Philippines: Magat
Sri Lanka: Kotmale and Rantembe
Tanzania: Pangani
Turkey: Atatürk and Karakaya
Venezuela: Macagua II

Box 2: IPPs -- Tough and Getting Tougher

Many of the problems confronting hydro developers are not unique to the industry. In common with other power producers, the shift to private sector financing for energy infrastructure projects has made raising finance not only more difficult but also more time consuming. Despite the active wooing of private investors by developing countries, many remain reluctant to become involved in what are perceived to be risky projects with low rates of return. Overall, the number of private sector infrastructure projects has fallen from 387 in 1996 to 384 in 1997, with the value of deals falling from $223.901 billion to $151.467 billion.

Initially, "Build, Operate and Transfer" (BOT) schemes formed the favoured vehicle for attracting private finance. For governments, such schemes offer a number of benefits, not least in removing the need for states to make any initial capital outlay and in placing the bulk of the risk on the contractor. For the foreign contractor, "the appeal of BOTs is simple; higher risk offers higher returns on investment than a direct construction contract."

Withdrawing from the Market

Innovative new financial packages have been put together to circumvent some of these problems. Nonetheless, many financiers are withdrawing from the IPP market altogether.

Many now believe that the future of privately-financed power projects is uncertain unless governments are prepared to give some support in the form of 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."

Source: Anderson, J., "Circumventing the Challenge", Independent Energy, October 1996.

Harding, J., "One way round past restrictions", Asian Infrastructure Survey, Financial Times, 23 Sept 1997.

Malhotra, A., "Private Participation in Infrastructure: Lessons from Asia's Power Sector", Finance and Development, December 1997.

"Project lending techniques a-changing", Power in Asia, May 1997.

Sayer, R., "1997: Mixed Blessings", Project Finance, January 1998.

Wright, C., "Not so Fast Track", Project Finance, January 1998.

Box 3: The Banker's Nightmare

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 BOT 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 contractual obligations, all due in a lump sum, to protect investors and lenders against foreign exchange risks. The capital structure of BOTs and BOOs also 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: "The result of all this is that governments commit themselves to billions of dollars worth of contractual obligations, all due in a lump sum, to project investors and lenders against foreign exchange risks. 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 worse 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 Dec. 1997.

Box 4: China and India: Risky Alternatives

Many equipment companies, including ABB, are looking to India and China to rescue the IPP market, since both countries have so far escaped the turmoil elsewhere in the rest of Asia. However, as Standard and Poor's, the international credit rating agency, notes in its December 1997 assessment of financial system stress and sovereign credit risk, both countries face major potential financial strains, including a high level of problem loans as a result of substantial directed lending and loans to loss-making state enterprises.

To date, foreign investors have shown themselves wary of investing in hydro IPPs in both China and India, despite major incentives provided by the respective governments. In India, for example, bureaucratic delays have plagued the IPP market, with only four hydro IPPs being signed up to May 1996. Of these, one -- the Maheshwar project -- is now indefinitely delayed due to public opposition. Moreover, the generous incentives provided to foreign investors -- up to 100 per cent foreign equity participation permitted, reduced custom duty on equipment, tax holidays on 100 per cent of taxable profits for the first five years -- are already provoking considerable political unease.

In China, constantly changing rules and doubts over the government's ability to pay its foreign debt of nearly US$100 billion (in 1995 dollars) have also deterred investors in hydro. As International Water Power & Dam Construction noted in 1995:

"Although some big names in the business like General Electric, ABB and Westinghouse have been lining up for joint ventures or direct stakes in power plants, no deals have been cut, due to China's insistence on limiting the rate of return on investment. [In 1994], Goldman Sachs pulled out of fund raising for power plants in the Shandong province when the government tried to impose a 12 per cent ceiling on the return on equity ... Another rule change, that foreign investors would not be allowed to hold majority stakes in power plants or equipment manufacturing ventures, dealt a blow to three investments planned by General Electric. Some concerns have also arisen over the non-payment of bills by state-owned companies. According to recent reports, Lehman Brothers are suing several state-owned corporations to recover accumulated debts."

China has since eased some of the rules that govern IPPs, making them more favourable to foreign investors. However, the future for hydro IPPs remains uncertain. And, ironically, if investors do decide that the returns outweigh the risks, the lack of projects elsewhere in the region as a result of the South East Asian financial collapse is likely to make competition fierce, potentially driving margins below levels that reflect risk.

Source: Dansie, J., "Orient Express or Slow Boat?", International Water Power & Dam Construction, March 1995.

Harding, J., "Invitation to an Unequal Feast", Asian Infrastructure Survey, Financial Times, 23 Sept. 1997.

"Financial system stress and sovereign credit risk", Standard and Poor's Credit Week, 10 Dec. 1997.

Box 5: Solar Versus Bakun

Solar power offer considerable potential, particularly where countries are able to establish a competitive edge in new technologies. A recent assessment of the solar potential for Malaysia, for example, points out that a solar programme aimed at providing 1500MW of power over the next 9 years would have cost significantly less than the cost of the now-postponed Bakun dam, for the same capacity. Moreover, the power produced would be cheaper, especially once the higher value of the daytime (rather than baseload) power produced was allowed for. Other advantages cited in the study included:

Technological Leadership: "Such a programme would promote Malaysia to a leading position in a key technology for the 21st century. At present no country has really established a mould-breaking programme in this area -- Germany and Japan lack the solar resource, and the US is politically averse to such wide ranging support."
Trade: "A large-scale solar programme is likely to be highly beneficial to Malaysian trade. The use of solar power avoids the need to import any fuel. Indigenous production would ensure that the overwhelming majority of the value of the projects would be retained in Malaysia, and Malaysia should in time become a major exporter of solar technology."
Environment: "The [programme] would be lauded as the most environmentally progressive power initiative in the world. It would not involve the destruction of forest, the production of air pollution or greenhouse gases or other significant environmental risks".
Flexibility: "Because the programme is continuous and involves small projects, it can easily be adjusted as power requirements emerge. One benefit of this is that it becomes possible to reconsider the amount of surplus capacity that Malaysia needs to accommodate growth. Another advantage of solar is that it can be installed in relatively small amounts near key areas of demand, and so avoiding the need to expand the power grid at great cost."
Risks: "The [programme] does not involve major risks, such as the potential to induce earthquakes or the major damage that would result from a dam collapse ... In addition, the modular nature of the solar programme means that there is less economic risk from cost overruns or delays."

Source: Mansley, M., "A Solar Opportunity for Malaysia", Delphi International, London, 1996.

Notes and references

Introduction

1 Evans, J., "CEO of the Year", Emerging Markets, 10 Oct. 1995, p.57: ABB, Annual Report 1996 -- ABB Group and Parent Companies, Zurich, 1997, p.4.

2 Evans, J., "CEO of the Year", Emerging Markets, 10 Oct. 1995, p.57: ABB, Annual Report 1996 -- ABB Group and Parent Companies, Zurich, 1997, p.4.

3 "ABB Targets $15 bn for Asia", Financial Times, 19 May 1997.

4 ABB, Annual Report 1996 -- ABB Group and Parent Companies, Zurich, 1997, p.4.

5 Barnevik, P., "Letter from the Chairman", in ABB, Annual Report 1996 -- ABB Group and Parent Companies, Zurich, 1997, p.5.

6 ABB, Annual Report 1996 -- ABB Group and Parent Companies, Zurich, 1997, p.16.

7 Evans, J., "CEO of the Year", Emerging Markets, 10 Oct. 1995, p.57.

8 "Europe's Most Respected Companies", Financial Times, 24 Sept. 1997.

9 ABB, Annual Report 1996 -- ABB Group and Parent Companies, Zurich, 1997.

10 O'Neill, P., "Currency powers fallout in Far East", International Water Power and Dam Construction, November 1997, p.14.

In the Doldrums

1 See: International Water Power & Dam Construction Handbook, 1997.

2 Arter, A., Eichenberger, P. and Widmer, R., "Worldwide Hydro Potential and Conditions for Development", Hydropower and Dams, Issue 4, 1997.

3 Cited in Taylor, A., "Growth of more than Light Interest", Asian Infrastructure Survey, Financial Times, 23 Sept. 1997.

4 Without major investment in upgrading old plant and in building new facilities, India is forecast to have a 22 per cent power shortfall by the year 2000. In Vietnam, where per capita electricity consumption is expected to double in the next decade, an estimated 600-750MW of new generation capacity would need to be be commissioned annually up to the year 2005 to meet the predicted growth in demand. For overviews, see: Taylor, A., "Growth of more than Light Interest", Asian Infrastructure Survey, Financial Times, 23 Sept. 1997; Hydropower and Dams, "World Atlas and Industry Guide", Hydropower and Dams, 1997; B. Petry, "Hydropower at the onset of the 21st Century", Hydropower and Dams, 4, 1997.

5 For a lower range of forecasts, see, for example, Malhotra, A., "Private Participation in Infrastructure: Lessons from Asia's Power Sector", Finance and Development, December 1997. Figures on existing demand vary considerably as do demand forecasts, which are routinely exaggerated. In more than 100 national demand forecasts used by the World Bank, actual demand seven years after the forecasts were made was on average one-fifth lower than had been projected. See: Besant-Jones, J., "A View of Multilateral Financing from a Funding Agency", in Financing Hydro Power Projects 1994, proceedings of conference sponsored by International Water Power & Dam Construction, Frankfurt, 22-23 Sept. 1994: McCully, P., Silenced Rivers:The Ecology and Politics of Large Dams, Zed Books, London, 1996, p.135.

6 Hydropower and Dams, "World Atlas and Industry Guide", Hydropower and Dams, 1997, Table "World Hydro Potential and Development", p.6. See also: Arter, A., Eichenberger, P. and Widmer, R., "Worldwide Hydro Potential and Conditions for Development", Hydropower and Dams, Issue 4, 1997 p.41.

7 ABB, "Hydropower Development", Chart prepared for Aspen Energy and Environment Roundtable IV, in ABB, Hydropower Plants: Clean Energy from Water, 1997.

8 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, ISSN:1365 3512.

9 The World Energy Council (WEC), for examples, forecasts that hydro energy production will increase from around 2,000TWh to nearly 5,000TWh by 2020 -- excluding small hydro developments. Such an increase in production, notes the 1998 International Water Power and Dams Business Report, "would necessitate an increase in installed hydro capacity of around 4 per cent per annum -- to some 2,200,000 MW by 2020." On these calculations, "it is estimated that installed hydro capacity will increase from around 10 per cent of the technically feasible potential to around 30 per cent by 2020."

Roughly half of this expansion is expected to take place in China, India and Brazil. In China, a country where ABB hopes to secure major orders, 80 GW of hydropower is planned long-term, and the country's installed hydro capacity is to be increased from the present 53,000 MW to 70,000 MW by the year 2000. India, where ABB is also active, has 10,000 MW under construction and a further 28,000 MW planned, and Laos, Nepal, the Philippines, Malaysia and Russia all have programmes which entail commissioning several thousand megawatts of additional hydro capacity in the coming years. Likewise, Indonesia plans to increase hydro capacity by 4471.8 MW in the near future.

In Latin America, boom times are also forecast for the hydro industry. "Brazil has more than 10GW of hydro capacity under construction and is planning a further 20 GW. Honduras is planning four new hydro schemes with a total capacity of 1125 MW over the next 20 years, Mexico has identified projects totalling nearly 5000 MW, of which about 2000 MW is planned to be implemented soon, and Ecuador is planning a further 580 MW." See: Hydropower and Dams, "World Atlas and Industry Guide", Hydropower and Dams, 1997; Market Tracking International/International Water Power & Dam Construction, International Water Power & Dams Business Report 1998, London, 1998; Arter, A., Eichenberger, P. and Widmer, R., "Worldwide Hydro Potential and Conditions for Development", Hydropower and Dams, Issue 4, 1997.

10 Examples drawn from Shripad Dharmadhikary, "Large Dams: The Beginning of the End?", PIRG Update, No. 4, September 1997; McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1996.

11 McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1996, p.308.

12 World Bank/IUCN, Large Dams: Learning from the Past, Looking to the Future, Workshop Proceedings, IUCN and World Bank, Gland Switzerland, 1997, p.4. For a discussion of the problems caused by dams, see: McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1996.

13 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.

14 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.

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

16 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.

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

18 For example, Dan Beard, a former Commissioner for the US Bureau of Reclamation, the largest dam building institution in the USA, stated recently: "We have to be realistic about the future ... We have to recognise our traditional approach to solving problems -- the construction of dams and associated facilities -- is no longer publicly acceptable. We are going to have to get out of the dam building business ... Within the last two decades, we have come to realise there are many alternatives to solving water resource problems in the US that do not involve dam construction."

19 Andreas Liebenthal, principal evaluation officer in the Bank's operations department, quoted by 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, ISSN:1365 3512.

20 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, ISSN:1365 3512.

21 Public opposition largely accounts for the decline in funding. However, within the Bank, there is also increasing recognition that dams have failed to achieve their stated objectives. A recent internal World Bank review of the record of 50 large dams which had been financed by the Bank concluded that only 13 of them were "acceptable"; of the rest, 8 should, in the Bank's view, never have been built, even judged by the less stringent standards operating at the time they were approved; 5 would not be acceptable by today's standards; and 24 were only judged "acceptable" if remedial action were taken to correct the environmental and social problems they had caused. See: Liebenthal, A. et al., The World Bank's Experience with Dams: A Preliminary Review of Impacts, Operations Evaluation Department, Washington DC, 1996: World Bank, Lending for Large Dams: A Preliminary Review of Impacts, OED Précis No.125, World Bank, 1996.

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

23 "Brazilian IPP opportunities planned for the end of the year", International Water Power & Dam Construction, October 1996, p.3.

24 "They've got an awful lot of hydro in Brazil", International Water Power & Dam Construction, October 1996, p.22.

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

26 McCandless, D.H., "Hydropower strategy for the Philippines", International Water Power & Dam Construction, November 1995, p.32.

27 Most commonly, the state undertakes resettlement costs and provides guarantees for power purchases from state owned utilities.

28 ABB, "Hydropower Development", Chart prepared for Aspen Energy and Environment Roundtable IV, in ABB, Hydropower Plants: Clean Energy from Water, 1997.

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.

30 Nonetheless, industry supporters are putting on a brave face. Market Tracking International, for example, states: "The three main growth markets of China, India and Brazil continue to represent a vast potential and the mood of the hydropower industry in general remains optimistic." See: International Water Power and Dams Business Report 1998, Market Tracking International/International Water Power & Dam Construction, London, 1998.

31 Kositchotethana, B., "Surging Demand at an End", Bangkok Post, 15 Jan. 1998.

32 Bello, W., "The Rise and Fall of South East Asia's Economy", The Ecologist, Vol. 28, No.1, January/February 1998.

33 Shaw, J., "The Money Game", International Water Power & Dam Construction, December 1997.

34 Despite projected revenues of some $250 million a year, the project developers have been unable to raise the necessary finance from commercial banks without government guarantees for the loans. Adding to the project's woes, there are question marks over the future involvement of at least one of the three Thai stakeholders.

35 In most cases, the power contracts signed for IPPs are in US dollars -- which, in the wake of local currency devaluations, will mean local electricity utilities having to pay more for power. Governments are therefore likely to seek to renegotiate existing power contracts -- particularly where projects are still in an early stage of development.

36 Quoted in Sayer, R., "1997: Mixed Blessings", Project Finance, January 1998, p.8.

37 "Project lending techniques a-changing." Power in Asia, May 1997: Anderson, J., "Circumventing the Challenge", Independent Energy, October 1996, p.8.

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

High Risks, Low Returns

1 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.

2 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.

3 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.

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

5 "Bakun: High Dam, High Risk", Delphi International, London, 1996. See: McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1996, Table 1, p.266.

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

7 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.

8 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.

9 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.

10 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.

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

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

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

14 McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1996, p.138.

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

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

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

18 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.

19 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 Dr. Wayne White, hydropower expert and partner at 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$7M 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. "Were this reduction to occur, profits from the dam would fall short of profits from sustainable logging in the area." 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.

20 This section draws heavily on "Bakun: High Dam, High Risk", Delphi International, London, 1996.

21 Lemperiere, F., "Dams that have failed by flooding: an analysis of 70 failures", Water Power & Dam Construction, September/October 1993.

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

23 McCandless, "Hydropower strategy for the Philippines", International Water Power & Dam Construction, November 1995, p.30.

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

25 "Reaching the end of the road", International Water Power & Dam Construction, January 1998, p.25.

26 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.106: World Bank, "1981 PPAR Colombia: Guatape II Hydroelectric Project", Report No.3718, Washington DC, 1981.

27 World Bank, Learning from Narmada, OED Precis, May 1995.

28 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.

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

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

31 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., "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.

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

33 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.110.

Alternatives

1 Editorial in US Hydro Journal, cited by Goodland, R., "Environmental Sustainability in the Hydro Industry: Disaggregating the Debate" in World Bank/IUCN, Large Dams: Learning from the Past, Looking to the Future, Proceedings of Gland Workshop, Gland, Switzerland, 1997, p.93.

2 Goodland, R., "Environmental Sustainability in the Hydro Industry: Disaggregating the Debate" in World Bank/IUCN, Large Dams: Learning from the Past, Looking to the Future, Proceedings of Gland Workshop, Gland, Switzerland, 1997, p.93.

3 Gagnon, L. and van de Vate, "Greenhouse gas emissions from hydropower", Energy Policy, Vol.25, No.1, 1997.

4 Fearnside, P. "Hydroelectric Dams in the Brazilian Amazon as sources of 'Greenhouse Gases'", Environmental Conservation, Vol. 22, No.1, 1995.

5 Intergovernmental Panel on Climate Change, Climate Change: The IPPC Response Strategies, Island Press, Washington DC, 1991, p.181.

6 This section draws heavily on McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1996.

7 "The Battle for World Power", The Economist, 7 Oct. 1995.

8 McCully, P., Silenced Rivers: The Ecology and Politics of Large Dams, Zed Books, London, 1996, p.222.

9 Flavin, C. and Lenssen, P., Power Surge: Guide to the Coming Energy Revolution, Norton, New York, 1994.

10 Houlder, V., "A Place in the Sun", Financial Times, 10 July 1995.

11 Flavin, C. and Lenssen, P., Power Surge: Guide to the Coming Energy Revolution, Norton, New York, 1994.

12 Fraenkel, P. et al., Micro-Hydro Power: A Guide for Development Workers, Intermediate Technology Publications, London, 1991.

13 Malhotra, A.K., "Private Participation in Infrastructure: Lessons from Asia's Power Sector", Finance and Development, December 1997, p.35.

14 Mansley, M, "A Financial Analyst's Perspective" in Leggett, J., (ed), Climate Change and the Financial Sector: The Emerging Threat -- The Solar Solution, Gerling Akademie Verlag, 1996, p.130.

15 Mansley, M, "A Financial Analyst's Perspective" in Leggett, J., (ed), Climate Change and the Financial Sector: The Emerging Threat -- The Solar Solution, Gerling Akademie Verlag, 1996, p.130.

16 Mansley, M, "A Financial Analyst's Perspective" in Leggett, J., (ed), Climate Change and the Financial Sector: The Emerging Threat -- The Solar Solution, Gerling Akademie Verlag, 1996, p.131.

17 Bob Kelly, cited in Brown, P., Global Warming: Can Civilization Survive?, Blandford/Cassel, London, 1996, p.191. See also: Kelly, R.C., "An Oilman's view of the emerging market for solar" in Leggett, J., (ed), Climate Change and the Financial Sector: The Emerging Threat -- The Solar Solution, Gerling Akademie Verlag, 1996, p.200.

ABB Under Scrutiny

1 At the time that the contract was signed, the environmental impact assessment was still the subject of a legal challenge in the Malaysian courts. It has also emerged that ABB's decision to bid for the contract was taken without referring the project to the company's environmental advisory board. Despite a stated commitment to "communicating openly with interested parties, communities and countries", the company also refused to meet with a seven-member delegation from Malaysian NGOs seeking to discuss the project and explain their concerns.

2 VTZ-Delphi, "ABB -- Asea Brown Boveri AG (Switzerland)", Ethical Performance Report, Zurich, January 1998.

3 Zachary, G.P., In These Times, November 1997.

4 "Bakun: High Dam, High Risk", Delphi International, London, 1996, p.11.

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

6 Tages-Anzeiger, 19 Jan. 1998.

7 Flemings Research, ABB, Robert Fleming Securities Limited, London, 12 Aug. 1997.

8 Reuters, 8 Sept. 1997.

9 Kositchotethana, "Surging Demand at an End", Bangkok Post, 15 Jan. 1998.

10 "ABB to Cut Jobs in Europe, Financial Times, 9 June 1997.

11 Frederick Hasslauer, analyst at Bank Sal. Oppenheim, quoted in Wall Street Journal, "ABB Denies that It Lost Huge Contract As Malaysia Delays Bakun Dam Project, 5 Sept. 1997.

12 Financial Times, 17 Feb. 1997.

13 Dansie, J., "Orient Express or Slow Boat?", International Water Power & Dam Construction, April 1995, p.37.

14 VTZ-Delphi, "ABB -- Asea Brown Boveri AG (Switzerland)", Ethical Performance Report, Zurich, January 1998.

15 ABB, Annual Report 1996 -- ABB Group and Parent Companies, Zurich, 1997, p.8.

16 VTZ-Delphi, "ABB -- Asea Brown Boveri AG (Switzerland)", Ethical Performance Report, Zurich, January 1998.

High Risk -- Low Return?ABB’s Hydropower Strategy under Review

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High Risk -- Low Return?
ABB’s Hydropower Strategy under Review