Since the late 1980s, the Lao People's Democratic Republic (Lao PDR) has been instructed by advisors from the World Bank, Asian Development Bank, United Nations Development Program and bilateral western donors that it has no option but to develop its hydropower resources and sell the power to Thailand. These advisors, coupled with hydropower industry consultants, have promised huge influxes of foreign exchange that will help fuel economic development in the country.

Many people are concerned that the dependence of Lao people on their rivers for all aspects of their lives � including for fish, fresh water, irrigation and fertilization of crops, transportation, and recreation � renders them highly vulnerable to the very substantial changes in the river systems brought about by large dams, and that these costs may outweigh any economic benefits.

In February 1998, during a dialogue with Lao government officials, International Rivers Network was encouraged to visit the Lao countryside and some dam sites. As a result, IRN visited six project sites at various stages of implementation and talked to many observers within the country. The sites visited included Nam Theun-Hinboun, Nam Leuk, Nam Theun 2, Houay Ho, Xe Pian-Xe Namnoi, and Xe Kaman 1. These field studies form the basis of this report, which aims to provide an overview of hydropower development in Lao PDR, informing the debate at the local, national and international levels.

The study revealed some similar and very fundamental problems with all of the projects, including:

• Poor financial viability
• Inadequate resettlement practices
• Inadequate compensation
• Uncontrolled logging
• Problematic environmental impact assessments
• Lack of appropriate regulation

These problems are illustrated below and discussed in greater detail in the case studies.

Poor financial viability
While the Lao government has invested millions of dollars in encouraging private sector investment in hydropower development, there are already signs that this strategy is not working. Out of the five projects that have been built in Lao PDR to date, four involved concessionary financing from a public source, and one was financed entirely from a company's own resources. No other private consortium has managed to raise commercial financing, nor successfully negotiate a power purchase agreement with Thailand, nor are they likely to until at least 2006, when Thailand may negotiate additional power purchases from Lao PDR.

Those projects that have proceeded are already running into financial difficulties. As a result of the economic crisis, revenues for Houay Ho and Theun-Hinboun hydropower projects - the first two public/private projects to be built in Laos - have been affected due to the low tariff and the drop in the baht exchange rate. In 1998, in its first year of operation, Theun-Hinboun lost around $10 million in revenue due to the devaluation of the baht. The 150 MW Houay Ho Hydropower Project was funded entirely from Korean conglomerate Daewoo's balance sheet, and was completed at the end of 1998. The financial viability of Houay Ho is so poor that Daewoo has been looking to sell its stake for the past year but has had trouble finding a buyer. The 60 MW Nam Leuk hydropower project, owned entirely by the Lao government and due to be completed in 1999, is expected to incur a $15-20 million cost overrun which will affect the economic viability of the project. The government may be forced to sell a part of the project to a private power company.

Inadequate resettlement practices
Hydropower is increasingly being used as a pretext to resettle ethnic minorities from upland areas to lowland areas in keeping with the government's policy of resettling shifting cultivators by the year 2000. Anticipatory resettlement is occurring in some watersheds and inundation zones long before it is certain that a dam will actually be built. At Houay Ho, Xe Pian-Xe Namnoi, and Xe Kaman 1, resettlement is taking place under very poor conditions, causing hardship and suffering for the ethnic minority groups who have been forced to move. A lack of arable land and fresh water supplies, coupled with an unfamiliarity with wet rice cultivation and separation from ancestral lands, has resulted in food shortages and increased rates of morbidity and mortality for those resettled.

Inadequate compensation
Hydropower projects in Lao PDR are proceeding without adequate efforts to document the livelihoods of people living downstream and upstream from the dam site prior to construction, nor to provide for sufficient compensation for livelihoods losses occurring as a result of the dam. These impacts have been best documented in the Nam Theun-Hinboun case study, where villagers in three different areas reported substantial declines in fish catches, flooding of vegetable gardens, transportation difficulties and fresh water shortages. As with resettlement costs, private developers must be held responsible for paying their fair share of the compensation costs of a project. It is also important to recognize that compensation will never substitute for an unobstructed riverine ecosystem.

Uncontrolled logging and access to protected areas
Hydropower projects are being used as a pretext for logging of reservoir areas, long before a decision to build a dam has actually been made. The construction of roads and bridges has opened up more land for logging and hunting and has led to increased environmental degradation. As many hydropower projects are situated in protected areas, the impacts on biological diversity are especially serious. In the case of Nam Theun 2, the military-run logging company, the BPKP, has logged more than one million cubic meters of timber on the Nakai Plateau to clear the reservoir area even though the dam may never be built. Dam proponents now justify building the project on the basis that the Nakai Plateau is so degraded from logging that it is not worth saving. At Xe Kaman 1, all indications are that the dam may never be built, and that the project is in fact an elaborate logging scheme in disguise. In this case, the Lao government is foregoing lucrative logging revenues in anticipation of future proceeds from electricity sales that may never eventuate. Meanwhile, some of mainland southeast Asia's last remaining tropical rainforest, together with an array of rare and endangered species, may be sacrificed.

Problematic environmental impact assessments
Rather than being used to ensure that all of the social and environmental costs of a project are known and accounted for, the environmental impact assessment (EIA) process is being manipulated to protect hydro and logging interests. EIAs in Lao PDR are carried out by hydropower consultancy companies with vested interests in ensuring that the project proceeds, mainly because they stand to gain further lucrative contracts once the project goes ahead. EIAs for Theun-Hinboun, Nam Leuk, and Xe Pian-Xe Namnoi were heavily criticized for omitting crucial information and ignoring or downplaying concerns about the potential negative impacts of the projects. Other problems with how EIAs are carried out in Lao PDR include preparation late in the process of project approval, insufficient capacity within the government to critically review highly complex documents in English, lack of public consultation, and the lack of monitoring and enforcement of recommendations.

Lack of appropriate regulation
The financial interest that the Lao electricity utility, Electricit� du Laos, has in maximizing profits from projects in which they are joint venture partners creates a conflict of interest with their role as regulator. This places a constraint on EdL's ability to negotiate a risk allocation which is in the best interests of the Government and Lao PDR. In Northern � and increasingly in developing � countries, an independent regulatory body establishes and enforces licensing and environmental assessment procedures. These licensing procedures allow for early and effective public notification, access to information, consideration of the "no-go" option, the right to review decisions, and the right to legal remedies if damages occur. It is clear that more work needs to go into developing a regulatory regime for Lao PDR that is fair, efficient and ensures the greatest possible benefits for the Lao people. Continued unregulated development will only cause further problems along the way.

These issues are discussed in greater detail below. Chapter 1 of the report documents the history of dam plans for Lao PDR and looks at the macroeconomic impacts of the proposed hydropower strategy. Chapters 2 through 7 provide case studies of individual projects at various stages of implementation. The concluding chapter points to some similar and fundamental problems with all of the projects examined in the report.