Changing Mekong Currents Compound Dam Anxieties in Southeast Asia

The government of Laos officially submitted the Pak Beng Dam to the Mekong River Commission in mid-November and has begun preparatory work around the future dam site. While this announcement appears to indicate that the government of Laos and international funders for more than 100 hydropower projects are continuing to move full steam ahead despite serious concerns from downstream countries and affected communities, emerging financial risks and regional shifts are increasingly impacting the risk calculus for future projects.

There are three regional factors disrupting the terrain for investment in large hydropower dams in mainland Southeast Asia. The first is the emergence of Myanmar as a competitor for energy sector investment. Myanmar is an underdeveloped country with significant hydropower potential of up to 100,000 megawatts (MW), nearly four times that of Laos. Western sanctions and domestic instability previously prevented hydropower from moving ahead in Myanmar, and as a result the Salween and Irrawaddy remain largely undisturbed.

Although internal political issues in Myanmar raise questions about the speed and extent of development that is politically feasible, investors are interested. The International Finance Corporation (IFC) is supporting a country-wide Strategic Environmental Assessment for hydropower development, and there have been a plethora of Thai-Chinese joint projects in the Salween River Basin announced in recent years. These projects will compete strongly for financing that previously may have flowed towards projects in Laos.

The second trend is the economic slowdown in China. China’s role in designing and constructing more than half of all large dams globally means that it would previously have been a likely replacement for any loss of funding from overseas development assistance donors or multilateral development banks (MDBs). However, there is emerging evidence that China’s economic slowdown may impact the ability of Chinese developers to get financing for large infrastructure investments abroad. Chinese banks were previously given political mandates to support projects abroad in strategic sectors such as hydropower, mining, and fossil fuels. Even in cases where financing analysts recognized high project risks, such as the Myitsone Dam in Myanmar, the political mandate and the influence of large investment companies meant that loans gained approval.

While supporting unprofitable projects was possible in years of fast growth, the central government is increasingly concerned over China’s rising stock of non-performing loans. As year-on-year growth forecasts drop to a range of only 6.5 to 4.5 percent for 2016, financial institutions in China are increasingly under pressure to rein in bad debt. China’s debt issue is now widely recognized, and concerns over debt prompting a recession have prompted greater consideration of risks by Chinese regulators.

This may lead to a drop in support for risky projects such as hydropower projects, where profit margins are returned over long periods of time, subject to shocks in electricity pricing and demand, and face long term maintenance costs. Anecdotal evidence shows this is already happening: China Export-Import Bank has a hold on loans for six hydropower projects in Myanmar until political issues over the Myitsone Dam are addressed. In Laos, Chinese developers are postponing the construction of some tributary dams due to the inability of Chinese banks to follow up on funding the continued development of projects.

This raises the question: if China becomes unwilling to fund the controversial and potentially risky projects on the Mekong mainstream, who will? All of the signed MOUs for mainstream Mekong hydropower are build-own-operate-transfer (BOOT) projects. Neither Laos nor Cambodia has the financial strength to finance such large projects themselves. Practical concerns over losing money have led many Chinese hydropower companies to shift from the BOOT model, where they have to take on loans directly, toward a subcontracting model that allows Chinese companies to avoid long-term ownership and management risks while continuing to export the design, procurement, and construction of dams.

This appears to be what happened with the Don Sahong Project, which is owned and financed by a Malaysian company called Mega First but will be built by Sinohydro. In other cases, Chinese firms may transform projects into joint ventures to share the risk: the Pak Beng project, which has been on the books as a Datang Hydropower project for years, has apparently shifted to a joint venture with a Thai company. 

Finally, the severe drought in 2016 has highlighted the need for a more coordinated approach to water management throughout the basin. Food security and livelihoods have been impacted throughout the region and particularly in Vietnam’s Mekong Delta, with up to half of the Delta’s paddies affected by encroaching salinization during the worst drought recorded in 90 years. In Thailand the 2016 drought prompted the government to announce intensive irrigation plans to draw water from the Mekong tributary system when reservoirs ran dry. This stirred regional controversy, as the diversion of water was done without consultation through the MRC and in the face of concerns from Vietnam and Cambodia.

The extreme challenges posed by the drought and growing recognition of emerging political and financial risks have brought the issue of optimization of resources to the forefront of the conversation about regional development. Climate change predictions anticipate more flooding and more drought in coming years, making optimization planning vital if Mekong countries want to efficiently operate cascades in an uncertain water future. According to one senior engineer at the Mekong River Commission, these risks mean Laos will likely only end up building five of the nine proposed dams, including Xayaburi and Don Sahong. This is not unanticipated — globally, most river basins do not proceed with construction for all proposed hydropower projects. This raises questions as to which planned projects will ultimately be built.

The time seems ripe for Laos to consider alternative development options and better cumulative project analysis to ensure that it makes the best decisions about which projects will move forward. There are emerging models and analytical tools that can explore multiple development scenarios and compare the benefits and costs across a variety of sectors, such as The Nature Conservancy’s Hydropower by Design concept. Utilization of these tools could help Lao decision-makers explore different development options that would provide similar amounts of power with differing levels of social and environmental impacts.

It is clear that the government will not end up with 100 percent of the planned projects currently on the books and considered in its revenue plans. The earlier Lao officials start to consider alternative development scenarios, the higher the likelihood that high-revenue, low-impact options will remain on the table and the more strategic their decisions about which projects to pursue will be.