The role of the World Bank
Currently World Bank support for the Nam Theun 2 project is in-part
dependant on NTEC securing an acceptable Power Purchase Agreeement (PPA) with EGAT. The
price that NTEC will be able to extract from EGAT will determine whether the project is
financially feasible. Should a PPA be secured the Bank will move to appraise the project
on its financial and economic merits as well as its environmental and social impacts, and
mitigation plans. Because of possible Bank involvement the consortium has had to follow
the Bank's guidelines for environmental assessment, indigenous peoples, resettlement and
public participation. During the project's development the Bank has played a central role
in advising and arbitrating on the interpretation and implementation of these guidelines.
Should the Bank decide to support the project, it will take on two financial roles. First
the Bank will provide a concessional loan for the Lao Government's 25% equity in the
US$1.5 billion project. Secondly, at the request of the NTEC and the GoL, it will provide
the financiers of the project with a partial risk guarantee. The guarantee is crucial in
securing long-term finance because financiers and developers are reluctant to provide such
finance in countries such as Laos because of their underdeveloped regulatory systems and
the sovereign risks. Sovereign risks include risks relating to the government's
interference in a project, nonfulfillment of the government's contractual obligations,
foreign exchange convertibility, expropriation, civil wars, etc. However the guarantee
comes at a cost to the government. The GoL will have to provide a counter-guarantee
against the partial risk guarantee, and should the GoL wish to change any aspect of the
contract which it feels is in the best interests of the country and its people, it will be
unable to do so on the threat that the financiers will call on the guarantee.
While government subsidies and guarantees in infrastructure project finance have been
around for a long time, the use of guarantees by the Multilateral Development Banks in the
poorest countries is relatively new. The World Bank supports these countries through its
concessionary loan arm, the International Development Association (IDA). In its role
as catalyser of private sector finance in developing countries' infrastructure, Nam Theun
2, because of its large scale financing needs, was one of the first projects to bring to
light the need for the World Bank to consider the development of a sovereign risk
guarantee mechanism to catalyse such investments in IDA countries. Such guarantees had
previously been restricted to the richer developing countries supported by the IDA's
sister organisation, the International Bank for Reconstruction and Development (IBRD). The
approval for the use of guarantees to cover sovereign risks in IDA countries came in July
1996.
The use of such guarantees has been critisised by international NGOs as a public subsidy
to a few large private companies from developed countries and which involve large
opportunity costs for the countries whose sovereign risks are being guaranteed. More
recently, as the Asian financial crisis has unfolded, enlightened analysts from within the
infrastructure and investment industry have warned that such guarantees that encourage
large scale financing could lead to increasingly complex and riskier projects being
implemented.
|