Changing economics10 June 1998
World Bank sources report that hydro schemes in developing countries should have a bright future, but at the same time the financial institution’s investment in such projects is declining. Does this reflect the Bank’s diminishing support for hydro? Suzanne Moxon reports
Over the past three decades the World Bank has played an instrumental role in financing hydro power projects in the developing world. Bank-supported projects, which total 110 in over 50 countries, have a combined generating capacity of 35,000MW. With the demand for electricity in developing countries set to triple over the next three decades, hydro power should have a bright future in such areas of the world; encouraged by its following traits:
•Hydro technology is considered to be well suited to developing countries due to its simplistic nature and low operating costs.
•Developing countries have vast untapped hydro resources — less than 10% of hydro potential has been utilised in Asia, Latin America and Africa, compared with 70% in North America and Western Europe.
Bearing such factors in mind, World Bank sources agree that the outlook for hydro power in developing countries ‘would appear to be rosy’. Why is it then that over the course of the 1990s the World Bank, one of the leading advocates of hydro power, has actually reduced the amount of money it lends to hydro projects? Bank lending for hydro has fallen from 3.4% to 2.5% of the US$20B the organisation lends annually.
Problems and challenges
John Briscoe, senior water advisor at the World Bank, says that upon close analysis of the hydro industry, deep problems and many challenges are unearthed. In an attempt to account for such a decline in the Bank’s hydro financing he said: ‘This is not something we have a clear policy on. We do not have a policy that says we will get into or out of hydro or other energy projects. The reality is that large dams have become very controversial. Ultimately, the Bank has become a lightning rod for concerns about dams.’
Briscoe went on to explain about the political reality of the situation. ‘Whenever we take on a project with a large dam in it, it does not even have to be a power project it can be a water supply scheme such as the Lesotho Highlands project, but such projects become contentious almost by definition. Managers at the Bank know that a large dam will probably cause a huge amount of never-ending discussions with NGOs and the Bank’s board. In the real world the managers’ reactions actually play out to “can’t we do something else instead?”.’
Briscoe believes that organised opposition to dams has had an effect on the Bank’s declining loans. ‘Hydro is potentially environmentally benign, and real domestic industry builds around it,’ he said. ‘These are both plus points but the social and environmental issues surrounding dam building have become so contentious that for institutions, such as the World Bank which exists in a political context, these issues are costly. I think that this has something to do with the decline in the Bank’s lending.’
Although environmental and social pressures undoubtedly account for some of this marked decline, there are other implications. ‘What seems likely,’ Briscoe explained in a recent report about the Bank’s hydro activities, ‘is that since money is fungible, developing countries have simply taken the path of least resistance, using their own resources for the more controversial investments, and submitting projects to the World Bank which are more politically palatable in the West.’
Indeed, countries seeking finance for hydro projects know that large dams have become contentious issues, and this is a recipe for high costs. ‘There have been so many problems with large dams over the years,’ Briscoe said, ‘that the transaction costs of dealing with such problems have become very high. If countries have access to alternative sources of finance they will not come to the Bank.’
Alternative sources of finance include funding from the private sector, and such involvement has changed the World Bank’s role in hydro power substantially. Briscoe explained how such private sector involvement has altered the economics of dam building — for the better. When governments were the main sources of funding for such projects more often than not costs exceeded their estimates and schedules were delayed. This was not considered unusual as it was more or less the normal way of doing business. ‘But it is not the case with the private sector,’ Briscoe points out. ‘You have really got to be on time and on cost. Thinking that you can go along with the same way of doing things, when you’re competing with a more modern private sector in other energy areas, just will not work.
‘Private sector involvement in the hydro industry has changed the landscape considerably. It has changed dam building, making it much more accountable. You can ask is this being done as effectively as can be, whereas before there was a public sector mentality involved.’
The changing landscape of dam building has also necessitated a role change for the Bank. ‘We used to be big financiers where hydro is concerned, but we are now more in the guarantee business,’ Briscoe explained. ‘Most of our finance is also focused on the social and environmental side of things. We’re really trying to get this right.’
It may sound surprising, Briscoe said, but the Bank is considered to be one of the agencies with policies most able to deal with the variety of public and NGO actors involved in dam building. ‘We’re perceived to have a comparative advantage,’ he said. ‘On the financing and construction side the private sector can do a lot. However, the environmental and social side needs a different sort of expertise, and we can do a lot of that.’
Environmental and social issues can bring great uncertainty for the private investor. ‘There is a lack of security for private investors,’ Briscoe commented when comparing hydro investment to that involved with thermal power plants, where there is less uncertainty. ‘With hydro you can’t just say to investors this is the game and this is how we’re going to play it. The whole game keeps changing. The environmental and social rules keep changing, the goal posts tend to shift every six months or so and the whole process becomes more costly. There is a very positive and strong case for hydro power,’ Briscoe added, ‘but unless we can deal with these environmental and social issues more effectively it is going to become a very difficult situation for private investors.’
Effective management of such issues is where the Bank is hoping to play a central role. ‘These are serious issues and you have to deal with them,’ Briscoe said. ‘If you think you are going to sweep them under the rug it is never going to work.
‘In the old days,’ he went on to explain, ‘resettlement used to be dealt with by saying to the affected people: “The water is rising”. That’s how it was done. We have now learnt that you have to work on such environmental and social issues far in advance. We have also been part of the evolution of getting affected people involved in the projects. The task of getting broad participation in consultation processes is very important and really does matter.’
Resettlement and environmental issues must be incorporated into the design stage of dam building, the Bank believes. Such issues must also become part of the actual choice process and have to be worked on before dealing with the infrastructure of the project. ‘This is a huge change in how things were done before,’ Briscoe commented.
From its involvement in several controversial hydro schemes, such as the Sardar Sarovar dam in India and the Manantali dam in Mali, the World Bank has learnt various lessons. ‘We play an important role in hydro projects,’ Briscoe said, ‘but our borrowers are the critical ones. When they deal with environmental and social issues effectively we are happy. But in situations where they are not taken seriously and our borrowers do not follow the same procedures as us, there is very little we can do to patch it up. What we have learnt from this is the value of conveying to the borrowers the importance of dealing with such issues up front. There is a lot of advocacy going on between the Bank and the borrowers, where we are telling them how much easier it will be to do these things correctly at the beginning. More borrowers are now taking it seriously.’
Briscoe uses China as an example of a country which is taking such issues very seriously. ‘The Chinese are, in a Western stereotypical way, just seen as shunting their people around,’ Briscoe said when commenting on the large scale resettlement of 1.25M people at Three Gorges dam. ‘However, they do such resettlement extremely well. This has been the case on projects we have worked on with them and also on their own projects.’
The fundamental reason why the Chinese carry out successful resettlement is that they see it as an opportunity to develop, and not as a cost of development, Briscoe explained. ‘It is a fundamental belief that such project-affected people should be better off,’ he said. ‘The Chinese carry out extensive consultation and involve the people themselves in finding solutions; most importantly financial resources are available to ensure that such solutions can be found.
‘If at first such solutions do not work, and they rarely do with resettlement, the Chinese will try again until the problems are solved. They do this fantastically well,’ Briscoe enthused.
Resettling 1.25M people at Three Gorges is a tremendous task but Briscoe believes the Chinese have not underestimated this. It is the only country in the world with a consistently good track record in resettlement.
‘If any other country in the world was undertaking this task it probably could not be done,’ Briscoe said. ‘The Chinese started putting together new places to settle the dam-affected people more than 15 years ago. It was not a case of the authorities saying “Oh my goodness. The dam is springing up what do we do?”, this has been a process they have been working on for a long time. A lot of preparatory work has been done.’
World Commission on Dams
The increasing importance of environmental and social issues was instrumental in the Bank’s decision, along with the World Conservation Union, to form the World Commission on Dams in 1997 (see IWP&DC May 1998, pp 32-33). Briscoe, who was the Bank’s point person in launching the Commission, explained why it was necessary. ‘No matter what the Bank does it is perceived by NGOs as not having moral authority about dam related issues. For example, when I’m sitting in my office in the US, they may say about me: “What does he know about dams in developing countries?”. This is why trade-offs and choices have to be made by people in developing countries. It may sound trite,’ he added, ‘but it is people who have to live with dams who should be involved in the decisions about them. The large dams controversy has not always been a debate where the right kind of information has been brought to the table.’
From the Bank’s perspective the Commission is not a ‘big deal’. Only 2.5% of the Bank’s spending is allocated to hydro and, as Briscoe explained, it is not a life or death situation for them. The important issue, however, is achieving standards for dam building — something the Bank does have an interest in.
Briscoe believes that the time has now come to scrutinise when dams should be built, and most importantly of all, how they should be built — giving consideration to the various parties who will be affected by them.
How successful does Briscoe think the Commission will be in pleasing all of its members, who are both opponents and proponents of dam building? ‘When all of the Commissioners signed up they agreed to do their best to reach a final, agreeable report. If we did not think this could be achieved we would not have established the Commission,’ he said. ‘Personally, I do not think of rating their chances on reaching a compromise, it is more a case of this is something they just have to do.
‘If they can put this thing together and come up with standards which will balance all points, it will be of immense value to dam building countries and their people, as well as those institutions, such as the World Bank and private financiers, who have to work with them.’
Whatever the Commission’s recommendations are, one fact is clear to Briscoe. ‘Living without electricity is a lousy existence,’ he said. ‘It is not a pretty picture and it is unkind to the environment. It is a well known fact that energy demand will continue to rise, and people in developing countries need that energy.’
When asked what he thinks the future holds for hydro power and dams in the developing world, Briscoe thought for a while before saying: ‘The question is can hydro modernise itself? Can it compete with other energy supplies in terms of financing so that it can be, as it should be, an environmentally positive source of energy?’.
The results from the first meeting of the World Commission on Dams may help to answer this question but only time will tell what the future holds for hydro, and what shape its relationship with the World Bank will take over the forthcoming years.