FLE COPY
Third report of the International Advisory Group
on the World Bank's handling of social and
environmental issues in the proposed
Nam Theun 2 hydropower project in Lao PDR.
A
re.  IF   i' ,      l,
I,.
6 April 2001






TABLE OF CONTENTS
SUMMARY OF CONCLUSIONS AND MAIN RECOMMENDATIONS .............1
1.  INTRODUCTION ....................         ...........................................3
2.  MACRO-ECONOMIC CONSIDERATIONS ............................................ .  5
5                      2.1   Economic performance developments ..........................................5
2.2   Revenue usage ......................     .........................................6
3.  SOCIAL IMPACT ISSUES ......................................................... . . 9
3.1   General observations .............................................................9
3.1.1   The Upland Development and Conservation Project (LIL) .......... 10
10                      3.2   Watershed Developments: getting the system  in place ..... . . I 1
3.2.1   Developments of legislative frameworks .............    ...................... I 1
3.2.2   Environmental and Social Management Operational Plan ......... 13
3.3   The plateaulreservoir area: the challenge of resettlement  ... 15
3.4  The downstream areas: pluses and minuses                      . .   18
15                      3.5   Summary ..............................................................    19
4.  ENVIRONMENTAL ISSUES AND RISKS                   ............................................ 21
4.1 The Watershed    .                           .21
4.2 Developments in the forestry sector   .                  .23
4.3 World Heritage status    .                       .24
20                       4.4 Global support for NBCA    .                      .24
4.5 The plateau / reservoir    .                      .25
4.5.1    EAMP findings on selected issues: vegetation and water ........... 25
4.6   Fishery risks ............................................................ 26
4.7   Downstream  areas               .......................................... 27
25                      4.8   Summary ............................................................      27
5.  GLOBAL CONSIDERATIONS .               .     .......................................................... 29
5.1   Greenhouse gas emissions ........................................................... 29
5.2   Measuring NT2 against WCD standards ....................................... 29
6.  CONCLUSIONS ..................          .......................................... 31
30
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APPENDICES
1. Letter to the Vice President of the World Bank
5               2. Composition of LAG and resource persons
3. Working Programme of the IAG
4. Reference documents used
10
5. Map of the NT2 project area
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SUMMARY OF CONCLUSIONS AND MAIN RECOMMENDATIONS
*  The timing of the visit was strategic: the project process is close to the big
decisions.
*  The people are impatient over the delays; so the IAG sent a message to
the relevant World Bank Vice President advocating the setting and
promulgation of a timetable for decision-making.
*  The macro economic situation is transformed for the better: the GoL has
made substantial progress in stabilising the economy.
*  The World Bank's remaining apprehensions about the projects are largely
being resolved:
*  The leakage of trained people is still a problem but there are ways for
the GoL to reduce this;
* Overall public expenditure and fund management are improving with
the active help of international financial institutions including the
Asian Development Bank;
*  Revenue usage issues involve trust and sovereignty: the IAG's view is
that seeking some form of guarantee that project revenues will go into
poverty alleviation (official GoL policy) is premature and that there
are systems in place and means to monitor and influence allocative
decisions sufficient to allay the World Bank's fears;
* But the GoL would bolster confidence by publishing in full its budget
documents including its use of ODA flows.
* The major remaining social impact issues relate to the people in the
NBCA rather than to those to be resettled or downstream of the
powerhouse. The priorities are:
* Maintaining, upgrading and expanding the LIL project;
* Setting up the (now legislated) Watershed Management and Protection
Authority (WMPA) as soon as possible and initiating some activities on
the ground;
* Starting work on upgrading boat/track access to facilitate the delivery
of livelihood, agriculture extension, health and education services to
watershed villages.
* The revised Resettlement Action Plan (RAP), if faithfully and yet flexibly
carried out provides a sound basis for successful resettlement and is
usefully spelled out in the draft Concession Agreement (CA). The
developer should look at World Commission on Dams (WCD) guidelines
for performance contracts with families and communities
* Downstream of the power station there will be some negative impacts of
the inter-basin transfer of Nam Theun waters, most notably on riverside
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gardens and (probably) on fisheries. The draft CA spells out
compensatory arrangements.
* There will also be substantial benefits in the potential for stimulating dry
season rice and other production through irrigation.
* The major environmental issues and risks also relate largely to the
NBCA:
* The NBCA and its corridors are largely intact. They represent a global
treasure. This is all highly encouraging;
*  Public education on nature conservation is nevertheless needed;
* To counter cross-border hunting and wildlife trading joint patrolling
with Lao military and villagers acting together is recommended:
* While preparations should begin now with setting up of the WMPA, the
application for World Heritage status for the NBCA and its corridors
should probably not be initiated until an effective management regime
is in place.
= Other major environmental issues and developments are:
- The ban on illegal logging across the project area seems to be largely
effective, with court action following a transgression;
• There is an over-capacity in wood-processing facilities in Laos,
symbolised by the new plant outside Laksao;
-  Initiating baseline monitoring of fisheries in the project area is an
overdue development and a sensible one but the risks to fisheries
remain high especially in the downstream areas;
* An update on predictions for greenhouse gas emissions for the project
is called for;
* The restructuring (and downsizing) of GoL agencies with
responsibilities in the conservation and environment areas was most
untimely and better co-ordination of the new agencies in support of
the project is needed.
In conclusion, the IAG strongly supports the project going to appraisal in
the very near future and, along with the overwhelming majority of the
external agencies consulted over the years, strongly supports this
impressive project proceeding. It meets the WCD guidelines and standards.
It may be argued at this point that the risks of the project not proceeding
outweigh the risks inherent in major infrastructure projects like this.
Among the losers, if the project were not to go ahead would be the people,
the forests and other biodiversity of the watershed, those to be resettled and
those downstream and elsewhere, who would benefit for many years from
the revenues being invested in poverty alleviation and, it has to be said, the
reputation of the World Bank in many circles.
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INTRODUCTION
Only three of the five members of the International Advisory Group (IAG) set
up to provide an independent assessment of the World Bank's handling of
environmental and social issues in the proposed Nam Theun hydropower
project in Lao PDR were available for the third visit' from 5 to 10 March
2001. Mr Kazuo Takahashi and Ms. Meg Taylor were unfortunately both ill,
so the team on this occasion was made up of Mr Dick de Zeeuw, Mr David
McDowell and Mr Emil Salim.2
The Group had six days in Laos, three working days in Vientiane consulting
with the Deputy Prime Minister, the Minister of Handicrafts and Industry,
senior Lao officials involved in the project, the representatives of
international financial institutions and NGOs based in the country and the
developers (NTEC). The extensive use of a helicopter enabled the team to
have talks with Provincial and District officials in Laksao and Nakai3, to
consult with the people in village meetings in the Nam Theun watershed
(Ban Navang and Ban Makfeung) and the Nakai plateau (Ban Sop Phene
and Ban Sailom, the latter being the designated pilot resettlement village)
and to overfly community forests in the Nam Malou area, much of the
watershed and plateau and the areas downstream of the proposed power
station including the Gnommalath Plain4.
The timing of the visit was strategic. The long drawn out investigatory,
planning and legislative phase of the proposed project is now drawing
towards the close. The adverse macro-economic situation in Laos which
had delayed progress for two years has taken a substantial turn for the
better. The power purchase and concession agreement negotiations which
must be concluded (with drafts on the table) before the World Bank takes a
decision to proceed (or not) to formal appraisal are being actively pursued
and should be concluded by April (concession) and May/June (power
purchase). The Bank itself is engaged in a final risk assessment exercise
and is moving to a pre-appraisal phase. In short, the project is close to
decision time.
The lAG's mandate was the standing one - to assess the World Bank's
handling of social and environmental issues in the project and the risks
involved - but it was asked also to give its opinion on two key documents5,
the revised Resettlement Action Plan and the just-completed Environmental
Assessment and Management Plan (EAMP), February 2001. The Group was
to comment on the prospects for the revenues accruing from the project
being well managed and in particular for them being used, as planned, for
poverty alleviation. The Government's commitment in relation to forest
management, reducing illegal logging, conserving biodiversity and
supporting existing World Bank field projects related to the NNT venture
were to be gauged.
'The first visit was made in May - June 1997 and a second visit in November 1998.
2 See appendix 2 - composition of LAG.
3 See appendix 5 - map of the project area.
4 See appendix 3 for the complete working programme of the LAG.
5 See appendix 4 for an overvew of documents used.
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These were substantial tasks to be achieved in what was a short visit. The
IAG concentrated on what it saw as essentially new developments since its
last visit and on providing the World Bank with a snapshot of the situation
on the ground in Laos. It does not claim to have made comprehensive
assessments of the latest technical documents relating to the project, some
of which are still under negotiation.
The Group's immediate impression was that the level of impatience in Laos
over the repeated delays in coming to decisions and in particular over the
absence of a known schedule for decision-making was such that an early
warning to the Bank was called for. A letter to the relevant Vice President
(Mr Jemal-ud-din Kassum) was drafted accordingly and sent to him on
March 10, the last day of the visit. A copy of the message is appended6. It
argues for the setting and promulgation of a timetable for decision-making.
Some preliminary views on the issues of revenue usage, public expenditure
management, capacity building and technical assistance are incorporated in
the letter.
In essence, the IAG strongly supports the project going to appraisal in the
very near future and, on the basis of its four year association with one of the
most comprehensive and pro-active processes ever engaged in by the World
Bank, strongly supports the project proceeding. In our view the risks of not
proceeding - for the Government and impoverished people of Laos, for the
world-class forests and biodiversity of the country, for the reputation of the
World Bank given the almost universal endorsement of the project by a
series of highly qualified advisers and technical consultants7 and the high
priority and commitment to the project by the Government, outweigh the
social and environmental risks inherent in such projects. But this is to
anticipate. Suffice it to say at this point that the GoL and the World Bank
are to be congratulated on the progress thus far in setting up what may well
come to be seen as a global model for such projects.
This report below addresses four broad subject areas: macro-economic
considerations (section 2). social impact issues (section 3) environmental
issues (section 4), global considerations (section 5) and conclusions (section
6). References to previous IAG recommendations are incorporated in the
appropriate section rather than being listed separately.
6 See appendix 1
7 5 Visits of POE (Panel of Experts]. 3 visits of IAG. 2 visits of Dam Safety panel and extensive public
consultation
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2.          MACRO-ECONOMIC CONSIDERATIONS
2.1         Economic performance developments
On the latest occasion the IAG visited Laos (November 1998) World Bank
officials were very concerned over the emerging macro-economic situation
faced by Laos consequent upon the so-called Asian financial crisis. The
Bank was seeking assurances and further action on the policy and
management levels to right the situation and was clearly disinclined to move
much further on the NT2 project until there were improvements.
The situation is now transformed. As is well known, the GoL has met its
ambitious expenditure targets - albeit at the cost of some damaging cuts on
the social and environmental fronts - and has made what the IMF describes
as substantial progress in stabilising the economy:
* The excessive liquidity has been mopped up;
* Inflation is down from a high of 167% to an annualised level to January
2001 of 10% with relatively realistic targets of 8% and 5 % for the next
two years;
* The exchange rate has stabilised at around Kip 8,200 to the US $1;
* The reserves of the Central Bank have steadily expanded;
* The real growth rate is annually 5% to 5.5%.
In short, the consensus is that the economic performance of the GoL, not
least its fiscal discipline, has improved substantially. Representatives of the
international financial institutions resident in Vientiane express 'cautious
optimism" about the future. Reservations relate to the continuing lack of
transparency regarding the allocation of external resources (an issue
currently being addressed), the pace at which the economy will be permitted
to open up further, and continuing capacity problems in areas like Budget
allocation processes, public expenditure management in general and Central
Bank and Ministry of Finance staffing.
As the World Bank is aware, the international financial institutions
represented in Vientiane, notably the Bank itself, the IMF and the Asian
Development Bank, have established greatly improved relations with the
GoL and are co-operating actively with their national counterparts in
addressing basic development issues as well as economic and financial
management and capacity problems.   This is a most encouraging
development. The IAG was impressed with the bread and depth of this
technical assistance, with the quality of the IFI representation in Vientiane
and with the growing confidence between the GoL and the IFIs. The current
Public Expenditure Review with IFI involvement can also be expected to
produce upgraded processes and capacity in due course.
While capacity leakage remains a difficulty, the bank's apprehensions about
overall public expenditure and fund management are being actively
addressed. This is reassuring, though of course there remains a good deal
to be done. Given that project revenues from NT2 (assuming it is approved)
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do not come on stream for a further five to six years, it would seem that
there is time for the capacity and competence building programmes in the
central financial institutions to acquire greater strength before the pressures
generated by NT2 revenue flows begin. The Bank should derive
encouragement from this. It should also continue to invest in financial
management upgrading programmes.
For its part, the IAG encourages the GoL to try to stem the constant leakage
of trained manpower and attract well qualified recruits by upgrading its
personnel management techniques and lifting public finance management
salaries to a level where there is a greater degree of parity with the private
sector and trained staff can concentrate on their responsibilities without
needing supplementary income. Investment in staff of the central financial
agencies pays dividends.
2.2         Revenue usage
The World Bank has a legitimate concern to ensure that the greater
proportion of the revenues of the NI2 project flow, as is the declared
intention of the Government, into poverty alleviation programmes. The
Bank management has its own shareholders and monitors and has had
some embarrassing experiences elsewhere in the world over the direction of
revenues into unproductive channels. In an economy as small as that of
Laos the expected project revenues would represent a considerable
proportion of Government resources. The temptation to use them
indiscriminately simply to cover the general Budget deficit, for example, will
be high.
This is a sensitive area, as was brought out in the lAG's discussions with
Ministers. Questions of trust and sovereignty arise. What is acceptable,
indeed mandatory, in one country will be obtrusive if not offensive in
another. Interestingly enough, two of the Bank's partners in Vientiane
argue against it pressing for too explicit and too binding an assurance about
revenue usage, noting that policy distortions can arise and effective fiscal
management can be affected if a large proportion of Government resources
are in some way 'ear-marked', especially some years before they begin to
flow. They point out that there is an active and ongoing debate in Laos
about what poverty is and how to alleviate it most effectively. International
financial institutions are fully involved in these strategic discussions. There
is a high level of transparency in the debate and further transparency can
be expected to evolve as trust grows.
The IAG started out with some trepidation by seeking ideas on a process, a
mechanism, an institution or a programme which might help assure the
Bank about project revenues going into poverty alleviation work. They tried
out several ideas, ranging from ear-marking to establishing a subset of
budget lines devoted to poverty alleviation, to setting up a poverty reduction
endowment or fund of some sort, to creating a joint institution of some kind
to monitor revenue usage. Neither the GoL side nor the international
agencies to which we talked were particularly attracted to these ideas
though there has apparently been some discussion in government circles of
a poverty reduction fund idea and there are already precedents for
international involvement provided for in monitoring several aspects of the
project. Examples are:
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* Annual 'joint monitoring and control of wood exploitation activities in
forest reserve area" between the GoL, NTEC and the World Bank with
participation of two international experts from the POE and the IAG -
Notice No. 0885/CPMO of the Prime Minister's office;
* Provisions in the recently signed Decree establishing the NNT Watershed
Management and Protection Authority for representatives from donors or
intergovernmental organisations to become members of the WMPA Board
by invitation and for an independent monitoring agency and an
independent auditor, both of "international standing", to monitor, audit
and report on the activities of the Authority in the interests of
'transparency and accountability";
* provision in the draft Concession Agreement for a Panel of Experts in
Social and Environmental fields to review project impact mitigation and
performance of CA social and environmental objectives.
There is an element of the chicken and egg situation here. The World Bank
has indicated that it seeks assurances on revenue usage but it has put no
specific proposal on the table. Similarly, the GoL might be prepared to
consider putting on paper its policy on revenue use or even to discuss ideas
on a Poverty Reduction Fund or some form of unobtrusive joint monitoring
but it is not clear about what the Bank is seeking and has taken no
initiative. There was earlier talk of a letter of development policy but the
GoL is unsure what this means. In short. there is an impasse.
To be frank, the lAG's view is that it is premature for the World Bank to be
seeking some form of programmatic or institutional assurance about project
revenue usage beyond the broad policy statements already made at the
highest level (and reaffirmed to us by the deputy prime minister and
minister of finance). There are many avenues through which the Bank can
monitor and even influence the GoL on allocative matters. The round table
process, for example, is increasingly open - though still not open enough -
and the dialogue is almost continuous. At the November 2000 Round Table
meeting the government responded positively to suggestions that it expand
its allocations to the social sectors. The Bank is a participant in the current
public expenditure review exercise which will address inter aha financial
management and allocative procedures in the context of poverty alleviation.
The Bank is helping the GoL draw up an interim poverty reduction strategy
paper leading to the proposed establishment of an IMF poverty reduction
and growth facility. The Bank's international partners are closely involved
in helping make the five year plan process more connected to social and
economic programmes at provincial and district level. These are just some
avenues through which the Bank can monitor and influence (though not
direct) the GoL's allocative policies. It seems likely that in the years ahead
an even closer relationship will develop between the government and the
IFIs. In the lAG's view, all this provides the context for developing the
confidence about the government's implementation of its declared policy on
using revenues for poverty alleviation which the Bank is seeking.
Furthermore, the Bank or other external consultants will, as noted above,
be involved in monitoring or executing many aspects of the poverty
alleviation programmes of the NT2 project itself. We are not convinced that
a more formal process or mechanism is called for at this time although there
may be a case for a suitably drafted letter of development policy, in which
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case the GoL would need some guidance on the usual content of such a
document in order to prepare it.
The area in which the government could quickly help allay apprehensions is
in publishing in full its budget documents including its use of ODA flows.
That is an action the IAG recommends that the GoL undertake in the very
near future. It is unusual for such flows not to be identified publicly.
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3.           SOCIAL IMPACT ISSUES
3.1         General observations
The reality the IAG faced in its visits to four villages, two in the watershed.
two in the plateau and in its discussions with village representatives in
Nakai is that measures imposed as a precondition for project planning to
proceed have had the unintended (and hopefully short-term) effect of
impacting adversely on the economic situation of the villagers. The level of
poverty encountered appears to be even more abject than it was when the
IAG first visited the area four years ago. This is as true of the villages where
the Bank-funded Upland Development and Conservation Project (LIL) is
being implemented as in other villages since the LIL project has been slow to
get under way and has, in the IAG's view, made no significant impact as yet.
Destructive of habitat and species though they were, the traditional hunting
and cultivation practices of the people both in the watershed and in the
plateau area did provide a more or less adequate living at the subsistence
level. Hunting provided protein, forest food gathering supplemented the
staple crops and slash-and-bum cultivation usually provided a reasonable
level of productivity from a succession of soil plots. In those areas where
wildlife hunters and traders had penetrated and in areas where logging was
either permitted or conducted illegally, the villagers often benefitted directly
or indirectly in cash terms from such activities.
For sound project-related reasons such activities, with the possible
exception of forest food gathering, are now frowned upon if not explicitly
prohibited. Slash-and-bum cultivation is still going on, a smoke haze at
this stage of the dry season hanging over much of the lower areas of the
NBCA, the plateau and even the plains along the Mekong, but its reduction
and eventual elimination is official policy and the plateau villagers are
having to travel further each year from their homes to find cultivatable
areas. Similarly, the progressive clearance of forest and other vegetation
from the plateau in anticipation of inundation has resulted in the
diminution of areas for food and other NTFP gathering including house
building materials. Although the IAG had no independent means of
verifying this, it seems that the serious threat to biodiversity posed by
commercial poachers from across the border remains (see POE's fifth report,
January 2001, and further comment below) but the widespread collection of
firearms from village hands has had the dual effect of conserving
biodiversity around many villages (POE) but at the same time, of course,
reducing their sustenance from hunting. There has apparently been some
reversion to non-firearm methods of killing birds and animals.
In short, as already noted in the LAG's letter of 10 March 2001 to Vice
President Jemal-ud-din Kassum8 the net effect of the project-related
measures now in force in the project areas has been negative in economic
terms. It is also true that the villagers, waiting for the project decisions,
have felt unable to undertake other initiatives which might better their
circumstances.
8 See appendix 1
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3.1.1       The Upland Development and Conservation Project (LIL)
None of this has yet been addressed by the Upland Development and
Conservation Project (LIL) in the three villages covered although poverty
alleviation is an objective of the project. The LAG saw enough on the ground
in two of the pilot LIL villages (Ban Navang and Ban Makfeung) to suggest
that if the management, late delivery and counterpart payment problems are
overcome the project may begin to make an impact. We were impressed by
the enthusiasm of the managers on the spot and by their plans for livelihood
diversification and farming practice improvement. They deserve better and
more timely support for the Provincial level, which is where the delays on
the funding side appear to be occurring. Counterpart funds have been
approved but there are delays in releasing them to the District and Village
levels.
The IAG notes that the World Bank Mission which visited Khammouane
Province in December 2000 including one of the pilot villages, recorded that
if implementation does not improve significantly within the next six months
(to June 2001) the project will be "rated unsatisfactory". While recognising
the factors which led to this recommendation the IAG expresses the hope
that a further discontinuity in help to the pilot villages will not result. One
of the sources of the scepticism towards visitors which the December
Mission noted (Aide memoire, December 2000, p3) is the lack of continuity
over the past five years in programmes of development and conservation
assistance to the villages in the watershed. The history is well known - and
the reasons for it- but it is clear that the stop-go-stop nature of Bank-
funded activities in the area has been discouraging to the villagers. Though
less outspoken than the people in the plateau area, they have seen
restrictions imposed on their traditional practices without consistent action
benefitting them by way of balance. They expressed impatience verging on
anger about this. For their part, two of the plateau villages said that if
resettlement as promised was not forthcoming they would go into the NBCA
-because life is easier there-. When asked why they saw it so, they said that
in the uplands there was ready access to suitable slopes for slash-and-burn
and to forest products for food, housing materials etc..
Though the GoL would presumably not permit this, the threat of a return to
the watershed does put a new slant on resettlement options! It also
emphasises the risks of alternative scenarios if the NT2 project does not
proceed within its present framework.
In line with its recommendation to Vice President Kassum that the Bank
retum,now that the macro-economic situation has so substantially
improved, to a more pro-active approach on technical assistance, capacity
building and practical poverty reduction and conservation programmes the
LAG suggests that the LIL programme be focussed on by both the Bank and
the GoL and turned into an ongoing success story. We recommend that the
GoL free up its systems and follow the logic of its decentralisation policy by
delegating further financial powers on the LIL project to the District and,
where appropriate. to the village level itself, while retaining overall
monitoring and audit functions. The history of decentralisation endeavours
elsewhere in the developing world is that the only way to decentralise is to
decentralise i.e. there are risks involved but devolving responsibility down
the chain as far as possible is the surest way to achieve practical progress in
rural  development  projects  like  this.  Halfway  or  half-hearted
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decentralisation does not work. (We will revert to technical assistance and
capacity building further on).
3.2         Watershed Developments: getting the system in place
The logical way to assess actual or potential impact developments since the
IAG last reported in November 1998 is to address developments in the
watershed in the NBCA arca and then proceed downstream (as it were) to
the resettlement area (the southern portion of the proposed reservoir and it's
southern embankment), and finally to the areas below the dam on the Nam
Theun and below the power station on the Xe bang Fai.
3.2.1       Developments of legislative frameworks
As is broadly true of most other sectors of the project, the planning and
legislative work has largely been accomplished in regard to the definition of
the NBCA area and associated corridors and the authorisation of the
management institutions required has been given. So far, so good. But, as
elsewhere, further progress is at present held up because of the
uncertainties about whether or how soon the World Bank will approve
involvement in the project. The LAG's view is that, without prejudice to the
Bank's decision, further work is highly desirable in the meantime and can
be justified both on social (poverty alleviation) and environmental
(biodiversity conservation, for economic as well as scientific reasons)
grounds.
Since 1998 there has been substantial progress on paper and some on the
ground. The promulgation of two prime ministerial Decrees relating to the
watershed marks a big step forward. First, on 29 December 2000, Decree
No. 193/PM formally established the extent and status of the various areas
affected by the NT2 Project. The IAG had pressed for protection of the
watershed and its extensions in 1998 and the IAG and POE representatives
on the WB Logging Survey Mission of May 2000 had recommended to the
Prime Minister that such legislative action be taken at an early date. The
Decree is a comprehensive piece of work which largely follows the agreement
in principle between the GoL and the World Bank of 1996 (Aide memoire
dated 25 November 1996) and makes clear that not only the NNT National
Biodiversity Conservation Area (NNT NBCA) but the wildlife corridors to the
Phou Hin Poun and Phoun Hin Nam No NBCAs have full Conservation Area
protection. This is an important development which enhances the global
significance of the whole project in biodiversity conservation terms. The
reservoir area (at full capacity) is recognised 'for the purpose of electricity
generation" and the resettlement area and associated forest area "for the
people directly affected by the NT2 Project". This is all very satisfactory.
It might be noted at this point that the area left out of the Decree, while not
strictly part of the NT2 watershed, has important biodiversity values also
and was originally seen as a logical extension of the project area for
protection purposes. The IAG recommended in 1998 that the so-called
Northern Extension be included in the proposed World Heritage site
application. There has now been a restructuring which places the Northern
Extension in another Province (Bolikhamnxay). At the same time the area
has been accorded legal protection as a Provincial Protection Area. Like the
POE in its most recent report, the IAG commends the Bolikhamxay
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authorities for this action and supports the POE's proposal that the GoL
seek international assistance for the Bolikhamxay authorities to develop an
effective programme for conserving the biodiversity of this area. It is hoped
that security considerations do not postpone such action, or further action
by the Province, indefinitely since there are reports of logging in the area.
By way of the second Decree (signed on 26 February 2001, just before the
IAG arrived), the Prime Minister gave authority for the setting up of the long-
planned Nam Theun 2 Watershed Management and Protection Authority
(WMPA) 'for the purpose of the conservation and protection of the nature
and considerable cultures' in the watershed area. It is an impressive piece
of work. It sets out the status, purpose and objectives of the Authority and
authoAses the WMPA to have responsibility for "the management,
development and protection" of the watershed area. The objectives are
worth recording in full:
* Protection and rehabilitation of forest cover in the Nam Theun 2
Watershed Area to assure adequate water flows with low sedimentation to
or away from the Nam Theun 2 Reservoir;
• Conservation, maintenance and promotion of biological diversity coupled
with the development of a national park appropriate for tourism and
scientific research;
* Building and strengthening capacity of the Authority and those
stakeholders contributing to management and implementation of the
Authority's activities;
* Facilitation of improved livelihoods for inhabitants of the Nam Theun 2
Watershed Area by focussing on poverty reduction through
environmentally sustainable development;
* Prudent management and effective use of funds for the purpose of
furthering the above objectives.
These are, in the view of the LAG, an adequate delineation of the objectives
of the Authority and its Executive Secretariat as widely discussed over the
past year or two. The objectives are reflected in the functions and powers
given to the Authority. The latter are to prevail over local administrative
authority 'except in respect of national security and defence" which is a
legitimate caveat. Although not spelled out further in the Decree the
references in the preamble to the various ethnic populations "considered as
indigenous peoples with traditional and cultural differentiation" and to the
conservation and protection of 'the... considerable cultures in the area' are
reassuring, given the provisions of the WB's operational directives on the
protection of indigenous peoples in project areas. It will be a matter of
interest for the IAG to monitor these provisions, particularly in relation to
the Vietic speakers, as the project evolves.
Two aspects of the Decree are of particular interest in the context of
monitoring. These were mentioned earlier (provisions for outside
representation on the WMPA's Board and for an independent monitoring
agency and an independent auditor, both to be of international standing).
There are additional monitoring provisions in the draft Concession
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Agreement. This level of transparency and accountability is to be applauded
in the IAG's view.
The Decree adds up, as already noted, to being an impressive management
document. It should be welcomed.
At the same time, the IAG is concerned that the development should not
stagnate at this point while the WB goes to appraisal and makes its final
decisions. The intervening period should be used. The Decree notes that the
activities of the Authority are to be funded by NTEC 'as required by the
Concession Agreement", together with other funds from governmental and
other public and private sources. The draft Concession Agreement certainly
provides for the payment by the development company of substantial funds
for the preparatory and construction phases plus the earlier agreed US$1
million for each year of the operating phase, adjustable upwards (only)
according to CPI movements, the purpose being to fund the WMPA and
activities undertaken under its wing.
The dilemma, as in other sectors, is that no-one appears to be responsible
for any funding until the CA is signed. So the prospect seems to be that
valuable weeks stretching into months which could be utilised to begin
setting up, hopefully convening the Watershed Authority on a preliminary
basis and even initiating some low level practical activities will be wasted
unless the process is kick-started. The IAG recommends that the GoL
ministry responsible for launching the WMPA (agriculture and forestry) be
given ministerial authority immediately to initiate administrative action to
get the Authority up and running if only on a provisional basis. This would
involve minimal costs but would save a good deal of time further down the
track when time will be of the essence, not least in terms of capacity
development at all levels.
3.2.2       Environmental and Social Management Operational Plan
On the basis of the agreed Plan for the Environmental and Social
Management of the Watershed and NBCA (ESMP), GoL has developed a
much shorter operational plan (ESMOP) to serve as a prioritised and
focussed work plan for carrying out the provisions of the full ESMP. An IAG
member was able to take part in a public consultation on this document
when it was in draft in May 2000 and was satisfied that by and large it was
heading in the right direction though budget figures were not agreed
between NTEC and the GoL at the time and some reservations were held by
the IAG member regarding the access options mentioned (see below).
Tracing these drafts through to the draft Concession Agreement it is clear
that there is not the detail in the CA on implementing watershed plans that
there is in relation to giving effect to the RAP. This is because the company's
obligations are largely for mitigation and funding watershed activities rather
than for the hands-on implementation they are involved in relation to the
RAP.
The LAG visited only two watershed villages (Ban Navang and Ban
Makfeung) on this occasion. It will confine itself to commenting on three
social aspects only of the ESMOP: the development of alternative livelihoods,
the provision of health and education services and the linked question of
future access to the villages.
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The all too brief contact this time around with the communities nevertheless
served to bring home to the IAG again how impoverished and deprived the
villagers in the project area are even by Third World standards. Most still
have virtually no health services, there are only a handful of schools in the
area, literacy is very low and there is no food security to speak of. These are
some of the poorest of the poor, so if the Bank has a commitment to poverty
alleviation, as it has, then this is the sort of area it should be working in.
Developing alternative livelihoods here is a vital necessity not a routine
exercise, particularly because as is argued elsewhere the poverty levels of
the communities have, for project-related reasons, declined at this point
rather than risen. The IAG greatly regrets, therefore, that its 1998
recommendation to the Bank that the impressive start made at that time in
introducing new livelihood models be further developed without a break was
not followed. This was to set aside much of the work accomplished by a
group of experienced and dedicated advisers from the World Conservation
Union (IUCN) and Ecolao and their partners in the pilot villages in designing
and setting up programmes to wean the people away from their destructive
practices and achieve better nutrition and a higher level of food security.
Trust and credibility have suffered as a result. The lack of continuity has
produced a degree of disillusionment in the villages. As contended above,
this makes it doubly important that the LIL project, a partial successor to
the earlier programmes, succeeds and indeed be expanded. The case for
investing in this and the earlier programmes was and remains based on
poverty and biodiversity conservation imperatives which are cogent and
relevant to the Bank's priorities whether or not the NT2 project goes ahead.
The IAG trusts that this important point has been taken on board by both
the GoL and the World Bank.
One aspect of the livelihood work which struck the TAG this time was how
wedded the villagers in both the watershed and the plateau are to rice
production and preferably year-round rice availability. There is a
longstanding practical problem here: neither of these habitats is particularly
adaptable, even with new production techniques and more irrigation to the
level of rice production the communities seek. Year-round rice supplies have
not been available historically in these areas so some dampening down of
expectations and the successful introduction of alternative staples and other
crops (fruit. vegetables) is a necessary component of alternative livelihood
programmes. Some of the research has already been done by earlier
programmes and at the excellent NTEC demonstration farm  at Theun
Douane. At the same time, helping meet the demand for rice growing to the
degree it makes sense should be pursued. The eventual availability of cash
from the adoption of some of the new livelihood models for purchasing rice
from high production areas like the Gnommalath Plain will help meet the
demand although transport problems may inhibit the more remote villages
from following this course.
Which raises directly the other sensitive social question, how to deliver not
just rice but the needed health and education services to the villages in the
watershed in particular. The IAG was told by the watershed villagers they
consulted that their priorities, in order, were: in Ban Navang, rice, irrigation
(rice again!), and a school teacher; in Ban Makfeung, padi (rice), access, food
and the promised health worker; they already have two teachers. The
question is how the necessary upgraded services can be delivered to the
communities without compromising the forests and other unique
biodiversity which surrounds them.
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The IAG has consistently argued over the years for the introduction into the
watershed of appropriate or intermediate technologies which are low impact
the provision of micro/micro hydro devices (there is a low cost Chinese
model available) to bring lights to the villages, the use of small weirs
employing gravity feed mechanisms for paddy irrigation rather than large
weirs or fuel - hungry pumps, and particularly the upgrading of access
through greater use of water-borne transport (especially once the reservoir
has filled) and the upgrading of tracks, but only to the point where they can
take all terrain motor-cycles, the ubiquitous two-wheel Kubota tractors and
trailer and/or buffalo carts. The IAG recommends firmly against the
building of roads into the watershed.
The basis for this stand is that the global experience is that roads inevitably
produce widespread wildlife harvesting as hunters and wildlife traders
exploit the access opened up. The literature is replete with horrendous
accounts of how roads have provided the access to wipe out whole species.
And in most cases the loggers have in the end had their way and gained
access to forest resources when roads exist. Hence the IAG's position.
The IAG is disconcerted to see that while the revised ESMOP appears to
favour a water-based access option with some tracks it still has as an option
a road-based system which would see all-weather roads put through to the
middle of the watershed. It notes that Provincial authorities have started
constructing a road which would follow the Nam Noy up as far as Ban Dong
but have run into practical difficulties. The POE confirms that all the gullies
on the five kilometers thus far bulldozed have already washed out which
underlines how expensive the construction and maintenance of such a road
would be.
The LAG reaffirms its opposition to roading in the watershed and on balance
supports the recommendation of the POE that high priority instead be given
to accelerating conservation and essential village development activities in
the NBCA by surveying and constructing a two-wheel tractor access route
into the Nam Noy and Nam Pheo tributary basins. Such a track would be
hand made and hand maintained rather than bulldozed.
To conclude these comments, it will be for the WMPA eventually to pick up
the pieces of the various programmes designed to introduce alternative
livelihoods and integrate them into the ESMOP's activities. The lAG's view is
that there is much of the earlier programmes pursued by IUCN and Ecolao
advisers which merits further investment and even the use of such agencies
again, oriented as they are also to the other objectives of the WMPA
(watershed and biodiversity protection). In the interim the LIL project
carries the hopes of the three pilot villages and deserves the full attention of
both the WB and the GoL. The major objectives of the WMPA are intimately
linked.
3.3         The plateau/reservoir area: the challenge of resettlement
Dam projects have a history of not dealing adequately with the resettlement
of people displaced by the rising waters. The World Commission on Dams in
its report launched in December 2000, with World Bank and IUCN
sponsorship, chronicles the sorry history in great detail.  Its broad
conclusion is that social and environmental factors must rank equally with
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economic and financial factors in assessing energy options and its specific
conclusion on resettlement is that adversely affected people must be
recognised as first among the beneficiaries of the project.
The IAG talked with the people of the two villages expected to be resettled -
Ban Sop Phene and Ban Sailom. It also visited the proposed new site for
Ban Sailom, the selected pilot resettlement village. The level of impatience
was high in both villages, the articulate elder women not pulling their
punches as they described how much harder life has been as they have
waited year after year for resettlement and how exhausted they are with
walking longer and longer distances to extract NTFPs as the remaining
forest patches in the plateau area are gradually cleared for inundation.
The lAG's position is that the Resettlement Action Plan, if faithfully, flexibly
and imaginatively implemented, provides a sound basis for achieving a
successful resettlement. It regrets that the proposal in its 1998 report that
resettling an entire village at an early date was not adopted but notes that
NTEC, under constant pressure from the villagers, have progressed well
down the track on the new Ban Sailom site with land use and fresh water
supply plans drawn up and other prepatory work underway. For their part,
the villagers have used the current dry season to begin burning off low value
trees and scrub on the site and have visited the impressive demonstration
farm at Theun Douane to acquire new cultivation techniques especially for
vegetable gardens.  With preparations having progressed this far it is
difficult to imagine how the situation will be handled here and elsewhere if
the project does not go ahead in its present form.
If the IAG has a comment on the RAP's housing plan it is that the company's
intention to bring electricity to a connection outside each new house is
admirable (and appropriate) but the plan not to install even one light inside
the houses until the householders are prepared to meet the attendant costs
seems short sighted. Surely the benefits in terms of goodwill of installing a
couple of the long lasting low-consumption bulbs in each house would
outweigh the negligible costs involved and studies elsewhere show that the
social benefits of even such minimal lighting are considerable.  The
company should revisit that one.
The RAP provisions and obligations are currently being nailed down in
excruciating detail in the draft Concession Agreement. The draft seen by
the JAG includes:
*  An undertaking by the company that the EAMP complies inter alia with
World Bank guidelines
*  Provision for a heavy payment by the company by way of an irrevocable
letter of credit as security against meeting its obligations and the
environmental and social objectives of the project
*  An undertaking by the company to survey, detect, render safe, remove
and destroy all UXOs located in specified project areas
*  Provision for the setting up of a Panel of Experts (environmental and
social) to provide independent review of and guidance on mitigation and
remedying of project impacts, implementation of each party's obligations
etc.
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*  An undertaking by the parties to "materially improve the standard of
living of the resettled" and to this end the setting of household income
targets in US$ terms for resettled households four years after
resettlement and nine years after resettlement
* The establishment of an independent monitoring agency "of international
standing" to check regularly the adequacy of the various poverty
alleviation and mitigatory activities
*  33 pages detailing responsibility for all activities under the RAP
*  The outline of a grievance procedure etc.
This is an extremely comprehensive and binding document (if signed) and
represents a huge step forward in spelling out the respective obligations of
the parties, and especially the company, for achieving successful
resettlement. The provisions for international monitoring and a POE are
welcome.
There is one ambiguous area which the IAG, with its limited time in
Vientiane, was not able to clarify. The draft CA provides for the parties "to
materially improve the standard of living of the resettlers and improve
incomes of resettler's households on a village by village basis above the
national rural poverty level". It is not clear to us whether this means that
the undertaking to improve standards of living and income is to each and
every household or more generally to lift living standards and incomes
across villages.
The matter is not academic. The IAG's assessment is that the RAP (and
even more so the draft CA) meets in virtually every respect the requirements
for the resettled of the WCD report except one: it does not appear to
envisage the signature by government and the developer of performance
contracts with individual families and the community specifying
entitlements, delivery schedule and recourse procedures (see WCD Report,
Dams and Development, p243). For its part, the IAG can see a good deal of
point to the exercise, reassuring, as it would be to the villagers. The fact
that the great majority are illiterate is another argument in favour of a
contract; how else can they come to know exactly what their entitlements
are from the plethora of documents around and the meetings they have
attended over the years? They will simply need an available reader to
explain what their household contract says. The LAG recommends that the
company gives early consideration to this measure, bringing them further
into line with the WCD standards as it would.
In summary, the IAG has from the beginning had considerable confidence in
the RAP and the consortium's capacity. It will fulfill its resettlement
obligations, sensitive work though this sort of social engineering (shift from
cultivation to permanent cultivation with diversification is a 'social
revolution') in a different culture may be. The [AG retains that confidence
and shall be interested to monitor the validity of their judgement in the
years ahead.
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3.4         The downstream areas: pluses and minuses
It has always been true that one of the net negative impacts of the project
would be the heavily reduced flow in the Nam Theun below the dam once
impoundment occurs. There is no permanent settlement for 40 kilometers.
below the dam site but the aquatic resources of this stretch are harvested
(probably over-harvested) by communities along the nearby Route 8. A
decrease in fish stocks would also affect some species of wildlife like fish
eagles and otters. There is some suggestion that the current nutrient-
constrained river system would benefit from the low flow-related
eutrophication which will follow impoundment and that greater numbers of
species like fish, crustaceans and molluscs will be found up to an
undetermined threshold after which declines will occur (EAMP, p.6-104).
This seems to be contrary to experience elsewhere in South East Asia and
will need monitoring and compensation if losses occur. It seems likely that
one fish species at least which dwells in fast-flowing waters will not survive
here.
The POE's view is that in the rocky gorge of the Nam Theun in this section
the reduced flow of the river will have little or no effect on the riparian forest
or other vegetation and the minimum flow to be maintained will also ensure
that there is little effect on wildlife. A benefit of the dam will be that at flood
time the reservoir will be able to retain the whole flood in three years out of
five and will at least attenuate the flood in other years, thus relieving to a
degree the effects of excessive flooding in the downstream areas all the way
down to the Nam Kading and the Mekong itself.
The LAG has not focussed in detail in past reports on the social and
economic impacts of the inter-basin diversion of the Nam Theun's flow. As
now redesigned, the release of up to 285 cubic metres from the power
station at the foot of the Nakai escarpment into a regulating reservoir weir
and thus down a 27 km. long channel (partially concreted and upraised)
down the Nam Phit to the Xe Bang Fai (XBF) will impact adversely in some
important respects. It will also have the potential to water rice and other
dry season crops and hence raise productivity virtually throughout the
journey to the Mekong well south of Thakhek. The release of a minimum
flow of 15 cubic metres per second down the Nam Khatang should benefit
the villages along its banks in the dry season.
How do the pluses and minuses balance out? The IAG helicopter flew along
the upper reaches of the Xe Bang Fai, above the project area, where it was
apparent that water from pumping stations at the river's edge were
transforming an otherwise arid dry season scene into a swathe of green rice
fields. It is clear that in the richer alluvial soils of the downstream plain
areas investment in irrigation pays off more in productivity terms (some say
8 to 10 times more) than in the thinner and poorer soils of the catchment
and the plateau. The upraised section of the channel will enable largely
gravity-fed irrigation in an area of the fertile Gnommalath Plain six or seven
times greater than is now possible in the dry season. Similarly, dry season
irrigation over the length of the XBF basin will be possible. There are plans
for further irrigation works in the Gnommalath and Mahaxai areas and the
Southern Provinces Electrification project will (with WB input) help develop
rice growing through enabling pumping in the lower reaches of the XBF. In
short, the potential for stimulating extensive dry season rice and other
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production in the large basins and plains downstream of the power station
has emerged as a big development plus in the overall NT2 equation.
What of the wet season? Project redesign has reduced the impact on flow
constancy which it was initially feared the EGAT's insistence on the power
station switching to a peaking regime would produce, while NTEC told the
IAG that it has also agreed that the power station will stop generating and
outflows when natural flooding in the XBF reaches 2,270 cubic metres per
second, the level at which over-bank flooding would normally occur. That is
a helpful move.
Nevertheless, it is clear that "natural' wet season flows of the XBF, with the
NT2 diverted flow added, will have a serious effect on access to riverside
gardens in the XBF basin. (See below for the effect on fisheries.) NTEC have
recently agreed to pay increased compensation for the loss of garden access
in the upper and lower reaches of the XBF9.
As for other downstream social impacts, the detailed entitlements to
compensation for 'loss of land or infrastructure or economic loss or
disturbance" in the downstream zones and areas impacted by access roads
and dam and powerhouse construction and in the area impacted by the
transmission line construction are now helpfully spelled out in the draft CA.
Those affected will be variously entitled to housing, land, trees, disturbance
allowances or replacement costs for infrastructure or economic losses. The
provisions appear equitable as long as the options are made clear and there
is adequate information and consultation. Again the WCD recommendations
on contracts with project-affected people (or with communities, if more
culturally appropriate) bear examination by NTEC.
3.5          Summary
In summary, the view of the IAG is that by far the most complex and
sensitive social impacts of the project are occurring and can be expected to
occur in future not among those to be resettled in the plateau area or those
affected below the powerhouse but among the people of the upland villages
of the watershed. It is not coincidental that it is in this area that least
progress in developing alternative livelihoods and lifting hving standards has
been achieved. The lack of continuity in development assistance
programmes, the remoteness and inaccessibility of the villages and the
project-related measures (bans on hunting, wildlife trading and logging,
pressures against slash-and-bum cultivation) which have had the effect on
occasion of inducing deeper poverty not alleviating it, are all contributory
factors.
The IAG therefore lays stress on:
* maintaining, upgrading and expanding the LIL project;
9 NTEC might be well advised to consult the WCD's Dams and Development,p.242, for some useful
comment on past experience elsewhere in paying cash compensation, the global experience being that
cash payments have proved ineffective in re-creating lost assets and opportunities in less monetarized
economies and should be avoided. As the IAG understands their intentions, NTEC plans to discuss the
compensation issue further with riverside communities.
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* setting up the WMPA as soon as possible, even if only on an interim
basis, and initiating activities for which the Authority is responsible:
* starting work on upgrading boat/track access to the villages to facilitate
the delivery of health, education and agricultural extension services once
funds from the developer become available and revenues from the project
eventually begin to flow.
As the IAG has had occasion to say before, the social and livelihood
programmes in the NBCA are not an add-on but a quite fundamental
element of the whole project and in the final analysis one of the ultimate
justifications for it. Without success in these social areas, prospects for
conservation of the invaluable biodiversity in the NBCA are not good
because the temptation for still impoverished communities to harvest these
natural resources on their doorstep will be too strong to resist.
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4.          ENVIRONMENTAL ISSUES AND RISKS
4.1         The Watershed
Flying over and venturing into the fringes of the extensive pristine forests of
the NNT NBCA is an uplifting experience. Here is one of the most intact
such sanctuaries of tropical biodiversity left in the world. The question is
how intact is the NBCA and its associated areas and what environmental
impacts and risks from the NT2 project will occur outside the (now
extended, taking in two wildlife corridors) NBCA itself? And what can be
done about all this?
For the first time comprehensive responses to these issues have been
brought together in the final version (two volumes) of SEATAC's Nam Theun
2 Hydroelectric Project Environmental Assessment and Management Plan
(EAMP). The EAMP has just been completed and one copy (only) was made
available to the IAG on arrival in Vientiane. It is a most useful work,
collating as it does most of the numerous environmental and social studies
undertaken over a period of a decade and more in relation to NT2 and
including new material as well, and addressing mitigation/protection/offset
responses.
The EAMP draws on upwards of 40 technical studies, plus additional
sources such as POE reports. There are few gaps in its coverage. There is
little point in the IAG attempting at this stage in the process to second guess
all the major issues raised. Instead the LAG concentrates below on those
environmental issues where they judge that faster and earlier action may be
needed or where they assess that there are risks which cannot necessarily
be covered at this point. As before, the IAG will look at these issues project
area by project area, starting from the NBCA.
The LAG is gratified that, following the submissions of last May's Logging
Mission, the GoL has gazetted the NBCA area, with the wildlife corridors
incorporated, for protection. This action is a measure of the Government's
commitment to the project, since the area involved is substantial and the
natural resources it contains are quite invaluable. Now comes the hard
part: giving them effective protection on the ground.
The IAG has stressed above that one very important element of this is
weaning the people away from their destructive hunting, gathering and
cultivation practices by helping them develop alternative livelihood models
which are proven, which are culturally attractive and which remove the
necessity for collecting cash, generating protein and other supplements
from the forests. This applies as much to the plateau people as the
watershed dwellers: particularly when the reservoir fills, access by boat to
the Dividing Hills and the lower reaches of the NBCA from the resettled
villages will become much easier. One of the interesting new maps in the
EAMP is one showing (the reduced) hunting travel time once the reservoir
has filled (EAMP, Figure 6-7).
Another potential group of hunter-gatherers is the inhabitants of the huge
workers' camps which will be associated with the dam and powerhouse
construction sites. The latter will have upwards of 4000 workers (plus
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retainers and hangers-on) based not too far from the escarpment area while
the dam site will have valuable forest areas within a few minutes' walk.
How important conservation education will be not just in the NBCA but in
the resettlement villages and construction sites was brought home to the
IAG when it visited the pilot resettlement village, Ban Sailom. Generosity to
visitors is a cultural feature of the people, but nature conservation is not:
the IAG members were nonplussed to be handed three or four very beautiful
living and blooming orchid plants each, garnered from the forest. This was
touching, but not in accord with one of the basic objectives of the project.
Nature conservation education is a part of the LIL programme and is built
into training programmes for the watershed, the plateau and the resettled
peoples. But, as the EAMP puts it, this will be -a long term commitment
with a lag in returns in basic behavioural changes of several years, it is an
investment'. The IAG strongly supports the public education programmes
as set out in the EAMP (pp. 10-41, 10-42) and would merely note that if the
recommendation immediately below (involvement of the Lao military in
patrolling) is accepted, then the sort of video, slide and poster education
programme envisaged for the village people will also be required for the
military to enable them to carry out their biodiversity protection task.
The threat to the NBCA does not only come from the people of Laos. It is of
interest that the EAMP does not appear to address directly the biodiversity
depradations into the NBCA by wildlife hunters and traders from across the
border, although this is undoubtedly the most serious threat to the unique
biodiversity of the watershed. Reports from the area indicate that the
incursions have not declined and several markets in Vietnam and on its
border with China sell vildlife from Laos ranging from "golden turtles" to
birds of various species to animal parts. One observer on the ground found
that intruders were catching fish in the upper reaches of the watershed
rivers and salting them for selling across the border.
The POE has also been concerned over the years at these cross-border
incursions. In its most recent report (January 2001) the POE recommends
that as a high priority, village-based anti-poaching patrols be revived and
expanded. The LAG would go one step further. The earlier anti-poaching
patrols were made up of villagers, local police and local militia. Many of the
villagers have since given up their guns in the interest of conservation. The
lAG's view is that the extent and nature of the poaching (the perpetrators
are armed) and the encroachment on the sovereignty of Laos it represents
call for the involvement of Lao military in the patrolling operation. We
appreciate that this is a sensitive matter but can see no other early or
realistic way of stiffening the resistance to poaching. We recommend
accordingly that the GoL look seriously at this option. Intensive briefing of
the military would be required.
Wildlife monitoring and management, if the term is relevant in an area as
remote and still essentially unknown as the NBCA, are among the
responsibilities of the newly decreed WMPA. But the WMPA (when it is
established) will face a capacity problem on the wildlife conservation side.
The LAG was concerned to learn that a restructuring of the units within the
GoL involved in nature conservation had reduced significantly the numbers
of trained people in government employ to perhaps a third of those formerly
available. This is most untimely. Furthermore, there appears to be a
problem in getting the scattered units of the GoL involved in forest and
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wildlife conservation (the Environment Department of the Science,
Technology and Environment Agency, the biology people in the Lao
University, the Division of Forest Resources Conservation in MAF etc)
working together. Without suggesting which agency should have the lead,
the IAG encourages GoL Ministers to foster inter-departmental co-ordination
in the interest of helping overcome the capacity deficiencies in and around
the NT2 project.
4.2         Developments in the forestry sector
The IAG was encouraged by several developments on the forestry front. A
recent letter to the World Bank signed by the Deputy Prime Minister pulled
together some previously loose ends and provides a basis for beginning to
resolve some of the forestry sector's considerable problems at the national
level. At the same time, the IAG, monitoring the follow-up to the NT2
Logging Mission of May 2000, found that the Prime Minister's Office Order
(No. 0885/CPMO of 19 May 2000) which had called for 'a cessation of wood
exploitation" in the areas identified by the mission as sites of illegal logging
had been effective in stopping the great majority of the illegalities. The IAG
checked out the Nam Malou area by low altitude helicopter surveillance and
found only two trucks removing old logs. There was no evidence here of the
unmistakable signs of recent logging and the IAG saw no other evidence of
illegalities. In discussions with the Nakai District people it emerged that
700 cubic meters of illegal logs had been confiscated and the loggers
arrested. In the LAG's view such public actions will serve as an effective
way of ensuring that the PMO achieves its objectives.
Monitoring of the logging ban for the years ahead will also be important.
The PMO gave "approval in principle" to the Mission's proposal that annual
joint monitoring and control of wood exploitation activities be undertaken in
the NT2 forest reserve areas with GoL, NTEC and the WB, represented by
two international experts from the POE and the IAG, taking part. The IAG
notes that, nine months on, it is time to begin giving effect to this measure
and encourages the GoL to do so.
The pressures to log are ongoing. The Taiwanese company (Chang Lin)
which has build a very large timber processing complex outside Laksao was
good enough to let the IAG go over its plant. Only one of the three large
buildings had machinery in it and here it was largely Fokienia which was
being processed for export to East Asia. The plant's main concession area is
in Xieng Khouang, 200 kilometers away but it is drawing Fokienia from all
over the country. The plant can process other species said the manager but
it is not yet doing so. The Fokienia export returns are paying the bills.
The Laksao plant is a symbol of the over-capacity in Lao PDR in wood
processing. If and when this plant is fully up and running the volumes of
timber it could handle will be very large. The GoL is addressing the issue
nation wide but the IAG members reflected that the major remaining large
stand of Fokienia, for example, is in the upper reaches of the NNT NBCA.
The temptations are there and there remain large sections of the NBCA close
enough to existing roads to be logged. The EAMP also notes the prevention
of logging above the FSL is critical to preserving forest resources on the
Nakai Plateau and calls for its strict enforcement by the WMPA. The need for
effective and ongoing monitoning remains.
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4.3         World Heritage status
The IAG has in earlier reports called for an early move to seek World
Heritage status for the NBCA and its corridors. Having researched World
Heritage requirements and discussed approaches and the state of readiness
inside GoL Departments, however, the IAG is inclined to agree that a formal
application, as contrasted with preparations leading to an application in
several years time, is premature. The reality is that after some unfortunate
experiences elsewhere, UNESCO's World Heritage Committee will not grant
this exalted and desirable status nowadays until it is convinced not only
that the site has been well researched but that there is an effective
management structure in place to help ensure that the global biodiversity
values identified in the area are maintained.
It cannot be claimed that such a structure yet exists in the NNT NBCA,
although as already noted, the plans and legislative authorities for setting
up the WMPA are in place. In these circumstances it seems logical to the
JAG that the GoL's energy and resources for the next two to three years
should go into establishing an effective management regime in the proposed
World Heritage site, the actual application being lodged when it has a
greater chance of being accepted, for instance in 2004. The IAG advocates
this approach.
The IAG is also of the view that, again looking in part to World Heritage
status but also for conservation reasons, early consideration might be given
by the WMPA to accelerating the baseline monitoring and research into the
NBCA's wildlife and to helping fine tune and begin implementing the
management plans for the key wildlife species identified in the EAMP (pp.6-
107,108). Some of the key mammalian (e.g. elephant, saola) and bird
species (e.g. the White-winged Duck) are likely to be affected at a very early
stage by the commencement of project construction and associated
activities. It would seem sensible to have the Wildlife Conservation Society
contribute to this work since it was this NGO (which now has just signed an
MOU with the GoL) which undertook much of the initial research in the
NBCA. Together with the World Conservation Union (IUCN) of which Laos
has been a State member for many years and which has representation in
Vientiane, the WCS could also play a valuable role in environmental
education and in capacity building in relation to both the NBCA and plateau
conservation programmes. Some NTEC funds are available at an early stage
for this type of work.
4.4         Global support for NBCA
In its second report (December 1998) the IAG suggested that the potential of
mechanisms like carbon sequestration schemes and debt-for-nature swaps
be examined by the GoL in collaboration with the World Bank as further
means of seeking global compensation for the designation of the NNT NBCA
and its corridors as a strictly protected biodiversity and carbon sink area.
While these possibilities remain worth further exploration, it is more urgent
to begin to put in place now legislative and other measures to protect the
NBCA's flora and fauna from illegal and unrecompensed exploitation by
international pharmaceutical and crop development organisations or
companies. Ratification of the Biodiversity Convention is only the first step.
Providing a national legislative framework to enshrine the Convention's
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benefit sharing and fair compensation principles is also necessary---and, as
other developing countries have discovered to their cost, negotiating binding
and equitable contracts with pharmaceutical and crop research companies
can be a challenge.
The IAG recommends that the GoL considers drawing on the expertise of the
World Resources Institute (WRI) in Washington DC in approaching this
subject. The WRI's publication Biodiversity Prospecting  (WRI, 1993) is a
primer on the issues involved in seeking returns from biodiversity treasures
and on negotiating equitable contracts. IAG members would be happy to put
the GoL in contact with the relevant WRI contacts if they wish to proceed to
explore this path.
In the interim, it was striking to the IAG (particularly its Indonesian
member) to find how little seemed to be known in the villages visited on this
occasion about traditional medical uses to which freely available plants in
the NBCA and the plateau may be put. When other medical services are
virtually non-existent traditional medicine has a very important role. There
will be traditional knowledge available in Laos or neighbouring countries ---
the IAG recommends that it be accessed. Sponsorship of teaching visits to
the villages of the watershed and plateau by a traditional medicine specialist
would doubtless be available from one source or another.
4.5          The plateau / reservoir
4.5.1        EAMP findings on selected issues: vegetation and water
The environmental impact on the plateau of the NT2 project has already
been substantial through the removal of a high proportion of the
commercially useable forest and the consequential destruction of wildlife
habitat. It will be even more so when 450 km2 of plateau land is converted
to lake. If there are any advantages derived from the delays in implementing
the project they revolve around the removal of a much greater percentage of
the biomass in the inundation area and the time for more capacity building
at all levels'0.
A new consideration arising from the completed EAMP (p 6-82) is that it has
been found that the magnificent coniferous habitat in the plateau is
important (relatively) to birds. This is an argument for husbanding the
remaining stands of merkusii pine. The EAMP (p6-1 14) calls for the
protection for logging of all remaining merkusii stands above the maximum
operating level of the reservoir and not required for the siting of resettlement
infrastructure. Merkusii and other mixed plantations would be established
on logged or degraded lands near the resettlement sites. While agreeing
with this in principle, the IAG would point out that some existing merkusii
10 In a no-project scenario, of course, without the offset of the conservation of the adjacent NBCA area
with its high biodiversity values, the clearing of much of the remaining forests and other vegetation
from the planned inundation area would represent a big environmental setback. Much of the area can
be reforested in due course but it has seldom proved possible around the world to re-establish
destroyed habitats to the old growth values they had originally.
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stands were originally to be exploited by resettlers as sources of cash
income in the first years of resettlement. The lAG's view is that some
flexibility (on an agreed and negotiated basis) may be necessary until the
plantations come on stream; there would still be close to 40,000 hectares of
merkusii and mixed conifer/broadleaf forest above inundation level if
several hundred hectares were set aside for resettlement village exploitation.
The rising waters will destroy existing riparian and wetland areas along the
Nam Theun in the plateau areas. These are of high value for wildlife,
mammalian and avian: the expectation is that new riparian and wetland
habitats will be created as inundation occurs, although the wet season/dry
season fluctuations and draw downs will produce seasonal variations to the
extent of these habitats. Baseline monitoring for wildlife and ecosystem
dynamics will be undertaken to set goals and standards for wildlife
populations but there are some risks of species loss here - not least the very
small colony of white-winged ducks.
The quality of the water in the reservoir and discharged downstream into
the Nam Theun and the Xe Bang Fie is an important consideration in
environmental terms, having implications for greenhouse gas emissions (see
section 5), for human consumption, for reservoir sedimentation, for
irrigation and for wildlife and particularly fish. The EAMP is largely upbeat
on this score, claiming that recreation and drinking water guidelines will be
met in the reservoir, while below the turbines the water in the downstream
channel will be suitable for irrigation. Experience elsewhere in South East
Asia suggests that it is only in the dry season that releases from storage
reservoirs like the NT2 one are acceptable for downstream aquatic life but
the EAMP argues that the modelling shows otherwise in this case, with good
surface water quality conditions high in oxygen and low in nutrients
throughout the year (EAMP pp.6-58, 6-77). It is contended that it is not
necessary to remove more vegetation for the betterment of water quality
within the reservoir but that merchantable timber should be removed, along
with other commercially harvestable logs, in order to use the resource.
4.6          Fishery risks
The IAG has no scientific basis for questioning the above EAMP findings
but, on the basis of its collective experience, is cautious about the prospects
for the fisheries in the various project zones and particularly in the waters
below the power station where the ecology will be considerably altered by
the inter-basin transfer of large volumes of modified (and cooler) water. The
sensible actions are being recommended and initiated.   The POE's
recommendation that a pre-impoundment baseline study of the fishery
resources of the lower Xe Bang Fai basin be undertaken has been picked up
by NTEC and an agreement with the recommended specialist is to be signed
shortly. But the fact that such a study has had to be undertaken at this
stage illustrates the paucity of basic information and data which could form
the basis of a confident prediction on fisheries.
It seems likely that species in the Nam Theun below the dam which prefer
fast flowing habitats will suffer losses. The prospects for the reservoir
fishery and large sections of the Nam Theun tributaries subsumed into the
reservoir appear much better, indeed the EAMP studies forecast an initial
rise in fisheries productivity and an increase in fish diversity after a decade
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or so. It is reassuring that no exotic fish species are to be introduced
advertently into the reservoir.
NTEC expects an improvement in fish catch in the Xe Bang Fai fisheries, a
degree of optimism not shared by the IAG, but will maintain a minimum
flow in the channel when power is not being generated and will monitor any
changes in catch and compensate for any losses. Since fish is the primary
source of protein for people along the river the risks are high and potentially
damaging to livelihoods so the IAG recommends that NTEC keep a close eye
on this aspect of the project and be prepared to undertake further
mitigatory and precautionary measures which emerge from the study to be
undertaken.
4.7         Downstream areas
The POE has recently studied and reported on impacts in the various zones
of the Xe Bang Fai. The IAG endorses the panel's findings and
recommendations which particularly call for a survey of the extent and
importance of riverbank gardens along the length of the XBF, for adequately
funded fisheries surveys and for the integration of irrigation-cum-fishery
projects into GoL planning for the project to take advantage of over 20.000
hectares of irrigable land in the middle and lower zones (POE's fifth report,
recommendations 16-18).
4.8         Summary
As was the case with the social impacts, the major environmental issues
and risks relate to the NBCA. The NBCA and its corridors are largely intact
and represent a global treasure..This is highly encouraging. Nevertheless,
some vigorous actions are now required if this is to remain the situation.
Public education on the principles and practices of nature conservation is
an urgent requirement. To counter cross-border hunting and wildlife
trading, joint patrolling with Lao military and villagers acting together is
recommended by the IAG. The case already made for an early start to be
made in getting the WMPA up and running has as much relevance to the
environmental field as the social. This has special significance in terms of
the timing of an application for World Heritage status for the NBCA---it is
unlikely that such status would be conferred until and unless an effective
management regime is in place across the watershed.
Other major environmental issues and developments include the lAG's
finding that the ban on illegal logging across the project area seems to be
largely effective at this point. No evidence was found of any recent logging in
the areas where it was observed last May and an arrest had been made in
Nakai of a suspected violator of the ban. Potentially more worrying in the
medium term is the over-capacity in wood-processing facilities in Laos, with
the very large new plant near Laksao a constant reminder of this fact to
project staff. A further area of concern to the LAG is the risks inherent in the
impacts the project will have on fisheries particularly in the downstream
areas. Initiating baseline monitoring of fisheries in the area is a welcome
and overdue move but it will not of itself reduce the element of risk. The IAG
is also of the view that an update on predictions for greenhouse gas
emissions from the project is called for, it being several years since the
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original study was made---and this being a preoccupation of the WCD in its
report. Finally, the IAG's view is that the recent restructuring and
downsizing of GoL agencies with responsibilities in the nature conservation
and environmental areas was most untimely and it feels that this underlines
the necessity for the new agencies to be both better resourced and better co-
ordinated , not least in view of their responsibilities in respect of the Nam
Theun 2 project.
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5.          GLOBAL CONSIDERATIONS
5.1         Greenhouse gas emissions
In its original report (1997) the IAG noted the innovative step the WVB had
recently taken with IUCN, in setting up a World Commission on Dams. The
WCD has reported and has recommended inter alia that since the emission
of greenhouse gases from reservoirs due to rotting vegetation and carbon
inflows from the catchment has now been identified as an ecosystem impact
(on climate), storage dam projects should be investigated to establish the
likely level of GHG-emissions. Making such predictions is an evolving but
far from exact science. NTEC had a study made five years ago (why has it
taken this long to surface?). It was probably state-of-the-art when it was
undertaken in 1996. It compared the amount of GHGs likely to be released
into the atmosphere by the conversion of 450km2 of Nakai land to lake with
the amount which would be produced by fossil-fuelled electricity energy
generation of an amount equal to that generated by NT2. The finding was
that the NT2 reservoir emission would probably be less than half of the
emissions of a thermal power station of comparable power and much less as
the decades pass. But the equation has changed in the intervening five
years. On the one hand, there is much less biomass left in the inundation
area than was expected five years ago but the significance of this is difficult
to assess, because the WCD report notes that the net effects of removal of
vegetation are still not well understood. The WCD report notes further than
shallow, warm tropical reservoirs are more likely to be major GHG emitters
than deep cold boreal dams, so the 1996 comparison with emissions from
reservoirs in French Guyana and Ivory Coast was logical enough in a sense
but these habitats are still very different from the Nakai plateau habitat.
Furthermore, the WCD report points out that comparisons with gas
combined cycle generation plants are now more relevant than with the
fossil-fuelled plants used for comparisons in 1996.
In short, the IAG's view is that NTEC would do well to seek an updated
version of the earlier study taking into account technological and scientific
advances made in the intervening period. In this regard it notes that the
calculations of the contribution of new reservoirs to climate change should
desirably, in WCD's view, include an assessment of the natural pre-dam
emission (or sink) in order to determine the net impact of the dam.
5.2         Measuring NT2 against WCD standards
Predicting greenhouse gas emissions aside, the Nam Theun 2 project
measures up well against the standards and guidelines set by the World
Commission on Dams. Reading Dams and Development with a knowledge
of the procedures and frameworks for decision-making followed in NT2 is a
reassuring exercise. It reinforces the IAG's longstanding judgement that the
World Bank, the GoL and the developers have gone to unusual lengths to
ensure that the social and environmental problems which have been
encountered in the case of many earlier WB dam projects have been
investigated early on and either dealt with or mitigated in this case. In a
very real sense, the procedures, not least in terms of consulting all parties
at all stages and ensuring equitable and "better off' arrangements for
affected people, have anticipated the requirements of the WCD report, which
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go beyond WB Operational Directives. And the WCD report itself
acknowledges that the environmental offset approach involved in according
protection to the biodiversity-rich NBCA and its conridors is a useful
precedent: 'The (NT2) plan has the potential to benefit both forest
ecosystems and the lifespan of the dam through reduced sedimentation."
(Dams and Development, Box 3.1, p75).
The IAG sees no point in second-guessing the POE in assessing in detail
how the project measures up to WCD standards and guidelines. There are
several crossovers between the WCD exercise and the NT2 one. The
alternative energy use expert who undertook the original study of the
alternatives to the Nam Theun 2 project, Dr. Engelbert Oud, later became a
member of the WCD Secretariat and was heavily involved in drawing up the
options section of the WCD report. One of the WCD Commissioners, the
eminent ecologist Professor Thayer Scudder, is a long time member of the
POE for NT2. Dr. Oud drew up for the POE a complex matrix reviewing the
WCD guidelines against Nam Theun compliance. This is annexed to the
POE's most recent report. While somewhat cryptic in form the matrix is
comprehensive and authoritative. On the few aspects where the matrix
records non-compliance or "exceptions" the IAG largely concurs (e.g. there
remain reservations about the Xe Bang Fai fishery's prospects; and the LAG
view, apparently differing from the POE one on this issue, is that an update
is now desirable on the five-year old greenhouse gases report. It was
interesting to note that the matrix recorded as "programmed" the drawing
up of benefit-sharing contracts with affected people. It is not clear whether
these contracts are to include the spelling out of entitlements and
performance requirements as called for by the WCD. The IAG was,
incidentally, intrigued to discover that it did not appear to qualify as "an
independent panel' which had -reviewed and endorsed mitigation plans.'
Perhaps the fact that the IAG reports to the WB President ruled it out.
The overall POE conclusion is that the NT2 project "meets WCD criteria and
guidelines better than any other large dam on the drawing boards anywhere
in the world." The IAG concurs in this judgement.
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6.          CONCLUSIONS
The IAG was set up to provide the President of the World Bank with an
independent assessment of and recommendations on the World Bank's
handling of environmental and social issues in the proposed Nam Theun 2
hydro power project and the risks involved.
This was the Group's third visit to Lao PDR. Its members feel privileged to
be part of an extensive external input into one of the most unique projects
on the world development scene. The Nam Theun project is unique not just
because of the environmental offset arrangement which would help preserve
one of South East Asia's handful of remaining intact tropical forest areas,
replete with mammalian and untold other biodiversity. (Few botanists, for
example, have yet penetrated the NBCA). Those involved in its evolution are
resolved to face up to the environmental and social shortcomings of other
large dam projects and endeavour to turn them, where this is feasible, into
pluses not minuses. Even the developer has, from the beginning, been
determined to go beyond WB operational directives by undertaking to help
ensure that the affected people will not be "no worse off" than before but
significantly better off, thus anticipating a standard now set by the World
Commission on Dams.
The World Bank has, in concert with the GoL, sensibly required an array of
technical studies to be undertaken in sector after sector, well over forty in
number. There has been virtually no dissension from the widely held view
that this is an outstanding project technically, designed to earn foreign
exchange for a country with few options and to help preserve some of the
most outstanding intact stands of tropical forest and associated biodiversity
left anywhere on the planet, aimed at alleviating the situation of one of the
poorest groups of people in one of the least developed countries in the world,
and with creative mitigatory or compensatory mechanisms built in where
impacts are unavoidable.The accumulation of information and positive
findings on NT2 is highly impressive. It cannot lightly be set aside. The
World Bank, to its considerable credit, has learned many of the lessons of
the past and internalised them, its resolve over the years to get this one
right is reflected in its considerable investment in the preparatory processes.
The Bank has had its moments of hesitation. It quite rightly required the
GoL to get its macro economic house in order three years ago when Laos, at
the foot of the regional economic and financial totem pole, was heavily
impacted by the Asian financial crisis and was slow to take remedial
measures. That situation is now, in the view of international financial
institutions represented in Vientiane, under control.
The Bank is still seeking some reassurance about the commitment of the
Government to the project and to compliance with its undertakings. The
Bank seeks, for example, legitimately enough, to have some assurance that
the revenues from the project will be channelled largely into poverty
alleviation and not simply become, for example, a general Budget deficit
offset. The IAG's conclusion is that there are adequate existing and planned
means of monitoring revenue usage in place at this point. It is the GoL's
publicly stated policy, reaffirmed to the JAG by the Deputy Prime Minister
and Minister of Finance, that the revenues will go into poverty alleviation.
For its part, the Bank and other financial institutions are now working very
closely with GoL agencies on developing a poverty alleviation strategy and
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new allocative procedures. The public expenditure management
performance of the country is being actively reviewed and strengthened with
outside help. There is greater transparency at all levels, though the Lao
Government has to go further in making public its use of external ODA
flows in particular. The Round Table process of bringing donors into active
collaboration with Laotian development agencies on strategic issues is
beginning to work well.
So there are, in the LAG's opinion, adequate means for the World Bank to
keep in touch with evolving development policies and procedures before the
NT2 revenues begin to flow five years and more down the track. And the
Bank has the opportunity to help further strengthen the allocative and
public expenditure systems in the meantime.
At the project level there is a very high level of both internal and external
monitoring already provided for. External agencies and/or auditors of
international standing are to monitor the watershed management system,
any illegal logging, the resettlement programme, the environmental and
social management programmes, site preparation and construction PMM's
(Protection or Mitigation Measures) and the operational phase of the project.
Some form of the existing POE and IAG will also presumably continue into
the implementation phase of the project. In short, the comprehensive
monitoring system with its external components should provide a good level
of reassurance to the WB on the faithful implementation of this venture.
Such reservations as the IAG retains relate to the early need to boost the
livelihood and nature conservation programmes in the watershed, the
requirement to counter cross-border poaching in the NBCA, possibly
through the use of mixed military/village patrols, the desirability of seeking
an update on the forecast of greenhouse gas emissions from the project, a
general uneasiness based on experience elsewhere about the future of the
fisheries in and around the project and some on going concerns about the
pace of capacity building at all levels. None of these problems or potential
problems is insuperable.
In short, the IAG agrees with the weight of opinion so carefully garnered
over almost a decade by the GoL, the Bank and the developer in favour of
the project proceeding.There are still risks involved. There always are in
ventures involving environmental and social engineering, whether they are
undertaken in a so-called developed country or a developing one. But the
IAG's considered judgement is that the point has now been reached,
through countering social impacts and combining mitigation with
environmental enhancement, where it may cogently be argued that the risks
of not proceeding with this excellent project in its present form outweigh the
risks of going ahead. Were the project to proceed without World Bank
participation as at present planned it would almost certainly be
substantially redesigned, refinanced and implemented on a very different
basis from that so meticulously and meritoriously put together over the
past decade. Among the losers would be likely to be the forests and other
biodiversity of the NBCA, the vulnerable and desperately poor communities
of the watershed, the plateau and some at least of the downstream areas,
and the credibility of the World Bank across much of the donor community
and among the numerous technical, scientific and engineering groups which
have been involved in putting this project together. The project should
proceed to appraisal, and to fruition.
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APPENDICES
With the third report of the International Advisory
Group on the World Bank's handling of social and
environmental issues in the proposed Nam Theun 2
hydropower project in Lao PDR
(appendices 1 to 5)






APPENDIX 1
Letter to the Vice President of the World Bank, Mr. Jemal-ud-din Kas-
sum.
Mr. Jemal-ud-din Kassum
Vice President
World Bank
Washington D.C.
Vientiane.
10 Mardh 2001
Dear Mr. Kassum,
As the three members of the International Advisory Group on the Narnm Theun 2 project
available to visit Lao PDR last week, we have an urgent message to convey to you even
before our report reaches you.
The message is that the Bank's reputation is being damaged at all levels in Laos, from
Ministers, Governors at the Provincial and District level down to the people in the villages
and among the wider international community with interests in the NT2 project. This is
because there is no known schedule for decision-making by the Bank on NT2. You will have
heard this adverse comment when you came here on what was obviously a highly successful
visit five months ago.
It is difficult to overstate the degree of impatience bordering on anger among village
people and Ministers alike over the prolonged delays and what is seen as a new set of
conditions. In villages we visited. the people have if possible sunk to a lower level of poverty
than they were experiencing five or more years ago, because over this planning phase they
have been forced for project-related reasons to reduce or eliminate entirely those traditional
techniques - hunting, wildlife trading, forest food gathering, slash-and-burn cultivation, to
say nothing of logging - which gave them sustenance and cash in the past. For the people in
the plateau area the situation has been exacerbated by the progressive clearance of much of
the remaining forest areas in preparation for inundation, so that the villagers have to travel
much greater distances to gather material for house building and roofing, for example.
For their part, the politicians have been offended by passing reference to 'the Chad-
Cameroon formnula' by which they understand that revenues go into an offshore account and
there is external scrutiny of any and all expenditure. This has touched a raw nerve and
raised questions of infringement of sovereignty. Although we said that we were sure that
such extreme measures were not being considered by the Bank in relation to Laos, Ministers
were clearly upset that there might have been any discussion of such possibilities. A
confidence gap has emerged in the relationship.
We will be making some suggestions in our report about possible ways of reconciling the
Bank's legitimate concerns about revenue usage and public expenditure management vnth
the GoL's legitimate concerns about its sovereignty. We have to say at this stage, however,
that having repeatedly sought ideas on how to establish a process, mechanism or
programme which would help reassure the Bank that a high proportion of project revenues
will go into practical poverty alleviation work, we have come to appreciate that it is in a



sense premature to be seeilng programmatic specifics at this point. This is also the view of
intemational finance people here. Few governments can tell you six or seven years ahead
what particular programmes will exist for poverty alleviation.
T1he fundamental point is that it Is clearly the firm intention of both the Bank and GoL
Ministers that the bulk of revenues should go into practical poverty programmes. But
working out how to ensure this and where resources should be invested is part of a wider
ongoing and active debate in Laos about poverty alleviation and how to combat it, which the
Bank Itself, the IMF (planning to sign an agreement soon on establishing a Poverty
Reduction and Growth Facility), the ADB (working on definitions for. and indicators of
poverty) and other donors are actively participating in. Ways of ensuring monitoring and a
greater degree of transparency will emerge from this debate.
There is another point we would make here. It is our observation that there is a need for
a more pro-active approach by the Bank on the capacity building and technical assistance
fronts and in pursuing practical poverty reduction pilot programmes like that funded by the
LIL. There has been, as you know, somewhat of a start/stop process over recent years (for
reasons we do understanud). The results are unsatisfactory at this point. We have said to the
Lao that they have to do their homework here also. not least tlrough fulfilling their
counterpart obligations and endeavouring to slow down the leakage of trained people. But
the Bank also needs to become more pro-active again on these fronts.
There are of course other issues Ministers and officials (not to mention the developers)
feel that they have been asked to go through a prolonged series of hoops by the Bank over
the past decade to meet Bank requirements and standards. They have responded favourably
on all occasions - and the series of high powered teams of international consultants and
experts have given a succession of resounding approvals to the project and its attendant
programmes on practically all occasions. The intenational consensus on the technical
aspects including the potential social and environmental impacts of this project is very high,
the latest warm endorsement being by the POE which includes a member of the World
Commission on Dams (Professor Thayer Scudder) in its ranks. Even the IMF people are
happy to see the project go ahead if it is commercially viable. For this reasoni it is all the
more difficult for the Lao and the international community - with the possible exception of
some of the more radical NGOs - to understand why there is not an immediate move to pre-
appraisal and then appraisal. Given the very substantial progress on the macro-econornic
front as well, we would ourselves unequivocally support such action
May we presume to suggest a logical basis for drawing up a decision-making schedule?
We gather that your processes are contingent inter alia on a negotiated draft Power
Purchase Agreement and a draft Concession Agreement being available and that your staff
are also engaged in a risk assessment exercise. The CA negotiations are apparently
proceeding, with the legal teams due to report back shortly. There is confidence that a draft
will be ready by April. The ?PA negotiations are detailed and tough. NTEC's forecast is for
completion by May/June. There is also apparently a tariff negotiaton deadline towards the
end of May - and you have your own budget deadlines in June.
Given the many years of planning and the excellent platform for decision-making which
already exists might the pre-appraisal be initiated immediately and undertaken in parallel in
the intervening months (balance of March, April. May) and the full appraisal initiated by the
end of June? Surely the risk assessment is part of the pre-appraisal process?
We are nlot in a position to forecast how long the full appraisal will take or w-hen the
matter might go to your Board, but might a target date of December 2001 be set for these
steps too? Lao Ministers pointed out to us that if the project is approved but so late that the
commissioning target date of 2006 is not able to be met. they will be into another round of
tariff negotiations with the Thai, probably to their cost.



We apologize for appearing to interfere in the Bank's internal processes but feel strongly
that al Involved have reached the point where a relatively firm and known basis for
planning is called for.
We write to you in this vein because it is our objective assessment that confidence in the
Bank. both among the Lao people and the international community, is being seriously
eroded by the delays and uncertainties. To be frank, we have also been reminded all too
forcefully of the sufferings of the village people of this least developed country. The prospects
for the poor and for the biodiversity of Laos should the project not proceed remain bleak. We
know that you personally recognize this.
Because of the urgency of the situation - and because we are mandated to report to him
directly - we shal send a copy of this submission to Mr. Wolfensohn. We will report formally
before the end of March and, because two of us will be in Washington on other business in
the first week of May. would hope to discuss the project with you at that time, notably on 4
May.
Yours sincerely,
(sgd.)     Dick de Zeeuw,     David McDowell,   Emil Salim
International Advisory Group on Nam Theun 2, Lao PDR






APPENDIX 2
Composition of LAG
International Advisory Group
Mr. Dick de Zeeuw     Former Deputy Chairman of the Netherlands Commission for
Environmental Impact Assessment (Convenor)
Mr. David McDowell   Former Director of IUCN - the World Conservation Union
Mr. Emil Salim        Former Minister of Environment for Indonesia
Mr. Kazuo Takahashi   Director of the International Development Research Institute,
Japan
(did not participate in 3rd visit)
Ms. Meg Taylor        Former Ambassador of Papua New Guinea to the United States
Compliance Advisor / Ombudsman, IFC, USA
(did not participate in 3rd visit)
Ms. Ineke Steinhauer   Technical Secretary to the IAG






APPENDIX 3
Working Progranme of the IAG
Date      Time               Activitv
March 4   09.30 hrs          Arrival Mr. David McDowell in Vientiane
12.00 hrs         Lunch with Mr. William Robichaud, Lao Swedish Forestry
Protected Areas Review Advisor (former WCS Lao representa-
tive
March 5   09.30 hrs          Arrival of Mr. Dick de Zeeuw, Mr. Emil Salim and Ms. Ineke
Steinhauer
11.00 - 12.00 hrs   Mr. Eric Sidgwick. Representative IMF
14.00 - 15.30 hrs   Mr. Jean-Christophe Devallet, Director, NTEC
16.00 hrs         Mr. Chris Flint, IUCN
17.00-18.30 hrs    Ms. Linda Schneider and Mr. Enrique Crousillat
19.00 hrs         Mr. Gary Oughton, Ecolao
March 6-7 06.00 hrs          Car trip: Departure Tai Pan Hotel (1 lAG + 2 GOL+ 1 NTEC)
06.45 hrs         Departure from Tai Pan Hotel to Wattay Helicopter Base Vi-
entiane (3 LAG + 1 GOL)
Meeting with Bolikhamxay Province and Khamkeut District
officials ( 1 hour)
08.30 hrs         Land at Laksao - visit wood processing factory (1 hour)
10.00 hrs         Take-off from Laksao, overfly: Road no. 8B to junction Road
No. 8B and old access road to Navang
10.15 hrs         Land at Ban Navang - NBCA, to see the LIL project and the
status of the old access road
11.00 hrs.        Take-off from Ban Navang, to Pristine area of primary forest,
non affected by the Project, to be part of NBCA.
* Overfly Nam Xot from middle to upper stream
* Turn south to follow annamite range to Ban Maka and
turn East to West.
11.15 hrs.        Land at Ban Makfeuang - visit LIL project



12.00 hrs.        Car group arrives in Theun Douane
12.25 hrs         Land at Theun Douane - Helicopter party meets car group
Picnic lunch at Theun Douane and a visit to NTEC's demon-
stration farm, developing livelihood models for project reset-
tlers
14.00 hrs         Take-off from Theun Douane
14.10 hrs         Land at Ban Sop Phene to visit Ben Sop Phene, one of the
villages to be resettled. IAG met these villagers in 1997.
15. 10 hrs        Take-off from Ban Sop Phene
15.20 hrs         Land at Nakai, refreshment drinks at NTEC Guest House
16.00 hrs         Car party arrive in Nakai
Depart by car to Ban Sailom (Selected Pilot Village) - meeting
with village administration, elders, LWU
17.00 hrs         Depart to resettlement site of pilot village where resettlers
cleared the land for rice growing during wet season
18.15 hrs         Return to NTEC Guest House
19.00 hrs         Dinner at NTEC Guest House with District officials and RMU
(Resettlement Management Unit)
Night in Nakai
March 7   8.30 hrs           Meeting with Provincial, District officials, chiefs of villages and
elders from Ban Nakai Neua, Phonephanpek. Ban Done
* Presentation of the project preparation by local authori-
ties.
* Questions and answers
11.00 hrs         Take-off from Nakai, overfly
*  Phou Ak escarpment to Nam Malou, to see community
forest,
* Turn East to the junction of Nam Xot and Nam Theun,
*  Follow range of mountains separate NBCA and reservoir
(Pristine area of primary pine forest)
* NNT NBCA South eastern
*  Across road no. 12
Appendix 3 page -ii-



* Southern extension Phou Hin Nam No
* Fly back from South to North following upper stream of
Nam On until extreme end south of reservoir
* Turn South-west to the junction Nam Phit and Xe Bang
Fai (5 km upstream of Mahaxay)
* Follow Nam Phit (Downstream Channel)
* Overfly Gnommlath Plain
12.00 hrs        land at Nakai for refueling and lunch, car party goes back to
Vientiane
13.00 hrs.       Take-off from Nakai to Vientiane
15.15 hrs        Arrival at Vientiane
March 8   09.00 hrs         Mr. Maydom Chanthanasinh, NT Project Director; Mr. Phalim
Daravong, Officer; Mr. Bounsalong Southidara, NTSEP Project
Director; Mr. Fernando Lecaros from the Hydropower Office
11.00 hrs         Mr. Michael Hedemark & Ms.Arlene Johnson, Representatives
wCs
15.00 hrs         H.E. Sitaheng Rasphone, Vice-Minister of Agriculture and
Forestry; Mr Phouang Parisack Pravonviengkham, Deputy
Permanent Secretary, Cabinet; Mr. Xeme Samountry, Direc-
tor, Forestry Department - Ministry of Agriculture and For-
estry
17.30 hrs         H.E. Soulivang Daravong, Minister of Industry and Handicraft
Cancelled         H.E. Phoumy Thipphavorn, Minister of Commerce and Tour-
ism
March 9   10.00 hrs         H.E. Yao Phonevantha, Vice-Minsiter of Finance and Staff
H.E. Sisavath Keobounphanh, Prime Minister of Lao PDR
H.E. Siene Saphanthong, Minister of Agriculture and Forestry
14.30 hrs         Mr. Soukata Vichit, Director of Environmental Department
STEA
16.00 hrs         Mr. Paul Turner, Asian development Bank
17.30 hrs         H.E. Boun Nhang Vorachit, Vice-Prime Minister, Minister of
Finance
18.15 hrs         H.E. Mdame Khempheng Pholsena, Vice-Minister, Office of
the Internation Co-operation
Appendix 3 page -iii-



H.E. was not avail-  H.E. Bouathong Vonglorkham. President of State Planning
able, no represen-  Committee
tative
H.E. was not avail-  President of STEA a.i.
able
Not in Vientiane -   Mr. Roland Eve, Representative, WWF
in Vietnam for the
week
19.00 hrs         Reception hosted by H.E. Renaud Levy, Ambassador of
France
March 10  10.30 hrs         Departure of IAG
Appendix 3 page -iv-



APPENDIX 4
Reference documents used
PROJECT DOCUMENTATION PROVIDED BY THE WB BEFORE VISIT TO LAOS
* Nam theun 2 Overview Update, December 2000
* Report of the Social and Environmental Panel of Experts (POE), 5th mission to Lao PDR,
January 2001
* National PCPP on EAMP - workshop record, 22-23 November 2000
* Operational Plan for the Environmental and Social Management of the Nakai Nam Theun
2 Watershed and NBCA, May 2000
* Copy of the signed Tariff MOU with EGAT, 8 August 2000
* RAP Activities Report, July 1998 to October 1999
* CD-ROM database on census / asset registration / socio-economic survey on the Nakai
Plateau, August 1999
* Decree No. 193/PM, of the Prime Minister, Decree on the establishment of the Nakai -
Nam Theun NBCA, corridor areas, NT2 project reservoir area and resettlement and forest
area for people affected by the project, 29 December 2000, Unofficial Translation
* District Upland Development and Conservation Project. Cr. 31860-LA. Aide Memoire, De-
cember 2000
* Project Appraisal document, Learning and Innovation Loan LIL District Upland Develop-
ment and Conservation Project, report no. 18551-LA, 18 February 1999
_ Lao PDR Production Forestry Policy Review. World Bank/Sida/Ministry of Foreign Af-
fairs, Government of Finland. Volume 1 Main Report, 4 January 2001 and Volume 2 An-
nexes, 3 January 2001
* World Bank Logging Mission: Technical report, Lao PDR, Nam Theun Social and Envi-
ronmental Project, 1- 12 May 2000
* Resettlement Action Plan. Prepared by NT2 Electricity Consortium, Vientiane Lao PDR,
July 1998
* Dam safety Panel of Experts. Report on meetings, Charnbery, France, June 2000
* Draft Consession Agreement, Clause 31 and Schedule 4, 26 February 2001
* Decree of Prime Minister on the establishment and activities of the Nam Theun 2 Water-
shed Management and Protection Authority, 1 March 2001
* Ministry of Industry and Handicraft Lao PDR, Power Sector Policy Statement, Discussion
Draft, September 2000
* Report of the World Commission on Dams, November 2000



* E-mails of World Bank (Rahul Raturi), of 22 and 27 February 2001, with suggestions for
Terms of Reference for the Third IAG visit
DOCUMENTS PROVIDED DURING VISIT TO LAOS
* Environmental Assessment and Management Plan SEATEC, February 2001
* District Upland Development and Conservation Project (LIL) Project Implementation Unit
Thakhek, project presentation, March 2001
* Poverty reduction Paper Lao PDR AsDB
* IMF Lao PDR: Recent Economic Development, January 2000
* Lao PDR: Staff report for 1999, article IV, consultation, November 1999
* IPRSP
Appendix 4 page -ii-



APPENDIX 5
Map of the NT2 project area
'NTE~DADlCE TUNNEL/,
,X   s~~ROOAJr7hoN'' 
|lgw)!~~~~~~~~~NG0



Acronyms and abbreviations
CA    -     Concession Agreement
CPI  -      Consumer Price Index
EAMP -      Environmental Assessment and Management Plan
EGAT -      Electricity Generating Authority of Thailand
ESMOP -    Environmental and Social Management Operational Plan
ESMP -      Plan for the Environmental and Social Management of the Watershed and
NBCA
FSL   -     Above Sea Level
GHG  -      Green House Gas
GoL  -      Government of Laos
IAG   -     International Advisory Group
IFI   -     International Financial Institutes
IMF   -     International Monetary Fund
IUCN  -     World Conservation Union
LIL   -     The Upland Development and Conservation Project
MOU  -      Memorandum of Understanding
NBCA -      National Biodiversity Conservation Area
NGO  -      Non Governmental Organisation
NNT  -      Nakai Nam Theun
NTEC -      Nam Theun 2 Electricity Consortium
NTFP -      Non Timber Forest Products
NT2  -      Nam Theun 2 hydropower project
ODA  -      Official Development Assistance
PMO  -      Prime Minister's Office
POE  -      Panel Of Experts
RAP  -      Resettlement Action Plan
UXO  -      Unexploded Objects
WB   -      World Bank
WCD  -    World Commission on Dams
WMPA -    Watershed Management and Protection Authority
XB3F  -     Xe Bang Fai



Theun Douanc Dcmonstration Farmn             Near resettlemernt site of pilot village
~~~ !_
Ban Sailom pilot village                     Meetirig witlh Provincial, District Officials,
chiefs of villages and elders from Ban
Nakai Ncua, Phonepanpek, Ban Done
Ban Sailom pilot village                     Take-off from Nakai