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In its attempt to increase foreign investment inflows into the country, Laos government is confronted with two challenges: attracting new investment projects, and simultaneously transforming previous investment pledges into tangible realities. There is often a discrepancy between a developing country’s total foreign investment pledges and its actual inflows, either due to delays in getting projects enacted, or because some projects simply fail to get off the drawing board, often for the want of sufficient financing. Laos, however, has a particularly large discrepancy between its cumulative inflow pledges and tangible foreign-invested assets.
This is largely attributable to the licensing of a small handful of large power projects during the first half of the 1990s, which together account for over 40 per cent of Laos’ total stock of foreign investment pledges. All of these proposed power projects envisaged generating electricity for export to neighbouring Thailand, rather than for domestic consumption in Laos where total demand remains small, electricity prices are subsidised, and there is no national power grid. But for a variety of reasons, including a downward revision in Thailand’s electricity consumption demand forecasts after the Asian economic crisis, and Bangkok’s growing preference for independent domestic power producers, several of these power projects in Laos have failed to materialise, at least thus far.
The biggest of these elusive power projects is the mighty 1,088 MW Nam Theun 2 hydropower plant, to be sited south-east of the capital Vientiane, near the town of Thakhek. The largest power project envisaged in Laos by far, the US$1.2 billion project would dwarf the only two foreign-invested projects to materialise in recent years: the 214 MW Theun-Hinboun and 126 MW Houay Ho power plants, both of which became operational in the late 1990s. Reasons to explain the delays surrounding Nam Theun 2 are lengthy and complicated, but have largely revolved around three factors: i) difficulty in securing political risk guarantees from multilateral development banks to support the considerable commercial bank credit required (over US$700 million); ii) difficulties stemming from legitimate concerns over the human and environmental impact of the project, which necessitate the flooding of a large area of forested land and the relocation of some villages; and iii) very lengthy negotiations on a power purchase agreement (PPA) with the intended customer, the Electricity Generating Authority of Thailand (EGAT).
However, recent reports in the industry press suggest that a PPA deal may be imminent. If so, construction of the dam and power plant could commence towards the end of 2003, and the project could be in operation by 2009. With over 990MW of total output to be exported to Thailand, the project would generate very substantial foreign exchange revenues for Laos, and also add a few percentage points to the country’s national GDP. The plant is structured as a build-operate-transfer (BOT) project, with the Lao government taking full ownership after 25 years of operation. It is to be built and managed by a consortium that currently comprises: Electricite de France (35%), the state-owned Electricite du Laos (25%), Electricity Generating Company of Thailand (25%) and the Italian-Thai Development Company (15%).
If the project does get the long-awaited green light, one of the first tasks will be to ensure that no unexploded ordnance - left over from intensive US bombing in the early 1970s, and an on-going menace in large parts of southern and eastern Laos - remains hidden in the construction area.
WATCHPOINT: Should Nam Theun 2 make the leap from the drawing board to reality, it would be the country’s first billion dollar investment project and an important landmark in Laos attempt to attract foreign investment inflows. The mega-project would also serve as a motor of growth for the small economy, both during construction and subsequently when operational.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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