Challenges of Dam Financing for Thai Banks The Case of Xayaburi and XPXN Projects

November 2019 Executive Summary Thai companies and banks are at the forefront of foundational elements in the TBA Sustainable Banking growing intra-regional investment within the Mekong Guidelines. region. Over the past two decades, Thailand’s com- mercial banks have increased their lending to major Leadership and responsible lending infrastructure projects such as hydropower dams in commitment neighbouring countries. ◆ Develop and issue a human rights policy, which Large-scale dams are risky projects. They are complex, clearly articulates banks’ recognition to respect capital-intensive, and often require the majority of human rights, in line with UN Guiding Principles financing upfront. Because large hydropower projects on Business and Human Rights and timebound alter river systems, they often have significant im- commitments to ensure implementation pacts that are not confined to the project area or even ◆ Develop and issue sector lending policies, includ- within national borders. In the case of the Mekong, an ing for hydropower, in line with international important transboundary river system that sustains standards. food security, livelihoods and local economies for ◆ Strengthen the TBA Sustainable Banking Guidelines populations across six countries, impacts and risks are especially extensive and complex. Stakeholder Engagement

Drawing on case studies of two controversial hydro- ◆ Stakeholder engagement should be conducted in power projects in the Mekong Basin in Laos financed line with UN Guiding Principles on Business and by Thai banks, this report points to weaknesses in Human Rights the Thai banks’ considerations of environmental ◆ Ensure that clients conduct meaningful stakeholder and social risks. The report outlines why Thai banks participation and engagement prior to finalising must integrate environmental, social and governance lending to high risk projects (ESG) risks into their lending decisions and conduct ◆ Establish direct grievance mechanism between the human rights due diligence in line with international bank and potentially affected communities, and standards. By doing so, Thai banks can better identify, help strengthen existing judicial and non-judicial prevent and mitigate adverse impacts, and minimise grievance mechanisms reputational, legal and financial risks from their lending. Internal implementation mechanisms

The first section of the report outlines ESG risks and ◆ Mandate clients to conduct human rights due impacts of hydropower projects and responsibilities diligence as a condition to hydropower financing and commitments of financial institutions, drawing ◆ Significantly increase resourcing and investment on relevant international and national standards in ESG risks, including staff capacity and expertise and guidelines, including the Sustainable Banking ◆ Include clear environmental, social and human Guidelines adopted by the Thai Bankers’ Association rights obligations as covenants and drawdown (TBA) in August 2019. The second section examines conditions in loan agreements the Xayaburi and Xe Pian-Xe Namnoy hydropower projects in Laos, describing their environmental and Transparency social risks and impacts, and the Thai banks’ roles and responsibilities. The last section makes recommen- ◆ Regularly and timely disclose project finance loans, dations on how Thai banks can more meaningfully including projects in the pipeline integrate ESG risks into their policies and practices. ◆ Allow opportunities for stakeholder input on cur- rent and future project financing decisions This report makes the following recommendations ◆ Provide timely and meaningful responses to stake- for Thai banks to help ensure that future hydropower holders who request information about banks’ financing can cope with both existing and emerg- involvement in projects ing risks, as well as conducted in line with the four Introduction

Historically, international financial investment in the Mekong. Large-scale 1. World Bank (2010, October 22). World institutions including the World Banks dams are risky projects. They are com- Bank Group Welcomes Strategic Envi- ronmental Assessment of Mekong and the Asian Development Bank played plex, capital-intensive, and often require Mainstream Dams, Press release. a key role in financing large infrastruc- the majority of financing upfront. They Available at: https://www.worldbank. org/en/news/press-release/2010/10/​ ture projects in the Mekong region. More have long development timeframes and 22/world-bank-group-welcomes-stra​ recently, these institutions have moved entail high socio-economic and envi- tegic-environmental-assessment-me​ kong-mainstream-dams away from direct financing of large ronmental risks.3 Hydropower projects infrastructure projects and have ex- frequently experience cost overruns 2. National Human Rights Commission of Thailand (2015). Report no. 1220/2558: pressed concerns over projects such as and delays, in part due to environmental Seaport and Dawei Special Economic the Xayaburi dam on the Lower Mekong and social risks and impacts.4 Because Zone Development. (Bangkok: National Human Rights Commission of Thai- mainstream due to their significant en- large hydropower projects alter river land). Available at: http://www.nhrc. vironmental and social impacts1. In their systems, they often have significant or.th/getattachment/0564e1b7-0374- 4b7d-9622-75b7383e1361/รายงานที่-​ place, private sector lenders, including impacts that are not confined to the 1220-2558-เรื่องสิทธิชุมชน-กรณีการดำ�เนิน. Asian regional banks, are increasingly project area or even within national aspx stepping in to fund projects such as borders. In the case of the Mekong, an 3. Trandem, A. (2019). Offloading Risks & Xayaburi that international financial important transboundary river system Avoiding Liabilities: How Financial Insti- tutions Consider Hydropower Risks in institutions will not directly support. that sustains food security, livelihoods Laos. (Bangkok: Focus on the Global and local economies for populations South). Available at: https://focusweb. org/wp-content/uploads/2019/03/Off​ Thai companies and banks are at the across six countries, impacts and risks loading-Risks-Avoiding-Liabilities-1-1. forefront of growing intra-regional are especially extensive and complex. pdf investment within the Mekong region. 4. International Finance Corporation Over the past two decades, Thailand’s Thai banks have lent billions of dollars (2015). Hydroelectric Power: A Guide for Developers and Investors. (Stuttgart, commercial banks have increased their to multiple hydropower projects in Laos, Germany: International Finance Cor- lending to major infrastructure projects including the Xayaburi and Xe Pian-Xe poration), p. 5. Available at: https:// www.ifc.org/wps/wcm/connect/topics_​ such as hydropower dams in neighbour- Namnoy dams profiled in this report ext_content/ifc_external_corporate_ ing countries. Thailand’s largest banks (see Table 2 and 3). Thai banks repre- site/sustainability-at-ifc/publications/ hydroelectric_power_a_guide_for_de​ have all been involved in providing sent a significant source of financing velopers_and_investors funding for risky resource projects. for hydropower in the Mekong Basin. However, unlike the traditional interna- Furthermore, Thai banks are also con- tional financial institutions, which have sidering financing other hydropower rigorous performance standards and projects in the region, including on the safeguard policies, Thai banks’ envi- Salween River in Myanmar. ronmental, social and governance (ESG) standards and policies are largely weak Yet, despite the risks and impacts or non-existent. The Xayaburi dam and inherent in these projects, lending the Xe-Pian Xe-Namnoy hydropower policies and decisions by Thai banks project in Lao PDR, discussed in this to date have paid scant attention to report, are examples of controversial environmental, social and governance major infrastructure projects that Thai (ESG) risks and impacts. Fair Finance banks have financed as part of a wider Thailand’s policy assessment of the program of internationalising their ac- nine largest Thai commercial banks tivities. In another example, Thai banks found that Thai banks performed poorly are also involved in financing a major in relation to ESG criteria, particularly industrial complex in Dawei, Myanmar in relation to nature (environment and that has faced criticism for its extensive social impacts and mitigation), gender environmental and social impacts.2 equality and human rights (see Box 2).5

This report examines the need for im- In August 2019, the Thai Bankers’ Asso- proved ESG policy and practice for Thai ciation (TBA) issued Sustainable Bank- banks through the lens of hydropower ing Guidelines: Responsible Lending,

Fair Finance Thailand 3 5. Fair Finance Guide International (2019, April). Executive Summary. Fair Finance which “defines minimum expectations the guidelines are a step in the right Thailand: 2018 Policy Assessments. on responsible lending practices for all direction, much more needs to be done Available at: https://fairfinanceguide. org/media/495072/fft-exec-summary-​ banks based in Thailand” and provides to ensure that Thai banks more mean- english.pdf guidance on integrating environmental ingfully implement responsible and 6 6. The Thai Bankers’ Association (2019, and social risks and impacts. While sustainable banking practices. August 13). Sustainable Banking Guide- lines: Responsible Lending by The Thai Bankers’ Association. Available at: https://www.tba.or.th/wp-content/up​ loads/2019/08/Guidelines-Responsi​ bleLending.pdf Hydropower: Risks and Impacts 7. World Commission on Dams (2000). Dams and Development: A New Frame- work for Decision-Making. (London and Large-scale hydropower projects are of the agriculture sector in the Delta, Sterling: Earthscan Publications Ltd). complex and carry high environmen- the losses would equate to billions of Available at: https://www.international​ rivers.org/sites/default/files/attached-​ tal and social risks. Large dams block dollars annually.11 files/world_commission_on_dams_​ fish migrations, degrade important final_report.pdf habitats, and disrupt flows of sediment Large dams may contribute to climate 8. E.g. see International Centre for Envi- and water, which in turn impact on the . While promoted as ‘clean ener- ronmental Management (ICEM) (2010). change Strategic Environmental Assessment of availability and productivity of aquatic gy’ by the hydropower industry and dam Hydropower on the Mekong Mainstream: resources important for communities’ proponents, a growing body of scientific Summary of the Final Report. (Victoria: ICEM Australia). Available at: http:// food sources, livelihoods and econo- evidence indicates that reservoirs in www.mekongwaterforum.org/sites/ mies Dams have flooded large areas of tropical areas, such as the Mekong, default/files/ICEM_2010_SEA_of_hy​ . dropower_mainstream_summary_ wetlands, forests and agricultural lands, emit significant amounts of greenhouse EN.pdf; Mekong River Commission and displaced an estimated 40 to 80 gases. A 2016 study, which analysed (MRC) (2017). The Council Study: Key Findings on the Study on Sustainable million people globally.7 They contrib- more than 250 hydropower projects, Management and Development of the ute to social unrest and conflicts over estimates that globally dams emit Mekong River Basin, including Impacts of Mainstream Hydropower Projects, 8 access to and use of water and land, and around one billion tonnes of greenhouse December. Links to all the MRC Council erosion of local cultures and identities. gases annually, accounting for 1.3% of Study reports can be accessed through: http://www.mrcmekong.org/assets/ These risks are heightened in places human-caused global emissions.12 Publications/the-CS-reports-cover.pdf like the Mekong region, where rivers 9. Mekong River Commission (2017). and related resources sustain the lives Weak regulatory regimes may exacer- Thematic Report on the Positive and and livelihoods of millions of people, as . Most hydropower invest- Negative Impacts of Hydropower Devel- bate risks opment on the Social, Environmental, well as making significant contributions ments in the Mekong are located in and Economic Conditions of the Lower to national economies. countries with lower standards for Mekong River Basin, p. 10. environmental and social protection 10. Mekong River Commission (2017, No- compared to those stipulated by Thai vember 23). The Council Study: Key Understanding environmental and Message from the Study on Sustainable social risks must include cumulative law and international best practice. Fur- Management and Development of the In the Mekong thermore, even when relatively strong Mekong River Basin, including Impacts of and basin-wide impacts. Mainstream Hydropower Projects, p. 4. Basin, there is a wealth of publicly avail- standards exist on paper, they are often able studies that examine cumulative not fully implemented, such as require- 11. Nam, S. et al (2015). Economic Value of Lower Mekong Fisheries: Lower Me- and basin-wide impacts and point to ments for environmental impact assess- kong Fisheries Estimated to Be Worth risks that large-scale dams pose on the ment and compliance monitoring. This Around $17 Billion a Year. Catch and Culture vol. 21, no. 3 (December), pp. Mekong’s ecology, economy and soci- can present risks to projects later on, 4–7. Available at: http://www.mrcme​ ety.8 Most recently, the Mekong River for example, projects that have secured kong.org/assets/Publications/Catch- and-Culture/CatchCultureVol-21.3.pdf​ Commission’s (MRC) Council Study, approvals without adequate assessment published in 2018, found that planned of transboundary impacts. It can also 12. See: Hurtado, M. E. (2016, November 7). Dams Raise Global Warming Gas. dams would reduce the amount of mean legal risks due to non-compliance. SciDevNet. Available at: https://www. sediment reaching the Mekong Delta A notable example is the collapse of an scidev.net/global/energy/news/dams- raise-global-warming-gas.html by 97%9 and fish stocks by 40% to 80% auxiliary dam at Xe Pian-Xe Namnoy Hy- by 2040.10 Given the high economic dropower Project in July 2019 that killed value of the Lower Mekong River Basin’s dozens of people and displaced some capture fisheries (valued at USD$11 7,000, and damaged the homes and billion), and the importance of sedi- property of thousands more across the ment to maintaining the productivity border in Cambodia.13 There is evidence

4 Challenges of Dam Financing for Thai Banks suggesting that non-compliance on the 13. Inclusive Development International A shifting energy landscape poses and International Rivers (2019). Reck- part of developers may have caused or risks to hydropower’s future economic less Endangerment: Assessing the Re- contributed to the dam collapse.14 sponsibility for the Xe Pian-Xe Namnoy viability. Project studies should include Dam Collapse. Available at: https:// comprehensive options assessment. www.inclusivedevelopment.net/wp-​ Noting the widespread and irreversible content/uploads/2019/​07/reckless_​ Large hydropower projects frequently endangerment_final_for_web.pdf experience cost overruns and delays. impacts hydropower development, one A 2014 Oxford University study, which of the MRC Council Study’s recommen- 14. Ibid. examined 245 large hydropower dams dations is for MRC member countries to 15. Ansar, A., Flyvbjerg, B., Budzier, A. and in 65 countries, found that large dams consider other renewable energy sourc- Lunn, D. (2014). Should We Build More Large Dams?: The Actual Costs of suffered average cost overruns of 96% es such as solar and wind as alternatives Hydropower Megaproject Develop- and implementation schedules were to hydropower, which are becoming ment. Energy Policy (March), pp. 1–14. Available at: SSRN: https://ssrn.com/ delayed on average by 44%.15 Delays in increasingly cost-competitive.18 With abstract=2406852 schedules and inability to meet perfor- the rapid changing landscape in power 16. Vida, T. (2019, March 19). Dry Spell mance targets (i.e. electricity outputs) sector investments, there is a risk that Causing Power Cuts: PM. Khmer Times. can lead to substantial penalties for the large hydropower projects, which often Available at: https://www.khmertime​ skh.com/587742/dry-spell-causing- investors if milestones and provisions take several years to build, become power-cuts-pm-2/ stipulated in Concession Agreements stranded assets. For example, an MRC 17. Thai PBS (2018, July 30). Water Dis- and Power Purchase Agreements (PPA) summary note examining different hy- charged from Lao Dams Pushes Up are not met. dropower pathways in the Mekong iden- Water Level in Mekong. Available at: https://www.thaipbsworld.com/water- tifies inconsistencies in the hydropower discharged-from-lao-dams-pushes-up- Climate change increases risks for hy- export plans of Laos and Cambodia on water-level-in-mekong/ dropower’s future viability and safety. the one hand, and electricity import 18. Mekong River Commission (2017, No- Climate change can also negatively plans of Vietnam and Thailand on the vember 23). The Council Study: Key Message from the Study on Sustainable impact hydropower projects’ ability to other. According to the paper, by 2040 Management and Development of the generate both electricity and income. Lao plans to export 11,739 MW of power Mekong River Basin, including Impacts of Mainstream Hydropower Projects, p. 3. With climate change comes more to Thailand, while Thai plans indicate unpredictable and extreme weather it will only import 4,274MW.19 This dif- 19. Mekong River Commission (2018). Summary note: Review and Update of events, which influences reliability of ference of nearly 7,500 MW, which is Basin-wide Sustainable Hydropower water flows, the main determinant of greater than the combined installed ca- Development Strategy for the Lower Me- kong Basin, Draft version 1.0, 28 August how much electricity a hydropower pacity of all the seven mainstream dams 2018, pp. 13–14. Available at: http:// project can generate. Droughts reduce planned or under construction in Laos,20 www.mrcmekong.org/assets/Uploads/ Summary-note-Draft-SHDS-Aug-2018. the amount of electricity a dam can pro- points to uncertainties in the market for pdf duce, while extreme rainfall increases planned hydropower projects. 20. Seven mainstream dams entirely with- risk of dam failure and massive flooding in Lao territory includes Pak Beng, due to sudden water releases. There are already signs indicating that Luang Prabang, Xayaburi, Pak Lay, Sanakham, Phou Ngoy and Don Sahong. the market for planned hydropower Pak Chom and Ban Khoum dams are These climate change risks are not is becoming more unpredictable. Two planned for the Thai-Lao border. hypothetical predictions of the future; planned Mekong mainstream dams, the 21. Vannak, C. (2019, August 9). Solar to they are affecting how dams operate in Pak Beng and Pak Lay dams, which com- Make Up 15pct of Local Energy Produc- tion by 2020. Khmer Times. Available the Mekong region today. For example, pleted the MRC Prior Consultation pro- at: https://www.khmertimeskh. low rainfall and water levels resulted cess in 2017 and 2019 respectively, have com/631779/solar-to-make-up-15-pct- of-local-energy-production-by-2020/; in major and on-going power cuts in yet to secure a Power Purchase Agree- Vireak, T. (2019, July 8). Gov’t to Reduce Cambodia in 2019, largely because ment. Following major power shortages Reliance on Hydro. Phnom Penh Post. Available at: https://www.phnompenh​ hydropower projects — which com- due to underperforming hydropower in post.com/business/govt-reduce-reli​ prise approximately half of domestic 2019, Cambodia is increasing invest- ance-hydro capacity — were unable to generate ments in solar power and has recently sufficient power.16 In 2018, it was floods indicated that the Sambor and Stung that caused major devastation in parts Treng dams planned for the mainstream of Laos and the Lower Mekong Basin — are no longer part of the government’s flooding which was exacerbated by the power development plan.21 sudden release of water by dams to cope with the large amounts of rainfall.17 Given the significant uncertainties and risks associated with large-scale

Fair Finance Thailand 5 22. Trandem, A. (2019). Offloading Risks & banks should no longer focus primarily Avoiding Liabilities: How Financial Insti- hydropower projects, it is vitally impor- tutions Consider Hydropower Risks in tant for investors and lenders to compre- on short-term gains and profits at the Laos. hensively assess ESG risks at the outset expense of long-term adverse impacts of 23. OECD (2017). Responsible Business and undertake regular monitoring. Yet their lending decisions and activities. In Conduct for Institutional Investors: Key the scope and quality of risk assess- the words of, Veerathai Santhiprabhob, Considerations for Due Diligence under the OECD Guidelines for Multinational ments on large hydropower projects to Governor of the Bank of Thailand:24 Enterprises. Available at: https:// date have downplayed risks, particularly mneguidelines.oecd.org/RBC-for-Insti​ tutional-Investors.pdf environmental and social risks, which “…financial institutions cannot underes- often take second place to investors’ timate the risks that come with various 24. Santhiprabhob, V. (2019). Opening Remarks, Bangkok Sustainable Banking and lenders economic and strategic aspects of ESG, as these risks can impair Forum 2019. 13 August 2019, Bangkok, interests22 (see the long-run sustainability of the financial Thailand. Bank of Thailand. Available Box 1: Downplaying and at: https://www.bot.or.th/Thai/Pres​ offloading risks). There is growing recog- institutions themselves. To manage and sandSpeeches/Speeches/Gov/Speech​ nition that failure to include ESG issues reduce these risks, it is important that Gov_13Aug2019.pdf into investment and lending practices financial institutions internalize sustain- not only poses significant operational, ability considerations and properly price legal and reputational risks, but is also potential risks into different aspects of seen as a failure of fiduciary duty.23 Thus, their operations.”

Lenders’ Commitments and Responsibilities Commercial banks and financiers play considering lending to large hydro- an important role as intermediaries as power projects. Common to all these their decisions over where and how international standards and guidelines financial resources are allocated and are institutional commitments to sus- invested can determine whether or not tainability and corporate responsibility, projects proceed. The financial sector’s which includes, among others: minimis- growing recognition of the importance ing adverse social and environmental of integrating ESG risks into lending impacts; conducting due diligence and policies and practices is evident in the monitoring to assess and manage risks, number of international initiatives, importance of stakeholder engagement, standards and guidelines that have and strengthening transparency and been developed. Some of these have accountability. been led by the financial sector and institutions themselves, acknowledging There are, however, some differences that adverse environmental, social and in the guidelines when it comes to human rights impacts of their activities financial institutions’ human rights can increase reputational, legal and obligations and ensuring effective rem- financial risks. Table 1 below outlines edy. The Equator Principles, IFC Perfor- some key international initiatives, mance Standards, and OECD Guidelines standards and guidelines covering ESG on MNEs were all updated after the risk management in the financial sector. adoption of the UN Guiding Principles on Business and Human Rights (UNGPs) While these international standards in 2011, and include references to com- and guidelines are largely voluntary panies or clients’ responsibilities to re- and some are more principles than spect human rights and ensure access to operational guidelines, they can help remedy throughout their supply chains. banks better understand and manage Two important principles in the UNGPs risks and promote good practice when that, if properly implemented, would go

6 Challenges of Dam Financing for Thai Banks 25. The Economist Intelligence Unit (2017). Water Security Threats Demand Box 1: Downplaying and offloading risks New Collaborations: Lessons from the Mekong River Basin. (London: The Economist Intelligence Unit), p. 16. Excerpt from Trandem, A. (2019). Offloading Risks & Avoiding Liabilities: How Financial Available at: https://ccacoalition.org/ Institutions Consider Hydropower Risks in Laos. (Bangkok: Focus on the Global South). en/resources/water-security-threats-​ demand-new-collaborations-lessons-​ mekong-river-basin “Risk assessments, as currently carried out by hydropower investors and lenders, often provide a misleading picture of risks involved in dam building. There are a wide range of reasons why risk assessments are rarely accurate. Firstly, the upfront costs required to develop a project proposal, including its feasibility study and impact assessment are lost if a project is not approved. Secondly, hoping to get a project approved can serve as an incentive for an investor to exaggerate the projected benefits, while downplaying the risks. Finally, without strong independent regulatory systems in place to ensure accurate planning and accountability from investors and lenders, many unidentified and longer-term risks are simply ignored and transferred onto the public sector…

“Risks are downplayed in part because few investors and lenders really in- tegrate comprehensive environmental, social, and governance (ESG) factors into their investment practices. And when they do, the ESG considerations may take second place to economic and strategic rationales…

“Investors and lenders, instead, often rely on environmental and social impact assessments (ESIA) to understand the risks of a dam to the environ- ment and local population. Too often, the quality of ESIA reports is poor and many environmental and social risks are ignored. Civil society has raised concerns over many ESIA reports in Laos as simply ‘rubber-​stamping’ approval of the dam. The ESIA reports, when made public, fail to achieve accurate analyses or meet international standards. Peter King, an expert on ESIAs in the Mekong region who heads the Asian Environmental Compliance and Enforcement Network secretariat, stated ‘Despite generally sound laws, the EIA in the region is seen more as an administrative requirement than an excellent tool to improve project design. In general, across the region, public participation in EIA procedures is encouraged but not mandated, grievance mechanisms are often lacking and public access to EIA reports is poor.’…25

“Another obstacle to fully understanding a dam’s impacts is that meaningful consultations with affected communities are rarely held. Furthermore, when indigenous people are consulted, their rights to Free, Prior and Informed Consent (FPIC) are not respected. ESIA reports also rarely consider trans- boundary impacts and the cumulative impacts of multiple dams being built in the same basin. Other important risks are rarely considered in ESIAs, including: climate change; seismic risks; debt distress and future payment challenges; growing social inequality; alternative energy options; and wheth- er the risks inherent to the project undermine people’s rights and the country’s development goals.”

Fair Finance Thailand 7 26. Danish Institute for Human Rights a long way in lessening social and en- should, in good faith, not only partic- (2019). UN Guiding Principle 18. Availa- ble at: https://globalnaps.org/ungp/ vironmental impacts from hydropower ipate in all such legitimate processes, guiding-principle-18/ projects are meaningful consultation and but also comply with their remedial 2 7. UN Working Group on Business and access to remedy. decisions. Attempts to limit the scope of Human Rights (2017). Report of the existing remedies or targeting affected Working Group on the Issue of Human Rights and Transnational Corporations communities with strategic lawsuits and Other Business Enterprises. Available against public participation may also at: https://documents-dds-ny.un.​org/ doc/UNDOC/GEN/N17/218/65/PDF/ Meaningful Consultation be regarded as inconsistent with the N1721865.pdf?OpenElement responsibility to “cooperate” with le- 28. BankTrack (2017, December). Human Although companies routinely conduct gitimate processes aimed at obtaining Rights Briefing Paper: How Banks Con- various forms of stakeholder engage- effective remedies.”27 tribute to Human Rights Violations. Available at: https://www.banktrack. ment, numerous grievances of affected org/download/how_banks_contribute_​ villagers from past hydropower con- There are also various hydropower-​ to_human_rights_abuses/180416_ how_banks_contribute_human_ struction projects in the Mekong region specific standards and tools, which rights_​1.pdf attest to the fact that few project com- can help banks better understand and panies paid attention to whether their manage risks related to hydropower. engagement is meaningful. Principle These include, for example: 18 of the UNGPs advises businesses to “involve meaningful consultation with ◆ The World Commission on Dams potentially affected groups and other (WCD), which developed a deci- relevant stakeholders, as appropriate sion-making framework based on to the size of the business enterprise recognition of rights and assessment and the nature and context of the oper- of risks. WCD put forward seven stra- ation” (italics added). For engagement tegic priorities based on a set of policy to be meaningful, the guideline advises principles, and 26 guidelines for good businesses to “seek to understand the practice that lay out actions to comply concerns of potentially affected stake- with the strategic priorities. holders by consulting them directly in a manner that takes into account ◆ The Hydropower Sustainability As- language and other potential barriers sessment Protocol (HSAP), which is to effective engagement. In situations an industry-led auditing tool to assess where such consultation is not possible, and improve sustainability of individ- business enterprises should consider ual hydropower projects. It measures reasonable alternatives such as con- sustainability performance of hydro- sulting credible, independent expert power projects at different stages resources, including human rights de- across more than twenty topics. fenders and others from civil society.”26 ◆ The Rapid Basin-wide Sustainability Assessment Tool (RSAT) is a multi-​ stakeholder dialogue and assessment Access to Remedy tool to examine hydropower sustain- ability issues in a river basin context. Principle 22 of the UNGPs provides that Initial developed by MRC with ADB where “business enterprises identify and WWF, it has been piloted in vari- that they have caused or contributed to ous river basins in the Mekong region. adverse impacts, they should provide for or cooperate in their remediation Commitments to and endorsement of through legitimate processes.” In a 2017 international standards and guidelines, report to the UN General Assembly, the however, does not guarantee compli- UN Working Group on Business and ance, as evidenced by documentation Human Rights further clarifies that “as of harmful projects financed by banks, part of their responsibility to respect including signatories to the Equator human rights, business enterprises Principles.28

8 Challenges of Dam Financing for Thai Banks Table 1: Select international initiatives, standards and guidelines covering ESG risk management in the financial sector

Initiatives Standards, Description Guidelines

UN Environmental Launched in 1992, UNEP FI is a global partnership between United Nations Program (UNEP) Environment Program and the financial sector to promote sustainable finance. Finance Initiative (FI)[1] Over 250 institutions, including banks, insurers and fund managers, work with UNEP to understand the impacts of environmental and social considerations on financial performance. Equator Principles (EP)[2] A risk management framework adopted by financial institutions to determine, assess and manage environmental and social risk in projects. The EP reference the IFC’s Environmental and Social Performance Standards and aim to provide a minimum standard for due diligence and monitoring to support responsible decision-making.

Currently 97 financial institutions have officially adopted EP. Current version — EP3 — was adopted in 2013, but following a review, EP4 was adopted in November 2019 and will be effective from July 2020. IFC Environmental and The Performance Standards (PS) apply to clients of the International Finance Social Performance Corporation (companies that have secured IFC financing for a project). The eight Standards[3] standards establish responsibilities that client must meet ‘throughout the life of an investment’. The current version of PS (2012) are supported by Guidance Notes, which [4] provide further guidance on PS requirements. Sources: UN Principles for Launched in September 2019, PRB outlines six principles under which adopting banks [1] See: https://www.unepfi.org/ [2] See: https://equator-principles.com/ Responsible Banking commit to aligning “business strategy to be consistent with and contribute to [3] Available at: https://www.ifc.org/wps/ [5] (PRB) individuals’ needs and society’s goals, as expressed in the Sustainable Development wcm/connect/24e6bfc3-5de3-444d-be9b- Goals, the Paris Climate Agreement and relevant national and regional frameworks.”[6] 226188c95454/PS_English_2012_Full-​ Document.pdf?MOD=AJPERES&CVID=​ UN Principles on Developed by a group of international institutional investors, the UNPRI sits alongside jkV-X6h Responsible Investment UN Global Compact. Launched in 2017, UNPRI assists investors to better incorporate [4] Available at: https://www.ifc.org/wps/ (UNPRI)[7] Environmental, Social and Governance (ESG) issues into investment practices. UNPRI wcm/connect/9fc3aaef-14c3-4489-acf1- see that ESG issues impact investment portfolios over time, so they must be a1c43d7f86ec/GN_English_2012_Full-Doc​ ument_updated_June-27-2019.pdf?MOD=​ incorporated in order for investors’ fiduciary responsibilities to be met. AJPERES&CVID=mKqITOj UN Guiding Principles The leading global framework for business and human rights, endorsed by the UN [5] See: https://www.unepfi.org/banking/ bankingprinciples/ on Business and Human Human Rights Council in 2011, is based on three pillars: ‘Protect, Respect, Remedy’. [6] UNEP Finance Initiative (2019). Principles Rights (UNGPs)[8] These refer to the duty of states to protect human rights from abuses by third parties, for Responsible Banking. Available at: including companies; companies must respect human rights; and ensuring access to https://www.unepfi.org/wordpress/ effectiveremedy when human rights have been violated. wp-content/uploads/2019/07/ FINAL-PRB-Signature-Document-2-​ Interactive-22-07-19.pdf The UNGPs apply to all companies, including state-owned and commercial banks [7] See: https://www.unpri.org/pri and other entities in the financial sector. To avoid and address adverse human rights [8] Available at: https://www.ohchr.org/ impacts, banks should develop a human rights policy; undertake due diligence to Documents/Publications/Guiding​ PrinciplesBusinessHR_EN.pdf assess actual and potential human rights impacts; and ensure remedy for impacts [9] UNEP FI and Foley Hoag LLP (2015, that they have caused or contributed to.[9] The Office of the High Commissioner on December). Banks and Human Rights: A Human Rights has issued guidance on the application of the UNGPs to the banking Legal Analysis. (Geneva: UNEP FI). sector.[10] Available at: https://www.unepfi.org/ fileadmin/documents/BanksandHuman​ Rights.pdf; Also see: https://www.ohchr. The UNGPs have been incorporated in updates to the Equator Principles, IFC org/Documents/Issues/Business/ Performance Standards, and the OECD Guidelines on Multinational Enterprises. InterpretationGuidingPrinciples.pdf [10] OHCHR, Response to request from OECD Guidelines for Guidelines apply to governments and MNEs, including banks, in all 36 OECD countries BankTrack for advice regarding the Multinational Enterprises and 12 non-OECD countries (that have agreed to adhere to them). They are binding on application of the UN Guiding Principles (MNEs) 2011 Update[11] governments but non-binding on MNEs. Complaints relating to breaches of the on Business and Human Rights in the context of the banking sector. Available at: Guidelines can be made to National Contact Points (NCP), which are created by all https://www.ohchr.org/Documents/ adhering states. Issues/Business/InterpretationGuiding​ Principles.pdf The OECD has developed further guidance on how the OECD Guidelines apply to [11] Available at: https://www.oecd.org/daf/ inv/mne/48004323.pdf the financial sector. In 2017, OECD released a “Responsible Business Conduct [12] Trandem, A. (2019). Offloading Risks & for Institutional Investors” guide.[12] In October 2019, the OECD published “Due Avoiding Liabilities: How Financial Diligence for Responsible Corporate Lending and Securities Underwriting”, which Institutions Consider Hydropower Risks in aims to provide a common global framework for financial institutions to identify, Laos, p. 17. [13] Available at: https://mneguidelines.oecd. respond to and publically communicate on environmental and social risks associated org/Due-Diligence-for-Responsible-​ with their clients.[13] Corporate-Lending-and-Securities-​ Underwriting.pdf Task Force on An industry-led initiative established in 2015 to develop voluntary, consistent [14] See: https://www.fsb-tcfd.org Climate-related Financial climate-related financial risk disclosures for use by companies, banks, disclosure[14] and investors in providing information to stakeholders.

Fair Finance Thailand 9 29. The Thai Bankers’ Association (2019, August 13). Sustainable Banking Guide- lines: Responsible Lending by The Thai Thai Lenders’ Commitments Bankers’ Association, p. 1. 30. Thai Cabinet resolutions May 16, 2016 and Responsibilities and May 2, 2017. Available at: http:// www.cabinet.soc.go.th/soc/Pro​gram2- 3.jsp?top_serl=99319369&key_word=​ On 13 August 2019, the Thai Bankers’ meaningfully implement sustainable &owner_dep=&meet_date_dd=16&​ Association (TBA) issued “Sustainable and responsible lending policies and meet_date_mm=5&meet_date_yyyy=​ 2559&doc_id1=&doc_id2=&meet_ Banking Guidelines: Responsible Lend- practices. Currently, the guidelines date_dd2=&meet_date_mm2=&meet_ ing by Thai Bankers’ Association”, read like a list of high-level principles date_yyyy2= and http://www.cabinet. soc.go.th/soc/Program2-3.jsp?top_serl​ which defines “minimum expectations and aspirations. There is no substan- =99324013&key_word=&owner_dep=​ on responsible lending practices for all tive guidance nor concrete timebound &meet_date_dd=2&meet_date_mm=​ 5&meet_date_yyyy=2560&doc_id1=​ banks based in Thailand” and provides commitments and actions, indicating &doc_id2=&meet_date_dd2=&meet_ guidance for banks “to establish a re- when and how banks will translate the date_mm2=&meet_date_yyyy2= sponsible lending strategy to manage guidelines into practice. While the annex 31. Comments by the Royal Thai Govern- their environmental and social (E&S) includes references to international ment on the Report of the Working Group on the Issues of Uuman Rights risks and impacts.”29 The guidelines frameworks, standards and guidelines, and Transnational Corporations and identify four “foundational elements” such as the Sustainable Development Other Business Enterprises on Its Visit to the Kingdom of Thailand (A/ which should inform banks’ responsible Goals and the Paris Climate Agreement, HRC/41/43/Add.1), p. 4. Available at: lending strategy and practices. These there is no reference to more substantive https://documents-dds-ny.un.org/doc/ UNDOC/GEN/G19/159/72/PDF/G1915​ include: standards and guidelines. 972.pdf?OpenElement

32. Siam Commercial Bank (n.d.). Human 1. Leadership and responsible lend- Moreover, the guidelines make no refer- Rights Policy. Available at: https://www. which notes that ence to human rights, grievance mecha- scb.co.th/content/dam/scb/about-us/ ing commitment, sustainability/documents/15june​ commitments by senior leadership nisms and remediation measures. This is 2018/en-human-rights-policy.pdf of banks can be “powerful signals to a major gap, particularly in light of Thai 33. Kasikornbank (n.d.). Human Rights internal and external stakeholders on Cabinet resolutions issued in 2016 and Policy. Available at: https://www. banks’ commitments to responsible 2017, which made clear that Thai com- kasikornbank.com/en/IR/Corporate​ Governance/transparency/Pages/​ lending.” panies operating abroad are expected Human_Rights_Policy.aspx to adhere to international standards, 2. Stakeholder engagement, which including the UN Guiding Principles and recognises that effective and broad Business and Human Rights (UNGPs).30 engagement with a range of stake- The Thai Government recently adopted holders is important to determining the National Action Plan on Business ESG risks and assessing potential and Human Rights, which includes adverse impacts of lending activities. cross-border investments and multina- tional enterprises as one of the four pri- 3. Internal implementation mecha- ority areas.31 Two TBA members — Siam nisms, which outline not only the Commercial Bank32 and Kasikornbank33 importance of establishing policies — have also issued human rights policies, and processes, but also resourcing which articulate a commitment to adhere and building capacity of senior man- to international standards, including the agement and staff on ESG issues and UNGPs. Whether this will translate into risks and sustainability. concrete implementation of their human rights commitments remains to be seen. 4. Transparency, which encourage Given that one the four foundational banks to publicly disclose how they elements in the TBA guidelines include are implementing responsible lend- strengthening internal implementation ing guidelines. mechanisms, Thai Bankers Association and its members should develop further While the TBA’s Sustainable Banking guidance on support capacity building Guidelines are a welcome development, on how Thai banks can strengthen com- there is significant room for improve- pliance with the UNGPs. ment to ensure that Thai banks more

10 Challenges of Dam Financing for Thai Banks While important, Thai banks’ adoption laws; transparency and information 34. Middleton, C. (2009). Thailand’s Com- mercial Banks’ Role in Financing Dams of the TBA Sustainable Banking Guide- disclosure; and environmental conser- in Laos and the Case for Sustainable lines does not guarantee compliance. vation and support for local commu- Banking, p. 2. Available at: https://www. internationalrivers.org/sites/​default/ Major Thai banks have long articulated nities.”34 Despite these long-standing files/attached-files/sustainable​thaib- commitments to corporate governance, commitments, as the hydropower case anks_ir_dec09.pdf social responsibility and environmental studies in the following section demon- sustainability. While commitments vary strate, Thai banks have continued to between banks, these have included: finance large-scale dams without due “fair treatment of stakeholders, in- consideration of environmental, social cluding customers, investors, business and human rights impacts (see Tables partners, and wider society and the 2 and 3). environment; compliance with relevant

35 35. Fair Finance Guide International (2019, Box 2: Fair Finance Thailand’s Policy Assessment of Thai Banks April 24). Launch Fair Finance Thai- land. Available at: https://fairfinance​ Fair Finance Thailand (FFT), a coalition of NGOs advocating for Thai banks guide.org/ffg-international/news/​ 2019/launch-fair-finance-thailand/ to more meaningfully adopt and implement sustainable and responsible lending policies and practices in line with international frameworks and 36. FFGI methodology (2018). For policy assessments is available at: https:// standards, assessed publicly disclosed policies of the nine largest Thai com- fairfinanceguide.org/media/494198/​ mercial banks: Bangkok Bank, Siam Commercial Bank, Krungthai Bank, 2017-71-ffgi-policy-assessment-2018-​ methodology-180308-edits-180528. Kasikorn Bank, Bank of Ayudhya, Thanachart Bank, Thai Military Bank, pdf TISCO Bank, and Kiatnakin Bank.

Conducted according to Fair Finance Guide International (FFGI) criteria, the policy assessment assessed 12 topics: climate change, corruption, gender equality, human rights, labour rights, nature, weapons, tax, consumer pro- tection, financial inclusion, remuneration, and transparency and account- ability.

Overall, the FFT policy assessment revealed that Thai banks’ scores are the lowest among 10 countries where assessments have been undertaken using FFGI criteria.36 Thai banks received an average score of 12.6%, while the average score of the other nine countries (which include Belgium, Brazil, France, Germany, Indonesia, Japan, Netherlands, Norway and Sweden) is 46.7%. Thai banks’ low scores clearly demonstrate there is significant room for improvement, especially on ensuring that lending policies take into ac- count human rights, gender equality, as well as negative social and environ- mental impacts — criteria for which they scored particularly low.

Fair Finance Thailand 11 Table 2: List of Lao dams financed by Thai Banks

Project value Loan value Financing Operation International Lender BAY BBL SCB KTB TMB SCIB EXIM TISCO TBANK

(USD million) (USD million) closing date date KBANK bank(s)

Before 21st Century Theun Hinboun Power Co.Ltd.[1] 260 N/A N/A 1998 ✕ Houay Ho Power Co.Ltd.[2] 220–250 N/A N/A 1999 ✕ Partly financed by Thai Banks 21st Century onwards Nam Theun 2 Power Co.Ltd.[3] 1,581 920 May 2005 2010 ✕ ✕ ✕ ✕ ✕ ✕ ✕ ✕ ✕ Nam Ngum 2 Power Co.Ltd.[4] 832 N/A May 2006 2011 ✕ ✕ ✕ Theun Hinboun Power Co.Ltd. – October 586 N/A 2012 ✕ ✕ ✕ ✕ ✕ Expansion[5] 2008 Xayaburi Power Co.Ltd.[6] 3,800 N/A N/A 2019 ✕ ✕ ✕ ✕ ✕ ✕ Xe-pian Xe-Namnoy Power 1,200 738 N/A 2019 ✕ ✕ ✕ ✕ Co.Ltd.[7] Nam Ngiep 1 Power Co.Ltd. [8] 977 643 N/A 2019 ✕ ✕ ✕ ✕ ✕ Nam Theun 1 Power Company US$934.5 N/A N/A 2022 ✕ ✕ ✕ ✕ (NT1PC)[9] million Data sources: [1] Shoemaker, B. (2000). Theun-Hinboun Update: A Review of the Theun-Hinboun Power Company’s [6] BankTrack (2019). Xayaburi Dam: Financiers. Available at: https://www.banktrack.org/project/ Mitigation and Compensation Program. Available at: https://www.internationalrivers.org/sites/ xayaburi_dam#popover=financiers default/files/attached-files/theun_hinboun_update.pdf [7] Xe Pian Xe Namnoy Hydroelectric Power Project (2019). Available at: https://www. [2] Lawrence, S. (2008). Power Surge: The Impacts Of Rapid Dam Development in Laos. (Berkeley, CA: power-technology.com/projects/xe-pian-xe-namnoy-hydroelectric-power-project/ International Rivers Network). Available at: https://www.internationalrivers.org/sites/default/ [8] Nam Ngiep 1 (2014). Nam Ngiep 1 Hydroelectric Power Project. Available at: https://www. files/attached-files/intl_rivers_power_surge.pdf power-technology.com/projects/nam-ngiep-1-hydroelectric-power-project/ and Greater Mekong [3] BankTrack (2014). Nam Theun 2 Financing Launched. Available at: https://www.banktrack.org/ Subregion Economic Cooperation Program (2018). Annex to the Regional Investment Framework download/nam_theun_2_financing_launched/040301_nt2_financing_launched_press_ 2022: First Progress Report and Update. (Metro Manila, Philippines: GMS SECRETARIAT). Available release_ntpc.pdf at: https://www.greatermekong.org/sites/default/files/Annex%20to%20the%20RIF%202022:%20 [4] Middleton, C. (2009). Thailand’s Commercial Banks’ Role in Financing Dams in Laos and the Case First%20Progress%20Report%20and%20Update.pdf for Sustainable Banking. International River. Available at: https://www.banktrack.org/download/ [9] Hydropower and Dams (2018, May 22). Nam Theun 1 Achieves Financial Closure. Hydropower and thailand_s_commercial_banks_role_in_financing_dams_in_laos_and_the_case_for_sustain- Dams. Available at: https://www.hydropower-dams.com/news/nam-theun-1-achieves-​ able_banking/110707_sustainablethaibanks_ir_dec09.pdf financial-closure/ [5] Ibid.

12 Challenges of Dam Financing for Thai Banks Table 3: Social and environmental impact context for Thai banks lending to hydropower sector

Social and environmental Impacts

Theun Hinboun Power Co. Ltd.[1] - About 30,000 villagers lost fisheries, rice fields, gardens due to fluctuating water levels and rapid erosion. - Loss of drinking water as a result of the project. - Adequate compensation not provided. - Populations of fish and other aquatic species declined. Houay Ho Power Co. Ltd.[2] - Resettled about 2,500 mainly ethnic minorities to area with insufficient agricultural land and affected others downstream. - Adequate compensation not provided Nam Theun 2 Power Co. Ltd.[3] - Approximately 6,200 indigenous people have been forcedly displaced. - More than 110,000 people downstream have been directly affected by the project, due to destruction of fisheries, flooding of riverbank gardens and Sources: water quality problems. [1] Source: https://www.banktrack.org/ download/thhp_and_thxp_downstream_ Nam Ngum 2 Power Co. Ltd.[4] - Nam Ngum 2 dam displaced over 6,000 ethnic minorities impacts_report_2014_pdf/thhp_and_ - 9,000 directly affected by reduced fish stock. thxp_downstream_impacts_report_​ 2014.pdf Theun Hinboun Power Co. Ltd. - Over 7,500 people have been displaced. [2] Source: https://www.internationalrivers. - Expansion[5] - Serious impacts on the lives and livelihoods of around 30,000 people. org/sites/default/files/attached-files/ - Extra erosion, sedimentation and aggravated flooding. intl_rivers_power_surge.pdf [3] Source: https://www.internationalrivers. - Risks to fish stocks downstream. org/resources/report-l-nam-theun-2- Xayaburi Power Co. Ltd.[6] - Around 2,100 people resettled for the project. world-bank-withdrawal-leaves-major-​ concerns-over-project-outcomes - More than 202,000 people living near the dam will suffer impacts to their liveli- [4] Source: https://ejatlas.org/conflict/ hoods, income and food security. nam-ngum-2-dam-displaced-over-6000- - Threats to aquatic biodiversity and fisheries productivity ethnic-minorities-in-vientiane-lao-pdr - Transboundary impacts. [5] Source: https://www.banktrack.org/ project/theun_hinboun_dam_expansion/ Xe-Pian Xe-Namnoy Power - 71 dead or missing, and more than 7,000 are displaced due to the dam collapse. pdf Co. Ltd.[7] - 15,000 people affected by dam impacts in downstream Cambodia. [6] Source: https://www.internationalrivers. org/resources/the-xayaburi-dam-threat​ - Affected have yet to receive adequate compensation for their losses. ening-food-security-in-the-mekong-7675 Nam Ngum 3 Power Co. Ltd.[8] - Resettlement of 523 people within their village territory. [7] Source: https://www.inclusivedevelop​ ment.net/campaign/laos-xe-pian-xe-​ - Project will affect at least 2,455 people downstream and unknown numbers namnoy-dam-collapse/ upstream. [8] Source: https://www.internationalrivers.

[9] org/sites/default/files/attached-files/ Nam Ngiep 1 Power Co. Ltd. - More than 3000 people, who are primarily Hmong and Khmu, are being intl_rivers_power_surge.pdf resettled for the project. [9] Source: https://www.power-technology. com/projects/nam-ngiep-1-hydroelectric-​ Nam Thuen 1 Power Company - Resettlement of 3,700 mainly ethnic minorities power-project/; https://www. [10] (NT1PC) - Significant fisheries impacts affecting at least 32,000 people upstream and internationalrivers.org/node/8372 downstream [10] Source: https://www.hydropower-dams. - Decreased agricultural productivity due to loss of sediments and nutrients com/news/nam-theun-1-achieves-​ financial-closure/

Fair Finance Thailand 13 Figure 1: Xayaburi project as of 31 October, 2019. Source: https://theaseanpost.com/article/does-laos-xayaburi-dam-benefit-its-people

Thai Banks and Hydropower: Case Studies of Xayaburi and Xe Pian-Xe Namnoy Dams

37. Extra-Territorial Obligations (ETOs This section examines the risks and mainstream, and Xe Pian-Xe Namnoy Watch) (2018). Report on Thai direct impacts of two controversial hydro- hydropower project in the Sekong Basin investment abroad: impacts on commu- nities, environment, and human rights. power projects in Laos financed by Thai in southern Laos. Available at: http://www.nhrc.or.th/ banks — Xayaburi dam on the Mekong getattachment/eeb6c10c-8870-4593- 98c6-fd670a63ad1e/.aspx

Xayaburi dam Overview

The 1285-megawatt Xayaburi dam was state-owned electricity utility, EGAT, will the first dam to begin construction on purchase 95% of the dam’s electricity. the Lower Mekong mainstream. While lo- The project received an 80 billion Baht cated in northern Laos, it is largely a Thai (USD 2.6 billion) syndicated loan from project. The developer, Xayaburi Power six Thai banks: Siam Commercial Bank Company Limited, is majority-​owned (SCB), Bangkok Bank (BBL), Krung Thai by a consortium of Thai companies led Bank (KTB), Kasikornbank (KBank), by CK Power Public Company Limited, TISCO Bank and the Export-Import Bank a subsidiary of Ch. Karnchang, a major of Thailand, the government’s export Thai construction company. Thailand’s credit agency.37

14 Challenges of Dam Financing for Thai Banks As a Lower Mekong mainstream dam, for further data and studies. MRC mem- 38. Mekong River Commission (2010, De- cember 15–2011, April 22). Xayaburi Xayaburi was also the first project ber countries also expressed concerns Hydropower Project Prior Consultation to undergo the Mekong River Com- with Vietnam, calling for Xayaburi to Process. Available at: http://www. mrcmekong.org/topics/pnpca-prior-​ mission’s (MRC) Prior Consultation be suspended and a ten-year moratori- consultation/xayaburi-hydropower-​ process, which is required under the um on all mainstream dams, pending project-prior-consultation-process/ MRC’s Procedures for Notification, Prior further studies to better understand 39. Hirsch, P. (2011). Review of Xayaburi Consultation and Agreement (PNPCA).38 the river system and the impacts of Dam EIA Incorporation into Regional Consultation on Impacts. Available at: During the Xayaburi Prior Consultation proposed dam projects.41 https://www.internationalrivers.org/ process, which commenced in October sites/default/files/attached-files/hirsch_​ xayabouri_dam_esia_consulta​tion_ 2010, many stakeholders, including Despite the disagreement amongst MRC process.pdf MRC member governments, raised con- member countries, the Government of 40. Mekong River Commission (2011). cerns over the project and questioned Laos (GoL) pushed ahead with devel- Proposed Xayaburi Dam Project: MRCS the adequacy of the data and studies opment of Xayaburi, with the project Prior Consultation Project Review Report, p. 70. Available at: http://www.mrcme​ used to inform decision-making about developers announcing a redesign of kong.org/assets/Publications/Reports/ the project’s impacts and whether it the dam and additional investment PC-Proj-Review-Report-Xaiyaburi-24-​ 3-11.pdf should be built. Despite the fact that in impact mitigation measures to ad- the Prior Consultation process was not dress concerns, which has reportedly 41. Viet Nam National Mekong Committee (2011). Form for Reply for Prior Consul- formally concluded due to lack of agree- amounted to USD$400 million.42 tation: Xayaburi Hydropower Project. ment among MRC member countries, Available at: http://www.mrc​mekong. org/assets/Consultations/​2010-​Xaya​ the project proceeded and started full Xayaburi redesign: buri/Viet-Nam-Reply-Form.pdf operations in October 2019. Expensive but questionable 42. Mekong River Commission (2016, De- 43 effectiveness. cember). Procedures for Notification, Prior Consultation and Agreement (PNPCA) Inadequate ESIA increases Brochure, p. 7. Available at: http://www. project costs Serious questions and concerns remain mrcmekong.org/assets/Publications/ on the extent to which the redesign PNPCA-brochure-11th-design-final.pdf​ From the outset, the Xayaburi dam was measures will effectively reduce and 43. This section is largely excerpted from a highly controversial project due to mitigate the environmental and social Expert Commentary on the “Review of the Design Changes Made for Xayaburi Dam” widespread concerns over its expected impacts of the dam. In January 2019, published by International Rivers in impacts on the river system, including the MRC published a ‘Review of Design October 2019. Available at: https://​ www.internationalrivers.org/sites/​ transboundary impacts on neighbour- Changes Made for the Xayaburi Hydro- default/files/attached-files/xayaburi-​ ing countries within the basin. Yet, the power Project’,44 which assessed the sub- redesign-commentary-for-website.pdf project’s environmental impact assess- mitted information against the findings 44. Mekong River Commission (2019). ment (EIA), completed in 2010, only and recommendations of the Xayaburi Review of the Design Changes Made for Xayaburi Hydropower Project. Technical assessed potential impacts in the areas Technical Review Report (TRR).45 Reference Paper no. 65 (January). to be flooded for the reservoir and up to Available at: http://www.mrcmekong. org/assets/Publications/Review-of-the- ten kilometres downstream.39 Further- The MRC Review finds a number of design-change-made-for-Xayaburi-hy​ more, while the EIA was submitted to shortcomings in the redesign informa- dropower-project_technical-ref-paper_​ 2019.pdf the MRC technical review teams as part tion, both in terms of the adequacy of of Prior Consultation process, it was not the mitigation measures themselves, 45. Mekong River Commission (2011). Proposed Xayaburi Dam Project: MRCS publicly disclosed for the consultation as well as the comprehensiveness of Prior Consultation Project Review Report. workshops. the data provided to the review team in order to assess such adequacy. A par- The poor quality of the EIA and project ticular concern expressed throughout documents is evident in MRC’s Techni- the MRC Review findings is that, without cal Review Report (TRR), which found information on the operational rules of multiple gaps and flaws, noting that the the dam, it is not possible to assess the “dam design as well as management adequacy of the redesign measures. and mitigation measures as proposed in submitted documents do not yet In relation to the effectiveness of the comply with the PDG [Preliminary fish pass, the MRC Review notes that Design Guidance] or international best nowhere in the world have these meas- practice.”40 The TRR made a series of ures been tested or monitored. Xaya- recommendations, including the need buri is thus in effect being used as an

Fair Finance Thailand 15 Figure 2: Location of Xayaburi and other hydropower projects in Mekong River. Source: The Stimson Center, 2019.

16 Challenges of Dam Financing for Thai Banks experimental test case, which contra- Xayaburi Prior Consultation Process, 46. International Centre for Environmental Management (2010). Strategic Environ- venes the fifth and final recommenda- further constraining opportunities mental Assessment of Hydropower in the tion of the 2010 MRC-initiated Strategic for meaningful public participation.47 Mainstream, p. 24. Environmental Assessment of Hydro- Furthermore, despite multiple requests 47. The 2005 National Policy: Environmen- power on the Mekong Mainstream, from stakeholders over a number of tal and Social Sustainability of the Hydropower Sector in Lao PDR is appli- which states that that: “The Mekong years, key documents and information cable at time the Xayaburi EIA was mainstream should never be used as a relating to the redesign were not made conducted and completed. The 2005 Policy was replaced in 2015 by Policy test case for proving and improving full publicly available. The Lao Govern- on Sustainable Hydropower Develop- dam hydropower technologies.”46 ment’s 2015 Policy on Sustainable Hy- ment in Lao PDR (PSHD). Both policies require disclosure of EIAs. dropower Development (PSHD) and the There are also serious concerns over 2016 Implementation Guidelines also 48. Government of Laos, Policy on Sustain- able Hydropower Development in Lao sediment, with major and unexplained require project developers to disclose PDR (PSHD), 2015; and the 2016 Policy discrepancies between MRC and project gross project revenues and spending on Guidelines for the Implementation of Policy on Sustainable Hydropower in developer’s estimates on sediment com- environmental and social safeguards.48 Lao PDR (see 5.10 Information Disclo- position. This discrepancy suggests a However, there is little to no information sure, p. 13). significant scientific disagreement that on the Xayaburi Power Company Limit- 49. Available at: http://www.xayaburi.com/​ has an important bearing on Xayaburi ed’s website on what and how much the index_eng.aspx and other mainstream dams’ capacity company has spent on environmental 50. Mekong River Commission (2019, July to trap/release sediment, which in turn and social safeguards.49 18). Mekong water levels reach low record, Media Release. Available at: have major implications for the delivery http://www.mrcmekong.org/news-and-​ of sediment to the Mekong Delta. events/news/mekong-water-levels-​ Climate change and reach-low-record/ uncertainty: Potential The USD$ 400 million spent on the impacts on future power redesign have often been mentioned, generation and income but there is nothing in the documents provided that breaks down how these During June to July 2019, water levels funds have been applied to the various along the Mekong River were among components of fish passage, sediment the lowest ever recorded50 due to a passage, navigation and other aspects combination of extended drought and of the project’s redesign. Spending a China’s Jinghong dam located upstream lot of money does not guarantee effec- reducing the amount of water released. tiveness. Climate change is making weather pat- terns more unpredictable, which has There is an on-going risk that the pro- significant implications for Mekong Riv- ject may need to invest more to address er flows and levels. Flows into Xayaburi social and environmental impacts from reservoir, and hence electricity gen- the dam, thereby increasing costs and eration, will be influenced by climate potentially reducing profits, which in change and operations of existing and turn may impact on their capacity to planned dams upstream. Future extend- repay loans. ed droughts combined with upstream dams withholding water will reduce the Not a Transparent dam amount of electricity that Xayaburi dam can generate, which in turn can impact Xayaburi dam has been plagued by a on revenue. As a so-called run-of-river lack of transparency, with the developer dam, Xayaburi dam is particularly sus- and the Government of Laos either with- ceptible to reductions in flows, as the holding or delaying public disclosure of dam has less capacity to store water for key project documents throughout the long periods than large-storage dams. If process. As mentioned above despite power generation falls below targets set the EIA being completed in February out in the Power Purchase Agreement 2010 and Lao hydropower policies re- (PPA), the company may face penalties, quiring disclosure of EIAs, the EIA was which would further erode profits. not made publicly available during the

Fair Finance Thailand 17 Figure 3: A screen grab from an aerial video showing dry patches along the Mekong river downstream from the Xayaburi Dam. Source: AFP

51. International Rivers (2016, January 25). “It is widely known that the project may Media Kit on Xayaburi Dam Lawsuit. Legal risks: Xayaburi PPA Available at: https://www.international​ still in the courts cause impacts to the environment, water rivers.org/resources/9230 quality and quantity, the flow of water, 52. Harris, M. (2019). Our River, Our Rights: As of August 2019, a lawsuit filed by 37 ecological balances of the Mekong basin Extraterritorial Accountability in the villagers against five Thai state agencies and other transboundary impacts in Mekong. In M. Mullen et al (eds.), Navigating a New Era in Business and regarding the legality of the Xayaburi riparian countries, particularly local com- Human rights (n.p.: Article 30 and dam’s PPA, is still pending. Filed in Au- munities in the eight riparian provinces of Institute of Human Rights and Peace Studies, Mahidol University), pp. gust 2012, the plaintiffs argued that the the Kingdom of Thailand, which may bear 125–132. Available at: https://article30. approval of the PPA is illegal under the extensive impacts on environmental qual- org/wp-content/uploads/2019/08/a_ new_era.pdf Thai Constitution and the 1995 Mekong ity, public health, sanitation, livelihoods, Agreement because it was approved or community interests.”53 53. Supreme Administrative Court of Thailand, Judgement No. KS8/2557, without assessing the project’s trans- June 24, 2014. boundary environmental and social More recently, in July 2019, the plain- 54. Bangkok Biznews (2019, July 26). impacts and without consultations in tiffs filed for an injunction to suspend Mekong Villagers Asked Court for Thailand, as required under the Thai the PPA until measures to mitigate Injunction to Suspend Electricity Pur- chase from Xayaburi. Bangkok Biznews Constitution.51 environmental impacts are released.54 Available at: https://www.bangkokbiz​ The application for an injunction fol- news.com/news/detail/841902 While dismissed by lower courts on lowed Xayaburi dam’s testing of its jurisdictional grounds, the Thai Su- turbine during the extended drought preme Court accepted the lawsuit on period, which exacerbated impacts appeal in 2014.52 The acceptance not on downstream communities in Thai- only confirmed that Thai state agencies land who were already suffering from had responsibilities for project impacts, record-low water levels. Concerned despite its location in Laos, but also over the impacts on drought-affected pointed to the likelihood of transbound- provinces in northeast Thailand, on 19 ary impacts: July 2019, Thailand’s Office of National

18 Challenges of Dam Financing for Thai Banks Water Resources submitted an official and flaws in project risk and impact as- 55. Wipatayotin, A. (2019, July 20). Dam Test Sparks Crisis: Thailand Asks Laos letter requesting the Lao government to sessments, most of which were publicly for Xayaburi Delay. Bangkok Post. suspend the testing of turbines.55 available prior to the banks’ decisions Available at: https://www.bangkokpost.​ com/thailand/general/1715627/dam- to finance Xayaburi dam. As noted tests-spark-crisis While the court case continues, there above, the MRC Technical Review Re- 56. OECD (2017). OECD Investment Policy remains a risk that the PPA may be port, clearly states that project design, Reviews: Lao PDR, p. 253. Available at: cancelled or delayed if the court rules management and mitigation measures http://dx.doi.org/10.1787/978926​ 4276055-en in favour of the plaintiffs. If so, this to do not meet MRC guidelines or inter- could have major consequences for the national best practice. 57. Greacen, C. S. and Greacen, C. (2012, April). Proposed Power Development project’s financial viability Plan 2012 and a Framework for Improv- Comments also indicate that the banks ing Accountability and Performance of Power Sector Planning. Available at: Thai Banks and Xayaburi: made little to no effort to engage stake- https://www.internationalrivers.org/ holders in Thailand, let alone in the sites/default/files/attached-files/pdp​ Responsible and 2012-eng.pdf Sustainable? region, prior to making their decision to support the project. Furthermore, 58. See Vietnam and Cambodia’s formal reply forms to the Xayaburi Prior Con- Comments by senior leadership of Thai despite commitments to transparen- sultation Process. Vietnam: http:// Banks that financed Xayaburi dam (see cy, most of the Thai banks have yet to www.mrcmekong.org/assets/Consulta​ tions/2010-Xayaburi/Viet-Nam-Reply- Box 3), demonstrate there is a long way publicly disclose their contribution to Form.pdf; Cambodia: http://www. to go to translate their responsible and syndicate loan, nor the terms and con- mrcmekong.org/assets/Consultations/​ 2010-Xayaburi/Cambodia-Reply-Form. sustainable lending commitments into ditions for loan agreement, including to pdf practice. However, recently there has what extent, if any, conditions related been some encouraging trends, as some to environmental and social risks and senior bankers admitted to needing to impacts and monitoring were included. develop sector-​specific guidelines, i.e. looking beyond the lens of legal com- It is clear that the banks’ primary focus pliance, to promote more responsible is on the financial returns and project’s lending in the future. ability to repay loans, neglecting envi- ronmental and social concerns. Here, The comments indicate inadequate EGAT’s decision to sign a PPA to buy 95% due diligence by the banks on environ- of Xayaburi’s electricity for 29 years was mental and social risks and impacts a key factor in closing the deal, despite prior to agreeing to finance the project. ongoing questions by independent an- Engaging external experts to inform alysts and civil society over Thailand’s due diligence is important. However, need for the electricity.57 TISCO Bank’s CEO comments indicates that they relied primarily on the reports Kasikorn bank’s then-CEO in 2013 com- by consultants commissioned by the ment that “the project has already been developers and Lao Government, who approved by the international com- wanted to see the project proceed, and mittee” is misguided. At the end of the ignored other expert and independent initial six-month process, MRC member analysis and studies. Only relying on countries, particularly Vietnam and project-commissioned EIA and stud- Cambodia expressed strong concerns, ies for large hydropower projects is with Vietnam calling for a ten-year de- insufficient to comprehensively assess ferment on Xayaburi and mainstream environmental and social risks in Laos, dams, and Cambodia requesting exten- where “there is a lack of institutional sion of the Prior consultation process so capacity to plan, regulate and monitor further studies can be conducted and implementation of EIA.”56 more informed decisions made.58 The Xayaburi Prior Consultation was never It would not have taken much effort formally concluded. for the Thai banks to be made aware of major and widespread concerns about the project, including significant gaps

Fair Finance Thailand 19 59. Nanthawithaya, A. (2019). Comments made at Bangkok Sustainable Banking Forum 2019 [video]. Bank of Thailand. BOX 3: Thai Banks views on Xayaburi dam: from past to present Available at: https://www.bot.or.th/ broadcast/Sustainable/20190813-Sus​ tainable-Session3.mp4 “We’re not going to make the statement that we won’t [lend to] hydropower. But in fact, there is a standard [that] we should comply and work with our clients…. 60. Ibid. We keep asking ourselves ‘what type of standard’? In [Xayaburi] project, we also 61. Prachatai. (2013, April 26). TISCO Ex- tried to have our own independent advisor, but maybe it’s not good enough. So, plained to Its Shareholders: Xayaburi Loan is Not Unethical [‘ธนาคารทิสโก้’ แจง this is something we will keep an eye open and try to do better to improve our ผู้ถือหุ้น ปล่อยกู้ ‘เขื่อนไซยะบุรี’ ไม่ผิดศีลธรรม quality.” อันดี]. Prachatai. Available at: http:// prachatai.com/journal/2013/04/​ 46429​ — Arthit Nanthawithaya, 62. Prachatai. (2013, April 4). KBANK Ex- plained Its Confidence in; Refusing to CEO of Siam Commercial Bank, 2019, Disclose Loan amount [‘กสิกรไทย’ แจงผู้ responding to question from the audience regarding Xayaburi59 ถือหุ้น มั่นใจ ‘เขื่อนไซยะบุรี’ อุบเงียบมูลค่าเงิน กู้]. Prachatai. Available at: https://pra- cha​tai.com/journal/2013/​04/46111 “At the time we granted the loan, the proposal was that there were certain prin- ciples that were already complied with, so the decision was made at that time because certain criteria had been met. But now, I don’t know exactly if the drought that happened is because of the dam; there is still quite controversial Information. It is of course an issue, a very big issue for us; we have to be very, very careful going forward, as something that may have environmental impact.”

— Predee Daochai, President of Kasikornbank, 2019, responding to question from the audience regarding Xayaburi60

“TISCO has determined that this project is not unethical; it is an energy project that will boost Thailand’s economic growth, and we are confident that it will be able to repay loans on schedule... Xayaburi is a run-off-the-river dam without large reservoir; therefore, it has little sedimentary impact. It also has fish passage. As for potential impact to the society and environment, TISCO is not an expert in these fields, so the bank relied on external experts. This project employs six consulting firms which produced numerous reports... those reports concluded that this dam will have very little social and environmental impacts, less than Chinese dams built in the Upper Mekong. For these reasons, TISCO was comfort- able with joining the loan syndicate.”

— Oranuch Apisaksirikul, President and CEO of TISCO Bank, 201361

“Xayaburi project has almost no repayment risk. Every Thai bank [in this syn- dicate] jumped at the chance to support it, because the project has already been approved by the international committee. In addition, Electricity Generation of Thailand (EGAT) agrees to buy all electricity produced from the project, and Thailand also needs this electricity. We therefore are not concerned about re- payment .... But since it is a large project, it may have some impact on the local communities. For example, some communities will be relocated away from flooded areas. It is normal for large projects to have both supporters and dis- senters; therefore, it is a matter of weighing between costs and benefits.”

— Buntoon Lamsam, CEO of Kasikornbank, 201362

20 Challenges of Dam Financing for Thai Banks Figure 4: The location of XPXN project. Source: https://www.hydroreview.com/2015/11/19/us-1-02-billion-410-mw-xe-pian-xe-namnoy-hydroelectric-project-includes-3- dams/#gref

Xe Pian-Xe Namnoy Project overview

The 410-MW Xe Pian-Xe Namnoy Engineering and Construction of Korea 63. DFDL (2014, February 6). DFDL Advises on USD 1.02 billion Lao-Thai Hydro- (XPXN) is a trans-basin diversion pro- (26%), Korean Western Electric Power power Project Xe-Pian Xe-Namnoy, ject under construction in the Xekong (25%), Ratchaburi Electricity Generating Media Release. Available at: https:// www.dfdl.com/resources/news/dfdl- River Basin in Southern Laos. The pro- Holding Public Company (25%) and Lao advises-on-usd-102-billion-lao-thai-hy​ ject comprises three main dams and a Holding State Enterprises (24%). About dropower-project-xe-pian-xe-namnoy/ large storage reservoir on the Xe Nam- 90% of the electricity will be sold to noy River, enclosed by five auxiliary Thailand. A 20-year USD 714 million (or “saddle”) dams, which are used to syndicated loan from four Thai banks reinforce the reservoir (see Figure 4). is covering 70% of project costs. The lending syndicate comprises: Krung The USD1.02 billion project is being Thai Bank (as lead arranger), Ayudhya developed by Xe Pian-Xe Namnoy Bank and Tanachart Bank, along with Power Company Ltd, a joint venture, the Export-Import Bank of Thailand, whose major shareholders include: SK the government’s export credit agency.63

Fair Finance Thailand 21 Figure 5: Xe Pian-Xe Namnoy project in Laos. Source: https://www.nationthailand.com/news/30370233

64. Rujivanarom, P. (2019, February 17). involved.65 The National Investigation Special Report: Compensation Talks Dam collapse: Not a natural Begin for Lao Dam Disaster Victims. The disaster Committee was supported by an Inter- Nation. Available at: https://www.na​ national Expert Panel, which submitted tionthailand.com/national/30364301 On 23 July 2018, an auxiliary dam of Xe their investigation report and findings 65. Vientiane Times (2018, August 10). Steps Pian-Xe Namnoy (XPXN) Hydropower to the Lao government in March 2019. Taken to Tnvestigate Dam Failure. Project collapsed, unleashing a wall of Despite commitments by the Lao Prime 66. Lao News Agency (2018, July 30). water and wreaking havoc downstream. Minister to implement the investigation Government Will Investigate Xepian-​ Xe Nam Noy Case In The Most Trans- The official toll of dead and missing “in the most responsible, transparent parent Manner; PM. Lao News Agency. is 71.64 More than 7,000 people, who and just manner” the report has not Available at: http://kpl.gov.la/En/De​ tail.aspx?id=36552 received little or no advance warning, yet been publicly released66. However, were displaced. The dam collapse also comments by Lao government officials 67. Vientiane Times (2019, May 29). Inves- tigators: Dam Collapse Not a “Force damaged homes and properties of to Lao state media have ruled out force Majeure” Event. Vientiane Times. Avail- thousands of people living along the majeure, or an unforeseeable “act of able at: http://www.vientianetimes.org.​ la/freeContent/Free​Conten_Investiga​ Sekong River in Stung Treng Province, god”, as the cause of the disaster, im- tors.php Cambodia. More than a year later, thou- plying that construction problems were 67 68. See Inclusive Development Interna- sands of affected people are struggling the primary cause of the dam collapse. tional and International Rivers (2019). meet daily needs and face an uncertain Reckless Endangerment: Assessing the Responsibility for the Xe Pian-Xe Namnoy future. They have yet to receive ade- Other evidence and media reports sug- Dam Collapse, pp. 15–19. The Korean quate compensation for their losses. gest that the dam’s lead developer and media report is available at: http:// english.hani.co.kr/arti/english_edi- Cambodians affected by the disaster builder, SK Engineering and Construc- tion/e_international/865895.html have received little assistance and no tion may have caused the collapse. A compensation. Stanford University researcher found that the dam’s reservoir was built on Immediately after the collapse, the Lao a sinkhole, while Korean media re- government established a National ports indicate that SK Engineering & Investigation Committee, chaired by Construction lowered the height of the Deputy Prime Minister Bounthong Chit- dam walls in order to save money and many, to examine the cause of the col- maximise profit.68 lapse and the responsibilities of actors

22 Challenges of Dam Financing for Thai Banks Figure 6: Villagers stranded after XPXN collapse. Source: https://ichef.bbci.co.uk/news/834/cpsprodpb/FF43/production/_102674356_5a524acc-84ea-42c3-9b4b-a4a01a8f0a37.jpg

of impact assessments, meaningful 69. The other two dam failures/breaks in- Hydropower in Laos: Major clude: Kheng Khouane Dam (August disconnect between policy consultations, transboundary impacts, 2019) and Nam Ao Dam (September and practice among others over many years. Yet, 2017). these were ignored or downplayed, with The Xe Pian-Xe Namnoy (XPXN) dam the project receiving Lao government collapse highlights the major discon- approval, financial support from Ko- nect between policy and practice in the rean overseas development assistance hydropower sector in Laos. XPXN is not (ODA), and financing from the Thai the only dam to have collapsed or bro- banks, with devastating consequences ken recently in Laos, with at least two for communities in Laos and Cambodia. other dam breaks in Laos since 2017,69 causing significant damage. Despite Given the lack of enforcement of en- the Lao government adopting various vironmental and social safeguards in laws, regulations and guidelines for Laos, Thai banks should not rely solely hydropower sector and projects, which on ‘legal compliance’, but conduct their include provisions on environmental own due diligence and monitoring to and social impacts, consultation with af- ensure that their lending does not cause fected communities, transparency and or contribute to violations of rights and disclosure, among others, institutional damage the environment. capacity, enforcement and monitoring remains weak. Implications of dam collapse: Delays and liabilities XPXN has a long history of controversy, with NGOs and civil society document- The extent of the fall-out from the dam ing and raising concerns about the collapse for the project developers XPXN project’s impacts and failure to and Thai banks financing the project meet international standards in terms remains to be seen. This is in part

Fair Finance Thailand 23 70. Praiwan, Y. (2018, October 4). Ratch because key project agreements are While complaints have already been Pushes Back Start Date of Laos Dam. Bangkok Post. Available at: https://www. not disclosed. The dam collapse has filed through non-judicial mechanisms, bangkokpost.com/business/1551​706/ delayed the start date of the project developers and financiers of the dam ratch-pushes-back-start-date-of-laos- dam from early 2019 to late 2019.67 The may also be subject to lawsuits for developers have not publicly disclosed damages caused by the dam collapse 71. Kaohoon International (2019, February 20). Ratch Records 7% Lower of Profit what, if any, financial penalties they and liable for remediation. The Thai in 2018, Insurance to Support Dam must pay for their failure to meet the banks that financed the dam have a re- Collapse in Laos. Kaohoon International. Available at: https://www.kaohoon. commissioning date identified in the sponsibility to provide for or cooperate com/​content/279183 Power Purchase Agreement (PPA). Nor in remediation for the adverse human 72 72. Inclusive Development International have they publicly disclosed additional rights impacts they contributed to. and International Rivers (2019). Reck- costs required to rebuild and repair the Given the extent of damages and num- less Endangerment: Assessing the Re- sponsibility for the Xe Pian-Xe Namnoy infrastructure damaged due to the dam ber of people impacted, liabilities could Dam Collapse, p. 29 collapse, let alone funds to compensate be in the millions of dollars, which in affected peoples. turn has financial implications for the developers and fanciers. The cost overruns and delays in opera- tion will disrupt revenue stream, which Thai Banks and XPXN: in turn may impact on the company’s Responsible and capacity to repay the loans. According Sustainable? a media report, “the costs incurred as a result of the collapse are primarily Comments by senior leadership of Thai the responsibility of the contractor in Banks (see Box 4) on the XPXN dam charge of engineering, procurement and collapse are inconsistent. The Managing construction” — that is, SK Engineering Director of Thai EXIM is pointing to and Construction.71 inadequate dam structure as cause of the collapse, while SCB representative

Box 4: Thai Banks comments on XPXN dam collapse

“When engaging in financing hydropower projects, banks always take the risks of the project into considera- tion before lending out. However, the dam collapse in Laos occurred due to inadequate dam structure which is the responsible of contractors. Therefore, Laos must be the one who investigate the incident and propose appropriate solutions to the problem. Furthermore, for the future projects, banks will still continue finance the hydropower projects in Laos and leave the complication of constructions to other stakeholders.

— Mr. Pisit Serewiwattana, the Managing Director of Exim Bank

“The dam collapse does not significantly affect the dam financing in Laos because it happened due to unex- pected natural disaster. Moreover, before providing loan, banks have already considered the ability and condition of the project company based on international legal standard, strictly and comprehensively”

— Mr. Wasin Saiyawan, a Senior Executive Vice President serving as Head of Corporate Banking of SCB

24 Challenges of Dam Financing for Thai Banks states it was an “unexpected natural individual bank and sector-wide poli- 73. Santhiprabhob, V. (2019). Opening Remarks, Bangkok Sustainable Banking disaster”. Common to both comments, cies and guidelines, there is a need for Forum 2019. however, is the implication that the Thai banks to more seriously assess 74. For an analysis of how financial insti- Thai banks are not responsible for the and incorporate environmental and tutions involved in hydropower in Laos disaster and that the disaster should social risks into their due diligence and avoid and manage risks, including by transferring risks to others, see Tran- not affect future Thai bank financing of decision-making, if they are genuine dem, A. (2019). Offloading Risks hydropower projects in Laos. about ensuring more responsible and & Avoiding Liabilities: How Financial Institutions Consider Hydropower Risks sustainable investments. in Laos. In light of the dam collapse, and 75. The Thai Bankers’ Association (2019, development and adoption of new August 13). Sustainable Banking Guide- lines: Responsible Lending by The Thai Bankers’ Association, p. 1.

Conclusion: Towards More Sustainable and Responsible Lending

“When financial institutions focus mainly on short-term gains, neglecting the potential long-term effects or negative spillover of their activities, this can in fact increase financial institutions’ risks: risks that can impair credibility, public trust and financial positions in the long-run”

— Veerathai Santhiprahbhob, Governor of Bank of Thailand, 13 August 201973

The Governor of Bank of Thailand’s environment and society by linking cost quote above implies that to better man- of and access to capital to sustainability age risks, banks need to think beyond performance,”75 the banks must change short-terms gains and more meaning- how they assess and address ESG risks fully consider — and avoid — negative of the projects they finance. Currently, impacts of their activities. However, Thai banks priori­tise financial returns as the experience of — and Thai banks’ for themselves and their clients while public comments on — Xayaburi and Xe offloading the environmental and social Pian-Xe Namnoy dams illustrate this risks onto communities and the envi- has not been the case. Instead, through ronment. There is a major gap between various instruments and measures, the the Thai banks’ policies and commit- banks have protected their financial ments to positive environmental and interests by transferring the risks to social outcomes and what happens on other actors, with affected communities the ground directly as a result of the and Lao country as a whole bearing the project they finance. brunt of the negative social and envi- ronmental consequences of the projects While TBA Sustainable Banking Guide- they have financed.74 lines are a step in the right direction, much more can and should be done to If Thai banks are genuinely committed strengthen and operationalise commit- to being responsible actors that “can ments to integrating environmental and incentivise clients to mitigate negative social risks in bank’s decision-​making and increase positive impacts to the processes and operations.

Fair Finance Thailand 25 Recommendations Financing large-scale hydropower has always been violations, future ecosystem collapse, and climate a risky long-term activity for Thai banks. As the ex- change impact on hydropower construction and op- amples of Xayaburi and XPXN in this case study has eration need to be assessed and managed with new shown, both projects have been fraught with extensive mindset, principles and tools. To that end, this report social and environmental risks that are not adequately makes the following recommendations for Thai banks captured in legal compliance, which is the customary to help ensure that future hydropower financing can lens through which Thai banks have been using to cope with both existing and emerging risks, as well as make financing decisions. It is no longer sufficient to conducted in line with the four foundational elements simply demand that borrowers comply with all rele- in the TBA Sustainable Banking Guidelines. vant laws and regulations; the risks of human rights

Leadership and responsible lending Internal implementation mechanisms commitment ◆ Mandate clients to conduct human rights due ◆ Develop and issue a human rights policy, which diligence as a condition to hydropower financing clearly articulates banks’ recognition to respect human rights, , in line with UN Guiding Principles ◆ Significantly increase resourcing and investment on Business and Human Rights and timebound in ESG risks, including staff capacity and expertise commitments to ensure implementation ◆ Include clear environmental, social and human ◆ Develop and issue sector lending policies, includ- rights obligations as covenants and drawdown ing for hydropower, in line with international conditions in loan agreements standards. Transparency ◆ Strengthen the TBA Sustainable Banking Guidelines ◆ Regularly and timely disclose project finance loans, Stakeholder Engagement including projects in the pipeline

◆ Stakeholder engagement should be conducted in ◆ Allow opportunities for stakeholder input on cur- line with UN Guiding Principles on Business and rent and future project financing decisions Human Rights ◆ Provide timely and meaningful responses to stake- ◆ Ensure that clients conduct meaningful stakeholder holders who request information about banks’ participation and engagement prior to finalising involvement in projects lending to high risk projects

◆ Establish direct grievance mechanism between the bank and potentially affected communities, and help strengthen existing judicial and non-judicial grievance mechanisms

26 Challenges of Dam Financing for Thai Banks Annex 1 Select Guidance for Banks and Financial There is a growing number of resources specifically for banks and the finance sector that provide guidance Sector to Strengthen on how they can operationalise improvements in their process and practices to avoid and address adverse Human Rights Due impacts of their operations, including through their lending. Below is a select list, some of which also in- Diligence and Avoid clude checklist and key questions that banks can use at different stages to strengthen their due diligence Adverse Impacts before and after lending decisions have been made.

SELECT RESOURCES DESCRIPTIONS

UNEP FI Human Rights Guidance Tool for the Financial Sector An online tool aimed at finance sector which helps identify and assess potential human rights risks and mitigation measures. Tool includes https://www.unepfi.org/humanrightstoolkit/ information on human rights and finance, relevant international standards and guidelines, key questions in assessing human risks and impacts; and sector specific issues (e.g. power generation, infrastructure etc).

OECD (2017). Responsible business conduct for institutional investors: Key Specifically aimed at financial sector actors, these elaborate on the OECD considerations for due diligence under the OECD Guidelines for Guidelines for Multinational Enterprises. They include key steps and Multinational Enterprises measures that banks and institutional investors can undertake to improve due diligence and responsible conduct. https://mneguidelines.oecd.org/RBC-for-Institutional-​ Investors.pdf

OECD (2019). Due Diligence for Responsible Corporate Lending and Securities Underwriting: Key considerations for banks implementing the OECD Guidelines for Multinational Enterprises https://mneguidelines.oecd.org/Due-Diligence-for-Responsible- Corporate-Lending-and-Securities-Underwriting.pdf

BankTrack and Oxfam (2018). Developing Effective Grievance Mechanisms The report “reviews banks’ responsibilities and provides suggestions and in the Banking Sector recommendations for how banks can develop and implement effective operational-level grievance mechanisms that will be legitimate, trusted https://www.banktrack.org/download/developing_effective_ and meet their responsibilities under the Guiding Principles.” grievance_mechanisms_in_the_banking_sector/2018_pa_002_ bank_report_faweb2_3.pdf

Equator Principles A risk management framework adopted by financial institutions to determine, assess and manage environmental and social risk in projects. https://equator-principles.com/ EP aims to provide a minimum standard for due diligence and monitoring to support responsible decision-making. The website includes links to various guidance documents.

Office of the High Commissioner for Human Rights (OHCHR), Response Guidance note from the OHCHR providing advice and clarification on the to request from BankTrack for advice regarding the application of the UN application of the UNGPs to the banking sector. The guidance focuses on Guiding Principles on Business and Human Rights in the context of factors influencing how a bank is involved with an adverse human rights the banking sector. impact; the responsibilities of banks with respect to remediation in situations where a bank has contributed to an adverse human rights https://www.ohchr.org/Documents/Issues/Business/ impact; and the role of operational-level grievance mechanisms InterpretationGuidingPrinciples.pdf. in this context.

Fair Finance Thailand 27 About

Founded in 2018, members of Fair Finance Thailand coalition (FFT, website www.fairfinancethai​ land.org) include one research company and four CSOs — Sal Forest Co., Ltd., Foundation for Con- sumers, ENLAW Foundation, International Rivers and Ecological Alert and Recovery - Thailand (EARTH). FFT members have been monitoring impacts and sustainability challenges of Thai finan- cial institutions, and aim to advocate genuine adoption of the concept and best practices of sus- tainable banking. FFT utilizes Fair Finance Guide International (www.fairfinanceguide.org) meth- odology in its annual assessment of disclosed policies of largest Thai financial institutions, starting in 2019.

Project Coordinator: Julnarong Wannakowit Phone 091-884-3988 Email [email protected]