Economics Practice Guide MEKONG RIVER COMMISSION SECRETARIAT Office of the Secretariat in Vientiane Office of the Secretariat in Phnom Penh 184 Fa Ngoum Road, Ban Sithane Neua, 576 National Road, no. 2, Chak Angre Krom, P.O. Box 6101, Vientiane, Lao PDR P.O. Box 623, Phnom Penh, Cambodia Tel: (856-21) 263 263 Fax: (856-21) 263 264 Tel: (855-23) 425 353 Fax: (855-23) 425 363 [email protected] www.mrcmekong.org MRC Initiative on Sustainable Hydropower (ISH) GUIDELINES FOR THE EVALUATION OF HYDROPOWER AND MULTI- PURPOSE PROJECT PORTFOLIOS ANNEX 1 ECONOMICS PRACTICE GUIDE Feasible Project Portfolio Project Modification Economics s, if needed Environment Weighted & Social Evaluation Indicators November 2015 MRC Initiative on Sustainable Hydropower (ISH) Economics Practice Guide Produced by MRC Initiative for Sustainable Hydropower Produced for MRC Member Countries ISH11 Project Team Dr Armando Balloffet, Team Leader, Environmental Specialist Dr Bruce Aylward, Economist Dr Sarah Kruse, Economist Dr James Taylor, Social Specialist Mr Sok Bun Heng, Cambodia National Consultant Mr Lamphone Dimanivong, Lao PDR National Consultant Dr Warapong Tungittiplakorn, Thailand National Consultant Dr Tran Van Dat, Viet Nam National Consultant MRCS ISH Staff Voradeth Phonekeo, ISH Programme Coordinator Simon Krohn, ISH International Technical Officer Piseth Chea, Riparian Professional ** NOTES: 1. This Working Version has been reviewed by MRC member countries at Regional and National Meetings through 2014 and 2015. However, there is a need for ongoing and further discus- sion between MRC member countries on several aspects including the methods proposed for the multi-criteria analysis. 2. The economic valuation methods proposed here are based on international practice and re- search in the Mekong Region. The application of these methods by suitably qualified practi- tioners will require discussion with MRC member countries to ensure the valuation methods are suitable for the context of that particular application. Guidelines For The Evaluation Of Hydropower And Multi-Purpose Project Portfolios: Annex 1 (WV 1.0) i Economics Practice Guide Abbreviations and Acronyms ADB Asian Development Bank BDP Basin Development Plan (of the MRC) BCR Benefit-Cost Ratio CBA Cost-Benefit Analysis CDM Clean Development Mechanism CV Contingent Valuation EP Environment Programme (of the MRC) FAO Food and Agriculture Organization of the United Nations FP Fisheries Programme (of the MRC) GHG Greenhouse Gases GIS Geographic Information System GOL Government of Lao PDR HPST Hydropower Planning Support Tool IBFM Integrated Basin Flow Management ICEM International Centre for Environmental Management IDC Interest During Construction IKMP Information and Knowledge Management Programme (of the MRC) IPP Independent Power Producer ISH Initiative on Sustainable Hydropower (of the MRC) ISH02 The Guidelines Project of ISH IUCN International Union for the Conservation of Nature LMB Lower Mekong Basin M&I Municipal and Industrial MRC Mekong River Commission MRC-BDP Basin Development Planning Unit (of the MRC) MRCS Mekong River Commission Secretariat MRD Mekong River Delta NMC National Mekong Committee NPV Net Present Value O&M Operations and Maintenance PV Present Value RAP Resettlement Action Plans UMD Upper Mekong Development Scenario US United States of America USD United States Dollar VAT Value Added Tax WTP Willingness to Pay Guidelines For The Evaluation Of Hydropower And Multi-Purpose Project Portfolios: Annex 1 (WV 1.0) ii Economics Practice Guide Table of Contents Abbreviations and Acronyms ........................................................................................ ii List of Figures ................................................................................................................ v List of Tables ................................................................................................................ vi 1 The Guidelines - Overview ...................................................................................... 1 2 Approach to Economic Analysis used in the Guidelines ........................................... 4 2.1 Conceptual Framework for Valuation and Evaluation of Hydropower Dams .................. 4 2.2 Financial and Economic Evaluation: Monetizing Impact Costs and Benefits ................... 5 2.3 Impact Framework for the Mekong ................................................................................. 6 2.4 Mekong Studies on Valuation of Impacts ...................................................................... 14 2.5 HPST Approach to Valuation of Impacts ........................................................................ 16 3 Evaluation Methods and Decision Criteria ............................................................. 19 3.1 Parameters for Evaluation: Time Horizon and Discounting ........................................... 19 3.2 Net Present Value .......................................................................................................... 19 3.3 Benefit-Cost Ratio .......................................................................................................... 20 3.4 Normalisation of Indicators ........................................................................................... 20 3.5 Risk-Weighted Benefit-Cost Ratio ................................................................................. 20 4 Financial Valuation of Hydropower ....................................................................... 21 4.1 Time Horizon and Discount Rates .................................................................................. 21 4.2 Capital Costs .................................................................................................................. 22 4.3 Resettlement Costs ........................................................................................................ 23 4.4 Environmental Mitigation Costs .................................................................................... 25 4.5 Environmental and Social Mitigation Costs ................................................................... 27 4.6 Power Revenues ............................................................................................................ 28 4.7 O&M Costs ..................................................................................................................... 31 4.8 Taxes and Fees ............................................................................................................... 31 4.9 Interest During Construction (IDC) ................................................................................ 32 4.10 Financing ...................................................................................................................... 33 5 Economic Valuation of Hydropower, Direct Impacts .............................................. 34 5.1 Capital Costs .................................................................................................................. 34 5.2 O&M Costs ..................................................................................................................... 34 5.3 Power Benefits .............................................................................................................. 34 5.4 HPST Valuation .............................................................................................................. 39 5.5 Power: Transfer of Storage Benefits .............................................................................. 40 6 Economic Valuation of Direct Impacts: Multi-Purpose Components ...................... 42 6.1 Irrigated Agriculture ...................................................................................................... 42 6.2 Water Supply ................................................................................................................. 45 6.3 Reservoir Fisheries ......................................................................................................... 46 6.4 Flood Control ................................................................................................................. 48 6.5 Navigation ...................................................................................................................... 49 7 Economic Valuation of “Local” External Impacts: Human Populations ................... 52 7.1 Culture ........................................................................................................................... 52 7.2 Health ............................................................................................................................ 53 7.3 Infrastructure ................................................................................................................ 54 7.4 Displacement and Livelihoods ....................................................................................... 56 Guidelines For The Evaluation Of Hydropower And Multi-Purpose Project Portfolios: Annex 1 (WV 1.0) iii Economics Practice Guide 8 Economic Valuation of “Local” External Impacts: Land Uses .................................. 59 8.2 Developed Land ............................................................................................................. 59 8.3 Forestland ...................................................................................................................... 61 8.4 Wetlands ......................................................................................................................