ASIAN DEVELOPMENT BANK Independent Evaluation Department SECTOR ASSISTANCE PROGRAM EVALUATION FOR THE ENERGY SECTOR IN LAO PEOPLE’S DEMOCRATIC REPUBLIC In this electronic file, the report is followed by Management’s response and the Board of Directors’ Development Effectiveness Committee (DEC) Chair’s summary of a discussion of the report by DEC. Evaluation Study Reference Number: SAP: LAO 2010-42 Sector Assistance Program Evaluation October 2010 Energy Sector in the Lao People's Democratic Republic Independent Evaluation Department CURRENCY EQUIVALENTS (as of 30 June 2010) Currency Unit – kip (KN) KN1.00 = $0.000121 $1.00 = KN8,262 ABBREVIATIONS ADB – Asian Development Bank CAPE – country assistance program evaluation DEPD – Department of Energy Promotion and Development DOE – Department of Electricity DWR – Department of Water Resources EdL – Electricité du Laos EGAT – Electricity Generating Authority of Thailand EIA – environmental impact assessment EIRR – economic internal rate of return EMD – Environmental Management Division EMP – environmental management plan EPF – Environmental Protection Fund ESP – Environment and Social Program FIRR – financial internal rate of return GDP – gross domestic product GMS – Greater Mekong Subregion GWh – gigawatt-hour IEE – initial environmental examination IWRM – integrated water resources management kV – kilovolt kW – kilowatt Lao PDR – Lao People's Democratic Republic LHSE – Lao Holding State Enterprise MEM – Ministry of Energy and Mines MOF – Ministry of Finance MW – megawatt NARPDP – Northern Area Rural Power Distribution Project NLHP – Nam Leuk Hydropower Project NORAD – Norwegian Agency for Development Cooperation NPA – national protected area NPESSHS – National Policy on Environment and Social Sustainability of the Hydropower Sector NTPC – Nam Theun 2 Power Company PIZ – peripheral impact zone PKK Park – Phou Khao Khouay Park POE – Panel of Experts PPA – power purchase agreement PRC – People’s Republic of China PTDP – Power Transmission and Distribution Project RPTCC – Regional Power Trade Coordination Committee SAPE – sector assistance program evaluation SDR – special drawing right SEMFOP – Social and Environmental Management Framework and Operational Plan STEA – Science, Technology and Environment Agency TA – technical assistance THHP – Theun-Hinboun Hydropower Project THPC – Theun-Hinboun Power Company THXP – Theun-Hinboun Expansion Project WACC – weighted average cost of capital WMPA – Watershed Management and Protection Authority WREA – Water Resources and Environment Administration NOTE In this report, "$" refers to US dollars. Key Words asian development bank, adb, energy, lao pdr, evaluation, ied, independent evaluation department, program, sape, sector assistance program evaluation, sector reform Director General H.S. Rao, Independent Evaluation Department (IED) Director H. Hettige, Independent Evaluation Division 2 (IED2), IED Team Leader K. Thukral, Senior Evaluation Specialist, IED2, IED Team Members R. Lumain, Senior Evaluation Officer, IED2, IED R. Perez, Senior Operations Evaluation Assistant, IED2, IED Independent Evaluation Department, SE-24 In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page EXECUTIVE SUMMARY i I. INTRODUCTION 1 A. Objectives and Scope 1 B. Evaluation Framework and Methodology 1 C. Organization of the Report 2 II. SECTOR DEVELOPMENT CONTEXT 2 A. Background and the Institutional Context 2 B. Sector Performance 3 III. DEVELOPMENT CHALLENGES AND GOVERNMENT STRATEGIES 5 A. Pacing Hydropower Development 5 B. Meeting Future Energy Requirements 7 C. Managing the Environmental and Social Implications of Energy Projects 9 IV. ADB ENERGY SECTOR ASSISTANCE 11 A. ADB's Hydropower Support Strategy 11 B. ADB's Strategy to Increase Electricity Access 12 C. ADB's Strategy for Energy Cooperation within the Greater Mekong Subregion 13 V. EVALUATION OF ADB ENERGY SECTOR ASSISTANCE PROGRAM 15 A. Strategic Positioning 15 B. Relevance 19 C. Efficiency 20 D. Effectiveness 21 E. Sustainability 23 F. Development Impacts 26 G. Overall Assessment of ADB Energy Sector Assistance 27 H. ADB Performance 28 VI. KEY FINDINGS, LESSONS LEARNED, AND RECOMMENDATIONS 30 A. Key Findings 30 B. Lessons Learned 33 C. Recommendations 34 The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. Ruel Janolino, James Chamberlain, and Feroisa Concordia assisted as consultants. To the knowledge of the management of IED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. APPENDIXES 1. Energy Sector Overview 36 2. Overview of Renewable Energy Technologies Experience in the Lao People’s Democratic Republic 48 3. Lao People’s Democratic Republic Environmental and Social Regulations to Meet Sustainability Requirements for Hydropower Development 52 4. Institutional Strengthening for Managing the Environmental and Social Implications of Hydropower Projects 60 5. Financial, Commercial, and Institutional Aspects of The Nam Theun 2 Hydropower Project 70 6. Environmental and Social Aspects of the Nam Theun 2 Hydropower Project 77 7. Performance of Transmission and Distribution Projects 99 8. Environmental and Social Aspects of the Theun-Hinboun Hydropower Project 103 9. Environmental and Social Aspects of the Nam Leuk Hydropower Project 114 Attachments: Management Response DEC Chair Summary EXECUTIVE SUMMARY The Asian Development Bank (ADB) has made substantial contributions towards creating energy infrastructure in the Lao People's Democratic Republic (Lao PDR). In line with government policies and programs and in conjunction with assistance from other development partners, ADB energy sector assistance since the late-1980s has focused on hydropower projects, high-voltage grid extension, rural electrification, and capacity building to manage power sector infrastructure and utility operations. Total ADB energy sector assistance from 1988 to 2009 was about $290 million for loan projects and $13.9 million for technical assistance (TA) projects. During the sector assistance program evaluation (SAPE) period (2000–2009), ADB approved support for two energy sector projects: the Nam Theun 2 Hydropower Project and the Northern Area Rural Power Distribution Project (NARPDP). ADB's total energy sector assistance approvals during the SAPE period comprised $100.0 million in loans and $5.6 million in TA support. Seventy percent of loans and more than 50% of TA approvals were linked directly to the Nam Theun 2 project. As an input to the country assistance program evaluation, this SAPE assesses the performance of ADB assistance to the Lao PDR energy sector. More specifically, the SAPE examines the development effectiveness of ADB-funded projects. It identifies lessons for further development of the energy sector and makes recommendations for future interventions. Energy Sector Context and Key Findings The Lao PDR is a landlocked, mostly rural and agrarian country rich in natural resources, and a country that is becoming more urbanized and better integrated within the Greater Mekong Subregion. Traditional energy sources (mostly fuelwood and charcoal) are giving way to electricity and petroleum. While the Lao PDR imports all of its petroleum products, it has large hydropower potential, and a major portion of existing hydropower capacity is for power exports. The key energy sector objectives of the government include bringing electricity to all by expanding and improving the main grid or, where cost effective, by off-grid electrification; and earning foreign exchange by setting up export-oriented hydropower projects and exporting electricity. The government's energy objectives have remained remarkably consistent since the 1990s and through the SAPE period; only priorities for achieving the policy objectives have undergone some change from time to time. It is essential to mainstream screening of hydropower project developers and to build capacity to do so. Experience from the ADB-supported Theun-Hinboun and Nam Leuk hydropower projects show that adverse environmental and social impacts can linger for a decade or more after project commissioning. Taking the necessary steps up front to manage environmental and social impacts and preempt serious erosion of financial gains from all large hydropower projects (upwards of 50 megawatts [MW]) is recognized by the government and the development community, and was done for the Nam Theun 2 project (for which the Nam Theun 2 project company played a key role). The massive interest from international developers and investors over the past few years to sign memoranda of understanding for developing more of such large hydropower projects has reinforced the government's convictions on the importance of mitigating environmental and social impacts. However, to do this, there is a need to improve capacity to screen the developers better and instill competition among them, and enhance technical, financial, commercial, and environmental and social mitigation skills and expertise to improve capabilities with regard to project agreement negotiations. ii A requisite institutional base needs to be built over the medium term to ensure that all new hydropower projects comply with