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Section 4.2.4 (d) explored the traditional approach towards Value for Money and

concluded that the developed world public versus private type of approach is not always appropriate in a developing country context. This was most certainly the case in Laos in 1993, when decisions were being made about the project. At that time, the country had developed less than 200 MW of electricity generating capacity and it had no realistic prospect of developing a single project many times that size. Even countries with a long history of hydropower development would consider Nam Theun 2 to be a “worldscale” project. In addition, Laos was faced with “weak human capacity, governance,

institutions and physical infrastructure” at the time (Porter and Shivakumar 2011). The government was therefore not in a position to develop the project itself as

“NT2 couldn’t have been a public project because it was lacking in the skill and capacity to prepare and develop the project” (Project Development Team Member, Lao PDR, Interviewed: June 2010).

The alternative was to engage with the private sector for the development, construction and operation of the project. A whole of life approach was the only realistic way of attracting commercial interest, but this was complicated by there being very little experience of contracting hydropower development on that basis anywhere. Part of the difficulty lies with the problem of trying to procure a developer using approaches normally used for major engineering projects (Head 2000, p. 16). Hydropower

development costs, unlike most other types of power station projects, are extraordinarily site-dependent, so it is not possible to know the cost of the project and the consequent electricity tariff needed to recover those costs without a great deal of site investigation. Developers are simply not interested in committing the necessary time and expense, unless they are certain about their rights to develop the project. Consequently,

competitive tendering for hydropower projects on a whole of life basis (as discussed in Chapter 5.2.1) is not readily achievable. Another approach to procurement was needed (MacGeorge 2009, p. 29).

To recap so far in this subsection, if an infrastructure management system of the type described in Chapter 5 had been applied to Nam Theun 2, the project would have passed through the stages of candidate listing and been highly ranked. It proved that the project was financially viable, and could therefore be developed by the private sector. It also could be determined that no public form of cooperation was feasible because of human and capital constraints alone. A public-private partnership was inevitable therefore but the procurement approach was problematic, because it was known that competition to select a developer would fail given the circumstances.

The answer to the procurement challenges lay in the decision to negotiate with a group of developers that had the balance sheet strength and experience needed to develop the project, but also the sense of corporate citizenship that was needed to deal responsibly with a government that had a limited, but growing capability to act as a strong

counterpart because:

“Even though the project is a PPP, most of the shareholders are publicly owned and this made a big difference” (Government Official, Lao PDR, Interviewed: June 2010).

To help the negotiation, the government, with the help of the World Bank, appointed legal and financial advisers early in the process. This enabled the Nam Theun 2 project to stand apart from the many sub optimal hydropower agreements that were being struck with other developers in Laos around that time. The government’s advisers did not have the benefit of clear standardised processes and documentation in Laos, but they had international experience, and what is more, they managed to get the government to agree to take control of the documentation process rather than let the developer take the lead. Government taking control over documentation is an element of infrastructure management best practice, and so this was a feature discussed in Chapter 5 that was incorporated in the government’s approach (MacGeorge 2009, p. 10).

The process that was subsequently applied to procuring the Nam Theun 2 project developer, was for the government to enter into a Heads of Agreement in 1994 with the development consortium, which consisted of Transfield of Australia, EDFi, and several Thai companies at the time. It was agreed with the developer that as there could not be a

full competitive tendering for developer selection, EDF would lead construction as the “head contractor” (Porter and Shivakumar 2011), and that competitive tendering for as much of the project’s construction as possible would be pursued, and this would be done on an open book basis, meaning the government and its development partners could scrutinise the contracts. This led to the World Bank commissioning a report from Swiss firm Colenco, to determine whether the project construction costs were

reasonable (World Bank 2005, p. A104). Again, the involvement of development

partners proved to be pivotal in the absence of having a clear infrastructure management system. While “The role of the World Bank in a project is sized to the scale and

complexity of the project” (Porter and Shivakumar 2011, p. 129), a lesson for development partners is that it is arguably easier to assist with the development of a good infrastructure management system, than to become embroiled in the specifics of individual projects. Only large projects warrant this degree of input.