Energy Policy 47 (2012) 125–132

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Energy Policy
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The use of public participation and economic appraisal for public

involvement in large-scale hydropower projects: Case study of the
Nam Theun 2 Hydropower Project
Naho Mirumachi a,n, Jacopo Torriti b,1
a
Department of Geography, King’s College London, Strand London WC2R 2LS, UK
b
School of Contruction Management and Engineering, University of Reading, Whiteknights PO Box 219 Reading RG6 6AY, UK

a r t i c l e i n f o abstract

Article history: Gaining public acceptance is one of the main issues with large-scale low-carbon projects such as
Received 4 October 2011 hydropower development. It has been recommended by the World Commission on Dams that to gain
Accepted 18 April 2012 public acceptance, public involvement is necessary in the decision-making process (WCD, 2000).
Available online 17 May 2012
As financially-significant actors in the planning and implementation of large-scale hydropower projects
Keywords: in developing country contexts, the paper examines the ways in which public involvement may be
Cost-benefit analysis influenced by international financial institutions. Using the case study of the Nam Theun 2 Hydropower
Public acceptance Project in Laos, the paper analyses how public involvement facilitated by the Asian Development Bank
Public participation had a bearing on procedural and distributional justice. The paper analyses the extent of public
participation and the assessment of full social and environmental costs of the project in the Cost-
Benefit Analysis conducted during the project appraisal stage. It is argued that while efforts were made
to involve the public, there were several factors that influenced procedural and distributional justice:
the late contribution of the Asian Development Bank in the project appraisal stage; and the issue of
non-market values and discount rate to calculate the full social and environmental costs.
& 2012 Elsevier Ltd. All rights reserved.

1. Introduction dams for hydropower in particular have been subject to major

Clean energy projects are now increasingly considered for
energy policy at domestic and international levels. Hydropower
development has been one of the preferred strategies of energy
policy by many governments amidst concerns of climate change
(Pittock et al., 2008). At the international level, hydropower
has been promoted as a source of energy with low greenhouse
gas emissions suitable for the Clean Development Mechanism
(Pittock, 2010). Hydropower projects can greatly differ in type
and scale (Egré and Milewski, 2002). This variety of projects calls
into question the extent to which hydropower is a clean and
sustainable energy source. For example, it has been argued that
the amount of greenhouse gas emissions from reservoirs should
not be neglected when considering dam projects (Mäkinen and
Khan, 2010). Hydropower projects have both positive and nega-
tive implications to the environment and socio-economic condi-
tions of the project site and thus defy a generalised argument on
renewability and sustainability (Frey and Linke, 2002). Large
n
Corresponding author. Tel.: þ44 20 7848 2865; fax: þ 44 20 7848 2287.
E-mail addresses: naho.mirumachi@kcl.ac.uk (N. Mirumachi),
j.torriti@reading.ac.uk (J. Torriti).
1
Tel.: þ44 118 378 8196; fax: þ44 118 931 3856.
controversy regarding benefits and adverse impacts (Scudder,
2005). Over the years, several frameworks for assessing and
deciding hydropower projects have been developed from this
controversy. In 2000, the World Commission on Dams (WCD)
produced a framework to facilitate the planning, implementation
and operation of dams. The report, Dams and Development: A New
Framework for Decision-Making was ground-breaking at that time,
having been produced after extensive global consultations with a
range of stakeholders. The International Hydropower Association
developed the Sustainability Guidelines in 2004 and a Sustain-
ability Assessment Protocol in 2006. In addition, various assess-
ment techniques such as Social Impact Assessment (e.g., Égré and
Senécal, 2003), Multi-Stakeholder Platforms (e.g., Faysse, 2006)
and Transboundary Environmental Impact Assessment (e.g.,
Wyatt and Baird, 2007) have been applied to evaluate dam
projects.
These frameworks and techniques have emphasised on the
importance of considering non-economic benefits and disbenefits
through deliberative processes. The WCD established a trend to
ensure participatory decision-making by various stakeholders.
According to the WCD, ‘‘gaining public attendance’’ is a key
strategic priority in the decision-making of equitable and sustain-
able dam projects (WCD, 2000). Gaining public acceptance is not

0301-4215/$ - see front matter & 2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.enpol.2012.04.034
126 N. Mirumachi, J. Torriti / Energy Policy 47 (2012) 125–132
just limited to approving or rejecting a dam project, but also
extends to the policy, programmes, and institutional and techni-
cal set-up surrounding the dam project (Cariño and Colchester,
2010). Moreover, it is recommended by the WCD (2000) to
provide means of public involvement throughout the process of
decision-making. The paper focuses on this aspect of gaining
public acceptance and examines the ways in which public
involvement may be influenced by international financial institu-
tions (IFIs) in facilitating public involvement. IFIs are important
lenders in resource-intensive large-scale hydropower projects.
Moreover, the WCD regards them as actors that can be influential
to ensure projects follow key principles of decision-making for
equitable and sustainable water and energy resource develop-
ment (WCD, 2000).
Using the case study of the Nam Theun 2 Hydropower Project
in Laos, the paper examines the role of the Asian Development
Bank (ADB) in facilitating public involvement to gain public
acceptance. The Nam Theun 2 Hydropower Project is a large-
scale project within the Mekong River basin that exports hydro-
power from Laos to Thailand. The Nam Theun 2 Hydropower
Project was partially funded by the ADB, in addition to other
institutions, and has been in operation since 2010. While the
funding by ADB is smaller than that of the other major financial
institution involved, the World Bank, the ADB nevertheless plays
a pivotal role in the infrastructure development of the region.
Specifically, the ADB has established the Greater Mekong Sub-
region Programme that aims to facilitate economic development
amongst China, Myanmar, Laos, Thailand, Cambodia and Vietnam.
In recent years, clean energy projects have been particularly
promoted by the ADB as a way to transition to a greener, low
carbon economy within this Mekong region (ADB, 2009).
The Nam Theun 2 Hydropower Project is understood as a clean
energy project, beneficial to the region (ADB, 2010).
The paper focuses on the project appraisal stage during which
the ADB facilitated public participation and economic appraisal.
Public participation, or the inclusion of stakeholders is highly
important and can ensure the rights and entitlements of rural
communities and other vulnerable groups within society, who
have hitherto tended to be most affected by dams (WCD, 2000).
In terms of economic appraisal, the paper analyses the extent to
which the ADB assessed the full social and environmental costs of
the project in Cost-Benefit Analysis (CBA). The paper places
special emphasis on the non-market values within CBA because
accounting for these values requires public involvement through
willingness to pay (WTP) techniques. This analysis is important
because while the CBA by the World Bank has been examined
(Greacen and Sukkamnoed, 2005), scant attention has been paid
to the CBA by the ADB.
The paper provides an account of both public participation and
economic appraisal rather than just one or the other because this
approach enables a comprehensive analysis of the public involve-
ment process to achieve public acceptance. As will be explained
below, the analysis is guided by a conceptual framework of
procedural and distributional justice proposed by Dore and
Lebel (2010). Under this framework, the scope of public participa-
tion by the ADB will be examined to understand how procedural
justice was ensured. In addition, content test and function test are
utilised to analayse the CBA and assess distributional justice.
These are two techniques to examine ex post the matter and role
of economic appraisals in policies and projects (Morgenstern and
Landy, 1997).
The paper is structured as follows. Section 2 gives a brief
overview of the Nam Theun 2 Hydropower Project and the
involvement of the ADB. Section 3 explains the conceptual
framework of procedural and distributional justice and elaborates
on the analytical framework to examine public involvement.
Section 4 examines the process in which the ADB facilitated
public participation measures and the CBA conducted by the
ADB to analyse the extent of procedural and distributional
justice. Section 5 discusses the implications of the empirical
findings in the wider policy context using examples from devel-
oping countries and in the context of clean energy. Section 6
concludes.
2. Brief overview of the Nam Theun 2 Hydropower Project
The Nam Theun 2 Hydropower Project is the largest energy
project developed in Laos (Sayasone, 2010). It is located in the
Nam Theun River basin, a tributary basin of the transboundary
Mekong River which is shared by China, Myanmar, Laos, Thailand,
Vietnam and Cambodia. The main feature of the project is a 39 m
high dam storing the Nam Theun waters in a reservoir of 450 km2
in the Nakai Plateau. The Nam Theun 2 Dam has a generation
capacity of 1070 MW. It is expected that 5,354 GW h of electricity
per year is to be exported from Laos to Thailand (ADB, 2005d).
The project is estimated to generate approximately USD 1.9 billion
as government revenue including revenue from hydropower
export during the 25 years of concession to the project developer,
the Nam Theun 2 Power Company Limited (NTPC) (ADB, 2005d;
World Bank, 2005; Porter and Shivakumar, 2011). To cover costs
estimated at USD 1.45 billion, a number of foreign investors have
been involved. Funds have been provided from Thai and French
shareholders of NTPC, private commercial banks, the World Bank
and other international financial institutions including the ADB
(see World Bank (2005) for a complete listing). The ADB funded
USD 120 million in 2005 to the Government of Laos and to the
NTPC. Of this, USD 20 million was provided to the Government of
Laos for the purchase of equity in the NTPC, and the rest to the
NTPC (ADB, 2005a, c). The ADB raised the following as reasons
that justify its engagement:
The rationale of the [Nam Theun Hydropower] Project is to
help the Government [of Laos] develop hydroelectric power as
a foreign exchange earner and provide least-cost electricity
supply to consumers in the Lao PDR. The Project will support
medium- and long-term economic growth, poverty reduction,
and environmental conservation as outlined in the National
Growth and Poverty Eradication Strategy. (ADB, 2005d, p.2).
It should be pointed out that though developers were seeking
funding in the mid 1990s, the ADB only decided to engage with
this project in 2003, after having concerns of risks involved in
hydropower projects in general and in Lao projects (Porter and
Shivakumar, 2011).
The regional benefits of the project are considered to promote
and provide ‘‘energy efficiency and renewable energy’’ amongst
the member countries of the ADB (ADB, 2010, p.i). Specifically, the
ADB perceives this project as one of the projects to transition to a
greener, low-carbon economy in the Greater Mekong Subregion
(ADB, 2009). At the same time, this project has received intense
scrutiny and criticism since the inception phase. For example,
international NGOs questioned the economic viability (Ryder,
2004), highlighted impacts on downstream Lao fisheries (Blake,
2005) and critiqued resettlement and livelihood restoration
measures (Imhof, 2005; International Rivers, 2008). Aware of
the criticism of large-scale dam projects, the ADB has argued that
such projects are ‘‘selectively support[ed]y based on the eco-
nomic benefits and the projects will comply with ADB’s social and
environmental safeguards requirements’’ (ADB, 2009, p.7).
 N. Mirumachi, J. Torriti / Energy Policy 47 (2012) 125–132
3. Forms of public involvement in large-scale dam project
appraisal
Gaining public acceptance through various forms of public
involvement is needed to explore and justify positive and nega-
tive impacts of dam projects (WCD, 2000). The above-mentioned
WCD report emphasised how public acceptance is achieved
through ‘‘open and transparent decision-making processes’’ that
is conducive to ‘‘free, prior and informed consent of stakeholders’’
(WCD, 2000, p. 217). To this extent, the WCD report suggested
establishing stakeholder forums to facilitate a democratic deci-
sion-making process and using independent, external dispute
resolution organisations. Dore and Lebel (2010) pointed out that
the WCD report focused on decision-making process issues, or on
‘getting the process right’. They argued that equally important is
focusing on the way benefits and risks are shared, or ‘getting the
content right’. In other words, gaining public acceptance includes
aspects of both procedural and distributional justice (Dore and
Lebel, 2010). Public involvement enables procedural justice
through the inclusion of stakeholders and access to information,
and facilitates consent. Public involvement also enables distribu-
tional justice so that economic benefits and adverse social,
economic and environmental impacts are fully assessed, and the
appropriate compensation and rehabilitation programmes are
undertaken (Dore and Lebel, 2010).
3.1. Public involvement to ensure procedural justice
Noting how certain groups of stakeholders such as indigenous
communities and women have been marginalised from mean-
ingful decision-making processes in the past, the WCD (2000)
stressed identifying rights and entitlements to ensure inclusion.
By establishing the rights of stakeholders, risks posed by the
proposed dam project would be easier to assess. In addition,
stakeholders are to be empowered through ‘‘access to adequate
resources, including legal and other professional support’’ (WCD,
2000, p. 217). Importantly, the WCD report recommended the
incorporation of public participation from the initial stages of
planning. It has been argued that such forms of early involvement
would lead to more transparent and inclusive processes of water
and energy resources development (WCD, 2000, see also UNEP,
2007).
It has been pointed out that one way of ensuring stakeholder
consultation is through the rigorous application of safeguard
policies or guidelines of IFIs (UNEP, 2007). From this, the focus
of analysis in the case of the Nam Theun 2 Hydropower Project is
on the public participation measures as part of safeguard policies
of the ADB. These safeguard policies are underpinned by guide-
lines and protocols of the WCD and the International Hydropower
Association, which promotes sustainable energy development
(ADB, 2009).
3.2. Public involvement to ensure distributional justice
Dore and Lebel (2010) proposed three principles for ensuring
distributional justice. First, establishing a mechanism for benefit
sharing between concerned stakeholders. Second, identifying and
assessing risks to both stakeholders and the ecosystem. Third,
ensuring that ‘‘a population has secure and continuous access to
the natural resources, ecosystem and other services required to
maintain a living’’ (Dore and Lebel, 2010, p.136). To achieve these
three principles, public involvement is inherently essential and
the use of project appraisal tools, such as CBA, assist the ways in
which benefits and risks are identified.
While CBA has been used extensively in assessing dams
projects, limitations of this economic appraisal technique have
127
been highlighted. For example, the WCD argued three common
tendencies in the way CBA has been used:
projections of project costs are systematically understated[;]
social and environmental impacts are not valued explicitly or
are only indirectly accounted for through mitigation or reset-
tlement budgetsy[;] employing social discount rates that are
too high (WCD, 2000, p.181).
The WCD cautioned against the over-reliance on CBA as the
main methodology because it can lead to skewed outcomes based
on limited analysis (WCD, 2000).
Instead of critiquing CBA as a method, in order to understand
the extent of public involvement in the case of the Nam Theun
2 Hydropower Project, the paper applies content and function
tests of the CBA conducted by the ADB. Content tests are used to
analyse the contents of a CBA using guidelines or other CBAs as
benchmarks. The purpose of doing this is to verify that the
conducted CBA matches the criteria for preparation of CBAs, to
identify potential gaps in the report, and to validate consistency
with other CBAs. Comparing the CBA report of the ADB and the
WCD guidelines is a first, though important, step. The second step
consists of a function test, which is designed to investigate the
role of the economic appraisal within a specific policy or project.
Function tests seek to comprehend how specific CBAs were
produced and why they have certain characteristics in relation
to issues of public participation. A third approach is an outcome
test, i.e., comparing the figures in the CBA with actual impacts
from fieldwork. Outcome tests are typically carried out five or ten
years after the implementation of a project. Considering that the
project has been in operation since 2010, outcome tests are not
applicable in this case. The following sections will conduct a
combination of both content and function tests.
3.2.1. Monetisation of non-market values
In order to analyse aspects of public involvement in the project
appraisal stages, further to the content and function tests, the
issue of full monetisation of non-market values, such as environ-
mental costs and resettlement costs, and the setting of discount
rates are examined. Non-market values refer to those impacts
which cannot be directly associated with a market value, such as
changes in environmental and health services. Meta-analysis
conducted over 1600 studies from more than 40 countries on a
set of topics, including transportation, sanitation, health, the arts
and education, as well as the environment, shows numerous
examples of CBAs making use of non-market values as forms of
distributional justice (Carson et al., 1994). Evidence from existing
CBA studies on non-market values shows that the use or non-use
of different monetisation techniques of non-market values leads
to different estimates of benefits and costs (Hammond, 1990;
Lutter et al., 1999). This means that the monetisation of environ-
mental benefits and costs (e.g., removal of forest areas and
agricultural land), and health benefits and costs (e.g., associated
with human displacement) bring about different outcomes than
the monetisation of market values only.
In the case of the Nam Theun 2 Hydropower Project, the
estimation of the aggregate amount of costs and benefits takes
into account both market values and non-market values: the cost
of watershed for the Nam Theun 2 Dam and the benefit of
additional electricity generation; and the cost of displacement
and the benefit of low carbon energy.
3.2.2. Discount rates
The choice of discount rates is considered as an important
element of CBA for the development of project appraisals (Hanley
128 N. Mirumachi, J. Torriti / Energy Policy 47 (2012) 125–132
Table 1
Content test: indirect costs and benefits.
Indirect costs (WCD, 2000)
Resettlement costs to the resettled population
Health impacts to the population in the project area
Fisheries losses to the population in the project area
Natural habitat losses to the country present and future population
Downstream effects to the downstream population
Watershed sedimentation costs
and Splash, 1998). When setting discount rates, judgements are
made with regards to the future depreciation and hence value of
critical resources, such as farming land and forests. In other
words, the level of discount rate determines the economic
viability of alternative project options. The decision on levels of
discount rates may be taken by economists in isolation or be
influenced by interest groups (Torriti, 2010). However, discount
rates are rarely in the spotlight when it comes to large projects
and policies. In order to avoid discretionary decisions regarding
the net value of certain benefits, best practice on CBA involves
stakeholder consultation on discount rate levels. When looking at
the Nam Theun 2 case study, the focus is on how the discount rate
was set and its effects on public acceptance.
4. ADB’s facilitation of public involvement for procedural and
distributional justice
4.1. Public involvement strategies for procedural justice
When the ADB committed to funding the Nam Then 2 Hydro-
power Project in 2005, it was argued that a wide range of
stakeholders were consulted during the project planning stages
spanning over several years, and that information was dissemi-
nated through various media and through local facilitators (ADB,
2005d). The effects of such public participation were considered
to inform resettlement areas and livelihood reconstruction pro-
grammes (ADB, 2005d).
Specifically, the ADB facilitated public consultation by the
Government of Laos and the NPTC in early 2004 so that local
communities would be informed about the benefits and risks of
the projects and the livelihood restoration plans (ADB, 2005d,
p.13). Public participation had been part of project assessment
activities led by the NPTC prior to the financial commitment of
the ADB. The ADB funded the Government of Laos in the form of
Technical Assistance in March 2004 mainly to assist public
participation at local to international scales and to aid informa-
tion dissemination over 18 months (ADB, 2004c). Various types of
stakeholders operating at local, regional, national and interna-
tional levels were identified: ‘‘(i) project-affected people; (ii)
district, provincial, and national government officials; (iii) civil
society and nongovernmental organisations (NGOs); and (iv)
international NGOs, international organisations, and other inter-
est groups’’ (ADB, 2004d, p.7).
In addition, ADB became involved in the existing Public
Consultation and Disclosure process, which had begun before its
participation, since 1995. The Public Consultation and Disclosure
process hosted approximately 400 events between 1995 and
October 2004 for public debate and information dissemination
(ADB, 2004b). The function of this process seems to have been
particularly important to disemminate information especially to
local communities to be resettled: this process was the main
Cost of assessment Indirect costs Benefits (WCD, 2000) Benefits
(MAFF, 1999) (ADB, 2004b) (ADB, 2004b)
Low Y Power generation benefits Y
High N Agricultural, irrigation benefits Y
Low N Water supply benefits N
High N Flood control benefits N
Very High N
Medium N
communication channel in which villagers were first made aware
of project formally (Souksavath, 2011). In addition to consulta-
tions with stakeholders, project reports were disseminated via the
website of the project authority and through several consultation
meetings in various locations within Laos and also at interna-
tional venues for donors and international NGOs (ADB, 2004b).
At least on paper, the ADB ensured that its safeguard policies
were followed by involving a range of stakeholders at various
points in time and in different locations. The ADB took multiple
approaches to provide information, through its own procedures as
well as through the existing Public Consultation and Disclosure
process.
4.2. Public involvement in CBA for distributional justice
4.2.1. Content test: Environmental and social costs and benefits in
the CBA
A content test is performed using the summary of criteria for
apportioning indirect social and environmental costs and benefits
of large dam projects according to the WCD (2000). The main
indirect costs comprise: resettlement costs; fisheries losses; and
watershed sedimentation costs, which are atypically not consid-
ered as direct costs. The benefits include: power generation
benefits; agricultural irrigation benefits; water supply benefits;
and flood control benefits.
Table 1 represents the content test for the CBA conducted by
the ADB. It can be noted that apart from the resettlement costs,
indirect cost components were not estimated in the CBA. Simi-
larly, while benefits relating to energy and irrigation were
calculated, those relating to water supply and flood control were
not included. The costs of assessment are on average a small
fraction of the capital costs of a dam project. However, the cost of
assessment for various indirect costs may differ due to the
amount of resources associated with different assessment meth-
ods. For instance, contingent valuation surveys for non-market
costs are typically more expensive than desk research based
methods like the human capital approach (Pearce, 1998).
A column for the typical costs of the assessment, based on average
assessment cost figures from the UK Ministry of Agriculture,
Fisheries and Food (MAFF, 1999), is presented in Table 1 to
provide an indication of the magnitude of the economic appraisal
of indirect costs. It can be observed that the indirect cost
components not estimated in the CBA by the ADB would incur
varying levels of financial resources. However, the use of different
methods should lead to higher variance among assessment costs.
4.2.2. Function test: Extent of public involvement for the CBA
A characteristic of public involvement relevant to the CBA of
the ADB is the timing. The ADB began assessing project impacts
since November 2002 in partnership with the World Bank (ADB,
2004c). The rationale behind the joint assessment was so that
 N. Mirumachi, J. Torriti / Energy Policy 47 (2012) 125–132 129

‘‘due diligence work [would] ensure that the safeguard policies of quantitative assessment of the environmental impacts of the Nam
the two institutions are complied with and the sector issues are Theun 2 (Blake, 2005). The main negative environmental impacts
addressed appropriately’’ (ADB, 2004c, p.3). The two organisa- relate to the 450 km2 of forest, woodlands and other land which
tions evaluated their influence on public participation as the were lost in the inundation area. This led to the loss of terrestrial
following: and aquatic habitats in the Nakai Plateau. This loss of habitat is
likely to increase population pressures on wildlife that are
The NT2 project also showed the value of a thorough and open dependent on these habitats. The USD 3.2 million estimate by
consultation process within the country, within the region, the ADB as an overall cost of environmental deterioration from
and in multiple international fora, to debate controversial the dam project is the result of deducting the benefit associated
issues. This was a key factor in better project and programme with the market value of the timber (USD 50/m3) from the cost of
design, as well as for its acceptance by the global community deforestation. In other words, the ADB accounted for market
despite its complexities and potential controversies. In addi- environmental costs by taking into account solely market costs
tion, the WB was able to provide value added in improving and benefits. This approach did not consider the unique value of
information sharing among countries and stakeholders, and the Lao forest from a biodiversity perspective, which would have
overall in building trust. (World Bank and ADB, 2006, p.24). required non-market value methods, and increased the ratio
between environmental costs and total project cost from 2% to a
The ADB played a partial role in encouraging public participa- significantly higher value.
tion during the project appraisal stage. The late involvement of
the ADB in the project appraisal meant that much of the ADB 4.2.3.2. Resettlement costs. The construction of the dam required
activities were to summarise past public participation measures the resettlement of about 6,000 people over more than 20 villages.
and to assure that the existing measures met its safeguard Those individuals who were displaced because of the hydropower
policies. The ADB was reliant on past efforts by the World Bank dam were entitled to compensation. In the CBA by the ADB, the
to ensure its safeguard policies. Thus, the late intervention of the monetary value of resettlement was not estimated following a non-
ADB prevented it from playing a central role in determining the market valuation approach. The monetary assessment of resettle-
procedure, content and pace of public participation measures ment was estimated based on an ad hoc available price for
from the outset of project appraisal. resettlement and not on the non-market costs of resettling that
include the willingness to accept of locals, which could be informed
4.2.3. Monetisation of non-market values through public involvement. Conducting surveys in four out of the
According to the WCD (2000), environmental ecosystem costs 17 resettled villages, Souksavath (2011) found that villagers were
and human resettlement costs are two of the most significant provided with options in facilitating resettlement, rather than
typologies of costs associated with dam developments. The over- discussions on the levels of willingness to accept. Leaders of the
all environmental ecosystem cost of the Nam Theun 2 Hydro- community negotiated aspects of resettlment (Souksavath, 2011).
power Project was estimated at USD 3.2 million, whereas the However, the effectiveness of such negotiation is unclear.
social cost of resettlement, i.e., the total financial compensation to Depending on the amount of land owned, households were
those resettled, amounted to USD 45 million in 2002 USD entitled to an average of USD 76.47 per year. While this value
equivalent value (see Table 2). In order to understand how the might be arguably close to the average market value of land, which
figures for environmental and social costs were obtained and was USD 300 per hectare of land exploitation in 2004 USD
whether non-market values were taken into account, this section equivalent (Schumann et al., 2006), the spread of the resettlement
focuses on deforestation costs and resettlement costs. We have payments does not take into account the value of displacement for
chosen these two costs because they represent direct monetary future generations (Rabl, 1996; Howarth, 1996). In addition, it
compensations to affected people. This has implications in terms disregards the fact that compensation practice suggests actual
of distributional justice, which is of interest to the aim of payments may not take place any earlier than 10 to 15 years
this paper. from the time of household entitlement (Pearce, 1999; Scudder,
1994). Overall resettlement costs amount to about USD 13 million,
including fishery loss compensation. This figure is significantly
4.2.3.1. Environmental costs of deforestation. Extensive institu-
inferior to the other entry for social costs, i.e., watershed
tional work, particularly on behalf of the ADB, has gone into the
management (USD 31 million).
Table 2
Nam Theun 2 project costs. 4.2.4. Discount rates setting
Source: ADB, 2004b.
The discount rate used by ADB to assess the future value of
Typology of costs Total Million Cost/energy Assessment standard units of land is not consistent throughout the project.
USDea produced Cost/Total Three aspects need to be considered when reviewing the discount
(in USD/MW h) project rates for this project. First, a CBA study by consultants (Berger
assessment cost
International, 1997) made use of a discount rate of 10% for
Development costs 74 2.31 0.05 calculating the present value of lost future earnings associated
Social costs 45 1.40 0.16 with the loss of agricultural land in the Nakai Plateau. This high
Environmental costs 3 0.09 0.15 rate implied that the sunk costs of not having any future
Head construction costs 722 22.49 0.01 productive activity in the Nakai Plateau forest were lower than
Financing costs 250 7.79 0.13
General and 46 1.43 0.13
the benefits of the dam project. Second, the subsequent CBA by
administrative costs, the ADB (ADB, 2004b) applied a lower discount rate (7%) to
including capital agricultural land earnings, i.e., the opportunity cost associated
Pre-operating costs 109 3.39 0.18 with loss in land use. It is unclear whether there was direct
Contingencies 200 6.23 0.819
stakeholder influence in lower discount rates for land opportunity
Total project costs 1450 45.12 1
costs. Third, the project determined that an overall 7% discount
a
USDe: USD equivalent value. rate is applied after 25 years, once the project is handed over to
130 N. Mirumachi, J. Torriti / Energy Policy 47 (2012) 125–132

Table 3
Land opportunity costs: sensitivity analysis of discount rates for different standard unit values of wood, based on Berger International (1997) and ADB (2004a).

Year Land opportunity cost Land opportunity cost Land opportunity cost
(7% nominal discount rate) USD/ha (10% nominal discount rate) USD/ha (9% nominal discount rate) USD/ha
6.5% real discount rate 9.3% real discount rate 8.3% real discount rate

Standard unit Lowered unit Standard unit Lowered unit value of land Standard unit Lowered unit
value of land value of land value of land value of land value of land

2004 376.7 201.8 376.7 201.8 376.7 201.8

2005 353.7 189.5 344.6 184.6 347.8 186.3
2006 332.1 177.9 315.3 168.9 321.2 172.1
2007 311.9 167.1 288.5 154.5 296.6 158.9
2008 292.8 156.9 263.9 141.4 273.8 146.7
2009 274.9 147.3 241.5 129.4 252.8 135.4
2010 258.2 138.3 220.9 118.4 233.5 125.1
2011 242.4 129.9 202.1 108.3 215.6 115.5
2012 227.6 121.9 184.9 99.1 199.1 106.6
2013 213.7 114.5 169.2 90.6 183.8 98.5
2014 200.7 107.5 154.8 82.9 169.7 90.9
2015 188.4 100.9 141.6 75.9 156.7 83.9
2016 176.9 94.8 129.6 69.4 144.7 77.5
2017 166.1 89.0 118.6 63.5 133.6 71.6
2018 156.0 83.6 108.5 58.1 123.4 66.1
2019 146.5 78.5 99.2 53.2 113.9 61.0
2020 137.5 73.7 90.8 48.6 105.2 56.3
2021 129.1 69.2 83.1 44.5 97.1 52.0
2022 121.3 65.0 76.0 40.7 89.7 48.0
2023 113.9 61.0 69.5 37.3 82.8 44.4
2024 106.9 57.3 63.6 34.1 76.5 41.0
2025 100.4 53.8 58.2 31.2 70.6 37.8
2026 94.3 50.5 53.3 28.5 65.2 34.9
2027 88.5 47.4 48.7 26.1 60.2 32.2
2028 83.1 44.5 44.6 23.9 55.6 29.8
2029 78.0 41.8 40.8 21.8 51.3 27.5
2030 73.3 39.2 37.3 20.0 47.4 25.4
2031 68.8 36.9 34.1 18.3 43.8 23.4
2031 64.6 34.6 31.2 16.7 40.4 21.6
2033 60.7 32.5 28.6 15.3 37.3 20.0
2034 57.0 30.5 26.1 14.0 34.4 18.5
Net Present value 5295.9 2837.0 4146.1 2221.1 4500.2 2410.8

the Government of Laos from NTPC. This lower rate increases the
calculated present value of the projected Government of Laos
earnings for later years.
Furthermore, the unit value of land in the calculation used in
the CBA by the ADB (ADB, 2004b) was lowered compared with the
initial 1996 estimates which made use of a standard unit value of
land based on market prices (White, 1997). A ‘lowered value of
land’ was introduced by ADB in 2004 following a depreciation of
the market price of timber. This had knock-on effects on value
of land.
For comparison, Table 3 shows sensitivity analysis values for a
nominal 9% discount rate, which is consistent with other costs
and benefits in the CBA. Real discount rates were calculated
taking into account that the estimated cost of equity of land in
Laos according to Schumann et al. (2006) is 14.7% in nominal
terms and 13.6% in real terms.
Two observations can be drawn. None of the two (7% and 10%)
discount rates are consistent with other costs and benefits. This
raises issues with regards to discretionary use of discount rate
setting. The second observation regards a methodologically unu-
sual finding. Diminishing the discount rate from 10% to 7% should
have increased the present value of land opportunity cost. How-
ever, the fact that the unit value of land in the calculation was
lowered means that the overall cost in terms of land opportunity
costs decreased. As a result, the Net Present Value of land
opportunity cost used in the nominal dollar calculation of CBA
falls from USD 4146.1/ha to USD 2,221.1/ha between the 1997
and 2004 estimates using a nominal discount rate of 10%.as
shown in Table 3.
5. Challenges of public involvement in project appraisal of
large-scale hydropower dams
The empirical findings of the project appraisal stages of the
Nam Theun 2 Hydropower Project highlight some important
issues of public involvement to gain public acceptance. Regarding
procedural justice, while public involvement was facilitated by
the ADB, the extent of stakeholder engagement has been criti-
cised. In particular, civil society has repeatedly pointed out the
problematic public participation measures. For example, TERRA,
an influential NGO in the Mekong River basin argued that local
communities were involved in the public participation procedure
merely out of pressure by governments and development institu-
tions, thus compromising meaningful, active participation to
influence decision-making (Daoroung, 2002). Critics argued that
public participation was conducted to maintain the interest and
funding of the World Bank (Guttal and Shoemaker, 2004). These
criticisms point to conditions of effective public participation
where (a) the political climate must be conducive to open
deliberation; and (b) the crucial decision of project implementa-
tion must not be predetermined and be subject to debate
(Virtanen, 2006; Simpson, 2007).
Importantly, these criticisms highlight the significant role of
IFIs in large-scale energy projects requiring major financial
assistance. The ADB had the expertise and resources to host
consultations with local communities and to conduct systematic
analysis of benefits and risks, which requires public participation
measures. However, as the analysis of distributional justice
showed, the ADB was involved in the project towards the end of
 N. Mirumachi, J. Torriti / Energy Policy 47 (2012) 125–132
the overall project appraisal process. This meant that the time-
frame to conduct public involvement was limited and coordina-
tion with other supporting organisations, namely the World Bank,
was integral to the activities of the ADB in executing project
appraisal.
In addition, regarding distributional justice, the review of the
CBA by the ADB for the Nam Theun 2 Hydropower Project mirrors
the shortcomings of CBA utilisation warned by the WCD: non-
market values are inadequately valued and discount rates discre-
tionary. The problems revealed in the empirical analysis under-
score the role of institutions like the ADB to ensure various forms
of public involvement, be they public meetings or technical
meetings to discuss discount rates. The treatment of environ-
mental and social costs as market values, like any other operative
and management costs has severe implications on the way non-
market values like human displacement and deforestation caused
by the project are taken into account.
The case study of the Nam Theun 2 Hydropower Project
provides important and useful lessons for gaining public accep-
tance of large-scale dam projects. This project is not unique in its
challenges of procedural justice. The issue of identifying and
including stakeholders is complex. For example, the Three Gorges
Dam on the Yangtze River basin in China have faced issues of
including all stakeholders who would be negatively affected by
the project. It has been pointed out that the project has margin-
alised those who were not considered as permanent, registered
residents of the project site, even though they had been living on
the land for many years (Égré and Senécal, 2003). Moreover,
meaningful participation of these identified stakeholders can be
difficult to achieve in large-scale projects, just as in the Belo
Monte Dam in the Xingu River basin in Brazil. Despite the efforts
to gain public acceptance, the Brazilian government has not been
successful at integrating opinions of those against the dam,
causing it to ‘‘[use] all the political resources at its disposal in a
secretive process to win environmental approval for the plan’’
(Sousa Jr. and Reid, 2010, p. 264).
In addition, the aspect of distributional justice pointed out by
Dore and Lebel (2010) becomes even more important when
considering large-scale dams in the context of clean energy and
the transition to a greener, low-carbon economy. In this regard,
while hydropower projects may appear ‘clean’ in light of climate
change, the hydrological and socio-economic uncertainties of
climate change require a deeper consideration of discount rates
(Jeuland, 2010). IFIs have tended to set high social discount rates
of 10% or more that lead to ‘‘a consistent bias against investments
in long-lived infrastructures with high upfront costs, as well as a
bias in favour of projects that result in high environmental costs
in the distant future’’ (Jeuland, 2010, p. 202). Implementing large-
scale infrastructure projects without executing principles that
uphold sustainability of water and energy resources risks ‘‘incum-
bent interests [y] to sustain particular features of the status quo
which are supported for narrow section reasons, by tacitly
associated them with the more widely supported, publicly delib-
erated, substantive qualities of Sustainability’’ (Stirling, 2009,
p.196). The role of IFIs, such as the ADB, is therefore highly
instrumental in encouraging deliberative measures at the project
appraisal stage and beyond.
6. Conclusions
The paper set out to identify how two aspects of public
involvement to gain public acceptance, namely public participa-
tion and economic appraisal, were used by the ADB in the project
appraisal stage of the Nam Theun 2 Hydropower Project. This case
study applied a conceptual framework that examined procedural
131
and distributional justice, the latter being analysed by the use of
both content and function tests of CBA carried out by the ADB.
The analysis showed that at the project appraisal stage, principles
of procedural and distributional justice may have been under-
mined in three ways. First, the ADB was only partially involved in
facilitating public participation of the Nam Theun 2 Hydropower
Project during the project appraisal stage, hence exposing it to
criticism by civil society. Second, environmental and social
impacts were treated as market values only, hence excluding
from the assessment the actual WTP value of those stakeholders
most affected by the project. Third, discount rates were set
discretionarily, hence affecting the value of agricultural land in
particular.
While dam projects may provide direct benefits to local
communities as clean energy options, such large-scale projects
have added complexity in the financing arrangements and the
scale and scope of both positive and negative impacts on a wider
and more varied stakeholder group. For this reason, issues of
timely contribution of financing institutions in addressing public
participation, the inclusion of non-market values, and consistency
in choosing discount rates in CBA become vital in evaluating
the sustainability of large scale energy projects in developing
countries.
The role of the IFIs will be highly important as policy focuses
on clean energy projects. The investment decisions by these
institutions will inevitably impact the economic, social and
environmental communities within which these projects are
implemented. The transition to a low-carbon economy provides
a window of opportunity to exercise public involvement that
improves the governance of hydropower development projects.
Public involvement at the project appraisal stage will be crucial to
the overall effectiveness of the clean energy projects.
Acknowledgements
Authors thank the two anonymous reviewers for their con-
structive comments.
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