SE Asia Hydropower Growth Vital but Unbalanced

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While the world’s attention was diverted from the reforms in Myanmar to Hurricane Sandy in the U.S., the little known landlocked communist country Laos--with a population of just 6.4 million and one of the least developed countries of the world -- was finally able to secure itself a place in the world trade organization (WTO) after it applied for membership some 15 years ago. Meanwhile, the Asian Development Bank is expecting Laos to post GDP growth of 7.9% for 2012/13 which will be driven in part by its electricity sector. Laos has been working on several hydro power plants and its production in the next three years will reach 3,856MW from the current level 2,560MW. It has 17 hydropower plants working at the moment that light up 78% of its houses while it has dozens of projects in the pipeline. If things go according to its plan, Laos would emerge as the net exporter of electricity by 2015, a landmark which most of its peers have been unable to reach.

Recently, authorities in Vientiane, have allocated $1 billion to construct three dams along the 3,000 miles long Mekong river, home to the world’s greatest freshwater fishes. In the meantime, the work on the controversial $3.5 billion Xayaburi Dam was restarted by its Thai contractor Ch Karnchang PCL, PTT PCL and Electricity Generating PCL which has caused international environmental concerns, as no prior detailed scientific study on the impact of the 1,285MW dam on fish habitats had been carried out, along with creating political problems with its neighbors Cambodia and Vietnam. The three Thai companies, particularly PTT, are one of the largest corporations of the country and have significant representation in iShares MSCI Thailand Investable Market ETF (NYSEMKT: THD).

In all, the U.S.-based-N.G.O International Rivers believes that Vientiane is planning to construct 70 dams, as opposed to 11 officially announced, along Mekong and its tributaries. Nam Theun 2 is the largest dam to date that Laos has built along the river which exports almost all of its production to Thailand through which Laos will earn ~$2 billion over a period of 25 years. The dam, at its optimum operations, could contribute 10% to the country’s budget annually.

Despite the international pressure, which is being spearheaded by Vietnam and Cambodia, Laos and its energy starved neighbor Thailand, are bent on moving forward with their construction work. Xayaburi Dam project is also primarily aimed to supply electricity to Thailand. The dam threatens to cut the flow of rich nutrients to Vietnam that are essential for its rice crops, one of its primary exports. The four quarreling nations form what is called the ‘Mekong River Commission’ that in 2011 agreed to halt all dam construction until the necessary scientific studies are carried out. Laos and Thailand insist that all the necessary data has been collected but Cambodia and Vietnam think otherwise. The real irony here is that both Cambodia and Vietnam are also aiming to capitalize on the flow of Mekong by constructing hydropower projects that aren’t any less controversial.

Cambodia recently approved the construction of the 400MW Lower Sesan 2 hydroelectric dam in Stung Treng province through joint investment of $781.5 million from itself, Vietnam and China along a Mekong tributary. Lower Sesan 2 has not only faced resistance from environmentalists, but it also threatens the livelihood of around 50,000 people living in the area.

On the other hand, Vietnam is also moving forward with even more hydroelectricity which currently supplies 35% of the national grid. Last month, the country’s biggest hydroelectric project, the $2.5 billion Son La plant, started supplying 2,400MW to the national grid. Vietnam’s equity market is accessible to foreign investors through Market Vectors Vietnam ETF (NYSEMKT: VNM). The country witnessed a boom in its hydropower sector in 2007-08 that that coincided with the country’s GDP touching a growth rate above 8% in 2006-07.  This growth spurt significantly increased the demand for energy. But now that credit growth has been reined in, the country’s economic growth slowed down as inflation and interest rates soared leading to the cancellation of several hydropower projects that became nothing but debt albatrosses to the contractors and banks.  Real estate is not the only sector that saw unsustainable growth in Vietnam from the last round of credit expansion. The demand for electricity has now fallen to 13.7% from its peak.

So far, 19 hydropower projects have been scrapped while the ongoing construction on most of the projects, such as Tr’Hy, Dak Mi 2 and Dak Mi 3, have been going on for five years and are still far from complete. Quang Nam’s authorities have recently warned the project owners to speed up their activities or their names will be added to the list of 19. Quang Nam has 44 hydropower projects in its pipeline, the largest number among all provinces in Vietnam.

Unlike Laos, Cambodia has partnered with its long-time ally China to develop their hydropower potential. The latter is currently working on five hydropower projects with a combined production of 915MW that come though $1.6 billion in investment. The country’s largest dam, 193MW Kamchay hydroelectric dam, located in Kampot province, was built by the China-based Sinohydro Corporation and became operational in 2011. The remaining dams are expected to be completed by 2015, the biggest of which is the Russei Chrum Krom dam with a capacity of 338MW.

Long-term these power projects will create spillover effects into these countries’ more developed neighbors.  They form a major cog in the coming Asian Economic Community of 2015, which will turn the entire group of 10 ASEAN nations along with China, South Korea and Japan into a giant free-trade zone.  The Global X FTSE ASEAN 40 ETF (NYSEMKT: ASEA) is a small fund focused completely on the so-called ASEAN 5--Thailand, Malaysia, Singapore, Phillipines and Indonesia – and has returned 16.7% year to date compared to VNM (6.9%) and THD (26.9%).

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