U.S. Legislation May Pose a Threat to the Funding of Large Hydropower Projects

by King & Spalding

Buried deep within the massive Consolidated Appropriations Act of 2014 (House Resolution 3547), which was signed into law by President Obama on 17 January 2014, lies a provision, reportedly sponsored by Senator Patrick Leahy, Chairman of the United States Senate Appropriations Subcommittee on State, Foreign Operations, and Related Programs, that requires the Secretary of the Treasury to "instruct the United States executive director of each international financial institution that it is the policy of the United States to oppose any loan, grant, strategy or policy of such institution to support the construction of any large hydroelectric dam (as defined in "Dams and Development: A New Framework for Decision-Making," World Commission on Dams [November 2000])." Consolidated Appropriations Act, 2014 (P.L. 113-76) at Section 7060(c)(7)(D).

The World Bank and Large Dams

To understand the context and potential impact of the latest legislation by the United States on the funding by international financial institutions (IFIs) of international hydropower projects which include large dams, it makes sense to recap a little of the see-sawing relationship between the World Bank and funding of large dams. Historically, the World Bank has been one of the key sources of funding and backing for large dams. However, such funding has also brought much controversy over the years. The World Bank's former principal water adviser, John Briscoe, once stated that "lending for big dams accounts for 10% of the Bank's portfolio but 95% of its headaches."

In response to increasing criticism of the social and environmental consequences of large dams, the World Bank, together with the World Conservation Union (IUCN), convened a workshop meeting in Gland, Switzerland in April 1997, under the rubric "Large Dams: Learning from the Past, Looking at the Future." This meeting recommended the establishment of a World Commission on Dams (WCD) to "evaluate the development effectiveness of large dams" and "develop and promote internationally acceptable standards for the planning, assessment, design, construction, operation, and monitoring of large dam projects."

In a final report released in 2000 and entitled "Dams and Development: A New Framework for Decision Making", the WCD endorsed the definition of large dams by the International Commission on Large Dams, established in 1928, which categorises a dam as a large dam if it has a height of 15 metres or more from the foundation to the crest. If a dam has a height between 10 and 15 metres, a crest length of at least 500 metres, a maximum flood discharge of 2000 cubic metres per second and a reservoir volume of more than one million cubic metres, ICOLD and WCD also classify it as a large dam. Using this definition, the WCD noted that the world had over 48,000 large dams.

The WCD's final report set out best-practice guidelines and international standards with respect to dam design, environmental, and social matters, including a requirement for indigenous peoples to give their free, prior, and informed consent to projects. However, the WCD report met criticism from supporters of large dams, including governments and NGOs from developing countries, on the basis that it contained requirements so stringent that it had made it impossible to build another large dam.

The World Bank did not endorse the WCD's final report. Instead, under the leadership of its principal water adviser John Briscoe and with the strong support of developing country governments such as China, Brazil and India, the World Bank renewed its push into water infrastructure. In 2003, the World Bank approved a new Water Resources Sector Strategy in which it promised to "reengage with high-reward-high-risk hydraulic infrastructure, using a more effective business model." However, this new strategy failed to result in a step-change in the World Bank's funding of large dams. In 2011, John Briscoe noted that the World Bank had financed only two major dam projects in the past 15 years, namely the Bujagali hydropower project in Uganda and the Nam Theun 2 hydropower project in Laos.

The World Bank's New Institutional Focus on Hydropower

In the last year, the World Bank has announced its return to funding large hydropower projects, with a particular focus on projects in the Congo, the Himalayas, and the Zambezi Basin. No longer content to watch from the sidelines as countries such as China and Brazil fund such projects, the World Bank's return to the sector reflects its belief that its multidisciplinary nature and deep experience give it a comparative advantage in mastering the complexity of large dam projects. The World Bank also claims to have improved its knowledge of how to mitigate some of the potential problems associated with large dam development, including resettlement and environmental issues.

At the International Hydropower Association World Congress, which took place in May 2013 in Kuching in Malaysian Borneo, Jean-Michel Devernay, Chief Technical Specialist on Hydropower for the World Bank, situated hydropower at the intersection of challenges facing the world such as energy security, climate change, and poverty alleviation and underlined that the World Bank's support for hydropower would play a key role in meeting the Bank's key development goals. On 16 July 2013, the World Bank adopted a new energy strategy paper, which provided that the Bank would fund coal projects in only "rare circumstances," and would instead increase lending for large hydropower and natural gas projects. The World Bank has argued that such projects could "catalyze very large-scale benefits to improve access to infrastructure services" and combat climate change at the same time, citing the Inga 3 Dam on the Congo River as an example of this approach.

What Does the Recent U.S. Legislation Mean?

The recent Leahy-sponsored provision casts doubt on whether the World Bank's latest institutional push in favour of hydropower will actually result in increased World Bank funding and may also affect the funding and hence viability of large dams by other IFIs. The U.S. makes the largest financial contribution to the World Bank and other IFIs of any country and has the biggest vote share in World Bank and other IFI boards. The Leahy provision defines IFIs as including the World Bank (including the International Bank for Reconstruction and Development, the International Development Association and the International Finance Corporation), the African Development Bank, the Asian Development Bank and the European Bank of Reconstruction and Development, each of which has funded and continues to fund large dams across the globe. Peter Bosshard, policy director of International Rivers, has pointed out that the World Bank and other international financial institutions are free to ignore the position of the U.S. executive directors. However, reflecting a tradition stretching back to the early 1980s of the U.S. Congress paying attention to criticisms of the World Bank, the new provision recommends withholding US funding for any IFI that the U.S. funds unless "such institution has a policy and practice of requiring independent, outside evaluations of each project and program loan or grant and significant analytical, non-lending activity, and the impact of such loan, grant, or activity on achieving the institution's goals, including reducing poverty and promoting equitable economic growth, consistent with effective safeguards." This gives the legislation teeth, which may well bite new projects.

The new mandates relating to large dams and IFIs constitute just a tiny part of a massive bill, signed into law on January 17, that funds the U.S. federal government through the end of this fiscal year in the United States (30 September 2014). Given the legislation will lapse after such date, it is unclear what actual practical effect the Leahy provision might have and for how long. However, in the short to medium term at least, developers of hydropower projects which include large dams face uncertainty in securing IFI funding. Whether this has a longer-lasting effect on IFI approaches to the funding of large dam projects remains to be seen.

 Alex Blomfield
 +44 20 7551 2142

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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