Information in: Español - Français - Deutsch - Português - Russian - Japanese - Svenska - Italiano - Suomi

Large Dams

March 2002
By Peter Bosshard (*)

Power Finance: Financial Institutions in India's Hydropower Sector

Published by International Rivers Network, Urgewald and the South Asia Network on Dams, Rivers and People

This new report examines the latest trends in financing hydropower projects. Based on India's experience, it untangles the complicated web by which large dams are now being funded through financial intermediaries. It analyses the problems the new funding mechanisms create, and demonstrates how NGOs and social movements can press for accountability, human rights and environmental protection in a new era of indirect financing.

Dams have long been among the most controversial of development projects. As a consequence of growing public concerns about environmental destruction and human rights violations, international financial institutions have to a large extent withdrawn from funding large dams. "We are almost gun-shy of dams now", says Preben Nielsen of the Asian Development Bank. "The risks are great, the visibility is high, and the vulnerability is a constant concern." Most bilateral institutions have also stopped funding large dams. As the examples of Ilisu (Turkey) and Maheshwar (India) demonstrate, even export credit agencies have begun to reconsider their involvement in the sector.

International funding agencies, however, are increasingly supporting domestic financial intermediaries and utilities involved in developing hydropower projects. Straightforward project lending has been substituted by a maze of indirect financing. India's Power Finance Corporation, the China Development Bank and other domestic institutions raise funds from foreign lenders and channel them into projects which international financial institutions and banks would no longer dare to touch directly .

Who shares the responsibility for projects funded through financial intermediaries? What policies are applied? Whom can affected people hold accountable when projects are funded through intermediaries? And what strategies can NGO networks use to integrate environmental and human rights concerns into the new financing mechanisms?

Power Finance addresses these questions based on India's recent experience. It analyses in detail the role of government institutions and private investors, banks and insurance companies in the funding of hydropower projects in India. And it examines how multilateral and bilateral development institutions, export credit agencies and
international banks work together with domestic institutions in funding large dams. The report concludes that since the 1980s, financial institutions have gone through "a cycle of hope and disillusionment regarding hydropower projects in India". Funders have however never analysed the reasons why such projects have failed to deliver on their promises.

Power Finance demonstrates why financial institutions again and again end up funding uneconomic and destructive projects. Project appraisal by domestic financial institutions is skewed by the vested interests of private contractors and their political allies. International financial institutions focus on privatization in their power sector reforms, and neglect a balanced assessment of all options including efficiency gains. They extend large loans to power utilities and financial intermediaries which in turn fund wasteful and destructive power projects. In some cases (such as the World Bank's International Finance Corporation), they do not even inform the public, or affected people, about the projects they support through financial intermediaries. The new report concludes with a list of recommended actions and policy changes to address these problems.

Power Finance: Financial Institutions in India's Hydropower Sector, by Peter Bosshard, published by SANDRP, Urgewald, and IRN, March 2002, vi + 124 pp., $35 ($15 for NGOs), Euro 35/15, Rs. 100.

The report can be ordered from:
cwaterp@vsnl.com (for distribution in South Asia),
urgewald@urgewald.de (Europe),
irn@irn.org (other parts of the world).

(*) Peter Bosshard, formerly Secretary of the Berne Declaration, has a long history of researching, writing and campaigning on financial institutions and the power sector. He can be reached at
powerfinance@irn.org.