MERFI implemented the socio-economic, macroeconomic and cumulative impact assessments of the Mekong River Commission’s Council Study

The Council Study implemented a multi-disciplinary assessment of a set of scenarios the four MRC Member Countries agreed on. These scenarios include a wide range of development projects, including hydropower, irrigation, flood protection and navigation, and focused on the period until 2040. MERFI designed in close partnership with the MRC Secretariat the methodology for the socio-economic, macroeconomic, and cumulative assessments.

The Socio-economic Assessment

A primary objective of the socio-economic assessment was the estimation of changes in social and economic conditions within the Lower Mekong Basin (LMB) associated with i) the three main water development scenarios and 13 sub-scenarios considered in the CS and ii) the socio-economic conditions associated with exogenous, or non-water development, factors and iii) estimated changes in socio-economic conditions expressed as a revised suite of socio-economic assessment indicators. The social and economic component

of the Council Study addressed food, water, health, energy and income security, including sector employment and gender equality. Substantial changes, both positive and negative, are anticipated for the 2040 scenario. The changes are not uniformly distributed across the studied corridor of 15 km along the Mekong River and affect Member Countries unevenly, in different ways, and at different times. The analysis builds on the modelling implemented by the fisheries and the hydrology teams of the Council Study and feeds into the macro-economic and the cumulative impact assessments.

There is overall sufficient rice and fish production and surplus in the corridor to sustain 100% food security. However, maintaining this will require effective, willing distribution networks and cooperation amongst Member Countries to avoid significant increases in undernourishment in parts of the corridor under the 2020, 2040 and 2040 with climate change scenarios.

Managing fish declines is central to improving food security. Over the whole corridor, a reduction of ca 3,800 tons of fish corresponds to an increase of 1,000 households defined as undernourished in the 2007 scenario. Sensitivity to reductions in fish availability increases in the 2040 scenario where 3,300 tons of fish correspond to an additional 1,000 undernourished households. An increase of 12,500 tons of rice reduces the number of undernourished households by 1,000.

Overall fish catch declines by 43% in the 2040 scenario and by 40% in the 2040 with climate change scenario. The 3% variation in 2040CC is attributed to improved habitat for generalist species in Cambodia and the Delta. Rice production increases by 16% in the 2040 scenario and by 13% under the 2040 with climate change scenario.

The number of undernourished people in Cambodia and Lao PDR increased in the 2040 scenarios, compared to the 2007 baseline and remained relatively stable in Thailand and the Vietnam Delta.

Fish surplus declines to near zero in Lao PDR and in zones in Cambodia away from the Tonle Sap and remains positive in Thailand and Vietnam for the 2040 scenarios. Reduced surplus reduces resilience and the capacity to manage acute food shortfalls. Increased prices are likely to affect poor households. It is unclear if wage and income increases at current rates will provide sufficient compensation.

Increased fish prices introduce an incentive to convert land to aquaculture. The widespread use of antibiotics, deterioration of water quality and possibly reduction of water quantity due to the cumulative effect of dam impoundments will need monitoring and management. Developing agreed aquaculture production standards and monitoring protocols is an opportunity for trans-boundary cooperation.

A 10-11% decrease in rice production due to extreme flood affects 4.5-5.0% of the corridor population. An 11% decrease in rice production due to extreme drought affects 3.1-3.3% of the people. In case of extreme floods and drought (for example the 1995-96 El Niño and 2000-01 floods), Cambodian riparian communities appear to be the most affected. Years are predicted where drought or floods coincide with large fish declines, introducing the potential for acute undernourishment. The effects are likely to be more severe in Cambodia under the 2040 scenario with climate change, requiring careful transboundary planning.

The Macroeconomic Assessment

The macroeconomic assessment focused on three separate tiers, (1) a narrow sector specific cost-benefit analysis, (2) a projection of GDP growth for the lower Mekong basin and its member countries, and (3) a sustainability focused assessment of natural capital changes to approximate impacts on GDP growth potential. The sector-specific tier focused on the benefits and costs for hydropower, fisheries, agriculture, and navigation.

The development scenarios defined for 2020 and 2040 are likely to combine positive and negative outcomes. At the narrow sector level, much of the hydropower and agricultural expansion appears very positive. At the same time, hydropower is likely to trigger substantial losses in the fisheries sector. Agriculture is likely to receive too much investment and likely to lower macroeconomic growth. Some hydropower and a few selected agricultural expansion projects appear highly beneficial. This requires a project-by-project impact assessment. Substantial risks are linked to climate change as a drier climate change scenario (C3) would trigger substantial losses.

The overall combined macroeconomic gains are not only triggering large cross-sector trade-offs but also losses in natural capital. Small and more focused agricultural extension combined with productivity improvements for existing areas would lead to more sustainable outcomes. Similarly, if certain hydropower projects could be replaced by more sustainable forms of power generation, important secondary and tertiary sector growth could be achieved without large cross-sector losses.

Cambodia shows substantial GDP growth potential and could move its GDP from around $21 billion in 2017 to over $50 billion in 2040. Under 2040 development plans, GDP growth is likely to be lower at around $38.5 billion. This slowdown is largely due to the effect of excessive agricultural expansion and partly due to the decline in fisheries caused by hydropower. Cambodia is likely to experience from a national perspective the highest trade-off: for every dollar gained from hydropower about 62 cents would be lost in fisheries. Climate change that is drier than expected would affect GDP substantially and cause a further decline in fisheries of nearly 15%. The scenario for 2020 with only a subset of selected, highly beneficial agricultural expansion projects is likely to create the highest macroeconomic benefits.Lao PDR shows immense economic growth potential and could increase its GDP from about $17 billion in 2017 to over $42 billion in 2040. However, negative trade-offs associated with the 2040 development plans are likely to slow down GDP growth, leading to a GDP for 2040 of around $30 billion. Some investments included in this study are likely to help realise higher

growth while others would counter the growth trajectory.

Many hydropower projects are likely to be very beneficial to the national economy of Lao PDR. However, about 14% of hydropower benefits would be lost in fisheries reductions, which would also trigger substantial food security issues. Most of the hydropower benefits (70-80%) would go to foreign investors from Thailand, China, Malaysia or South Korea. Drier than expected climate change is a major risk and would reduce hydropower benefits by up to $2.2 billion in net present value.

From a macroeconomic perspective, agricultural expansion plans are likely to be too ambitious as workforce demands at current productivity levels would slow down macro-economic growth, particularly planned growth in the manufacturing and services sectors.

Thailand could double the GDP of its Mekong Basin areas from about $51 billion in 2017 to over $100 billion in 2040. The 2040 scenarios, however, are likely to realise a lower GDP of $71 billion due to the main negative effect of fish catch reductions. The hydropower-related benefits for Thailand or for Thai companies from mainstream hydropower in Lao PDR are substantial with up to $82 billion in net present value for the 24-year time period. These would coincide with income losses for small households along the Mekong of nearly $7 billion in net present value as fish stocks decline. Investments in secondary and tertiary sectors will be the most critical pillar for successful economic development. Vietnam has the potential to increase the GDP generated in its Mekong Delta area from about $50 billion in 2017 to about $93 billion in 2040. Proposed development plans for 2040 are likely to realise a lower GDP of $81 billion due to a range of negative development effects. Current strategies to prioritize investments in food processing instead of food production and to stimulate additional secondary and tertiary sector growth (e.g. in the transport sector such as navigation, education) are very promising. The past has shown that challenges for real GDP growth have been experienced as inflation peaks erased much of the economic growth. There is a risk that similar inflation peaks will be repeated as fish and other food prices are likely to increase substantially if hydropower investments are implemented as defined under the 2040 scenario. The LMB-wide trade-offs that hydropower is likely to cause for Vietnam’s fisheries would be substantial with $1.7 billion in net present value for the 2020 scenario and $3.2 billion for the 2040 scenario. Effective mitigation could involve sustainable expansion of fish farms and substantial investments in secondary and tertiary sectors to reduce community vulnerabilities.

Future growth potential depends on the availability of input factors. A key input factor is natural capital, in particular if growth in secondary and tertiary sectors (e.g. tourism) is targeted. The analysis of this perspective indicates that agricultural expansion and hydropower would cause a substantial loss of natural capital. The 2020 development plans would cause a decline of natural capital of $55 billion in net present value for a 24-year time period. Two thirds of this loss would be caused by deforestation to expand agricultural areas (actual loss until 2015). The loss of fish across the lower Mekong basin would establish one third of natural capital losses. The 2040 development plans would reverse the trend in loss of natural capital due to reforestation plans, which would increase natural capital by approximately $30 billion in net present value despite a large loss in fish. Thailand would suffer the largest absolute loss in fish related to natural capital (2020 scenario: $21 billion; 2040 scenario: $27 billion), followed by Cambodia (2020 scenario: $16 billion; 2040 scenario: $21 billion).

The loss in natural capital (-$33 billion) equals about one third of the combined effect of 2020 development plans across the four target sectors (+$148 billion). For 2040 plans the combined change in the four target sectors (+$302 billion) would be supported by the increase of natural capital ($30 billion). However, the combination of substantial agricultural expansion and extensive reforestation is highly challenging, in particular as urbanisation rates continue to rise. This challenge could be met by realising only the most beneficial agricultural expansion projects and focussing on efficiency gains in existing areas. Considering the relevance of fish losses for natural capital it is advisable to complete a project-by-project impact assessment of planned hydropower projects and realising only the most beneficial projects with effective mitigation measures would make substantial sustainability improvements.

Cumulative Impact Assessment

The cumulative impact assessment aims to synthesise across all disciplines and sectors to estimate (1) impacts on the resilience of communities in the lower Mekong basin, (2) impacts on the sustainability of the lower Mekong basin, and (3) transboundary trade-offs.

The key conclusions of the cumulative impact assessment are:

The development plans are likely to combine a group of highly beneficial and a group of non-beneficial hydropower and agricultural expansion projects.
Hydropower development plans increase energy security and contribute to economic growth, but result in substantial losses in ecosystem services, many of which are transboundary.
The developments included in the 2020 and 2040 scenarios are likely to reduce resilience and increase vulnerability of rural communities in the LMB, particularly in Lao PDR and Cambodia.
Poor households along the Mekong River are likely to be most disadvantaged, but the urban poor are also likely to face considerable challenges as fish prices are expected to increase.
Weather variability, particularly that associated with a drier climate, is likely to exacerbate the expected impacts on poor people.
The development plans conflate beneficial and non-beneficial hydropower and agricultural expansion projects.
The trade-offs between hydropower development and fisheries are substantial and require a project-by-project assessment.
The water resource developments defined by the main scenarios will result in substantial sustainability losses, many of which could be reduced or avoided by adjusting planned investment in hydropower and agriculture.
In the absence of successful cross-sector benefit sharing, the sustainability index[2] would drop substantially by 6 points from ca 30 points to ca 24 if 2040 development plans were implemented (Cambodia -30%, Lao PDR -28%, Vietnam -23%, and Thailand -17%). The positive and negative impacts of development will be unevenly distributed, with most benefits accruing to energy companies and most impacts experienced by fishing households.
Effective benefit sharing needs to be designed as a cross-sector mechanism and not a compensation scheme between countries because beneficiaries (e.g. energy companies) and disadvantaged groups (e.g. fishing households) alike are located in all four countries.
A possible burden sharing mechanism could be a levy, which would need to be approximately 8.6% for tributary dams and 18.9% for mainstream dams to avoid unfair distribution.

One key recommendation from the CIA is to conduct a project-by-project assessment as current development scenarios combine both highly positive and negative hydropower and agriculture projects. Cumulative impacts need to be adequately considered in this process.

Finally, considering the irreversible effects and path dependency of hydropower development in the LMB, it is strongly recommended that current and future energy planning includes consideration of other renewable power generation technologies as these are increasingly being viewed as less environmentally-damaging alternatives to hydropower.