Three Gorges Probe

Chapter 14

(May 31, 1994)

THE BOTTOMLESS PROJECT BUDGET FOR THE THREE GORGES DAM

An Interview with Qiao Peixin1

by Li Shuxi2

Li Shuxi:When did you begin to take an interest in the Three Gorges project?

Qiao Peixin: In 1984, at the sixth session of the Chinese People’s Political Consultative Conference (CPPCC), the Economic Construction Group started to study the Three Gorges project. In May, 1985, together with Sun Yueqi and several other CPPCC members, I participated in a field survey of the Three Gorges. The more I came to know about the issue, the more I thought about it. Gradually, I became one of the dissidents on this subject.

Li Shuxi: I have read the article titled “The Three Gorges Project: More Losses Than Gains” written by you and eight other CPPCC members. Afterwards, it was learned that some departments involved in the Leading Group for the Assessment of the Three Gorges Project asserted that the project is necessary and that an early start is better than a late one. Could you comment on this in terms of budgetary concerns?

Qiao Peixin: The leading group was inclined at the outset to minimize the actual cost. The original calculation for the total project investment was Y15.9 billion, which has grown to Y36.1 billion today. In fact, there are still considerable costs that have not been taken into account in the budget prepared for the assessment report.

Li Shuxi: What major items have not been accounted for?

Qiao Peixin: In calculating the total investment required, some items can be estimated, such as the funds needed for basic construction: other figures, however, cannot yet be determined. These unknown costs, which could turn out to be huge, were not included in the budget. Moreover, the assessment did not consider the possible effects of inflation.

Li Shuxi: What is the current cost estimate?

Qiao Peixin: Based on the Yangtze Valley Planning Office’s (YVPO) estimated budget in 1985, the Investment Investigation Department of the Construction Bank made a very careful account: the investment for the construction of the key projects is Y12.4 billion; power transmission projects, Y4.9 billion; resettlement costs, Y11 billion; plus Y2.5 billion for the price increase index. The total amount comes to Y30.8 billion. According to the time limit proposed by the YVPO for the loans and repayment, the aggregated figure for the interest, calculated on an annual rate of 10.8 percent as set by the state, comes to Y45.8 billion, which exceeds the total amount of the investments, the combined sum of the two being Y76.6 billion (i.e., Y30.8 + Y45.8).3

Li Shuxi:. This is already four times that of the original estimate, isn’t it?

Qiao Peixin: Much more than that! This calculation was conducted in the way the YVPO wanted. If it had been done according to our4 method and that of the Construction Bank, the total required investment would have been at least Y30.7 billion. If you add the interest on the loans calculated over a 33-year period to the total amount for the entire project, it comes to Y107.8 billion, which is six times the original estimate!

Li Shuxi: How about the hidden costs? How many items of this kind are there?

Qiao Peixin: There are six items that can be foreseen but not clearly calculated at present:

1. The regulation of the water level in the Three Gorges reservoir has to be linked to the navigation requirements. In order to ensure a steady flow of electricity, a thermal power plant of a corresponding scale must be built. Of course, it would not have to be close to the Three Gorges reservoir area, but it would be a supplementary installation related to the Three Gorges reservoir, and its budget would certainly have to be covered by the state.

2. If floods occurred raising the water level to between 150 and 170 meters, 300,000 people would have to be temporarily removed and a number of factories and residential buildings would be submerged. The compensation for all these losses would also be the responsibility of the state.

3. An emergency budget must be set aside in the event of earthquakes.

4. After the construction of the reservoir, sedimentation would form at the upper reaches of the reservoir, while clear water would erode the banks of the river at the lower reaches, thereby changing the course of the river. Funds would be needed to maintain the main channel.

5. Because of the need to import generators, price and possible price changes constitute another unpredictable factor.

6. Since the construction period has been underestimated, the state must set aside extensive additional funds for possible prolongations of the construction time.

In a word, the total budget should include both the fixed and the contingent expenses. If the state cannot afford the expanded budget, project construction should not begin.

Li Shuxi: Since the summer of 1988, inflation in China has increased, and people are now complaining that the Renminbi5 is becoming worthless. Will that have any impact on the budget estimates?

Qiao Peixin: In the leading group’s assessment, the total investment is estimated to be Y36.1 billion, which was calculated on the basis of the price index at the end of 1986. If the project were to be started in 1989, the price increase in 1987-1988 could not be ignored. To do so would violate common sense.

Li Shuxi: It is said that the state has given project loans favorable treatment by granting an annual interest rate of 9.36 percent,6 minus the interest on investments in flood control and navigation projects. Other favorable treatments include the investment of the revenue produced by the Gezhouba dam power plant in the construction of the Three Gorges project. Will these factors in some way reduce the total cost of the project?

Qiao Peixin: Let’s look at the following table based on the favorable interest rate of 9.36 percent and see how the increase of the price index affects the investment:

Price increase index

Interest on the loans

Repayment per kWh(yuan)

Duration of the repayment(years)

The total amount of the loans & interest(billion)

0

9.36%

0.10

25

78.71

4%

9.36%

0.12

32

157.46

BudgetY36.1billion

6%

9.36%

0.17

30

202.44

8%

9.36%

0.22

28

231.39

10%

9.36%

0.27

30

320.33

Li Shuxi: You estimate the highest increase in the price index at 10 percent, which is obviously a conservative estimate.

Qiao Peixin: Yes. What I am emphasizing here is that it is impossible to have such a low interest rate. At the moment, the interest rate for investment in capital construction is 16 percent. Let’s look at another table using this interest rate:

>Price increase index

Interest on the loans

Repayment per kWh(yuan)

Duration of the repayment(years)

The total amount of the loans & interest(billion)

0

16%

0.16

38

286.1

4%

16%

0.25

31

293.9

BudgetY36.1billion

6%

16%

0.30

33

396.1

8%

16%

0.35

36

567.6

10%

16%

0.45

32

584.3

Li Shuxi: Could you make an estimate based on the present price increase index? As far as I know, according to the State Statistical Bureau, the price increase index in civil construction has reached 18.1 percent in 1988.

Qiao Peixin: Given present trends, it seems unlikely that prices will drop. If we have confidence in the efforts of the Central Committee of the Party to redress these economic trends, we might expect the price index for 1989 to be lower than that of 1988. Therefore, in my calculation, the highest price increase would be less than 10 percent. In fact, this is the traditional means of calculation used by the Construction Bank. Whatever the methods used7 the figure of Y500 billion is an underestimation, which is already 10 times over the Y36.1 billion of the initial estimate of the assessment.

Li Shuxi: If people insist on starting the project, what will the economic results be?

Qiao Peixin: The state’s scale of construction must be in keeping with its financial and material capacity, which directly affects economic stability and the balance between expenditures and revenue in the budget and in bank loans. From the present economic and financial situation, starting the project would only worsen inflation.

Li Shuxi: Can you give more details of the financial situation?

Qiao Peixin: There has been a financial deficit for quite a few years, and banks have issued too many notes, making the financial situation very serious in my opinion. That is why the Central Committee of the Party has taken a series of measures to straighten out the economic situation and curb inflation.8 Today, the investment for ongoing capital construction has reached Y420 billion, and none of these construction projects can be easily canceled. Under such circumstances, starting the Three Gorges project would only result in the issuing of even more bank notes, thereby encouraging inflation.

Li Shuxi: I hear that half of the investment is self-financing.

Qiao Peixin: This so-called self-financing refers only to investing the revenues from the Gezhouba dam into the Three Gorges project. Under the present system, no matter what means you may employ, everything comes out of state funds in the end, therefore “self-financing” has no practical significance. I have made some inquiries at the Chinese People’s Bank and the Construction Bank. There, I was warned of the gravity of the present inflation rates since neither the state nor the banks have any money. As for accounts protected against inflation, the interest rate has been more than 20 percent, whereas the interest rate on loans is only 16 percent and has to be subsidized by the banks.9 If the interest rate on loans is kept at the rate of 16 percent, then the banks will suffer more losses. The only solution then will be to print more notes, which inevitably brings about increased prices which affect salaries as well as investment in construction. All of them keep increasing by turns, producing a vicious circle. The financial results would be disastrous.

Li Shuxi:. Has anything of this nature ever happened elsewhere?

Qiao Peixin: Yes, the Brazilian military government started the construction of the Itaipu hydro-electric power station with a budget of US$18 billion. Such a costly project, combined with an acute shortage of funds at home, meant that the Brazilian government had to borrow from abroad. This resulted in a three-digit inflation rate: 110.2 percent in 1980, 223.8 percent in 1984, and 365.95 percent in 1987. Under such circumstances, the government had no choice but to call for a drastic reduction in public expenditures, including the suspension or cancellation of large-scale projects.10

Li Shuxi: I have interviewed some of the delegates of the National People’s Congress and of the CPPCC and listened to some of the debates on the Three Gorges project. One of the arguments was that to put the investment figure so high would only cause chaos regarding the advisability of the Three Gorges project. Would you comment on this?

Qiao Peixin: (indignantly) Who is causing chaos? A project costing the state billions of yuan over dozens of years before it makes a profit causes chaos. Today, inflation has become so serious that both the people and the state find it hard to tolerate.11 If this project were approved, it would ruin political stability and the plans for economic reform even before its construction could begin. I remember Premier Zhou Enlai said on November 8, 1972: “Should any trouble occur at the Yangtze River, it will be the trouble of the state and the Party as a whole rather than that of any individual.”

Li Shuxi: The Three Gorge project has become a focus of attention both at home and abroad. As the debate over this project continues, could you say something about the decision-making process as it relates to the issues of democratization and centralization?

Qiao Peixin: Of course, some progress has been made in the direction of democracy in our country. But as for the debate over the Three Gorges project, I am afraid there has not been enough democracy; the affirmative voices are allowed to be heard while the negative voices are often suppressed. Though the decision-making process seems to be democratic, this is not the case in reality.

Last year, during the session of the CPPCC, I was asked by the People’s Daily to present an article for the next day’s paper. Of course, I wrote what I thought about the project. In the interim, however, the editor received word from above, instructing him not to publish my article. As a result it had to be withdrawn.
I really wonder why different views cannot be published in the newspapers, especially when the issues involved are too important to be ignored. I believe in the saying that everyone has a share of responsibility in the fate of his country, and I therefore have taken a scientific approach to the issue of the Three Gorges project. As a matter of fact, it took me two years to write “The Three Gorges Project: More Losses Than Gains.”

We should all feel responsible for the state of the nation, for its present population as well as future generations. This is precisely the key point of difference between my position and that of the assessment report. It all boils down to one’s primary responsibility to speak nothing but the truth.


Sources and Further Commentary

1Qiao Peixin has held leading posts in the field of finance. In 1981, he retired from the post of vice-director of the Chinese People’s Bank. He is now president of the Chinese Banking Association, and a member of the Chinese People’s Political Consultative Conference. This interview was included in the original Chinese edition of Yangtze! Yangtze!

2Li Shuxi, a journalist and writer, is deputy editor-in-chief of Economics Daily.

3 In fact, recent estimates put the cost of the project at Y75 billion. See Appendix E.

4 The Chinese Banking Association’s method of calculation.

5Renminbi is commonly referred to as the people’s money. Up until late 1993, it could not be exchanged for foreign currency, and therefore its value on the black market dropped.

6As opposed to the official state-set rate of 10.8 percent.

7 Either the Chinese Banking Association’s or the Construction Bank’s method was used.

81993 saw renewed efforts in this direction as China’s inflation rate hit 14 percent

9As the banks are state owned, this subsidy is ultimately a state subsidy.

10Then Party general secretary, Zhao Ziyang, visited Brazil in 1985 where he reportedly carried out extensive discussions on this issue. See Lieberthal and Oksenburg, Policy Making, p. 337.

11Popular reaction to high levels of inflation in China was, in fact, a major cause of the 1989 pro-democracy movement in the country’s urban areas.

Categories: Three Gorges Probe

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