Financial Times
October 29, 1999

POWER PROJECTS PROBLEMS AT ERTAN POWER STATION BODE ILL FOR GIANT THREE GORGES SCHEME

China’s largest hydro-electric dam, built with the biggest project loan ever extended by the World Bank, is running at about half capacity and making a hefty loss, executives and bankers said yesterday.

The bleak situation at the Dollars 3.4bn (œ2bn) Ertan Hydropower Station, which started operating late last year, may further complicate the implementation of the controversial Dollars 29.5bn Three Gorges dam across the Yangtse river.

It may also tarnish the reputation of Li Peng, the former premier who still ranks second in the Communist party hierarchy, who has been the champion of both projects.

A manager at Ertan, in the south western province of Sichuan, said that the dam, built with Dollars 1.8bn in World Bank loans, is expected to lose more than Rmb1bn (œ72.2m) this year. Losses are expected to spiral next year after the last two of six turbines are installed for a total generating capacity of 3,300MW.

"The Sichuan provincial government has ordered only about half of our current generating capacity. We do not see the situation improving next year," said the manager, who declined to be identified. He added that the Sichuan provincial government, the dam’s main customer, has agreed to pay only Rmb0.17 cents per kw/ h, compared to the Rmb0.30 cents that had originally been budgeted for.

The fundamental problem is that Sichuan, along with many other parts of China, has an electricity glut after a steady slowdown in economic growth from 12.6 per cent in 1994 to a predicted 7 per cent this year. A second, but potentially more serious problem, is that the electricity generated at Ertan is significantly more expensive than that produced by smaller power stations that have sprung up since Ertan’s inception in 1991.

There are also issues of local politics. Chongqing, which in 1991 was Sichuan’s largest city, has since become a separate administrative region. It has agreed to take only a fraction of the power that was originally earmarked for it.

"We have our own power stations to satisfy our needs and they are cheaper than Ertan. Why should we take that power?" said a Chongqing city official.

The World Bank is confident of that its loan will be repaid on time because of a ministry of finance guarantee. However, a World Bank official expressed concern over the project and said talks were under way to find a solution to its grave financial problems. This may include rescheduling or refinancing its debts.

The implications of Ertan’s predicament for the Three Gorges stem from the two hydro projects’ many similarities as pet projects of Li Peng.

Ertan’s difficulties may strengthen the position of those such as Zhu Rongji, the premier, who are critics of the Three Gorges. It may also complicate efforts to bridge an Rmb25bn funding shortfall for the second phase of the Three Gorges, possibly via foreign lenders.

But Ertan’s problems are unlikely to derail Three Gorges, China’s biggest infrastructure undertaking since the Great Wall, because a retreat from the project would cost too much in national prestige.