Dams and Landslides

Big dam beset by big money troubles

Kelly Haggart

March 19, 2002

The cost of moving people to make way for the Three Gorges dam has soared hundreds of millions of dollars over budget and is one reason project managers are now scrambling to resolve funding problems, a respected Chinese publication reports.

The Three Gorges Project Development Corporation, which is building the world’s biggest dam on the Yangtze River, has announced plans to raise up to 5 billion yuan RMB (US$600 million) next year through an initial public offering on the domestic A share market. While only Chinese citizens can buy A shares, project officials hope to go on to raise more funds with a listing in Hong Kong, and possibly to tap international markets in London and New York.

A source in the Three Gorges corporation’s financial department told the Guangzhou-based 21st Century Economic Report (Ershiyi shiji jingji baodao) that this year will be an expensive one. The 2002 project budget is US$2.2 billion dollars, and raising that kind of money will be extremely difficult, the source said. Next year is expected to be costlier still.
The dam’s spiralling debt has become a major worry for project officials. Lu Youmei, general manger of the Three Gorges corporation, is quoted as telling a recent internal meeting about his concern that capital to build the dam was increasingly in the form of loans rather than interest-free government grants. More than half the capital in place by the end of last year had come from interest-bearing loans, Mr. Lu said – US$9.5 billion in all, of which 54.4 per cent was from loans and 45.6 per cent from non-loan sources.
The 21st Century Economic Report – a sister publication of the popular and courageous Southern Weekend (Nanfang Zhoumo) newspaper – said Mr. Lu had sounded more optimistic a couple of years ago. At that time he told a news conference in Beijing that the project budget had been brought under control and would not exceed US$22.5 billion. But now officials in his financial department say the cost of construction will reach US$25.5 billion, partly due to inflation and interest-rate fluctuations. (Industry sources estimate the final figure could be US$36 billion or more.)
The Three Gorges’ financial projections have also been thrown off by problems afflicting the resettlement operation, which have led to an unexpected escalation of costs, 21st Century Economic Report said. Guo Shuyan, deputy director of the Three Gorges Project Construction Committee, told reporter Luo Lie that US$768 million more than budgeted had been spent on the resettlement program by the end of last year.
This year’s resettlement budget has been set at US$900 million, with 143,700 people to be moved and 4.4 million square metres of new housing to be built. In addition, 137 factories must be relocated this year, the weekly publication said.
Mr. Guo cited three problems that could hamper this year’s resettlement work. “The first is that we are going to have a particularly tough time moving people because construction of infrastructure in the resettlement sites has greatly lagged behind, and some measures will need to be taken to address this issue. “
The second problem is that we have too many things to do in dealing with geological disasters and environmental protection. These issues have become urgent and difficult, and require a high degree of technological input. (For more on these problems, see Landslide threatens new town of 10,000 people and Radioactive debris, diseased rats, anthrax and E. coli: The reservoir-cleanup concerns pile up.) “
The substandard quality of rural resettlement poses the third challenge, and this must be solved immediately,” Mr. Guo was quoted as saying, though no details were provided.
According to official estimates, 1.2 million people are to be resettled because of the dam, though critics of the project say the final figure is likely to be close to two million. Almost half the initial budget worked out for the Three Gorges project was earmarked for the resettlement program, including the funds needed to compensate displaced people and build new settlements. (The budget can be found in Chinese on the Web site of the Chang Jiang Water Resources Commission.)
But the skyrocketing cost of resettlement is far from being project officials’ only financial worry. Potential investors both inside and outside China are hesitant, and wonder whether the costly project could yield commercial rates of return. Li Yongan, deputy general manager of the Three Gorges corporation, has acknowledged that returns will not be spectacular. “The era of 15 per cent guaranteed rate of return for power projects in China is gone forever,” he told the Financial Times of London.
Resentment is also brewing within the Three Gorges Project Development Corp. itself, 21st Century Economic Report said. Staff at the Gezhouba dam – 40 kilometres downstream of the Three Gorges dam and a major source of funding for the Three Gorges project – are unhappy that revenue generated by their own power plant is being poured into the Three Gorges project.
The Gezhouba scheme was a separate entity before it was bundled together with the Three Gorges project to become part of the Three Gorges corporation. Now, the corporation plans to set up a new energy giant called China Three Gorges Power Corp. later this year, before listing its shares on Shanghai’s A market next year. The 21st Century Economic Report quotes an insider at the Gezhouba dam who questions whether the proposed China Three Gorges Power Corp. will be able to sell the electricity it hopes to begin generating next year. For a start, it will have to overcome entrenched regional market protectionism.
Local governments prefer to support their own power plants (and strengthen the local tax base) rather than buy in electricity from elsewhere. The example of Ertan, currently China’s largest hydro dam and partly funded by the central government, is a case in point. Ertan risks bankruptcy because Chongqing municipality and Sichuan province, where the dam is situated, are reluctant to buy its electricity. (See the People’s Daily report, Why Ertan cannot sell its power.) Ertan faces the twin problems of a regional energy glut and competition from smaller power plants built by local authorities.
Without state protection, the Three Gorges dam will have trouble finding customers in China’s soon-to-be-competitive electricity market. (For a detailed discussion of this issue, and of cheaper, more efficient energy alternatives to big dams, see The Three Gorges Dam: a great leap backward for China’s electricity consumers and economy.) Local authorities have no interest in supporting big centrally funded projects such as Ertan or Three Gorges – and have to be ordered to do so. Indeed, the Financial Times reports that Mr. Li of the Three Gorges corporation “puts his trust in administrative fiat.
“The government has adopted some resolute measures,” Mr. Li was quoted as saying. “They have said to the provinces that they must take Three Gorges power before any other source. If they want to build their own plants, they can but only after they take our power.”
The Three Gorges corporation is also urging the central government to absorb as much as 25 per cent of the project’s debt. “We are now persuading the government to allocate this portion of the cost to the government,” Mr. Li said. “If we succeed, then the rate of return will be a lot higher.”
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