Dams and Landslides

Investors beware: Sacred cow is a white elephant

Kelly Haggart

May 9, 2003

Investors should be very wary of involvement in the Three Gorges dam, which requires constant government protection and coddling, and lacks inherent value and economic viability.


Analysis

As China prepares to raise funds on the domestic stock market to complete the Three Gorges dam, it is jumping through hoops to make an uneconomic project look good. But investors should be very wary of involvement in a venture that requires constant government protection and coddling, and lacks inherent value and economic viability.

“Potential investors should realize they would not be investing in a financially healthy enterprise, but in a political sacred cow,” says Patricia Adams, an economist and executive director of Probe International (which publishes Three Gorges Probe).

To earn the promised rates of return, investors will have to depend on government fiat to continue propping up Three Gorges. “The Chinese government protects this project with subsidies, by transferring costs to the public purse, and by forcing electricity consumers to buy more expensive Three Gorges power. They justify this special treatment on the grounds that the scheme is essential for flood control,” Ms. Adams said. “But the bottom line is that the project is a loser, both in terms of power generation and flood control.”

Building the Three Gorges dam will cost 180 billion yuan RMB (around US$22 billion), according to conservative official figures. By the end of last year, the builders of the dam had raised about half that amount. The funds have come mostly from state sources in the form of capital grants and preferential loans – all justified by the disputed claim that the dam is needed to protect lives and property from devastating Yangtze floods.

China Yangtze Electric Power Corp. – a subsidiary of the corporation building the dam – now hopes to secure up to five billion yuan RMB (more than US$600 million) through an initial public offering on the domestic stock market before the end of this year. It seeks to reap 40 billion yuan RMB (almost US$5 billion) this way over the next decade – an unprecedented sum to try to raise on Chinese equity markets.

“From a financial perspective, the Three Gorges is very attractive,” Asiamoney magazine quotes Kou Riming, chief financial officer of the dam-building corporation, as saying. “But some people always ask environmental or ecological questions and still have some doubts about the project.”

By sticking to its own less transparent markets with the share issue, China can avoid the more stringent disclosure requirements of foreign exchanges, along with tougher scrutiny of the Three Gorges scheme’s social and environmental consequences.

“Foreign investors know that threatening human rights and endangered species is bad news,” Ms. Adams said. “They also know that reservoir-induced seismicity, landslides, the dangerous accumulation of sediment in the reservoir and a plethora of other ‘environmental’ problems translate into costly technical problems, unforeseen liabilities and, ultimately, crippling financial costs.”

Chinese investors, with few other outlets for their cash on the domestic markets and less access to accurate information than their foreign counterparts, may still find China Yangtze Electric Power Corp.’s share issue attractive – and especially the claim that more than half the corporation’s profits will be handed back in dividends.

However, analysts are extremely skeptical about the promise of generous dividends, when the whole point of the IPO is to raise large volumes of equity to fund major purchases, such as the Three Gorges’ 26 giant turbines, and to finance future dam-building schemes.

The forthcoming share issue will be based on the dam’s hydropower-generation capacity, while the state continues to absorb project costs related to flood control, navigation and resettlement. This is how the dam is made to appear to be a viable economic concern, Ms. Adams says: by hiving off its huge social and environmental costs, and making taxpayers pay for those.

As one unnamed commentator, quoted in the March issue of Asiamoney magazine, says: “You can always make anything sustainable if you take a bunch of costs out and call it costs of flood prevention. Then the income looks much better.”

What’s more, Ms. Adams says, “the externalization of many of the dam’s costs onto the state is based on the scheme’s supposed flood-control benefits, which are themselves a fiction. Investors look at Three Gorges and see some pretty scary economics, but feel reassured by its ostensible flood-control role. They might assume that if the project has such enormous social value the government would never abandon it, and would prop it up forever.”

The bottom line, she says, is that the project is a boondoggle from an energy point of view. “Three Gorges electricity will be at least two to three times more expensive than power from readily available alternative sources, such as cogeneration and high-efficiency gas turbines, which also happen to be environmentally cleaner. I predict that eventually the economic appeal of alternative sources of power will be so compelling that Three Gorges will lose its favoured-son status.”

Customers will come to resent paying more for Three Gorges electricity and could rebel, seeking cheaper power sources elsewhere, Ms. Adams predicts.

“Of course, the state can manipulate the project’s economics for a long time, but that still doesn’t make Three Gorges a viable project,” she said. “Someone will have to pay, and it will be the ratepayers charged exorbitant rates and the taxpayers paying unfair amounts. Investors should know that they will be protected at the expense of Chinese citizens.”

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Flood-control argument full of holes

Flood control has long been touted as the most important function of the Three Gorges dam. But leaked, high-level documents dating from 2000 and obtained by Three Gorges Probe reveal that top Chinese officials know the dam will not provide the promised flood-control benefits.

“So even this last official justification for the dam is full of holes, and the flood-control argument melts away when you read the secret correspondence and other expert opinion,” Patricia Adams says.

The correspondence and transcripts of meetings show that the flood-control problem was discussed by Zhang Guangduo, an eminent Qinghua University professor who was in charge of part of the Chinese feasibility study on the dam, and Guo Shuyan, deputy director of the Three Gorges Project Construction Committee.

“Perhaps you know that the flood-control capacity of the Three Gorges project is smaller than declared by us,” Prof. Zhang said during a meeting with Mr. Guo. “The research showing that the dam’s flood-control capacity is inadequate was done by Qinghua University,” and “the Changjiang Water Resources Commission [planner and designer of the dam] has also admitted this is true.”

Prof. Zhang argued that the threat of floods could be addressed by lowering the water level in the Three Gorges reservoir to 135 metres above sea level, though this would adversely affect shipping on the river. “But keep in mind,” he urged Mr. Guo, “never, ever let the public know this.”

Experts such as Chinese Academy of Sciences researcher Chen Guojie have argued for years that the Three Gorges dam will be futile in the face of the most common type of Yangtze flood, such as occurred last year around Dongting Lake, 500 kilometres downstream of the dam. Floods of this kind are caused by incessant rain falling in areas downstream of the dam, and combining with floodwater from rain-swollen tributaries that join the main channel of the Yangtze below the dam.

This kind of flood “must not be underestimated,” Prof. Chen writes in a book on Yangtze floods published by Beijing’s Sciences Press. “And, more significantly, the Three Gorges dam currently under construction will be totally useless against this type of Yangtze flood disaster.”

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