Thu, Nov 22, 2001 page19

• China plays by own rules on Three Gorges Dam

  International investors lament that China hides its intentions and changes the rules willy-nilly, which makes it difficult to assess the risks of doing business there

  • BLOOMBERG
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  Three Gorges Dam, which is rising on China's Yangtze River, is the world's biggest construction project. As many as 30,000 workers have manned nine concrete plants, 40 cranes and hundreds of trucks as the wall stretches toward its 18-story summit. When completed in 2009, the dam will be wide enough to block the Golden Gate Bridge.

  The project, costing an estimated US$25 billion, will generate as much electricity as 18 nuclear plants for homes and industries as far as 1,000km away in Shanghai and Guangdong, according to State Power Corp, the government utility that will distribute the power. And the government says Three Gorges Dam will tame the Yangtze's floods, which killed over 320,000 people during the 20th century.

  International investors aren't convinced about the benefits of the dam, which will take a toll on people and the environment. To make room for the 660km-long reservoir the dam will create, the government is uprooting at least 1.1 million residents. When the basin fills, towns will vanish and people like Shen Yauyin, a 93-year-old former shopkeeper, will have to move.

  "I have lived here all my life," says Shen, his great-granddaughter tugging at his blue Mao suit. "But moving is state policy, so we have to do it." As China steps on to the international stage -- hosting the APEC summit this past October, completing its 15-year quest to enter the WTO and preparing for the 2008 Olympic Games -- investors are struggling to decipher the rules for doing business in the world's most promising market. The Three Gorges project embodies the contradictions and difficulties they face.

  On one hand, the dam reinforces the expectation that China will put national goals first, even as it agrees to adopt rules of free trade. On the other, China's 1.3 billion consumers form a market that is too large to ignore. GDP rose 7 percent in the third quarter -- almost triple the IMF's forecast for the rest of the world this year. Trade Minister Shi Guangsheng predicts that GDP will expand to US$1.51 trillion by 2005 -- a 40 percent surge from last year.

  "We know China has a lot of problems, lots of hindrances and difficulties," says Michael Lung, president of Dow Chemical Co's China unit, which is awaiting Beijing's approval to build a US$3 billion petrochemical plant in the northern city of Tianjin. "But the rewards are pretty big too. Can you afford to take the risk of not being a player in the Chinese market and hope 20 years later you are still a major player?"

  Many investors think not. Foreign direct investment increased 20 percent in the first eight months of this year to US$27.4 billion, according to the Ministry of Foreign Trade and Economic Cooperation.

  Contracted foreign investment, a gauge of future projects, rose 32 percent to US$43.7 billion. And the number of companies registered as foreign funded -- those that derive 51 percent or more of their registered capital from non-Chinese firms -- climbed 19 percent to 16,344.

  Still, many foreign investors have shunned the Three Gorges project. State Power officials acknowledge that it's difficult to reconcile the dam with investor expectations.

  "We are trying to state clearly our stance on migration issues," says Deputy Director General Chen Dongping, seated in the utility's Beijing headquarters, a former Qing dynasty home with carved pillars and Chinese paintings on the walls. "Based on the situation in China, it's very difficult for us to do so in a way that will satisfy Western investors."

  State Power says it intends to tap overseas funding sources when the country builds another 23 large hydro-power dams at an estimated cost of more than US$56 billion. Ouyang Changyu, head of planning at State Power's Department of Strategic Study and Planning, says the utility wants outside funding to account for a quarter of those investments.

  First, China will have to quell concern over the dam's social and environmental costs and avoid stirring similar objections with future projects, analysts say. "If [Three Gorges] is unsuccessful, including the resettlement and other issues, it will be a black eye to China," says Lester Ross, Beijing-based counsel for law firm Paul, Weiss, Rifkind, Wharton & Garrison, which advises foreign businesses on establishing and running operations in China.

  Because of the controversy over Three Gorges, more than US$12 billion of the dam's funding is coming from a tax on household electricity. China's State Development Bank provided more than US$3.6 billion in loans.

  China plans for power generation to repay the loans once the dam is completed, says Wang Jiazhu, vice president of China Yangtze Three Gorges Project Development Corp, the company set up to build and run the dam.

  The World Bank, which has financed 170 dams since 1970, has stayed away from Three Gorges. "The World Bank evaluation process would have taken too long," says State Power's Chen. "We chose to go it alone."

  World Bank officials declined to comment.

  The US Export-Import Bank, which provides financial assistance to companies with a view to promoting US trade, refused to extend credit to US firms trying to work on the dam, citing environmental concerns such as silt building up in the reservoir.

  The lack of financing or loan guarantees meant that most US contractors got excluded from bidding on contracts for the dam. Only a few companies, such as Rotec Industries Inc -- which had the only system capable of delivering concrete to a project the size of Three Gorges -- are taking part.

  One reason international lenders have shied away is that environmental groups have mounted a drive against the dam.

  Berkeley, California-based International Rivers Network and Toronto's ProbeInternational charge that Three Gorges Dam will cost triple the official estimate of US$25 billion and will fail to prevent flooding.

  Environmentalists also have targeted such international banks as Morgan Stanley Dean Witter & Co. International Rivers says the banks have helped raise money for the dam by working with China's State Development Bank, the nation's second-biggest issuer of bonds used to finance construction projects such as roads.

  China International Capital Corp, which is managed and 35 percent owned by Morgan Stanley, serves as Three Gorges Corp's adviser on overseas capital raising. In addition, Morgan Stanley says it was one of six co-lead managers of a US$500 million bond issue for China Development Bank in 1999.

  Morgan Stanley spokesman Bret Gallaway says his bank hasn't directly raised money for the dam and doesn't control State Development Bank investments.

  The issue of whether US banks are directly supporting controversial projects is likely to draw closer scrutiny if China seeks outside funding for future efforts, analysts say.

  "The experience with the Three Gorges has shown they're likely to run into all kinds of opposition and difficulties if they want to get overseas finance," says Fred Hu, director of Asian economic research at Goldman Sachs Asia in Hong Kong.

  One US company, Dallas-based Panda Energy International Inc, says it's already had a hard time working in China. In 1995, Panda began building a coal-fired generating plant near Beijing.

  Panda's president Todd Carter says the Chinese government agreed to buy electricity for 0.70 yuan (US$0.08) a kilowatt hour. By 1999, China was in an economic slump and cut the rate in half, Carter says. Panda also faced a tough competitive situation because government-subsidized plants were selling cheaper electricity.

  Panda sold its plant in September, and Carter is reluctant to return. "The playing field was not level, and the commitments were not honored," he says.

  Right now, China is focusing on ensuring that it moves people from the reservoir area without creating dissent or attracting further criticism. The first relocations began in 1994, one year after work on the dam started.

  When the reservoir rises, 129 towns and cities and 24,500 hectares of farmland will be flooded. That's caused an outcry from some who will lose their homes.

  "We are farmers. Our land is our livelihood," says 52- year-old Nie Guangqing, who grows cucumbers on her farm in Xiufeng Village, about 180km upstream from the dam.

  "If you flood it, what will we live on?" At the dam site, construction bustles day and night. The dam's main section will begin to hold back the Yangtze within a year, according to Three Gorges Corp's Wang Jiazhu. The first of 26 700-megawatt turbines will begin to turn in 2003.

  "We're under a lot of pressure to get it completed on time," says worker Xu Lijun, 23.

  Some scientists say criticism will escalate when the reservoir starts filling in 2003. The reservoir will end in Chongqing about 640km upstream.

  Here, the river will slow, dumping mud and rock that some hydrologists say will block shipping and cause floods.

  "Chongqing will be overwhelmed by the scale of sediments that they have to dredge out," says James Simpson, professor of geology at Columbia University in New York.

  In 1998, the Yangtze carried more than 700 million tonnes of sediment past the dam site. Wang says most will be flushed out each year through 23 gates near the bottom of the dam.

  To reduce pollution, the government is closing 7,000 factories along the river. "The pollution along the Yangtze River is very serious, especially in the reservoir area," says Wang Yaoxian, head of the State Environmental Protection Administration's planning department.

  China plans to spend a total of 700 billion yuan from this year through 2005 on environmental protection -- about 1.3 percent of its GDP, Wang Yaoxian says.

  "It's the lack of transparency that worries me," says Henry Coolidge, managing director of Mirant Asia-Pacific Ltd, a unit of Mirant Corp, one of the largest power producers and energy traders in the US and the owner of stakes in power plants in Guangdong and Shandong.

  Even as a member of the WTO, China isn't likely to provide such information. It will be up to investors such as Coolidge to decide whether they can play China's game without knowing all the rules.
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