DIRECTORATE OF INTELLIGENCE
36
China: Poor Outlook tor the Three Gorges Project
Summary
We believe Ihe Three Gorges hydroelectric projectar crv from ihe 'sure thing" China's power ministry has tried to convince Un.ted Slates and other foreign parties it is. For the project toeality, we believe seven major obstacles must be overcome, the World Bank must endorse it low cost financing must be secured. China's economy mus-Improve stronger domestic political support must betrategy for meeting short term energy needs must be agreed to. better management ol limited resources must be realizedivision of labor between Chinese and foreign firms must be worked out If the Cninese Government approves the project, we believe low-cost loans, grants and supplier credits from Japan, Canada, and elsewhere will give foreign firms the edge over the United States in bidding on the project
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the Chinese government has againlime until latafinal decision on whether to build the giant three gorges project (seen june, the state council assigned responsibility for the project to two new offices and authorized still more feasibility studies, which canada will carry out and (he world bank willumber of reasons, we doubt the project will come to fruition even if it wins state council approval
ammoth undertaking
for over three decides proposals to dam the yangtze river at three gorges nave been debated by successive chinese leaders, if built, the dam would provide more power capacity then any other in theegawattsccording to the chinese press, equal toercent of chine's current total powera practical distance ofower-starved coastal industries. it would also provide flood control and improved navigation on the yangtze river, possibly allowing oceangoing vessels to reach chongqing. the cost would bechinese end foreign estimates ranging6 billion, depending on height, power capacity, andconstruction would take anywhere fromoears.
some big ifs
for the three gorges to become reality, we believe seven major obstacles must be negotiated. the fact that the project has been on the drawing broad for overoars testifies to the difficulty of tt-dt task
favorable international findings
to persuade the state council that the projectegitimate use of tight investment funds, we believe china's review groups willtrong recommendation from the world bank. world bank approval, however, is not ensured. past favorable evaluations of three gorges, which were done by the pro-project ministry of water resources and electric powerever included the bank-style cost-benefit analysis. also, the technical studies of various aspects of the project done by mwrep
we believe the ministry of water resources end electric power--me leading proponent tor threebeen sidelined by the state council decision seeiscussion of who is celling the shots on the three gorges project
have used different assumptions about such factors es dameservoir levels, and navigationan assessment of the merits impossible. Nor is it dear that the Bank willingle large dam as the optimum method of meeting flood control and electric power needs; MWREP itself has been debating this question for decades. I
Low-Cost Financing
On the bests of US industry essessments. we estimate the Chinese will8 billion in foreign exchange for the Three Gorges project. Chine is only interested in low-cost concessionaryPremier Li Peng. China's energv cur. has told US Government officials that Three Gorges would not proceed without them We believe Chine cennot secure this amount without unusual cooperation from several countries and international organizations, and Balling's best sources of low-cost financing, the World Bank and Japan's Overseas Economic Cooperation Funday not be able to provide much help The World Bank has already indicated J
|tnat it would not finance ihrea Gorges aiono And.uss repdrTITBggast that Tokyo is willing to devoto Chine's next two OECF allocations (covering) exclusively to Three Gorges, we believe Chine's developing industries would lobby herd against the proposal because it would costajor source of low-cost protect financing for en entire decade |
We think China's best hope is to press potential foreign participants, including the United States, to contribute to an international finance package that mightamai OECF allocation, various eximbenk contributions, supplier credits, and possibly loans from the World Bank. Bering's success in assemblingackage will depend on the ability of foreign firms to agreeivision of the Three Gorges pie and to convince their governments and financial institutions to provide the financing, which wee difficult
A Sound Economy
Beceuse the dam provides no direct source of foreign exchange to repay protect loans, the level of Chine's foreign exchange reserves willactor in Beijing's decision, even if low-cost loans ere available By our calculations,0 year payback period, foreign loan repayment costs for the dam would climb gradually, to at0ear forr mora of those years Moreover, we trunk China would have considerable difficulty financing the costs of Three Gorges not covered by foreign loans, costs we estlmete atoillionore than China's entire hydropower budget In the last decade China's capital construction budget is already stressed by two years of excessive growth, and other industries will
Seeor comparisons of the Three Gorges project with other large hydropower dams worldwide
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try toecision on Three Gorges to preserve their share of thetrong Backer
Research by two leading US China scholars concludes that large projects such as Three Gorges must have strong backing from at least one top leader if they are toe believe the support of Deng Xiaoping or Zhao Zlyang is critical for Three Gorges We suspect the project feces strong opposition from many quarters in theother energy ministries such es coal and oil. and several provincialsee their shares of the state investment budget, access to foreign exchange, and power threatened. Vice Premier Li Pengukewarm supporter at beat, end we do not detect any other strong support In the top leadership, perhaps because no one sees any personal gain fromigh-risk, high-cost project that will not provide any peyoff for decades fjaj
Urgent Power Needs
Chronic power shortages resulting from rapid industrial growth inay force China to opt for investment in easy-to-build thermal plants and to defer long-term hydroprojects such es Three Gorges. China Is already building more thermal power capacity than it had planned, and although industrial growth has slowede believe that serious power shortages are likely to continue
Overextended Resources
China's record for completing hydropower projects is poor China actually commissionedW of hydrooromparedQO MW of thermal capacity, though it has0 MW of hydro capacity under construction for years. Most of the problem lies in overall management of the hydropower effort. Projects are frequently and wastefully postponed and later reactivated. Four of eight major hydroprojects begun In theere shelved for two years or more; two of the four only recently resumedven while some projects were on hold, those actively under construction had to compete for materials and Investment funds Moreover, over the last year, we suspect that dams designated as key national projects have had problems getting money that had been promised in thej
1 See Bureaucratic Politics and Chinese Energy Development, by Kenneth Lieberthal end Michelontractor the Department of Commerce. i
' Seeist of hydropower pients currently under construction.
We Deileve China could handle construction of Three Gorges if it were the only major hydroproject. but plans call for an embitlous expansion of hydropower even without Three Gorges. Chine's official targets for lerge hydropower projects call for0 MW of newas much as Three Gorgesthe
ii::
Tablemegawatts
China: Power Capacity5 and Targets for the Future
Capacity
Thermal
Hydro
Small Hydro
86
0 (seee doubt China can marshall the resources to add that much capacity in that time period, but given China's severe power shortages and provincial-level support tor other hydroprojects. Bailing is unlikely to scale back its plans either, in our judgment MWREP will find itself overextended end behind schedule even without Three Gorges
Self-Reliance Versue Foreign Participation
U Peng has ampheslzed that the Chinese themselves would bulk) Three Gorges, and not turn the project over to foreigners. Whether the Chinese truly act as general contractors for Three Gorges, or assume the role In name only, we believe efforts to ensure maximum Chlneae participation end the usual bureaucratic hassles encountered by foreign companies will lead to negotietlng and construction delays.
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Moreover the Chinese In our view misjudge their capabilities US officials havelarge part because of perceived problems in China's hydropowerBeijing plan on spending at least three-fourths of the cost of Three Gorges abroad to buy construction equipment building materials, electrical equipment (including allnd to acquire foreign consultants and management for various stages of construction. MWREP. however, told US officials it wants to keep foreign exchange costs down to roughlyercent of prolect costs and to minimise outside foreign management. It ia also considering importing the technology for the plant'sMW generators and building them in China. Either tactic is likely to delay completion, given China's lackluster record in hydropower construction and Its ongoing problems with even trial production ofW hydroturbines. |
We also expect bargaining with foreign suppliers on equipment and engineering contracts to cause considerable delay Based on our analysis of Chinese negotiating tactics, we believe the Chinese will play one vendor's quotes againstof the time wasted in negotiation For example. China began commerciat discussions for the Guangdong nuclear power plant more than three years ago. but only last montninal contract for the reactors,^
The Potential Role for the United States: No Inside Track
We believe that no compelling advantage to US firms would evolve from either private or US Government contributions to the current round of feasibility studies Past US contributions of nydroproject studies to China did not even guarantee USight to bid on those projects, and MWREPM(1YtoldJfMp^
i^Bthar any contributions for Three Gorges mustr to bid MWREP also said Ottawa was told that Canada's conrr.oLt.cn ofillion to the new studies did not preempt any other potential suppliers.
If the project is approved, both financing requirements and Beijing's emphasis on self-reliance suggest that neither the United States nor any other country will be permitted to teke the lead on Three Gorges. Consequently. US firms can expect substantial competition for all goods and services the Chinese seek for Three Gorges Shine has purchased both hydropower construction equipment and expertise from the Jmted States, but given the likely intensity of competition, price and financing arrangements willey role in ell negotiations, and here US firms will belstinct disadvantage. If China builds Three Gorges, low-cost loans, grants, end supplier :redits available from Japan, Canada and elsewhere would give other foreignompetitive edge that may exceed the benefitsheaper dollar.
inittle-publicized supplier credit issued by Canada concurrently with the feasibility study donation may have giveneg up on both the United States and Japan in supplying the hydropower generators for Three Gorges Canada'sillion In equipment credits allows for technology transfer packages, and if the project goes ahead the Chinese could use this money to importW generatorUS and Japanese hopes of selling Chinaenerators or the
technology to build them.
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confident!.
Appendix A
three gorges: who is calling ths shots
ws bslisvs ths ministry of water rtsources and electric powar (mwrep) has consistently mtsraprssantad both its ability to influence decisionmaking on the thraa gorgas prolect and the chances tha project will gam final state council approval indeed, the recant creation of two oversight bodies by the state councilecline in mwrep's influence and unhappiness with the way it had managed the protect
mwrep has marshalled every resource available in trying to convinceto build three gorges1 hoping for the dam's inclusion in the. mwrep's minister. madama qian zhangying. unsuccessfully triedto sell the dam as an answer to east china's electric powar naads. accordingwho also toldlater placed more emphasis on tna
dam's otherwe behave. mwrep remained deliberately vague about the height of the dam to gam maximum political support at the provincial level, hopingoalition of high and low dam supporters would lead to proiect approval before mwrep would have topecific height*
we believe mwrep's main strategy, however, has been to try to give the thrae gorges project enough momentum to preempt strong opposition from arising before the state councilinal decision. last year the ministry waslanning office toew chinese province for the dam. called sanxia. mwrep provided staff for the planning office, and used itpringboardress biltz on the benefits of the tnree gorgeshinting at support from dengcreate tha impression that its constructionoregone conclusion. articles in hong kong's ta kung pao and elsewhere mapped out tentative boundaries for the province, and mwrep hinted through these articles that its own officials in the planning office should eventually govern sanxia province i
1 in the process. mwrep proposals have undergone substantial revisions; initially they sought an even larger dam0 mw power capacity. i
in studies carried out by the us interior's bureau of reclamation1 under the us-china hydroelectric protocol. us experts told mwrepost-benefit terms the dam probably made more senselood control project thanource of electric power.
most of those outside of mwrep willing to consider the damower dam to keep down costs, including peasant relocation costs according to lieberthal and oksenberg, chongqingigher dam that will allow oceangoing vessels to reach the city; the provinces downstream presumably alsoigher dam with greater flood control capabilities. "
Criticism Forcas Poatponamont.
Wa believe MWREP's political maneuvering was Ineffective and possibly counterproductive. In March of this year, outspoken opposition lo Three Gorges surfaced at the sixth Chinese People's Political Consultative Conferenceell-received speech by economist Qianin both the Beijing and Hong Kongthe leadership's usual willingness to 'give the nod" to large projects without comprehensive technical evaluations. Following Qlan's speech, an earlier CPPCC review critical of Three Gorges was detailed In Ta Kung Pao. Then, in an April press conference.eng downplayed plansew province and belittled the planning office. In June, the leadership dissolved the provincial planning office andinal decision on Three Gorges until
ew Approach
In the meantime, the State Council has set up two new planning bodies for the protect. According to Chinese press reports, both are directly answerable to the State Council, and neither Includes any MWREP representation. The new groupseadership effort toore informed and less political decision on the merits of the Three Gorges project
The Three Gorges Project Coordination Group willew round of internal bureaucratic review. It Includes members of the State Council, the National People's Conference (NPC) Standing Committee, the CPPCC National Committee, and the Central Advisory Commission,eng. Wang Renzhong, Cheng Zlhua. and So Yibo.
More powerful is the Three Gorges Project Examination Committee, which will evaluate new foreign and domestic feasibility studies, and make the preliminary recommendation next year on whether the State Council should approve the dam Chinese press reports list Li Peng as chairman of this committee with two State Councillors as vice chairmen: Song Ping, head of the State Planning Commission [SPCJ. and Song jian, head of the State Science and Technology Commission (SSTQ Evidenceariety of sources indicates tne latter two are at least receptive to the possibility of building the dam. if not ardent supporters.
in an era of budget cutbacks and foreign exchange restrictions, he Is already committed to another big-ticket item, China's commercial nuclear program, which haa itself been cut back In recent months. Despite his influence and his position as 'energyaill recommend Three Gorges receive State Council approval only If concessionary funding is available and the feasibility studies make the project appear quite sound. Even then, he may nottrong supporter of the protect
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ID EKflA^NOFORN
Although Three Gorges Is nothighlow design optioneters would make it shorter thaneter dam being built by the Chinese atis relatively longa concrete-and-eerthIn volume terms Three Gorges ranks among the world's largest, many of which are lower, earth or rockflll dams
World's Highest Dams (Height above lowest foundation)
Costa
United
Rank In meters
Rogun"
Nurek
Grand Dixence
ingurr
Coulee
Under construction.
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World's Largest Volume Dams
Rank
New Cornelia Tailings US
Volume (million cubic meters)
10
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World's Largest Capacity Hydroplants
Currant Capacity
Rank Nam*
Three Gorges
itaipu
Guri"
Tucurui*
id
Grand Coulee
Seyeno-Shusensk
Dam
Under construction
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Reservoir capacity
(billion cubic meters)
3 37
3a
2
y
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Appendix C
Large Dams Now Under Construction in China
NA: Not available
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Original document.
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