DIRECTORATE OF INTELLIGENCE
36
China: Poor Outlook tor the Three Gorges Project
Summary
We believe Ihe Three Gorges hydroelectric proiectar crv from lhe 'sure thing"ower ministry has tried to convince Un.ted Slates and other foreign partiess. For the project toeality, we believe seven major obstacles must be overcome, the World Bank musl endorse it low cost financing must be secured. China's economy mg$-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 Chinese Government approves the proiect. we believe low-cost loans, grants and supplier credits from Japan, Canaoa. and elsewhere will give foreign firms the edge over the United States in bidding on ihe project |
CONrlQfcfTTIAL NOFQRN
Tbe Chinese Government has againtime until latefinal decision on whether to build the giant Three Gorges project (seen June. tha Stat* Council assigned responsibility for the project to two new offices and authorized still mora feasibility studies, which Canada will carry out and (ha World Bank willumber of reasons, wa doubt tha protect will coma to fruition even if It wins State Council approvalmWmm
Three Gorges ammoth Undertaking
For ova* three decades proposals to flam tha Yangtze River at Three Gorges have been debated by successive Chinese leaders, if built, ths dam would provide mora power capacity than any other in thaegawattsccording to tha Chinese press, equal toercent of China's currant total powera practical distance ofower-starved coastal Industries. It would also provide flood control and Improved navigation on tha Yangtze River, possibly allowing oceangoing vessels to reach Chongqing. Tha cost would baChinese and foreign estimates ranging6 billion, depending on height, power capacity, andconstruction would take anywhere fromoears.
Soma Big Ifs
For the Three Gorges to become reality, we be'iave seven major obstacles must ba 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 tha Stata Council that the projectegitimate use of tight investment funds, wa 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 tha project dona by MWREP
We believe the Ministry of Water Resources and Electric Power--the leading proponent tor Three Gorges--has been sidelined by the Stata Council decision Seeiscussion of who is calling the shots on the Three Gorges project
have used different assumptions about such factors as dameservoir levels, and navigationan assessment of tha merits impossible. Nor is it dear that ihe Bank willingle large dam aa 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 Oasis of US industry assessments, we estimate the Chinese will8 billion in foreign exchange for the Three Gorges project. China is only interested in low-cost concessionaryPremier Li Peng. China's energyhas told US Government officials that Three Gorges would not proceed without them We believe China cennot secure this amount without unusual cooperation from several countries and international organisations, and Bering's best sources of low-cost financing, the World Bank and Japans Overseas Economic Cooperation Funday not be able to provide much help The Wold Bank has already indicated!
that it would not finance three Gorges aiono And.uss reporTlTlrggest that Tokyo is willing to devoto China'swo OECF allocations (covering) exclusively to Three Gorges, we believe China's developing industries would lobby herd against the proposal because it would costajor source of low-cost protect financing for an 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 mightartial OECF allocation, various tximbenk contributions, supplier credits, and possibly loans from the World Bank. Being'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, whicn we be'ieve will be difficult
A Sound Economy
Because the dam provides no direct source of foreign exchange to repay project loans, the level of Chine's foreign exchange reserves willactor in Bailing's decision, even if low-cost loans are available By our calculations,0 year pay-back period, foreign loan repayment costs for ihe dam would climb gradually, io at0ear for to or 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 estimate atoillionore than China's entire hydropower budget In the last decade China's capital construction budget is already stressed by two years ol excessive growth, and other industries will
Seeor comparisons of the Three Gorges proiect with other large hydropower dams worldwide
try toaemon on Threa 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 toa oelieve tha support of Deng Xiaoping or Zhao Zlyang is critical for Threa Gorges We suspect the project faces strong opposition from many quarters in thaother energy ministries such as coal and oil. and several provincialsee their shares of the stata investment budget, access to foreign exchange, and power threatened. Vice Premier Li Pengukewarm supporter at beat, and 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 payoff for decades MWrnm
Urgent Power Naeds
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 as Three Gorges. China Is already building mora 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 hydrooromparedW 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. Projacts are frequently and wastefully postponed and later reactivated. Four of eight major hydroprojects begun In thaere shelved for two years or more; two of the four only recently resumedven while some projects ware 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 baan promised in theh
1 Saa Bureaucratic Politics and Chinese Energy Development, by Kenneth Lieberthal and Michelontractor the Department of Commerce. I
' Seeist of hydropower plants currently under construction.
We Deileve China could handle construction of Three Gorges if it were the only major hydropro|ect. but plans call for an ambitious expansion of hydropower even without Three Gorges. China's official targets for large 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
Large and medium Dams
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 for other hydro projects. Bailing is unlikely to scale back its plans either, in our judgment MWREP will find itself overextended and behind schedule even without Three Gorges
Self-Rallanca Varsua Foreign Participation
U Peng haa emphasized that the Chinese themaelvea would build Three Gorges, and not turn the proiect 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 and the usual bureaucratic hassles encountered by foreign compenles will lead to negotiating and construction delays.
5
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 tbe cost of Three Gorges abroad to buy construction equipment bui'ding 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(1YtoldJfM|^^
j^Bthar any contributions for Three Gorges mustto oia MWREP also said Ottawa was told that Canada's conrr.oLt.cn olillion 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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CONFIDENTIAL NOFORN
CONFIDENTS
Appendix A
Three Gorges: Who Is Celling the Shots
We believe the Ministry of water Resources and Electric Power (MWREP) has consistently misrepresented both its ability to influence decisionmaking on the Three Gorges proiect and the chances the project will gam final Slate Council approval Indeed, tne recent creation of two oversight bodies by the Stat* Councilncline in MWREP's influanc* and unhappin*ss with the way it had managed the protect
MWREP has marshalled every resource available in trving to convinceto build Three Gorges1 Hoping for tna dam's inclusion in the. MWREP's Minister. Madame Qian Zhengying. unsuccessfully triedto sell the dam as an answer to East China's electric power needs, accordingwho also toldlater placed more emphasis on the
dam's otherbelieve. 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 Thre* Gorges project enough momentum to preempt strong opposition from arising before the State Councilinal decision. Last yeer the Ministry waslanning office toew Chinese province for the dam. called Sanxia. MWREP provided staff for the planning office, and used Itpringboardress biltz on tne benefits of the Tnree Gorges dam--even hinting at support from Dengcreate the 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 hava undergone substantial revisions; initially they sought an even larger dam0 mvv 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 vassals to reach the city; tha provinces downstream presumably alsoigher dam with greater flood control capabilities. "
Criticism Forcea Postponement...
We 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 OJanin 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 Zihua. 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 Stete Council should approve the dam Chinese press reports list Li Peng as chairmen of this committee with two State Councillors as vice chairmen: Song Ptng. head of the State Planning Commissionnd Song jian, heed of the State Science end Technology Commission (SSTQ Evidenceariety of sources indicates tne latter two are at least receptive to the possibility of building tha 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 recant 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 tha project appear quit* sound. Evan than, ha may nottrong supporter of tha pro|*ct
8
i DEWtIa^NOFORN
Although Thraa Gorges Isighlow design optioneters would make it shorter thaneter dam being built by the Chinese atIs relatively longa concrete-and-eerthIn volume terms Thraa Gorges ranks among tha world's largest, many of which are lower, earth or rockflll dams
World's Highest Oama (Height above lowest foundation)
Costi
United
Rank In meters
Rogun"
Nurek
Grand Dixence
Inguri
Coulaa
Under construction.
9
CONFIfJiVftlAL^OFORN
World's Largest Volume Dams
Rank
New Cornelia Tailings US
Volume (million cubic meteri)
10
World's Largest Capacity Hydroplante
Currant Capacity
Rank Name
Three Gorges
itaipu
Ouri"
Tucurui*
Grand Coulee
Sayano-Shusensk
Dam
Under construction
11
Reservoir capacity
(billion cubic meters)
43
37
38
2
y
CONFIDENTIAL NOFORN
Appendix C
Large Dams Now Under Construction in China
na: Not available
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confioewtal'noforn
Original document.
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