DIRECTORATE OF INTELLIGENCE
36
China: Poor Outlook tor the Three Gorges Project
Summary
We believe the Three Gorges hydroelectric projectar crv from the 'sure thing" China's power ministry has tried to convince Un.ted States 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 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 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 |
CONHUfcfTflAL NQFORN
Tha Chines* Government hes againlime until latefinal decision on whether to build the giant Three Gorges project (seen June, the State Council assigned responsibility for tha 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 Stata Council approvallwmwm
Threeammoth Undertaking
For over three decades proposals to dam the Yangtze River at Threa Gorges have been debated by successive Chinese leaders, if built, the dam would provide more power capacity than any other in theegawattsccording to the 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 the Yangtze River, possibly allowing oceangoing vessels to reach Chongqing. Tha cost would beChinese and 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 difficultyt 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 dona by MWREP
We believe the Ministry of Water Resources and Electric Power--the leading proponent tor Three Gorges--has been sidelined by the State 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 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 basis 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 energy czar, nas told US Government officials that Three Gorges would not proceed without them Wa believe China cannot 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 Japans Overseas Economic Cooperation Funday not be able to provide much help The World Bank has already indicated j
that it would not finance ihrea Gorges aiono And.uss repcfrTsTlrggest that Tokyo is willing toa's next two OECF allocations (covering) exclusively to Three Gorges, we believe China's developing industries would lobby hard against the proposal because it would costajor source of low-cost protect financing for an entire decade |
Wa 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 eximbenk 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 tha financing, whicn wa baiieve will be difficult
A Sound Economy
Because the dam provides no direct source of foreign exchange to repay project loans, tha 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 the dam would climb gradually, io at0ear forr mora of those years Moreover, we tnink China would have considerable difficulty financing the costs of Three Gorges not covered by foreign loans, costs we estimate atoillionora than China's entire hydropower budget In tha 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
try toaemon 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 too bellava tha support of Deng Xiaoping or Zhao Zlyang is critical for Three Gorges We suspect th* project faces strong opposition from many quarters in th* bureaucracy-including other energy ministries such es coal and oil. and several provincialsa* 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 mm
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 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 ar*to continue
Overextended Resources
China's record for completing hydropower projects is poor China actually commissionedW of hydroor thraaomparedW 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 ar* 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 thatn promised in the budget
ureaucratic 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 handla construction of Three Gorgas if it were tha only major hydroproject. 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 Gorgasthe
ii::
Tablemegawatts
China: Power Capacity5 and Targets for the Future
Capacity
Thermal
Hydro
Small Hydro
Large and medium Dams
86
0 (seea doubt China can marshall tha 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 itsah* overextended and behind schedule even without Three Gorges
Self-Rallanca Varsua Foreign Participation
U Peng has emphasized that tha Chlnasa themselves would build Three Gorges, and not turn tha project over to foreigners. Whether tha Chinese truly act as general contractors for Three Gorges, or assume tha role In name only, wa believe etforta to ensure maximum Chlneae participation and th* usual bureaucratic hassles encountered by foreign companies will lead to negotiating and construction delays.
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Moreover the Chinese In our view misjudge their capabilities US officials havelarge part because of percejved 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 is 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 commerciet 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 MWREP has
j^Bthar any contributions for Three Gorges mustr to 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, the recent creation of two oversight bodies by the State Councilincline in MWREP's influence and unhappinass 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 tne
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 protect approval before MWREP would have topecific height*
We believe MWREP's main strategy, however, has been to try to give tha Three Gorgas project enough momentum to preempt strong opposition from arising before tha 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 Gorgas 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 tha 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 Forces 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 Zlhua. and Bo Yibo.
More powerful is the Three Gorges Project Examination Committee, which will evaluate new foreign and domestic feasibility studies, end make the preliminary recommendation next year on whether the Stata 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, heed of the Stata Planning Commission [SPCJ. and Song jian, head of the State Science end Technology Commission (SSTQ Evidenceariety of sourcee indicates the letter two ere et 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 has itself been cut hack In recent months. Despite his influence and his position as 'energy czar/ weill 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 project
8
i
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 rockfiit dams
World's Highest Oama (Height above lowest foundation)
Costa
United
Rank In maters
Rogun"
Nurek
Grand Dixence
Inguri
Coulee
Under construction.
g
c on fidwciIaTnoforn
World's Largest Volume Dams
Rank
New Cornelia Tailings US
Volume (million cubic meteri)
10
World's Largest Capacity Hydroplsnts
Currant Capacity
Rank Name
Three Gorges
itaipu
Guri"
Tucurui*
Grand Coulee
Sayano-Shusensk
Dam
Under construction
11
Reservoir capacity
(billion cuOic meters)
43
37
38
2
y
CONFIDENTIAL NOFORN
Appendix C
Large Dams Now Under Construction in China
NA: Not available
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CONFIOEfjff'rfu^ioFORN
Original document.
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