Volume 12, Number 6 / December 1997

Rough Sailing at Three Gorges Dam

by Catherine Caufield

As a brass band from the Navy's engineering institute struck up "Song for the Motherland," the Yangtze River was diverted into a side channel on November 8. A nationally televised ceremony of the closing of the coffer dam marked the start of construction of the main Three Gorges Dam, the biggest and most controversial dam in the world. Project managers say that the river must be diverted now so that a secure building site for the main dam can be completed before the summer floods begin.

But serious technical problems have arisen that cast a shadow over the official pomp. A potential coffer dam failure, unusable navigation facilities and sedimentation problems threaten the project's safety and viability, according to two engineers who were recently hosted at the dam site by Lu Youmei, president of the Three Gorges Project Development Corporation. And last month a former senior party official called for an immediate halt to construction so that engineers can reinforce the banks of the Yangtze, which he says are becoming increasingly unstable and are likely to collapse and block shipping routes.

In addition, according to a newly released report by the engineers who visited the site, the ship lock walls have been crumbling so badly that work on them has been halted while a team of outside engineers tries to solve the problem. Recently, one of China's most respected hydrologists, Huang Wanli, emeritus professor at Qinghua University, also called for construction to be stopped because the dam will increase the risk of disastrous floods for 500,000 people living upstream. And there have been new predictions that many of the more than 1.2 million people who are being displaced by the dam will resist their forcible evictions.

The river is washing away the massive boulders being used to complete the cofferdam, an indication that engineers have miscalculated river flow and sedimentation rates. In a report by the visiting engineers, Sklar-Luers & Associates, the authors state: "The relatively simplistic methods used in the design calculations regarding sediment supply and transport dynamics force us to conclude that sedimentation is likely to compromise the operation of the dam much sooner and more decisively than anticipated (as it already has in the diversion channel)."

Another issue of concern is that the coffer dam has not been designed to withstand earthquakes. The visiting engineers write: "Given the unusually long period (6-8 or more years) during which the coffer dam will be in use, we were also quite surprised to learn from project engineers that no seismic criteria were used in the coffer dam design. Abundant evidence of neo-tectonic activity, such as offset limestone bedding and fold discontinuities, is in plain view along the bedrock river banks in the vicinity of the dam … It is unreasonable to assume that the seismic hazards in this region are minimal. The coffer dam … will be highly vulnerable to ground accelerations of even moderate magnitude.

Follow the Money
Uncertainly about the dam's technical, environmental, social, and financial feasibility has caused many traditional dam backers, including the World Bank, the US Export-Import Bank, the Tennessee Valley Authority, Bechtel Corporation, and Hydro Quebec, to give the project a wide berth. Institutional Investor magazine has called the Three Gorges "the chanciest China play there is." And a coalition of nongovernmental organizations, led by International Rivers Network, the Geneva- based Berne Declaration and Friends of the Earth, have mounted a campaign to dissuade foreign investors from financing the dam.

China has tried to sidestep these objections by funneling foreign financing for the project through the State Development Bank of China, a so-called "policy bank" created in 1994 specifically to fund the Three Gorges and other large politically motivated projects. Though deploring its "severe asset quality problems," Moody's Investors Service gave the bank an A3 rating because it believes that China's rulers are so closely identified with it that they would lose face if it defaulted.

In March 1996, the State Development Bank sold more than $200 million of bonds in Japan. A planned second offering was suspended, however, after Kazou Sumi, professor of International Law at Niigata National University, charged that the first bond issue violated Japanese security laws by failing to provide clear information on the use and risks of the bonds. In January of this year, six financial firms, including San Francisco's Bank of America, underwrote a $330 million bond issue in the U.S. and Europe. There is likely to be another issue later this year.

Half of the dam's official estimated cost of $29 billion (¥240 billion) is to come from surcharges on electricity bills; 12.5 percent is in the form of a loan from the State Development Bank of China; and another ten percent is to come from profits generated by the Three Gorges itself after 2003 when its first set of turbines are slated to begin generating power. The remaining $8 billion, is to be raised from loans from other state banks and from domestic bond issues and foreign loans and export credits, including the $1.2 billion it has already received from Germany, France, the UK, Canada, Switzerland, and Sweden after firms in those countries received $740 million of contracts.

Sapping Government Coffers
The project's demands on China's economy, however, go far beyond the $29 billion needed for the dam itself. The government will spend another $7.25 billion over the next ten years to build the transmission grid needed to transmit the dam's hydro-power. This is equivalent to 5 percent of GNP. Outside analysts contest these figures, saying that the basic cost of the project is likely to be closer to $75 billion, more than 10 percent of GNP.

In addition, many of the Chinese firms contracted to work on the dam are turning to the stock market to raise the funds they need to buy equipment and materials. The Gezhouba Company, the project's chief contractor, raised $132 million on the Shenzhen stock exchange earlier this year. Dongfang Electrical Machinery, a state-controlled firm, raised $45 million on the Hong Kong stock exchange for new facilities for its Three Gorges work. There are also many subsidiary and spin-off schemes, including a $450 million Three Gorges Theme Park, a joint venture between a mainland firm and a Chinese-born Australian entrepreneur, which will reproduce in Beijing in miniature the scenic wonders due to disappear under the reservoir's waters.

The government says the dam will be self-financing by 2005 and the project's debt will be repaid completely by 2012. Such a rapid pay-back would be unprecedented in the world of big dams, where it is a rare thing for a project simply to meet its cost and time projections. China's largest hydro-dam so far, the Gezhouba, which is just downstream of the Three Gorges, took 19 years to build and cost $600 million, rather than the projected five years and $160 million. The same company that built Gezhouba is building the Three Gorges dam.

Critics of the dam say it is a dead weight on the Chinese economy and the government's determination to continue with it will undermine investor confidence in the country. Similar politically motivated megaprojects, such as the Bakun dam in Malaysia, have been important factors in the investor retreat from other Asian countries. "China's policy projects and the policy banks set up to fund them expose an awful lot of what is wrong with China," says Mark Mansley of Delphi International in London. "Their justification is political, not economic."

Despite the talk of China's move to a free market, China's rulers still exercise a great deal of control over the economy. Three Gorges is just one example of political domination of the market, says another an analyst at one of the other ratings agencies. "China is going down the same road of excessive property values, bulging external debts, and government interference with the market that has brought down so many of its neighbors. I think there's a false sense of security there. The question is, is China too big to fall?"

Catherine Caufield is a freelance writer from California. She is the author of Masters of Illusion: The World Bank and the Poverty of Nations (Henry Holt, 1997).

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