Case study - three Gorges dam

Many environmentalists consider the massive Three Gorges Dam as the world's most environmentally and socially destructive infrastructure project. The Three Gorges Dam is touted by the Chinese government as the worlds largest hydroelectric project and a symbol of Chinas development and "superior organizing." The Chinese government remains fixed on hydroelectric gigantism despite its continuing misery from past ill-fated hydro projects. The Three Gorges Dam, which will cost at least US$43 billion (unofficial estimates cite figures upwards of US$72 billion), will be 600 feet high, more than a mile wide and create a reservoir 400 miles long.

ECA Support:

Hermes (Germany) loan guarantees of up to $833 million to German engineering giant Siemens AG and turbine manufacturer Voith Hydro. Exportrisikogarantie/ERG (Switzerland) loan guarantees of almost $300 million to Swiss companies ABB and Sulzer Escher-Wyss. EDC provided a US$12.5-million taxpayer-backed loan, enabling Calgary-based Agra Inc. to secure its first contract. Since then, EDC has extended a further $153 million in support of a turbine contract awarded to General Electric Canada.

Project Description:

The Export-Import Bank of the United States refused to support the Three Gorges Dam, due to a lack of substantive information provided to the agency on mitigating environmental and social impacts. According to independent reports by the International Rivers Network and Friends of the Earth, budget costs are spiraling out of control and environmental and social issues are not being adequately addressed. According to Canada Business, the World Bank officials advised China not to approach them for loans after it became clear "they would become lightning rods for criticism of the project." (Canada Business, Feb. 12, 1999). "When the Americans pulled back, Canada very smartly stepped in," says Agra vice-president Peter Mayers. (Id.)

Independent experts note that the project has many significant environmental costs that threaten the financial stability of the project :

Involuntary dislocation and relocation of up to 1.9 million people. 
Inundation of valuable arable land.

Three Gorges is not expected to solve the flooding problems of China. Within 50 years, scientists expect the sediment-laden Yangtze will fill much of the dams reservoir, impairing any power production and impeding navigation with associated environmental costs. Heavy silting could compromise the dams financial operations and increase chances for a catastrophic collapse in a heavy flood.

The Yangtze River has become the biggest "sewer system" in China. According to the Chinese Academy of Sciences, in the Three Gorges area alone "there are over 3,000 industrial and mining enterprises which release more than one billion tons of wastewater annually, containing more than 50 different pollutants. Presently, there is very little treatment of industrial wastewater flowing into the reservoir area, and no treatment of residential wastewater; everyone relies on the rivers capacity to flush pollutants out to sea to keep it clean. But following the construction of the large dam, the rivers flow through the reservoir will be significantly and irreversibly reduced and with it any flushing capacity."

International financial institutions that have environmental standards recognize that environmentally destructive projects often have technical and financial risks, and can ultimately and collectively contribute to greater country risks. By integrating environmentally responsible standards into the project loan agreements, ECAs endeavor to lower risks to the project as a whole. Projects that cannot meet such standards can be rejected by the ECA. However in the Three Gorges example, Exim prudently refused support of the project, while other ECAs such as Hermes and EDC filled that gap of necessary support, thus creating a race to the bottom, where those ECAs with lesser environmental and social standards receive contracts for sensitive projects.

Recommended Actions:

A more appropriate approach would be for ECAs internationally to categorically prohibit funding of large dams that disrupt natural ecosystems or the livelihoods of local inhabitants. OPIC has taken a leadership role by adopting this standard. ECAs should start with that common line of prohibition and adopt internationally recognized common environmental standards for acceptable hydroelectric projects.

Sources:

World Rivers Review, Feb. 1997 
Canada Business, Feb. 12, 1999 
Christian Science Monitor, August 7, 1998 
Export-Import Bank of the United States Transcript, May 30,1996 
New York Times, Nov. 15, 1997 
"Report on Site Visit to 3 Gorges Dam" by Sklar-Luers & Associates, Oct. 17, 1997 
"Sediment Problems at Three Gorges Dam" Luna Leopold, Apr 11, 1996 
"The River Dragon Has Come!" by Dai Qing. 
[NB The $600m figure given by AFP was later corrected by Hong Kong press. It should be $60m (500m Yuan) - PMcC]