In the latest move to finance its massive US$21.7B project, Yangtze River Three Gorges Development Corporation (YDC) announced plans on 12 March 2002 to launch a US$500M initial price offering (IPO) on Shanghai’s ‘A’ stock market sometime next year. If that goes well, it would launch an overseas IPO of an unspecified amount, probably in London, UK, in 2004.
The moves seem likely to re-awaken widespread international protest and consequent scepticism against the dam that some years ago prompted several potential international lenders to avoid it. Even as recently as 2001, China was still committed to using domestic finance only.
But the relatively smooth development of the project – impoundment has already begun with the first generating units expected to be commissioned in June 2003 – may have encouraged YDC to try again. The project is also entering its most expensive phase.
For example, planned investment this year of around US$1.8B is almost double the annual average of about US$1B since 1993. Yet by year-end, only US$10.6B of total project cost will have been invested, leaving US$11.1B to be spent over the next seven years. Admittedly, from June 2003, revenues from power sales will meet progressively greater portions of the annual investment burden, but it is not yet clear how this may affect the IPOs.
The chief hurdle these are expected to face is further scepticism that the project will ever show a financial return. Analysts point to its sheer scale, the possibility that largely autonomous provinces may ignore Beijing’s directive to give priority to Three Gorges power purchases in the face of likely availability of their own lower cost supplies, and consequent downward pressures on Three Gorges tariffs.
These have been set at around 3.0 US cents/kWh, a claimed 1.2 cents/kWh lower than the average cost of power in China. But even at full projected sales, this would allow only modest financial returns of around 5% per year. Moreover the national average power cost, if it is reliable, will come down as dramatic efficiency gains in other power plants materialise and as natural gas is used more widely for power generation. The project’s financial margins are extremely tight.
YDC, however, has a couple of aces up its sleeve. First, the Shanghai IPO will test both domestic and foreign financial waters. Ten per cent – roughly US$50M – of the issue has been reserved for private placement with four strategic investors, two of whom will be foreign. Front-runners at present are Mirant of the US and Hong Kong’s China Light & Power (CLP). Both are international power generating majors. Both are talking to YDC. If they buy in this would strongly support the project’s financial viability.
Secondly, if likely returns still seem too low, Beijing has indicated it could assume up to 25% of total project cost in recognition of its social value. This would radically alter the arithmetic to offer much higher returns on the remaining investment.
Meanwhile, the resettlement issue that has dogged the project for so long is beginning to fade. China’s recent legislative assembly in Beijing heard that some 2.22M people along the flood-prone Yangtse are being resettled. Only half of these are in the Three Gorges reservoir area and all resettlement is well advanced.
Thus about 418,000 people in Three Gorges had been resettled by the end of 2001, plus some 600,000 more from other areas along the river, mainly in the Poyang Lake area. This leaves 650,000 more ‘other area’ people to be resettled this year and next, plus 712,000 from Three Gorges. Significantly, US$1.1B or 61% of this year’s planned project investment will be spent on resettlement.
