Wednesday, April 11, 2012

Fooling China's dam builders

Fooling China's dam builders
By Kirk Herbertson
April 06, 2012

When Chinese state-owned companies invest overseas, they can be caught
off-guard by corruption and environmental risks that arise because they
assume the host government will resolve these problems. But after recent
events such as the suspension of the Myitsone Dam in Myanmar, Chinese
companies have conceded that this may be a flawed approach.

In Sarawak—a forested Malaysian state on the island of Borneo— three
Chinese state-owned companies are helping to build a network of as many
as 51 controversial dams to spur rapid industrial development. (Twelve
schemes are firmly on the drawing board for 2020, while there is
discussion of building many more by 2037). China Three Gorges
Corporation, Sinohydro and the China State Grid Corporation are relying
almost entirely on the Sarawak state government to manage the extensive
environmental risks of these projects, and the companies have failed to
respond to numerous allegations of corruption against their business
partners. For Chinese investors, this is a ticking time bomb of local
opposition and a public relations disaster waiting to happen.

At first glance, Sarawak provides the kind of "win-win development" that
the Chinese government likes to promote. The Sarawak government wants to
build the first 12 dams by 2020 in order to produce 7,000 megawatts of
electricity and argues that the dams will attract industry to Sarawak
and lead to rapid economic growth.

The Sarawak government is led by Chief Minister Abdul Taib Mahmud, who
has been in power for the past 30 years. Taib is the state's leading
proponent of dam projects, and he has coordinated an effort to bring
Chinese investors to Sarawak. For example, in 2007 a representative of
Sarawak's state-owned electricity company spoke during a China-ASEAN
forum about potential Chinese involvement in the dams. In June 2009, the
Malaysian prime minister discussed the dams with President Hu Jintao
during his state visit to China. In April 2010, Taib led a Sarawak
delegation to China to visit the Three Gorges Dam and meet with
hydropower developers.

Over time, Taib's efforts have paid off. In 2008, Sarawak's electricity
company and China Three Gorges Corporation signed a US$1 billion
agreement to build the 944-megawatt Murum Dam. Construction began
shortly after. In 2010, the Malaysian government and the China State
Grid Corporation signed an US$11 billion deal to cooperate in developing
dams and related projects. In 2011, with the help of Sinohydro and China
Export Import Bank, the controversial 2,400-megawatt Bakun Dam became
operational after a delay of almost five decades.

But Taib has not provided the Chinese government with a complete picture
of costs and benefits of the dams. The hidden environmental costs of
these schemes will be significant, while mounting anger from local
communities over the projects could lead to major delays. Tens of
thousands of indigenous people will be displaced. Many of the indigenous
people who have already lost their traditional lands and hunting grounds
from the Bakun and Murum dams have found alternative livelihoods and
continue to demand better compensation. The full scale of the impacts is
unknown, however, because the Taib government has not shared an
environmental impact assessment with the public. Public trust is low; no
one believes government promises that the environmental impacts will be

While Malaysia's environmental laws look strong on paper, corruption
prevents these laws from functioning in Sarawak. As widely reported in
the Malaysian media, Taib and his family have a controlling ownership
stake in many of the local companies that have received contracts to
work on the dams. But he also chairs the board that reviews the
environmental impact of dams. This is a clear conflict of interest.
Indigenous communities have tried to enforce their traditional land
rights in Malaysian courts. According to Mark Bujang, head of the Borneo
Resources Institute of Malaysia, there are 327 ongoing court cases
related to native customary land issues. As Bujang explained, "the
courts are beginning to accept the concept of customary land according
to the customs and practices of the natives."

Corruption has also affected potential investors in Sarawak. In March,
the mining giant Rio Tinto cancelled its plans to build a US$2 billion
aluminum smelter that would have used electricity from the Bakun Dam,
not long after the Malaysian national government began a corruption
investigation into the project.

The Taib government has also failed to tell Chinese investors about
the economic risks of these projects. The 2,400-megawatts of electricity
produced by the Bakun Dam already far exceeds Sarawak's current demand
of 972-megawatts of electricity, and the state government has still not
found enough willing buyers for the excess electricity. Plans to export
the electricity to Malaysia's mainland have already been scrapped for
being too costly and technically unfeasible; and so most of the
electricity produced will have to be consumed within Sarawak or other
parts of Borneo Island.

But despite having no immediate use for the electricity, the Taib
government has continued to seek Chinese investment to build yet more

The Chinese government has made significant progress in improving the
way that state-owned companies manage the environmental impacts of their
overseas investment. Yet the dams of Sarawak offer an important lesson.
It is not enough for multinational companies to rely exclusively on the
host government to prevent environmental harm and corruption. Companies
should conduct their own environmental due diligence, consult directly
with local communities, and never proceed with a project until a robust
environmental impact assessment has been completed. This is already
common practice among many of the world's leading multinational
companies and will hopefully soon be embraced by Chinese investors as

In cases where multiple dams are planned for the same area, it is best
practice to conduct a strategic environmental assessment of the
cumulative impacts of the dams. The absence of such studies prevents an
informed discussion of the risks of the projects, to the detriment of
both local communities and businesses.

With such a risky venture, the Chinese government and companies
involved should be asking tougher questions of their business partners
in the Taib government. Where are the studies on the potential impacts
of the projects? What has the Taib government done to weigh the costs
and benefits of this scheme against other, more feasible alternatives?

China could actually benefit more if it could look beyond large
hydropower as the main vehicle for its investments, and instead view
Sarawak as a new market for its innovative clean-energy technologies.

Kirk Herbertson is Mekong campaigner at International Rivers.

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