12 Mar 2002 – A report in the London Financial Times today says that financing difficulties associated with China’s prestigious Three Gorges hydropower project may be addressed by an IPO and a listing on both the domestic and an overseas stock market.
The Rmb 180bn ($21bn) project to dam the Yantgze river is the country’s largest construction project since the Great Wall and it is intended that the 18 200 MW of electricity generated would come on stream in 2009.
The IPO of the China Three Gorges Power company on the Shanghai A-share market is expected to raise 4-5bn Rmb, said Li Yongan, deputy general manager of the Yantgze River Three Gorges Project Development, the company overseeing the whole project.
US power company Mirant has expressed interest in taking part of the ten per cent tranche being made available in private placements to four strategic investors for the domestic listing. The other two will be Chinese companies, said Mr Li.
London’s stock exchange has been courting the company for the IPO and benefits from the fact that many of the project’s creditors are European, although most Chinese listings go to New York.
Overseas investors may have concerns about the environmental impact of the vast project, which will result in the flooding of several cities and the re-settlement of over 1m people. Fears have been expressed that the 600 km lake formed by the dam will result in increased earthquake activity in the region and could change the climate.
Commercial returns on the project will be modest. Mr Li said that a rate of return of two per cent above the current cost of capital was anticipated – just over five per cent for a year’s term loan. “The era of 15 per cent guaranteed rate of return for power projects in China is gone forever”, he added.
Power generated from Three Gorges is estimated to cost 0.25 Rmb per kWh, around 0.1Rmb lower than the average cost of electricity in China. But local authorities in the surrounding areas may have to be forced to draw the power as, in the past, preferences have often been given to local production facilities.
Some 3000 MW of electricity is destined for the Guangdong province in the South, 72-MW will go to the area around Shanghai in the east and 8000 Mw will be delivered to central China.
In order to make the investment a more attractive one, the government mat absorb some of the debt over a period of time, in recognition of the social benefit of the dam. ” We are now persuading the government to allocate 25 per cent of the cost to the government”‘ said Mr Li. “If we succeed, then the rate of return will be a lot higher.”