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Hydropower mania poses challenges
(China Daily)
Updated: 2005-07-27 06:12

Four ministries have called off the construction of 32 hydroelectric projects that failed to abide by relevant land, environmental and resource regulations.

The projects, the completion of which would have cost an astronomical 85.5 billion yuan (US$10.5 billion), were already underway with spending at the 20 billion yuan (US$2.46 billion) mark.

The huge economic losses incurred from the cancellation of the projects do not justify the wild pursuit of hydroelectricity by some local governments and businesses. We may suffer even greater losses, economic, environmental or social, in the future if projects violating relevant laws go ahead unchecked.

This is not the first time the central departments have stepped in to stop such large-scale, illegal projects. Predictably, it will not be the last either. Despite repeated central government orders, fines and punishments, a large number of projects have gone ahead without adhering to the correct procedures.

Last year, the National Development and Reform Commission approved construction of hydroelectric projects with a total installed capacity of 60 million kilowatts. However, the real installed capacity of hydroelectric projects launched that year reached 180 million kilowatts.

What is behind the hydroelectric mania? Answers to this question would help us better understand the many challenges the country's policy-makers face in carrying out economic policies.

Two factors are behind China's cat and mouse situation in the hydro power sector: The rising demand for power and the interest discrepancy between the central and local governments.

China's economy has cruised on for many years, gobbling up huge amounts of energy and resources, including electricity.

Energy shortages have reached crisis levels nationwide in the past two years with two-thirds of provinces suffering their worst shortfalls and brownouts for many years.

In a market economy, where there is demand, there is supply. Businesses have understandably gone crazy seeking profits by constructing hydro electricity plants to tap low-cost water resources in the country's southwestern regions.

But national policy-makers need to strike a balance between power plant construction and other targets to achieve sound national development. Apart from environmental damage, unrestrained construction of hydroelectric plants may lead to a production glut and the wasting of resources. Excessive investment is also a culprit in the overheating economy.

This may not have happened in economies where property rights are clearly defined and someone must be held responsible for bad investment decision-making. But in China, where a sound accountability system is yet to be established in both corporate and government investment mechanisms, there is greater opportunity for disorderly construction.

It is estimated that if the current construction drive continues, after the nation's power demand and supply reach a balance point next year, oversupply will occur and peak in 2008.

If that happened, many hydroelectricity investors would be plunged into the red. Since a large part of the investment is borrowed from the bank, the fragile domestic banking system would inevitably suffer.

Making things worse, the investment impulse of businesses is often egged on by local governments, which benefit from the introduction of outside investment and impressive local gross domestic product figures.

(China Daily 07/27/2005 page4)

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