Ecological Destruction? ICBC Loan for an Africa Water Project Draws Controversy

Zhang Ke
Wednesday, June 30, 2010

Originally published in China Business News

(Unofficial translation by International Rivers)

"I have a savings card issued by the Industrial and Commercial Bank of China (ICBC). I certainly do not want that the money in my account be used for the destruction of environment." Dr. Peter Bosshard held up a savings card and was slightly agitated. Mr. Bosshard is the policy director of the environmental group, International Rivers.

Recently, it was said that ICBC has agreed to a US$400 million loan for Ethiopia's Gibe 3 Dam project. Some environmental groups believe that this project will affect the local environment. Among the groups is International Rivers where Mr. Bosshard is now affiliated.

On June 26, the ICBC's Chief Risk Officer, Wei Guoxiong, accepted an exclusive interview with China Business News, and revealed that the ICBC "has yet to agree and is reviewing" the loan for the Gibe 3 Dam project.

"As a global bank, for those projects affecting the environment, whether domestically or abroad, ICBC will not support them," Mr. Wei expressed clearly the bank's attitude.

Gibe 3 Dam

Gibe 3 dam is located in southern Ethiopia's Omo River. The project started in 2008, with a total investment of 16 billion birr (about $1.75 billion). The total generation capacity is 1,870 MW. It is expected to be completed in 7 years. It comprises a total of ten generating units, and is currently the largest hydropower project in Ethiopia.

An open letter jointly written to Jiang Jianqing, the ICBC's Chairman, by three organizations including BankTrack, International Rivers and Friends of Lake Turkana said: "According to a circular issued by Ethiopian Electric Power Corporation, ICBC has agreed to offer a loan of about 400 million U.S. dollars for Gibe III hydropower project on Ethiopia's Omo River."

The three organizations pointed out that the Omo River is the lifeline of the Lower Omo Valley and the Lake Turkana region. Both regions have extremely fragile ecosystems. The Gibe 3 Dam will end the natural flood cycle of the Lower Omo Valley, and reduce the water flow into Lake Turkana. Lake Turkana is a saltwater lake. Once the runoff is reduced, water salinity will increase, which will lead to the collapse of the lake environment.

Lake Turkana supports the livelihoods of 300,000 indigenous people in Northern Kenya. Any reduction of the streamflow in the Omo River will affect fisheries, agriculture and cattle herding, and will aggravate the famine and the resource conflicts which already plague the Lake Turkana region.

Mr. Bosshard explained that although the project has been in progress for four years, the project's economic, financial and technical assessments have not been completed.

Another key issue that the letter mentioned: The African Development Bank (AfDB), the World Bank and the European Investment Bank have considered support for the Gibe 3 project for more than a year. The international financial institutions have so far not committed any funding.

Renewed water dispute

Regarding the water issues between Ethiopia and the surrounding countries, People's Daily published a commentary titled "Conflicts between upstream and downstream countries over Nile River water resources intensify" on May 21, which pointed out that the act of Ethiopia to pursue "full development of water resources" may exacerbate its conflicts over water with the downstream countries.

Taking the Nile River valley as an example. The water of the Nile River, originating in the Ethiopian highlands, is mainly used for irrigation and the provision of water. In the last century, several dams were built on the Nile River, including two dams in Sudan; another dam, Aswan in Egypt, was built after negotiations between Egypt and Sudan and the Nile River Agreement was signed in 1959. The agreement allocates water resources from the Nile River (about 74 billion cubic meters in total) between two countries, of which 55.5 billion cubic meters of water was shared with Egypt.

In recent years, with accelerating economic development and population growth in the upper Nile River, the agriculture, industry and domestic water demand is increasing year by year, and water conflicts arise between upstream and downstream countries.

The deputy director of Institute of West Asia and Africa in the China Institute of Contemporary International Relations (CICIR), Mr. Xu Weizhong, commented in the People's Daily on the same day that Ethiopia's oil and coal reserves are lacking, and its electricity supply also falls short, but hydropower potential is rich. It is named the "East African Water Tower," so Ethiopia had hoped that the full development of water resources, such as construction of dams in the Nile River, will increase power supply, while taking into account agricultural irrigation.

But Ethiopia's move caused tensions with the downstream countries. According to the deputy researcher of Institute of West Asia and Africa in the CICIR, An Chunying, the degree of dependence on the Nile water resources of Egypt, Sudan, Eritrea, Kenya were 96%, 77%, 68% and 33% respectively, so those countries are seeking more rights to water for their own social and economic interests .

With the help of foreign companies, Ethiopia heavily invests in the construction of hydropower stations. They have already invested billions of dollars. It is expected that six hydropower stations could be completed in 2012-2013. This will not only meet the national demand for electricity, but also power the export to earn foreign currency.

It is said that the Ethiopian Electric Power Company last year signed a deal with foreign companies to build two hydropower stations with the installed capacity of more than 2,000 MW, including the Gibe 4 Dam and Halele Werabesa dams.

In late April, the Ethiopian Minister of Finance, Sufian Ahmed, made a visit to China, and met with the leadership of China Gezhouba Group. His hope from China Gezhouba Group was for a "wider participation in the development of Ethiopian electricity, energy and road construction, and greater contributions to the development of Ethiopia's economy."

ICBC to strengthen its green credit

In April, nine domestic non-governmental environmental organizations including Green Watershed, Green Earth, the Institute of Public and Environmental Affairs, the Global Environment Institute and Friends of Nature jointly issued a report titled "An environmental record of the China's Banking Sector (NGO Edition)." The report positively recognized the efforts of ICBC in the implementation of green credit policy in recent years.

The report revealed that, as one of the four leading commercial banks in China, ICBC has a bigger commitment in credit structural adjustment and green credit system, while the bank also introduced the targets, principles, framework and implementation steps for the building of a green credit system over the next three years. At the policy level, the bank will deny projects if environmental performance is unsatisfactory, in accordance with national environmental policies and regulations.

But the report also pointed out that ICBC only briefly mentioned its three-year goal in the "social responsibility report," which has no detailed reference to specific content. This not only reflects its lack of information transparency and clarity, but also the bank's insistence on the objectives and direction of green credit."

The report also pointed out that according to the data disclosed in its "social responsibility report," ICBC has a better record in withdrawing from "highly polluting and highly energy-consuming" industries, and committing to the environmental industry. However, this is only a small part in the total amount of credit in the bank. The lack of data and content led to a discount in ICBC's overall evaluation of green credit.

In July 2007, the former State Environmental Protection Administration, People's Bank and the China Banking Regulatory Commission jointly issued "a notice about prevention and control of  credit risk in highly polluting and highly energy-consuming industries," otherwise known as China's "green credit policy." The Chinese banking sector has officially implemented green credit policy.

The report released by the nine environmental groups told that, generally speaking, Chinese banks have accepted the concept of green credit, and have good performance on the implementation of green credit policy.

On the afternoon of June 26, the reporter of Chinese Business News attended "The Fifth Green Fortune 2010 (China) Forum" and interviewed Wei Guoxiong. "We (this project) are very careful, very careful!" Wei told reporters.

"Although ICBC is a commercial bank, we are not mercenary." Wei said that the bank would not support projects with serious environmental impacts, though the bank may earn relatively bigger profits. "Whether domestically or abroad, as a global bank, we will not support them."

Wei said that in terms of international business, ICBC makes a reference, but is not limited, to the Equator Principles (which was a financial industry benchmark established by the world's major financial institutions, on the basis of the policies and guidelines of the International Finance Corporation and World Bank, and was used to assess and manage the environmental and social risks of project finance), "because the Equator Principles itself also has some limitations. In some places (ICBC) has been more stringent than the Equator Principles."

The environmental risks of Chinese overseas investments

According to a new survey conducted by International Rivers, as of May 2008, Chinese enterprises and financial institutions have at least 97 large dam projects in 39 countries. Many of these projects are located in Southeast Asia, Africa, Latin America, Middle East and Eastern Europe. Many of those countries' governments are also in cooperation with Chinese enterprises over the construction of new dams. Most dams to be built are hydroelectric dams.

Why are there an increasing number of dams in the world built and invested by the Chinese enterprises? International Rivers' report titled "China's Overseas Dam Industry Guide" revealed that China has half the world's large dams, and has its own dam construction companies and dam equipment suppliers. Meanwhile, the competition of dam construction within China prompted many Chinese engineering companies and construction companies to seek business opportunities overseas.

In the international market, the operating costs of Chinese enterprises are low, and therefore they can often successfully outbid dam construction projects over their competitors from other countries. In addition, the traditional international investors have moved out from the investments of large dam projects, which leaves room for the development of China's banks and export credit agencies.

However, the environmental problems of Chinese overseas investment and assistance should share equal concern. In "The New Era's Reform and Innovation in Environmental and Economy Policy Symposium," which was held in 2008, the Environment and Planning Institute of the Ministry of Environmental Protection published an investigation report titled "The environmental protection of China's foreign investment and aid."

The report shows that China's foreign investment and assistance are concentrated in Africa and Southeast Asia. The investments and assistance are mainly concentrated in mining, dams, construction, timber and other industries. The report said: "China's dam construction and oil exploration projects in Africa have been repeatedly accused by Western media."

The report said that China's foreign investment is relatively concentrated in the exploitation of oil fields and other important resources, processing and assembly manufacturing, labor-intensive construction and service sectors. These industries can easily affect the local environment. Unless they strengthen environmental management, it is easy to bring about local environmental problems.

"Most foreign companies in China do not have a department or a commissioner in their environmental and safety department within their foreign branches or project team." The report also pointed out that with the rapid development of external credit operations of China's banking sector, there were also more environmental issues. A key reason is the absence of environmental issues in their credit management and risk management analyses, which leads to the lack of effective control in environmental risks.

The survey shows that China's financial institutions themselves also lack environment-related standards in mining, forestry and other projects affecting the environment. At present, only China Development Bank has adopted its own environmental financing standards. Export-Import Bank of China also has its own environmental policies. In addition, the Shanghai Pudong Development Bank published a corporate responsibility report covering this.

The report recommends that the state should develop and introduce environmental guidelines for China's overseas investment and aid. The concept of environmental protection and sustainable development strategy concepts should be realized throughout the whole life-cycle of a project, through the implementation of environmental impact assessments, environmental planning, community development and other means, to achieve "win-win" situations between both overseas investment and local environmental protection.

Regarding the banks' behavior in foreign investment and aid, the report recommended that the state should develop and introduce green credit guidelines for China's foreign investments, and guidance and supervision for the banks in taking into account environmental issues in financing decisions. The banks should actively incorporate environmental considerations into the decision-making of foreign credit. Meanwhile, the state should set up special funds for green economic cooperation, through environmental demonstration projects, to alleviate international pressure.