Sinohydro’s IPO: An Opportunity for Environmental Reform

Peter Bosshard
Tuesday, June 8, 2010

Originally published in The Asia Water Project

When companies list at the stock exchange, they need to define their brand and business strategy, which includes their approach to the environment.

In the coming months, Sinohydro, the world's biggest hydropower company, plans to list at the Shanghai stock exchange. Civil society organizations are calling on the company to adopt a world class environmental policy at the time of its Initial Public Offering (IPO). Here is the case for environmental reform.

Sinohydro, a state-owned enterprise, is the world's foremost dam builder. The company controls 70% of the Chinese and 50% of the global hydropower market. Its projects include the Three Gorges, Xiluodu, Xiangjiaba, Ertan, Pubugou, Ludila and Xiaolangdi dams in China. As part of its going-out strategy, Sinohydro has also taken on projects such as Bakun (Malaysia), Bui (Ghana), Hatgyi (Burma), Merowe (Sudan), Nam Ngum 5 (Laos), and Tekeze (Ethiopia).

Increasingly, the company not only acts as a contractor, but is also a developer, operator and owner of power plants. This increases its responsibility for the impacts of these projects. The dividing line in the power sector is between contractors, which provide equipment and/or carry out work for the developer, and developers, which take on ownership in the projects that they build. Developers can be private or state-owned enterprises (in BOT projects) or public utilities (such as the Three Gorges Power Corporation). Sinohydro is active throughout the hydropower value chain and takes on a variety of contracts, while also expanding its business from hydropower to other energy (coal, gas, wind), infrastructure and real estate sectors.

Like many dam builders, Sinohydro has encountered social, environmental and safety problems in some of its projects. Dam projects such as Bui (Ghana), Dikgatlhong (Botswana), Hatgyi (Burma), Merowe (Sudan) and Pubugou (China) have seen strong protests by affected people, environmental organizations and workers. The State Assets Security Administration Commission, which administers China's state-owned enterprises, in 2005 and 2006 downgraded Sinohydro from a B to a D over environmental pollution and safety accidents, but has since then upgraded the company again.

In November 2009, Sinohydro announced that it had concluded an internal restructuring process and planned to go forward with an IPO. The company intends to list 25-30% of its shares as A-Shares on the Shanghai stock exchange in 2010, and to raise RMB 12.9 billion (USD 1.9 billion) in the process. China Securities Co. and Bank of China International will act as the underwriters. In March 2010, the Ministry of Environmental Protection posted an Environmental Audit Report for Sinohydro on its website as part of its green securities policy. Environmental organizations from China and other host countries of Sinohydro projects urged that the company adopt an environmental policy which reflects international standards before it gets listed.

Sinohydro has demonstrated openness towards international civil society. In a recent article in the Public Diplomacy Quarterly, the company's CEO Fan Jixiang encouraged Chinese enterprises to "openly and honestly conduct an exchange and even debate with international dissenting organizations". International Rivers has been engaged in a constructive dialogue with Sinohydro since July 2009. Our bottom-line has always been that if Sinohydro wants to become a world-class brand in the global hydropower sector, it needs to adopt a world-class environmental policy.

An environmental policy which reflects the highest international standards will preclude destructive projects such as the Paklay Dam on the Mekong mainstream from going forward, and may mean additional costs for its other projects. Over the longer term, however, it offers an environmental and financial double dividend for the following reasons:

  • Reputation: As a market leader, Sinohydro will increasingly be scrutinized by international civil society and the media. Avoiding environmental disasters will help the company to protect its brand and its social license to operate.
  • Business risks: Environmental problems can delay or even derail projects by triggering protests, legal and political problems. Environmental safeguards help mitigate against such risks.
  • Commercial interests: A strong environmental policy will help Sinohydro design and build better projects. Adopting international environmental standards will make the company an attractive business partner, and will allow it to compete successfully for World Bank contracts.
  • Financial interests: Adopting highest international environmental standards will allow Sinohydro to access capital from socially responsible investors, and will make it easier to access carbon credits on the European market under the EU's Linking Directive.

In March 2010, Sinohydro informed International Rivers that it was now preparing an environmental policy, and invited us to submit recommendations. We were happy to recommend guidelines for the balanced assessment of water and energy options, thorough environmental impact assessments and management plans, public acceptance and participation of affected communities, and the sharing of benefits with local communities.

International Rivers supports Sinohydro's IPO under the condition that the company adopts and implements an environmental policy that reflects highest international standards. We encourage environmentally responsible investors to convey the same message to the company. By engaging in a dialogue with civil society and striving for robust environmental standards, Sinohydro can play a pioneering role in defining environmental and financial win-win solutions in the water and energy sector.