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In the past, funding for a giant enterprise like Three Gorges would almost certainly have come from the World Bank. In the 1990s, the bank pumped $1.8 billion into what is now China's largest hydroelectric dam, the Ertan Hydropower Station. (Last October London's Financial Times reported that project was running at half capacity and had lost more than $100 million in its first year.)
By its 1994 gold anniversary, however, the bank was under enormous pressure to reform. It had been founded after World War II as a financial consortium through which wealthy countries would make cheap loans to poor ones, thus alleviating poverty. But critics said it often funded projects that ultimately diminished the standard of living for millions of people. Indeed, in a 1994 internal review, the bank found that between 1986 and 1993, 15 percent of its lending went to projects forcibly displacing 2 million people. Given that the bank then closed or canceled 22 of these projects, there was little chance it would smile on Three Gorges.
"The Chinese government didn't even approach the World Bank for funding," says Simon Billenness, a senior analyst with Trillium.
Another likely source of aid was the U.S. Export-Import Bankan agency that, among other things, provides low-interest loans to help foreign industries buy heavy equipment from U.S. manufacturers. But that bank also declined; the U.S. National Security Council had advised against the dam, raising concerns in a 1995 memo about environmental and human rights issues, as well as the project's overall financial strength.
Other countries, including Canada, France, Germany, Great Britain, Sweden, and Switzerland, did provide export-import credits. Still, "there were some really big snubs," says Michelle Chan-Fishel, coordinator of the green-investments project for Friends of the Earth. "The Chinese knew that they would have to turn to private finance."
They were in luck: Banks that had once disdained so-called emerging markets as too risky now saw a potential gold mine. As a result, over the last decade, international development has essentially been privatized. Since 1990, public development assistance to developing countries has remained steady at around $60 billion a year. Meanwhile, money from private capital sources shot from $30 billion in 1990 to $212 billion in 1996. Unlike the World Bank, which has an obligation to include even the most destitute countries in its portfolio, private financiers focus on the regions whose hopes for prosperity are best.
China is certainly one of those hot markets, but Three Gorges apparently carries a stigma. According to FOE's Chan-Fishel, the Chinese tried to issue Three Gorges bonds several times over the years, but no one in the international markets would buy them.
So the Chinese government tried a new tackissuing bonds for a state bank, which in turn could loan money to the Three Gorges Dam. They offered investors guarantees and they hid the fact that Three Gorges might be a beneficiary deep in the prospectuses. One environmentalist calls these "stealth bonds." In 1997, Lehman Brothers and J.P. Morgan were the lead managers on a $330 million bond offering for the State Development Bank of Chinathe main source of government funding for Three Gorges. (Lehman Brothers, Credit Suisse First Boston, Morgan Stanley, and J.P. Morgan contributed $66 million each. Smith Barney underwrote $46.2 million, and Bank of America underwrote $19.8 million.)
That offering came to the attention of Trillium, which had been monitoring Three Gorges since Human Rights Watch issued a dire report on relocation in 1995. Trillium considers itself an early-warning system for corporations. "Smart companies will try to address our concerns," Billenness says. So far, only one large corporation has risen to the challenge on Three Gorges. In December 1997, Bank of America promised not to commit any direct lending to the Three Gorges project and to carefully weigh any transactions that might indirectly benefit the dam.
No other bank was as cooperative. As usual, Trillium was forced to pursue its mission through shareholder resolutionsit drafts statements expressing desired company policies and then asks all other shareholders to vote on them. These resolutions rarely pass, but they do provide a useful means of raising investor consciousness, both because they must be mailed to all stock owners and because the authors of the resolutions can question executives at the annual meeting.
Trillium launched its campaign at Morgan Stanley Dean Witter in 1998. Its resolution, which asked for guidelines to stop such destructive projects as Three Gorges, found one major ally: New York City's pension fund. Comptroller Alan Hevesi's support was one reason Trillium's resolution scored a solid 5.7 percent "yes" voteenough to allow it to be reintroduced in 1999. That caught Morgan's eye, and the firm agreed to sit down for talks.
Three high-level Morgan executives met with environmentalists last May, but the session didn't go well. "They mentioned they didn't want to poke their client in the eye," says Shen. "They want to enter China's emerging markets, with good favor from the governmentthat's where they are coming from."
Three Gorges "is a litmus test," Shen adds. "If they are involved in Three Gorges and claim they are following any social or environmental guidelines, they are really hypocritical."
Only days later, there was news of a $500 million bond issue for the China Development Bank, formerly the State Development Bank of China. Merrill Lynch and Salomon Smith Barney (part of Citigroup) underwrote $225 million each. Morgan Stanley Dean Witter, J.P. Morgan, and Chase Securities contributed $6.25 million apiece, and another 12 banks from overseas contributed as well. That was certainly a poke in the eye for the environmentalists, but Morgan didn't apologize. "They never called us back after that," says Julie Tanner, a specialist in environment and finance for the National Wildlife Federation.