Let the benefits flow

Ten years in the making, China's massive Three Gorges Dam finally opened for business in June when engineers closed the dam's sluice gates and raised water levels in the newly created reservoir to an average of 135 meters, While the rising waters have brought with them a flood of media interest, the spotlight has so far mostly focused on the project's environmental and social impact. Relatively little attention has been paid to important commercial implications that are expected to follow as the dam is finally pressed into service.

The most obvious consequence of the opening of the dam is the substantial improvement to navigation in upstream parts of the Yangtze. Today, the river above the dam is an average of 40 percent deeper and twice as wide, while the often treacherous current only half as fast. This means that for larger ships can now complete the 660km stretch between the dam and Chongqing, in the heartland of China's remote and relatively undeveloped west. According to figures published by the Three Gorges Project Development Corpora-tion, the creation of the reservoir now makes Chongqing accessible to 10,000-tonne barges (up from 1,500 tonnes) and increases one-way navigation capacity through the dam from 10m to 50m tonnes a year. Ultimately, it will cut shipping costs for the route by a projected 35 percent.

Whether this will make a significant difference to the regional economy remains to be seen, hut that is certainly the government's intention. Encouraged by tax incentives, growing numbers of investors are now making their way upriver as they eye the cost advantages of China's interior, especially in labour-intensive industries. This has caused significant new growth in western provinces, with GDP rising some 11 percent year-on-year in the first three months of 2003 – the highest rate since China initiated its 'Go West' campaign three years ago.

New arrivals include Ford Motor, which opened its first Chinese manufacturing joint venture at the end of last year with Changan Auto Group in Chongqing. In making this move, almost all investors are relying on improved communication links to provide efficient transport of raw materials and finished products to and from their newly-built factories.

According to a recent report from London-based consultants Drewry Shipping, cargo throughput on Yangtze ports has grown strongly over the last two years, with operators now deploying larger vessels to an increasing number of destinations. While up to 90 percent of this traffic takes place along the lower river between Shanghai and Nanjing, there is also greater activity to upstream ports, including Chongqing, which has shown recent annual growth of about 30 percent. That said, this is no greater than the phenomenal national average for Chinese port growth, and also comes off a low base. At under 10m tonnes a year, Chongqing's port throughput is less than 3 per cent of total cargo carried on China's mid- and upper -Yangtze in 2001 and remains tiny compared with that of China's major coastal ports.

For the future, the main focus of an official plan published by the Ministry of Commerce is to create a series of freight and distribution hubs at selected Yangtze ports with large economic catchment areas, including Chongqing, Wuhan and Nanjing. These will serve as regional transfer centres that connect to local rail and road networks, forming an integrated multimodal transport system for containerised shipments. In particular, the port of Nanjing which can already accommodate 25,000-tonne vessels, now operates as a hub for international services with further transhipment options to upstream ports. Nanjing handles approximately 500,000 teu containers annually – a figure expected to more than treble over the next eight to 10 years, according to Drewry.
That, at least, is the idea. In reality, there are a number of fundamental obstacles to the rapid development of new upstream transport links, notwithstanding government ambitions and improved navigation on the river. Infrastructure remains inadequate, despite official efforts to spur fixed-asset investment. In addition, bureaucracy is almost impenetrable throughout China's far-flung regions. In particular, Bruce Murray, resident representative for the Asian Development Bank in China, cites regional trade barriers that frustrate access for inter-provincial trucking operations, together with antiquated customs procedures that require the completion of complex and unnecessary paperwork. Foreign shippers also face regulatory obstacles to expanding their operations into China's interior.

While many foreign shipping companics welcome the chance to develop inland shipping hubs for containerised cargo, in practice they have met with limited success. According to Drewry, the vast majority of China's containerised freight currently travels no more than 320km inland, while rail container services still account for only 10 percent of total freight moved by rail. And on the Yangtze itself, no more than 5 percent of containerised barge traffic destined for international markets originates outside the immediate vicinity of major ports.

The reason for this is primarily based on cost – older break-bulk shipping facilities are cheaper than local container services. On top of this, the lack of facilities to process and deliver container freight, combined with the absence of IT infrastructure to track container shipments and a general ignorance of the advantages offered by container shipping has slowed uptake of containerised services.

The bottom line is that these obstacles to the creation of modern distribution services have led to incremental expenses that still outweigh the cost advantages manufacturers glean from moving operations further inland. While this situation is changing slowly, in the meantime it slows the expansion of new investment in inland areas and acts as a drag on the growth of shipping links on the upstream Yangtze. The dam will help to reduce these expenses, but it promises to be a drawn-out process.

The other major commercial function the dam is intended to address is power generation – it will ultimately serve as both China's biggest power plant and as the centerpiece for Beijing's plan to create a national power distribution grid.

On July 10, the first of dam's twenty-six 700MW turbines was pressed into service, followed by a second one week later. At least two more turbines, which are the largest in the world, are expected to be brought online by the end of the year. Once fully operational in 2009, the installed base of generators will provide annual output of 84,7m MWh of electricity as much as 5.5 per cent of China's current total.

Worsening power shortages
Fortunately for the dam project company, the inauguration of the first generator comes against a backdrop of worsening power shortages across the country. This is a far cry from the situation six years ago when China was awash in excess power, and many feared the enormous generating capacity offered by the dam's facilities would make it a white elephant. Since last year, though, a combination of poor central planning and growing demand from China's booming industrial base has led to a dramatic turn-around in electricity consumption.

A recent report published by China's National Power Network Corporation stated that a 10 percent rise in demand has led to a generating capacity shortfall of 10,000MW across 16 provinces, a figure expected to rise to 15,000MW in 2004. As a result, blackouts have become common in many parts of the country. According to HSBC Securities' Hong Kong-based analyst Ivan Lee, the shortfall will not end any time soon, with increasing at 8.5-9 percent for the remainder of this year, and averaging at least 7 percent over the next five years. Although authorities are rushing to bring new capacity online, he says "the increase will be gradual and over the next one or two years supply will not match demand, although this will be a problem only at times of peak demand and in fast-growing areas."

Increasing demand is only one factor likely to ensure that the dam's generators will continue to find a ready market for their power. Another is that the government is likely to keep pricing competitive, even if that means incurring low or no return on construction costs. Although the price of the dam's power has yet to be fixed by the State Council, the State Power Grid Corporation has reportedly proposed a generation price of YnO.25 per kWh, together with an average transmission fee ofYn0.07 per kWh. This compares favourably with average on-grid tariffs for China's urban areas of YnO.3 1-0.4 per kWh.
The dam is not simply a power generator, however. It also plays a pivotal role as the centre of a still developing distribution network that will shunt electricity around the country from where there is surplus to wherever it may be needed as seasonal and commercial requirements dictate. This includes sending excess hydropower and thermal power reserves from the west to China's industrial centers in the east, says Lee. For now, the most important destinations are Guangdong, Shanghai and eastern provinces.

The most important point, however, is that this supply can be delivered flexibly. Indeed, the distribution plan has already been altered from the original plan in order to meet current requirements. Ultimately, this should help to ensure that electricity is used more efficiently across the country.