Dam dilemma

At the turn of the century, the World Commission on Dams published its report "Dams and Development - a New Framework for Decision-Making". It was to be the decisive report, promising to bring an end to the protracted debate on the pros and cons of dams. Gone were the days, it seemed, that dams were on one side praised as the new temples (Nehru) or the modern pyramids (Nasser), and on the other attacked as symbols of the dark side of modernization.

Ten years on, though, dams around the world and especially in developing countries remain divisive. The Belo Monte storage hydropower station in Brazil has been subject to several technical redesigns, and the local environmental authority has laid down strict environmental standards for its construction. Yet these changes have done little to convince the environmentalists, small farmers and Indian tribes living in the region, who have announced that they will violently resist the dam's construction.

Another well known case is the Ilisu dam in south-east Turkey, from which two international financial consortia withdrew because of the Turkish government's failure to satisfy the environmental and resettlement requirements in constructing the dam. Recently, dam projects in which Chinese banks and firms are involved have come in for particular criticism because of lax environmental standards.

Infrastructure for development

Brazil, China, India and Turkey favor hydropower as energy sources and as part of strategies for climate change adaptation. But it is the African countries that have most to gain from hydropower. They are tapping only about 7 per cent of their technical potential (compared with 33 per cent in South America, 69 per cent in North America and 75 per cent in Europe). Because a fifth of African households are not connected to electricity and more than 30 countries in the African continent suffer from frequent power cuts, the African Ministerial Conference on Hydropower, the Ministerial Conference on Water for Agriculture and Energy in Africa and the African Union's Africa Hydropower 2020 Initiative have all agreed that hydropower must play a key role in Africa's development, if only because of limited reserves and rising prices of fossil energy sources throughout the world.

China, too, has a role to play in hydropower development in the developing world: China has become the largest financier of dam projects in Africa and is catching up in Asia, and of the top ten international construction companies, five are now Chinese. While the Chinese overseas construction firms operate primarily in Africa and Asia, their German counterparts concentrate on business through subsidiaries and holdings in the stable markets of the OECD countries.

Unfair competition?

Representatives of the German construction industry say competition distortion accounts at least in part for China's increasingly large slice of the international construction pie. German firms, they say, are committed to OECD environmental standards, which Chinese companies can ignore. Every German company seeking a Hermes export credit guarantee must comply with the OECD standards. In other words, an environmental impact assessment must be submitted with the application to the Euler Hermes insurance company. This is not the case with the China Exim Bank or Sinosure. They base their environmental impact assessments on the host country's environmental standards, which are often far less stringent than OECD standards.

In parts of the developing world, it seems that the OECD environmental standards are not the main reason for different levels of competitiveness. Studies in Ghana and Cambodia show that, rather, Chinese firms base their calculations on low wage costs and narrow profit margins, Chinese construction companies benefit from a fixed exchange rate, and loans are repaid with raw materials – cocoa for the Bui dam in Ghana, for example.

Yet there is some evidence for claims that Chinese-funded construction firms may be ignoring environmental standards: in Cambodia, for instance, Sinohydro has begun building a dam even though an environmental study has yet to be carried out. The Cambodian government has little control over the company, and environmental assessment procedures are explicitly kept weak so that investment permits can be issued quickly, especially in the energy sector. This suits Chinese companies, which do not take international standards as their guide. In this way, any rivals from the OECD countries are excluded from international competition from the outset.

Donors still have leverage

The World Bank, the Asian Development Bank and bilateral donors including Germany are back to financing dams, but only if strict environmental and resettlement standards are observed. They have adopted some of the recommendations of the World Commission on Dams and revised their standards.

Dam projects that comply with international standards undoubtedly make projects more expensive - so China must be brought on board in the interests of fair competition. Bilateral agreements concluded by a country and an international company wanting to cover its risk with export credit guarantees are subject to the OECD standards and possibly the Equator Principles, a code of voluntary environmental standards applicable to international banks. The China Exim Bank and Sinosure are not committed to the OECD standards, since China is not a member of the OECD. Talks between the OECD and China will produce few results for as long as China only has observer status at the OECD. China sees itself as a global player, one that is concerned with its reputation, and the same is true of the firms and banks mentioned earlier. Sooner or later China will have to adapt to international standards in its own interests.

To bring that time forward, the dialogue with China should be stepped up by the German government at a high political level. Not only in the interests of the German construction industry, but because dam projects all over the world will be rightly denounced by their opponents unless strict environmental and resettlement standards are observed in their construction.

This column reflects the opinions of the author.

Dr Waltina Scheumann is a researcher at the Environmental Policy and Management of Natural Resources Department of the Bonn-based think tank Deutsches Institut fuer Entwicklungspolitik, the German Development Institute.

The German Development Institute is one of the leading think tanks for development policy worldwide. The Institute draws together the knowledge of development research available worldwide, dedicating its work to key issues facing the future of development policy. The unique research profile of the Institute is the result of the cooperation between research, consulting and professional training. The Institute is building bridges between theory and practice and works within international research networks.

Author: Waltina Scheumann
Editor: Sophie Tarr