Alvin Camba develops a conceptual model to explain why certain Chinese overseas projects progress while others get stalled
By Alvin Camba
Why do some Chinese large-scale projects progress while others have been unable to do so? By interviewing political elites, Chinese officials, and members of various social movements, my ongoing research is currently examining four comparable cases of Chinese railway projects in Southeast Asia: South Rail in the Philippines (2017-), Sino-Thai high-speed railway (2013-), High-speed rail (HSR) in Indonesia (2016-), and the East Coast Railway in Malaysia (2016-2018). My preliminary research finds that the continuation or progression of China’s major railway projects depend on the coalition that Chinese actors form with host state actors. The success of these coalitions depend on (1) whether or not they hold the power resources to implement the project, which depend on the institutional structures of the state; (2) or how immediately vulnerable to electoral cycles or political turnover they are, which could usher in a new regime that reneges on the previous agreement with China.
To demonstrate the framework, this blog post focuses on the East Coast Rail Link (ECRL) case in Malaysia, which was started by former Prime Minister Najib Razak, suspended by the new Prime Minister Mahathir, and recently resumed ahead of the 2nd Belt and Road Forum in Beijing. The case is for critics a classic example of a developing country “pushing back” against China’s debt-driven Belt and Road Initiative. But my analysis will show that it is more of a case where a recipient country tries to leverage the BRI for economically viable and politically strategic projects that are with international credibility and domestic legitimacy.
In the ECRL case, a political elite coalition between Najib Razak and the Chinese firm (China Communications Construction Company, CCCC) was initially formed, which concentrated power resources in the hands of the United Malay National Organization (UMNO). Even though the project only began in 2016, it has made substantial gains in terms of land acquisition, rail track construction, and project coordination with state governments. Due to the centralization of power in the hands of the federal and state governments, the ECRL has made great progress relative to projects that have started earlier, such as Indonesia’s HSR and Thailand’s Sino-Thai Railway. Some officials of the “Alliance of Hope” (Pangkatan Harapan) attempted to derail the project but Najib’s power resources and UMNO’s control of the government limited these contentious activities.
Nonetheless, since the ECRL started seven years into Najib’s term, the project became very vulnerable to electoral turnover. This made Mahathir and the Alliance of Hope concentrate their efforts on winning the national elections, which capitalized on the 1MDB scandal, and the complicity of Chinese firms to corruption.
Numerous Chinese-financed projects were later linked to a massive rent-seeking venture for Najib. For instance, the MPP Malacca-Johor pipeline and Trans-Sabah Gas Pipeline (TSGP) were most likely used to illicitly transfer funds into the 1MDB fund by overpricing the project cost, which would have burdened Malaysia’s coffers, constraining medium- to long-term benefits and limiting welfare gains.
When Mahathir won the election, the state’s juridical power and political power resources were transferred to the new government. This led to the cancellation of both pipeline projects. However, the Malaysian government needed to compensate the contractors $2 billion USD or 88 percent of the total worth of both projects for just 15% of project’s completion rate.
The ECRL was more difficult to scrap because of the actual economic need to link the wealthier Malaysian states to the developing eastern regions. Furthermore, the Kuantan Industrial Park, which houses the Chinese firm Alliance Steel’s investment that employs locals and generates a multiplier effect on the state’s local economy, stands to benefit from the ECRL’s construction. These considerations led to the negotiations to bring down to cost by roughly one-third. As of April 2019, the project is back on track.
The fates of rail projects in three other Southeast countries are all different depending on how a coalition between China and host state actors negotiate their way through political dynamics involving multiple obstructing and rent-seeking local elites. In Indonesia, Jokowi Widodo’s Jakarta-Bandung High-Speed Railway (HSR) started early in his term and China offered better project terms in order to win the deal over Japan. Project timing, limited geographical coverage, and Jokowi’s political position enabled the project to progress. In the Philippines, the project started at the beginning of Rodrigo Duterte’s tenure, forming a coalition between the Duterte administration and the Chinese firm. However, regional-local elites lobbied the Duterte government for train stops in their own provinces. For the elites, economic activity and political gain will cluster cities or province who receive the stop. The Duterte government and the Chinese firm mediated these conflicts, promising livelihood projects and electoral support in return. In Thailand, a coalition between the Yingluk Shinawatra and the Chinese state agreed on a train project in 2013. However, Thailand’s internal political dynamics, particularly Prayut Chan-o-Cha’s coup and the emergence of the military regime, effectively deposed Yingluk and delayed all the major projects. The Chinese government was willing to renegotiate with Thailand, but Prayut wanted better term than the ones that Yingluk acquired. Recently, new terms are being renegotiated.
In sum, the progression and delays of these major railway projects depend on the coalitions that the Chinese government and firms form with host state elites. Contrary to perceptions of China “dictating” tough terms, host countries do have some agency to decide which projects to finance, terms to accept, and conditions to execute.
Alvin Camba is a China Initiative Fellow at the Global Development Policy Center and a Ph.D. Candidate at Johns Hopkins University. He works on the political economy of Chinese foreign capital and elite theory. His works can be found at alvincamba.com
A first-person account of how China’s hydropower giants engage with civil society groups when operating overseas
By Stephanie Jensen-Cormier
Global hydropower is a big industry. It currently supplies around 16% of global electricity and, though capacity installation rates have remained steady since 2008, is seeing a huge rise in investments. In 2017 the amount of money committed to hydropower projects doubled from the previous year. Chinese hydropower companies hold by far the lion’s share of this market, up to 70% according to the People’s Daily.
Increasingly packaging their projects under the “Belt and Road Initiative”, China’s hydropower companies tend to speak of their overseas projects in terms of poverty reduction, improving livelihoods, protecting the environment, and encouraging development. The negative effects of large scale hydro projects have been broadly documented, however. To take just one example, dams have displaced over 80 million people worldwide and are estimated to have negatively affected 472 million people.
With evidence stacking up against their claims to bring green development to communities, it is important to assess and judge just how serious China’s hydropower companies are about their words. One lens through which to judge this is companies’ engagement with civil society, who play an indispensable role in increasing companies’ accountability and warning about negative environmental and social impacts which the company may otherwise ignore.
During my three years working for International Rivers in China I had the opportunity to engage with some of these companies on their overseas projects. I’ve seen companies take steps towards greater openness to engage, understand and learn about the environmental and social concerns surrounding their projects. This has even led to tangible results in some cases. On the whole, however, my experiences showed that there is a long way to go before China’s hydro giants are ready to take that extra leap away from their traditional operating models and towards one which is more transparent, accountable and open to engagement. This blog outlines some of my key observations from interactions with Chinese hydropower companies and thoughts about how such corporate – civil society engagement may progress in the coming years.
From increased budgets to limited engagement
Some companies have tried to improve their domestic and overseas operations by increasing the size of project teams responsible for environmental protection and conservation, increasing budgets to compensate resettled and affected communities and environmental management and biodiversity offsets. These actions can provide an important step in internalizing costs that are otherwise externalized onto local people and the environment. However, in order to avoid such endeavors from ‘green-washing’ harmful projects, companies need to prioritize efforts to meaningfully include communities and NGOs in discussions, especially in the planning and design stages.
The 1,075 MW Nam Theun 2 dam in Laos demonstrates the blind spots of simply throwing resources at the problem. Beginning operation in 2010, the dam was heralded by the World Bank as a way of ‘doing a dam better’, due largely to the amount of money allocated to resettlement (USD 16 million) and conservation (USD1 million annual conservation fund) out of USD 1.45 billion total budget. Nonetheless, reports published from 2010 through to today by the Independent Panel of Experts established by the World Bank and project proponents demonstrate that the project’s intention for genuine benefit-sharing failed and that outcomes had failed to ensure indigenous peoples’ rights, negatively impacted the livelihoods of displaced communities, damaged fisheries, and precipitated the degradation of forests and wildlife (Shoemaker, International Rivers).
What the Nam Theun 2 dam case shows is that there is a pressing need for hydropower companies to engage in frank discussions with civil society organizations and NGOs, often squeezed by local governments for speaking against their priorities,
Since 2009 PowerChina, which owns over 50% of the global market share for hydropower, has made efforts to communicate with International Rivers. The engagement has included dialogue over the Nam Ou hydropower cascade in Laos. Consisting of a seven dam cascade, the Nam Ou cascade is the first time a Chinese company has obtained rights to develop an entire river basin outside of China. Its location on a major tributary of the Mekong is of significant concern, as are limitations in the project consultations with affected communities and its projected impact on a large number of fish and other riverine species.
Over several years, PowerChina Resources and the Nam Ou River Basin Hydropower Co. Ltd (in which PowerChina Resources owns 85%) hosted International Rivers staff in meetings at the Nam Ou Hydropower Project head office in Luang Prabang and in site visits to the Nam Ou cascade. The company provided access to high level and relevant management personnel, documents related to the project and prepared presentations with updates on the project status. Company representatives endeavored to be welcoming, constructive and informative. These were all positive signs, but limitations remained in terms of the information shared, including non-disclosure of key project documents and impact assessments. This constrained the substantive dialogue on the social and environmental performance of the cascade that we were aiming for.
Nonetheless, the company have been open to receiving feedback and have indicated that they would like to have training sessions on some of the aspects in which their project could be improved to ensure better outcomes for the health of the river system and well-being of affected communities.
In 2015 International Rivers published a scorecard report on Chinese overseas hydropower companies. Ranking last out of seven companies, Huaneng Lancang River Hydropower Inc. (Huaneng Lancang), a subsidiary of energy monolith China Huaneng Group, used the moment to reach out to International Rivers, dropping an earlier unwillingness to interact with the organization over the Lower Sesan 2 dam in Cambodia.
In 2015 and 2016, International Rivers participated in a series of meetings with the Huaneng Lancang. Several executives, including the company Chairman, travelled from Kunming to Beijing on short notice in order to attempt to rectify the poor review of their company and project. The Chairman (who has since retired) even participated in exchanges with NGOs during the ‘2015 Greater Mekong Forum on Water, Food and Energy’ held in Phnom Penh.
The company’s willingness to meet and exchange with NGOs was unprecedented for them and a step towards greater transparency. But parallel to these efforts, the Lower Sesan 2 project continued to face community resistance and was marred by negative attention concerning the project’s extensive environmental and social impacts, involuntary displacement of indigenous peoples, and lack of adequate consultation with affected communities.
Huaneng Lancang were keen to use their unprecedented engagement with International Rivers to urge us to modify the report ranking, which would cast the company and the Lower Sesan 2 project in a better light. We did not revise the report, however, and the company has since declined to meet with International Rivers. From 2017 Huaneng Lancang deprioritized communication and delegated junior employees with responding to us.
From the three year experience of our interactions with Huaneng Lancang it was apparent that there was a significant gulf between the two sides’ motivations for engagement. While International Rivers were keen to use the opportunity to engage the company on issues such as benefit sharing, comprehensive impact assessments and community engagement, Huaneng Lancang appeared to be seeking a quick fix, namely, changing their ranking in the scorecard report.
Since our interactions with the company were downgraded to junior staff, numerous reports, including a statement in 2018 by the UN Special Rapporteur on Human Rights in Cambodia, documented the project’s violations of the rights of communities. China Huaneng Group was expelled from the UN Global Compact in September 2018 for “failure to communicate progress.”
Hiding behind contract types
There are two main contract types for hydropower projects. In Build Operate and Transfer (BOT) arrangements, companies assume the liability for environmental and social aspects of the project; they finance, design and build in exchange for operating rights, typically 20-30 years. Engineering Procurement Construction (EPC) contracts have less liabilities. In my interactions and meetings, Chinese companies with EPC contracts tended to deflect the responsibilities for environmental and social impact assessments and compliance with local and international laws to clients – usually the host country government. Under an EPC contract, the company designs, builds and delivers the asset in an operational state. The client (not the company) is responsible for the financing, preliminary studies (including environmental, social and cumulative impact assessments) and legal requirements. Companies building EPC projects therefore have convenient excuses for why they do not ensure that proper due diligence is conducted. When companies with EPC contracts do implement environmental protection measures or provide compensation to resettled communities, no matter how insufficient these are, they claim to be going beyond their contract obligations.
Hiding behind contract types can mean that companies do not strive to develop better policies, mechanisms and practice, related to due diligence, environmental impact mitigation and monitoring or benefit-sharing with local populations.
This creates reputational risks for companies. For example, the complaints about improper contracts, low pay and poor treatment from workers of subcontracted companies at the 183 MW Isimba Hydropower Project in Uganda, expected to come online in this year, has had a reputational impact on the contractor China International Water and Electric and the parent company, China Three Gorges.
Failing to obtain a social license to operate
Chinese entities involved in developing hydropower projects overseas prioritize amicable government-to-government relations, and typically fail to actively demonstrate their social and environmental responsibility and commitments or understanding of benefit sharing.
The World Bank defines benefit sharing as “the systematic efforts made by project proponents to sustainably benefit local communities affected by hydropower investments.” It also contains recognition that affected people must be consulted about plans for compensation. In my experience Chinese hydropower companies have shown very limited understanding of this concept, and that lack of understanding is at the root of companies’ failure to obtain a social license to operate in the eyes of the public.
When companies have outlined their plans for benefit-sharing, these generally include providing one off payments of cash compensation for displaced communities, infrastructural development such as leveling land, building or improving roads and bridges, building schools or local community centers, adding fish to reservoirs or gifting company vehicles after the construction team leaves. Benefit sharing at this level, focusing on short rather than long term outcomes, falls short on a number of fronts.
Firstly, the individuals who comprise the ‘affected people’ are usually defined very narrowly in scope. International practice includes people who have been displaced as well as those who are impacted upstream, downstream or in the areas surrounding the reservoir. For most Chinese companies, however, only displaced people are eligible to receive benefits which have been defined by the company. For example, the Lower Sesan 2 compensation plan lists only six villages, while independent studies have shown that the dam impacted at least 250 villages.
Secondly, initiatives like building or improving roads improves access to the work site often benefiting the company more than local communities. Consulting with local communities in the process of infrastructure development could help ensure the public is better able to benefit from the new infrastructure. Adding non-native fish to reservoirs, which companies frequently do, including at the Lower Sesan 2 reservoir, is likely to diminish the balance of ecosystems and exerts even more pressure on native riverine species.
Lastly, these ‘benefit sharing’ initiatives are generally short term. Companies need to consider longer term monetary and non-monetary benefits like providing free access or preferential electricity rates, payments for environmental or ecosystem services, establishing long term community development funds, creating long-term employment, and ensuring custodianship over wildlife and other natural resources (World Bank).
Planned projects as a test cases
There are opportunities for Chinese companies, banks and the government to show that they are responsive to discussing projects with civil society organizations. One of these opportunities has been in the headlines in recent weeks. The Batang Toru hydropower project is a proposed 510MW dam in Sumatra, Indonesia, which, if constructed, will cut through the habitat of the Tapanuli orangutan, the world’s most recently discovered and most endangered species of orangutan. Campaigners say its construction will almost certainly lead to the species’ extinction.
The project is packaged under the Belt and Road Initiative, slated to be built by PowerChina Sinohydro and likely to be financed by the Bank of China. In recent months the Indonesian Forum for the Environment (WALHI) has filed a lawsuit challenging flawed environmental permits and has attempted to communicate with the Bank of China and Sinohydro for almost a year, but have been unable to open the door to meaningful discussions. In March, WALHI garnered support from peers in twelve countries to deliver letters to their local Chinese consulates and Bank of China branches. Despite months of unresponsiveness, the Bank of China publicly acknowledged reception of the letters within one business day.
Projects as destructive as Batang Toru are currently under consideration by PowerChina Sinohydro and other Chinese hydropower companies. Similarly, the Koukoutamba Dam in Guinea, if constructed, would seriously impact Critically Endangered chimpanzees, flooding a protected national park area and resulting in the deaths of up to 1,500 specimens. If projects like these get built, they will not only damage the reputation of the financiers and builders, but also exacerbate public distrust in the intentions of the Chinese government’s Belt and Road Initiative, something which voices in China are increasingly expressing concern about.
Long term impacts
The foremost experts on dams have warned against a lack of consideration or monitoring for the long-term social and environmental impacts of dams. It is essential for companies to take into account the cumulative impacts of their projects as rivers perform tangible and intangible services on which we all ultimately depend. Yet, Chinese hydropower companies generally lack appropriate tracking and monitoring mechanisms to evaluate the cumulative impacts of multiple projects in their areas of activity. They tend to look exclusively at the project site, ignoring the broader repercussions on the environment and people.
If Chinese hydropower companies open to deeper engagement, their powerful interests will likely be challenged and they may have to change the way they conduct business. In particular, they may need to evaluate whether proposed large infrastructure projects are a means to decrease poverty and promote environmental conservation. They may also have to more closely determine whether governments in Belt and Road regions have sufficient capacity to evaluate, monitor and oversee such projects. Chinese hydropower companies would be able to adapt — they usually have broad energy portfolios and have elsewhere proven their ability to build clean energy projects like solar and wind.
China has the potential to be a global and responsible leader in developing clean energy, but it must not shy away from constructive engagement with civil society and communities. In its endeavor to connect the world in a “people-centered” manner, China must ensure that its SOEs build genuine relationships of open and constructive dialogue with local communities, indigenous peoples and NGOs. If Chinese companies and banks decide to ignore global civil society’s requests to engage, communities will inevitably resort to more confrontational actions to have their concerns and voices heard.
Stephanie Jensen-Cormier is an independent consultant based in Costa Rica where she works on themes that interconnect environmental and social justice. She lived and worked in China for eight years; her last position prior to leaving in 2018 was as International Rivers’ China Program Director.
What a collection of ethnographic studies about “neighboring China” can tell us about the Belt and Road
by Tom Baxter
At over 22,000 km, China has the world’s longest land border. Lined up along that border are a total of 14 countries, countless local communities and long histories of interaction and isolation, trade and suspicion. The Art of Neighbouring: Making Relations Across China’s Borders (pdf available for download here) is a selection of essays that look at the diverse experiences of living on China’s border from the perspectives of the communities who live with its presence on a daily basis.
From Laos to Nepal, to Mongolia and Vietnam, the regions along China’s long border are too often seen as peripheral, on both sides — the northern highlands of Laos and Vietnam border China’s mountainous Yunnan province, Nepal neighbors the Tibetan plateau. But as China’s economic, political and social presence and engagement across the Asian continent expands, not least via the official encouragement of China’s “going out” policy and the more recent Belt and Road Initiative (BRI), the experiences of these border regions are becoming increasingly important in understanding China’s role across the continent. At the same time, it is the communities on both sides of the border who often feel the most direct impacts of the increased interaction being encouraged by Beijing.
In attempting to understand and assess the impact and the on-the-ground reality of the BRI, this year celebrating its sixth birthday, it is important that we acknowledge those communities’ experiences and look at, in the words of the collection’s editors, Martin Saxer and Juan Zhang, the “smaller scale processes of exchange”, which are undergoing rapid change. Through a series of in depth, mostly ethnographic case studies, The Art of Neighbouring is a step in that direction.
The case studies in the book all date from before 2012. That is, from before the Belt and Road Initiative was announced in October 2013. Nonetheless, they reflect the impacts of a trend of China’s increasing presence outside its own borders which holds true both before and after Xi Jinping’s BRI speech in October 2013. Each chapter of the book focuses on a case study from a total of eight of China’s neighboring countries. Running through those geographically disparate case studies are couple of major themes which deserve highlighting.
In a number of the book’s case studies the rapidly increasing interconnectivity with China is not a new phenomenon, but rather a revival of a historical norm. This is particularly evident in the case of Martin Saxer’s ethnographic study in northern Nepal where the trading relationships across a previously porous border was the basis of existence for borderland communities. It was only in the 1950s and 1960s that the border between China and Nepal became strictly demarcated and regulated. Where trade had once occurred wherever there was a passable valley, it now became limited to just six official border crossings. Before that, highland communities sought their existence as intermediary traders between the arid and harsh Tibetan plateau and the fertile lowlands of Nepal and India. Since the 1970s China’s increasing wealth and the renewed connectivity brought by new roads which link the borderlands to China much more directly and tightly than to Kathmandu revitalized this centuries old norm.
Along with these physically changing realities, local communities have also reimagined their place in the history of China-Nepal relations and understand their current occupations as following in the footsteps of their ancestors as borderland trading communities. “The new roads are primarily conceived of as ways back to what is remembered as prosperous trans-Himalayan exchange,” Saxer writes. In other words, in the eyes of local communities, a rising and more internationally present China is not so much a disruption of the world order, but is facilitating a return to normality after a comparatively brief interlude.
A case study of traders in Kyrgyzstan and Kazakhstan demonstrates a similar historical processes of a border region “under fuzzy sovereign rule” becoming closed borders during the Cold War to re-opening in the last thirty to forty years. Henryk Alff’s study of the traders reveals that they often attempted to rekindle (perceived) historical ethnic allegiances across borders with, for example, Hui Muslims in China. One Dungan trader from Kyrgyzstan states, “some of us had remote kinship ties with places in China where our ancestors originally came from.” In the post-Soviet and rising China period, traders have been able to take advantage of these perceived cross-border common identities to ease deals and partnership. It is another example of regional history re-imagined, which in turn informs how local people comprehend China’s growing presence and interconnectivity on the continent.
China as threat / China as opportunity
Which leads on to the second major theme in the book’s case studies. Informed by local history and present day circumstances, communities all along China’s border are divided in their perceptions of China as a threat or an opportunity.
In Saxer’s Nepal case study he provides an example of an embracing attitude towards China’s presence. Moreover, it is a welcoming coming from local communities and a bottom-up approach, rather than via the top-down government initiatives involving state owned companies, banks and political MOUs through which we normally make sense of China’s presence abroad.
In 2010 a former member of Parliament and local to the northern border region of Humla pulled together local business people to form a Road Construction Committee which lobbied Kathmandu to provide funding to build a road through the lesser used Limi valley to China. They were successful and, after securing funding from Kathmandu, also managed to reach agreement with China to temporarily open the border through the valley for sales of diesel for the construction equipment. By the end of the year the first section of the road was complete, and a Chinese delegation even came to attend the inauguration ceremony.
In another example, a study conducted between 2009 and 2012 of Myanmar Muslim communities residing in Ruili in China’s Yunnan province by Renaud Egreteau reveals that to these communities China is seen as a refuge and a sanctuary compared to the situation they face at home. One of his Ruili-dwelling Myanmar interviewees even says “it’s paradise here!”
In contrast, the histories of Cold War suspicion, tension and conflict along China’s Russian and Vietnamese borders do not wash away overnight. Two case studies of these borderlands show that a perception of China as a threat persists through to this day. A Vietnamese border trader interviewed by Juan Zhang in her study of the Lao Cai – Hekou border crossing says, “even now the Chinese are not much better than before…One can never be too careful.”
Within countries there are of course also divided perspectives on China as threat or opportunity. These as yet unsettled perspectives played out in a number of high profile elections in 2018 in Malaysia, Sri Lanka and the Maldives. 2019 is likely to see more of this tension as more politicians, banks, constituents and other interest groups push back on some of the excesses of Chinese projects and work towards establishing national level strategies on how to interact (or how not to interact) with China and the Belt and Road. Elections in India and, in particular, Indonesia this year could display snapshots of this trend.
What can we learn?
The voices and the world views of communities experiencing and engaging in China’s increasing global presence are an important part of the Belt and Road “story” and the rapidly changing on-the-ground reality across Asia. For one, they represent world views that are often overlooked in mainstream coverage of China’s influence abroad and the Belt and Road. While media often seek comment from local communities on their attitudes toward a specific project, it is rare to hear their take on the larger scale shifting reality or on such big questions as whether China is primarily conceived of as a threat or as an opportunity. As narratives on BRI become more and more polarized between the Beijing story and the Washington story or the Brussels story, it is important not to forget the voices of those who are far more directly impacted by the, in some places, transformational, change BRI is bringing.
But these local community voices are not just “color” for media stories. They are also agents in and of themselves. Saxer’s fascinating case study of a local community proactively campaigning for infrastructure connectivity with China is a case in point. The agency of these local communities is also being played out at very local levels, in national elections and in the establishing of recipient country policies and strategies toward the Belt and Road. In a recent article on Euromoney, Djiboutian minister of finance, Ilyas Moussa Dawaleh, stated “we have problems with the current Belt and Road narrative”. His voice may represent that of a recipient country political elite, rather than the grassroots voices explored in The Art of Neighbouring, but it points to the same problem — the current narrative of the Belt and Road too often overlooks the diversity of agency playing out in its growth and development.
The Art of Neighbouring points a way towards a deeper and more complex understanding of China’s growing presence and engagement on the Asian continent and of the dynamics playing out along the Belt and Road. For these reasons it is useful for all of us in the emerging “Belt and Road watcher” community. Even better will be more recent ethnographic studies of local communities’ perspectives on China since the announcement of the Belt and Road in 2013. This watcher, for one, is waiting keenly for that.
China is shifting away from coal domestically but building many coal power plants overseas, why?
China’s involvement in building coal power projects in other countries has been the subject of much criticism. The increasing urgency to address climate change, as highlighted by the recent special report published by the Inter-governmental Panel on Climate Change (IPCC), casts such involvement under serious scrutiny. The IPCC report bluntly states that in order to keep global temperature rises close to the 1.5 degree threshold that scientists deem relatively safe, countries should basically cease using coal as energy for electricity by 2040. Global temperatures are already 1 degree higher than pre-industrialization levels, leaving humanity with very little remaining “carbon budget” to spend if it is serious about keeping climate change under control. As one of the most carbon intensive way to generate electricity, coal-fired power plants (CFPP) understandably rank high in the phase-out list.
To a large extent, Chinese actions in this area would determine the fate of the “black gold” and the global fight against climate change, due to the size of its economy which still relies primarily on coal for electricity. In comparison, coal only accounts for 17.8% of the US’s primary energy source. Alarmingly, as China shifts away from coal domestically, for air quality and economic structure considerations, it appears to be building coal power projects elsewhere in the world that will likely negate part of the decarbonization happening inside China while exporting pollution.
Elizabeth Economy, a China expert at the Council for Foreign Relations, encapsulates the criticism in her 2017 article on Politico, calling out China’s overseas CFPP involvement as “ugly” and “not in keeping with the spirit of (the Paris Climate) Agreement.”
At a recent workshop that I attended in Jakarta, co-organized by the Beijing-based Global Environmental Institute and Indonesian think thank IESR, a local CNN correspondent asked the panelists the same question: Does China’s building of CFPPs in Indonesia constitute a “double standard”?
This is a question that is likely going to be asked more in the future, as the urgency of climate change becomes ever more salient and China’s overseas involvement continues to deepen. The Jakarta workshop, which convened stakeholders from both Indonesia and China, provided an opportunity to do just that, taking a closer look at an issue ripe with contradictions. Discussions at the workshop suggest that there are at least three lenses through which the issue can be viewed: recipient country agency, multi-stakeholder playing field, and Chinese industrial policy.
The role (& responsibility) of recipient countries
Responding to the question from the CNN journalist, Professor Yuan Jiahai from the North China University of Electric Power, who was present at the event, argued that it was largely an outcome of recipient country demand and market competition: Indonesia’s power sector is in need of CFPPs and Chinese companies are coming in to capture the market.
According to the Indonesian officials, electrification remains a priority of Indonesia, the 4th most populous country in the world, of over 18,000 islands, where access to safe and affordable electricity in many areas is still all but unavailable. At the same time, on the supply side, the government is at pains to diversify its energy sources, ever since Indonesia became a net oil importer for the first time in 2004. Within a short span of 8 years (from 2009 to 2016), electricity generation from oil fell from 25% in the general mix to below 7%. while coal rose from 39% to 55%. These changes have been led by twosuccesstive administrations (President Susilo Bambang Yudhoyono and President Joko Widodo) who spearheaded the so called “Crash Programs” to accelerate installation of power capacities to ease the country’s chronic electricity crunch.
However, it has not been all smooth sailing. President Yudhoyono’s first Crash Program was known for its poor execution. Announced in 2004, it aimed to add 10,000MW of new capacity by 2009. Instead completion was severely delayed until 2014, and the resulting power plants that were built were of such low quality that they could not perform at their stated capacity.
President Joko Widodo’s new program, created in 2014, aims to add another 35,000MW to the grid by 2019, a goal that many consider unrealistic.
And it is here that China’s involvement dovetails, as Chinese companies pocketed the majority of projects under President Yudhoyono’s initial program. As opposed to outright ownership of the projects, the Chinese companies were mainly involved in design and construction through EPC contracts (Engineering, Procurement and Construct), which meant that they did not operate, maintain, nor own the power plants that they built. Apart from their engineering and construction prowess, favourable financing support for Chinese company involvement may have also played a key role for their winning of this job.
As a result of these developments in Indonesia’s Crash Program, Chinese companies, and by extension, China, came to occupy a primary role in Indonesia’s energy system. Indonesian media was rife with open speculation that favoritism toward China was part of why so many projects were granted to Chinese companies, pointing to the fact that project tender process had deadline submission requirements only China’s companies could meet. The speculations weren’t entirely groundless. Recently, Indonesia’s national power company (PLN) is embroiled in corruption scandals related to its coal power project.
More guests at the dinner party
It is worth noting, however, that China has not been the only outside player eyeing the Indonesian coal power cake. Japan is a key player and has been exerting its influence.
At the workshop that I attended, the below chart kept appearing in presentations from Indonesia officials. It illustrated Japan’s roadmap to assist Indonesia in building its “clean coal” power fleet through to 2025. Created by the Japan International Development Agency (JICA) as part of its development assistance to Indonesia, JICA stated that “the introduction of Japan’s CCT（Clean Coal Technology), which represents the highly efficient technology for coal-fired power plants, will help curb demand for coal and greenhouse gas emissions by making it possible to increase the output of power generation without increasing the use of the resource.” In the planning for the study, JICA also built in a step where the roadmap could be “incorporated into Indonesia’s national power source plan”.
Beyond the controversy of an external country’s involvement in domestic energy developments, Japan’s pushing of “clean coal” has raised the ire of many who believe it be a false solution to climate change. Ironically, JICA created the roadmap in close coordination with Japan’s Climate Change Program Loan to Indonesia, announced in 2008 as Japan’s first climate change-related Official Development Aid (ODA) loan to assist Indonesia in its effort to reduce emissions, strengthen adaptation to climate change and respond to cross-sectoral issues. This practice of marrying the promotion of Japanese coal technology and its climate finance has been controversial and subject to much criticism internationally.
But Japanese officials are unabashed when confronted with the question. As Japanese media reported, promoting Japan’s high efficiency coal power technology as a climate change solution is part of Japanese government’s efforts to “assist Japanese businesses against Chinese rivals for coveted overseas power plant contracts.”
To some extent, Japan’s efforts in Indonesia have paid off nicely. Of the 8 high-efficiency coal power plants that are under construction,at least 3 projects, including the 2 largest (Jawa Tengah- Central Jawa and Jawa-4 – Central Jawa), are being financed by Japanese Bank for International Cooperation (JBIC) or built by Japanese companies such as J-Power and Itochu. And despite the controversy over the Jawa Tengah project for its land acquisition issues and environmental problems, Japan’s support for it continues, with one Japanese official telling the Nikkei Asian Review, that they wanted to make the Central Java project a showcase that will open the door to more projects.” Recent signs seem to suggest that there might be a rethinking of overseas coal financing from Japanese financial institutions.
Chinese industrial policy
Japan’s rather high-profile and coordinated activities in Indonesia to promote its coal interest provides a point of reference for Chinese efforts in the same arena.
If there is one component of the nebulous Belt and Road Initiative (BRI) that is relatively well defined, it is its function as an extension of Chinese industrial policy. The need for many Chinese industrial sectors to find new markets outside their home country is a powerful driver for China’s “Going Out” strategy which predates the BRI for more than a decade.
In the specific area of coal power, China, as its neighbor Japan, is keen to see its companies winning lucrative contracts overseas, a need accentuated by a slowing domestic market. According to Prof. Yuan Jiahai, China’s coal power sector is facing a severe overcapacity problem: “failure in power planning” (i.e. not foreseeing slowing electricity demand growth) makes many existing Chinese coal power plants badly under-utilized, spending a good part of the year idling. The situation prompted the Chinese government to apply the brake on new coal power plants, suspending new builds in 15 provinces.
But the Chinese companies that over the years have excelled in building CFPPs need jobs. And the unique bond between Chinese state-owned enterprises (SOEs) and the state machinery (diplomatic, finance and industrial) makes China particularly well disposed to make concerted efforts to advance the interest of its industries. A 2015 State Council directive on “international industrial capacity sharing” lays out a blueprint for how the government would assist competitive Chinese industries to expand globally. Within its toolbox are instruments such as Chinese policy banks (China Development Bank and the China EXIM Bank) that tie their concessional loans with business deals for Chinese companies; and high-level bilateral government-to-government dialogues that secure “full package” deals for Chinese corporations. Premium Li Keqiang’s “industrial diplomacy” with Kazakhstan is celebrated as the origin of this model.
Power plant construction and operation is listed in the directive as one of the priorities for such state support, as it is a sector through which not just Chinese equipment, but also Chinese services and standards, can be exported. And the model plays out in Indonesia’s power market. Shenhua, one of China’s largest coal industry conglomerates, won the contract to build and run the Java-7 coal-fired power plant in Banten, another high efficiency CFPP listed in the CCT roadmap. The Shenhua-led Chinese consortium managed to beat 36 other competitors in the bid, and attributed the success to its premium clean coal technology and “low-cost, tailor-made financing” based on its strategic partner relation with China Development Bank.
This may give the impression of a formidable, highly efficient industry-policy complex geared up to take over any country’s power market. But in reality, Chinese efforts in promoting the export of its industrial capacities are far from seamlessly coordinated. Government red tapes and lack of service/support are among the many complaints Chinese entrepreneurs make. And in many emerging markets Chinese companies are still required to follow standards set by “Europeans, Japanese or South Koreans.” Chinese actors are barely catching up with experienced players in the arena (such as Japan) that have mastered the art of merging foreign aid, industrial policy and overseas investment into a strategically aligned whole. By and large, Chinese companies still predominantly compete for EPC deals, which is considered low-end and low-value in the global value chain.
Shifting China’s overseas coal involvement
For anyone with an eye to engage and influence China’s overseas energy projects along the Belt and Road, the above should serve as a reminder of the intertwined forces that are collectively shaping the energy landscapes in those developing countries.
To shift the direction of such projects would require pulling multiple strings at the same time: without empowered and enabled host countries that are capable of envisioning their own energy future differently, investing countries alone would find it hard pressed to resist lucrative power deals that are being actively marketed; without a globally coordinated and aligned approach to public financing of fossil fuel projects, one country’s high-minded rejection of a project might simply become another country’s business opportunity; and without a conversation that could engage China’s industrial policy makers, the domestic economic agenda would continue producing strong momentums for Chinese companies to seek CFPP projects overseas, despite warnings from climate scientists.