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    China Business
     Jun 26, 2010
China draws fire on mega loan to Ecuador
By Gonzalo Ortiz

QUITO - The opposition and experts in Ecuador are questioning a US$1.68 billion loan from China to finance 85% of the construction and equipment of the Coca Codo Sinclair hydroelectric dam.

Work on the dam, to be built by China's state-run Sinohydro Corp - described as the world's largest builder of hydropower plants - is set to begin in July.

The 15-year financing deal with China's Eximbank, which carries a 6.9% interest rate, was signed on June 2 in Beijing by Patricio Rivera and Jorge Glas, ministers of Finance and Strategic Sectors, respectively.

Glas described the credit as "the largest that China has loaned to


any countries in South America's Pacific coast region".

The remaining 15% of financing for the nearly $2 billion dam - the most costly infrastructure project carried out in Ecuador - will come from this country: $300 million over the next six months.

The two governments reported that Eximbank is also interested in financing the Sopladora hydroelectric plant downriver from the Paute complex in southeast Ecuador, with a new $600 million credit. Like the Coca Codo Sinclair dam, the plant would also be built by a Chinese company.

If the deal for the Sopladora plant goes through as expected, the Asian giant will be financing nearly 60% of the public works projects in the energy sector currently underway in Ecuador.

There is no precedent for such a large share of investment by a foreign country in any sector of the local economy.

Although the laborers building the dams will be Ecuadorean, a contingent of Chinese engineers and other technical specialists is expected to arrive for work on the plants, and the turbines and other equipment will come from China.

The Coca Codo Sinclair dam is to be completed in 2016, when it will cover 35% of the country's energy needs, Glas said.

The dam will help reduce gasoil and bunker subsidies, which currently amount to $1 billion, and will eliminate the need to import electricity from Colombia and Peru.

The Coca Codo Sinclair dam, to be situated in the foothills of the Andes in the Amazon rainforest some 75 kilometers east of Quito, will be built on the Coca river, which flows into the Napo, a tributary of the Amazon river, at a big bend (or "codo") where the water level plunges 600 meters.

But the loan and the plant, which according to the administration of left-wing President Rafael Correa will have an installed capacity of 1,500 megawatts (MW), has drawn criticism on both technical and financial points.

"The installed capacity projected by the government has been exaggerated and does not have a sound technical basis," Jesus Jativa, who holds a PhD in electrical engineering, told Inter Press Service (IPS).

Jativa, a professor at the National Polytechnic School, pointed out that the former power utility INECEL studied the potential of the area and concluded in 1992 that the capacity would be 859 MW.

"The pre-feasibility study completed by the Italian firm Electroconsul in 2008," which served as the basis for the government to report a projected potential of 1,500 MW, "is not based on hydrological studies," Jativa said.

In response to the criticism, the government asked the Mexican state electricity company CFE for a report on the Italian study. The Mexican study, which the Correa administration received in January, found that the optimum potential of the new dam would be 1,200 MW.

But on June 14, the government published a new "supplementary" document in which the CFE amended its earlier projection upwards to 1,500 MW.

Jativa said the method of calculation used was theoretical: "In order to project $153 million in fossil fuel savings between 2016 and 2020, the installed capacity has been raised, as if the water flow rate in the Coca river could be increased by decree.

"That difference of 36,000 liters per second is an invention, because there are no studies showing that, and the minimum ecological flow required to keep the river alive would be compromised," Jativa said. "The economic explanation is neither technically nor environmentally sound."

Roque Sevilla, a local businessman and environmentalist, said it is only common sense to design a hydroelectric plant for a lower flow velocity rather than the peaks that occur during the rainy period, because otherwise there would be underutilized capacity.

Ecuador has been suffering longer and longer periods of drought, which has affected the Paute plant, also in the eastern foothills of the Andes, leading to electricity rationing from last November to January.

"The Coca dam is very necessary, according to the potential estimated by INECEL," Jativa said, "but the flows are not the same now; we have longer periods of low water followed by sudden increases in flow rate, which means continuous supplies for a project that has been blown out of proportion could not be guaranteed."

In the meantime, Marํa de la Paz Vela, an economist with the Multiplica consultancy, told IPS that multilateral lenders can offer 20-year loans at interest rates of between 4% and 5% for similar infrastructure projects.

For his part, former Ecuadorean vice president Leon Roldos (1981-1984) maintained that the loan is illegal, because it finances a "turn-key contract" without "definitive studies or detail engineering", which he said is expressly prohibited by law.

Another contradiction, Roldos argued, is that although it is a fixed price contract, the financing deal is based on price indexing - adjusting amounts by the change over time in prices - for materials and labor power "using a more generous formula than the one normally used for Ecuador's public procurements".

In an article published last week by the El Comercio newspaper, the former vice president said the dam was "severely overpriced" because the $1.98 billion price tag is $400 million higher than the cost projected in 2008.

In an interview with the state-run online paper El Ciudadano, minister Glas acknowledged that the cost of the project was increased because of its turn-key nature, but said this was justified because of the fuel savings that will result from the reduction in the need for power from thermoelectric plants.

"Besides the criticism, I would like to hear someone say somewhere that the project will cover 35% of energy demand in Ecuador and that we will be releasing four million tons less of CO2 [carbon dioxide] a year into the atmosphere," the minister said.

That savings will probably represent "around $100 million in carbon certificates," he added.

(Inter Press Service)

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