Fatal accident at Ecuador’s flagship hydro plant amplifies expert calls for transparency

Report released two days before accident claims lender was not transparent about risks

The numbers associated with Ecuador’s largest hydroelectric plant, Coca-Codo Sinclair, are staggering: a projected output of 8.63 gigawatts per year; an anticipated annual reduction in CO2 emissions of 4.5 million tonnes; Chinese investment totalling US$1.7bn.

And 15 lives lost.

On the evening of Saturday 13 December, 25 workers were standing on a platform inside the main pressure well – a vertical pipeline which, when operational, will transport water from an overflow reservoir to the main engine room – when part of a stone wall gave way letting in a powerful current of water. The platform collapsed, killing 13 of the men and injuring the other 12.

It is Coca-Codo Sinclair‘s second fatal accident: in 2012 a bus carrying employees crashed into a rock, killing two and leaving 30 injured.

Hydropower revolution

In the last four years, Chinese institutional investors have poured a total of US$3bn into Ecuador’s hydropower revolution. But the deaths of 10 Ecuadorian and three Chinese workers at the flagship Coca-Codo Sinclair project have given both countries a stark reminder of the other costs.

Ecuador’s energy strategy depends on the success of Coca-Codo Sinclair. It is estimated the colossal project, located between the Napo and Sucumbios regions in the Ecuadorian Amazon, will meet around 40% of the nation’s energy demand when work there is completed, which is scheduled for early 2016. Once completed, Coca-Codo Sinclair will be the centrepiece of Ecuador’s plan to generate 90% of its energy from hydropower. Responsibility for meeting this ambitious target is in the hands of the world’s largest hydropower engineering company, Sinohydro of China.

But in recent years, the construction of hydropower projects in Ecuador by Chinese companies has been blighted by accidents. In April 2014, four Chinese explosives experts working for the contractor Genzhouba group at the Sopladora hydroelectric plant on the Paute River in Azuay and Morona Santiago provinces were killed in an explosion.

Sopladora is financed by a US$ 571m loan from the Export Import Bank of China (China ExIm bank), which has also provided 85% of the funding for Coca-Codo Sinclair. The question that analysts of Chinese infrastructure funding are asking is: does China ExIm Bank monitor such projects closely enough?

Like other Chinese banks, China ExIm Bank is instructed (rather than a legally obliged) by the regulator, the China Banking Regulatory Commission (CBRC), to monitor the social and environmental risks associated with their investments.

But, according to Martha Torres Marcos-Ibáñez, an Amazonian specialist at Peruvian NGO DAR (Environmental Law and Natural Resources in English), the risks that caused the Coca-Codo Sinclair accident were well known and avoidable. “Effectively, all the risks that the project implies are contained in the Environmental Impact Assessment (EIA),” she told Diálogo Chino.

“The accident was not caused by some natural or external disaster, there had to be structural failures to allow the entry of water and the collapse of the pressure well,” she explained. “It was an accident due to structural failure, and yes, it could have been avoided.”

Torres points out that the EIA stresses that any one of the principal risks – including pipeline ruptures and water overflow – could cause the loss of human life, unless the company adopts the necessary measures for prevention, mitigation and preparing for emergencies.

Two days before the accident at Coca-Codo Sinclair, DAR jointly released a report that compared the environmental safeguards implemented by China ExIm Bank and three Latin American development banks. They gave ExIm Bank low marks in comparison to the others because it lacks a key element that enables safeguards to be implemented: transparency.

According to Torres, better disclosure of information means that risks can be more closely scrutinised and knowing these risks can help to prevent accidents like the one that occurred at Coca-Codo Sinclair.

“An adequate policy of transparency and access to information allows a deeper knowledge, not just of the project but of other actors involved,” she argues. “In this case, having access to information about the risks, responsibilities and behaviour of the construction company, contributes to raising awareness about its working conditions, health and safety, and the environmental effects of the project.”

China’s overseas responsibilities

Bank safeguards are intended to minimize the social and environmental risks associated with their investments. They underpin the Green Credit Directive (GCD), a policy made applicable to China’s overseas investments in 2012 which extends the stringent criteria for domestic investments, originally introduced in 2007.

Under the GCD, lenders are required to detail safety measures and to monitor impacts at every stage of the project cycle – from planning to decommissioning – with information that should be made publicly available.

In theory, China’s banking regulator, CBRC, has the power to stop the flow of funding from banks to contractors in the event that safeguards are not properly implemented. But this relies on the free and public disclosure of information about what the company is or is not doing to mitigate the risks of an investment. ExIm Bank does not have a public reporting mechanism and is habitually unresponsive to requests for information in Ecuador and elsewhere.

While the Latin American banks that DAR studied for its report offer information and documents on purpose-built web portals, China Exim Bank has no web portal and offers no documents. Diálogo Chino attempted to contact ExIm Bank but it could not be reached for comment.

Not learning lessons

Chinese banks have attracted criticism for falling below international standards on transparency. In response to the report on safeguards, Yu Xiaogang, the director of Green Watershed, an NGO based in western China that ranks banks in terms of their green credentials, said that as one of China’s policy banks, ExIm Bank should “act as an example for commercial banks to follow.”

Policy banks are responsible for financing projects that are aligned with Chinese government development priorities and are outlined in the country’s five-year plans.

In China, neglecting to disclose important information on risks has often proved to be self-defeating, “the deliberate covering up of information on major environmental and social risks, and infringing the public’s right to know, often causes projects to incur widespread public opposition,” said Yu.

Simon Zadek, co-director of the UNEP Inquiry into the Design of a Sustainable Financial System – which looks at the policy options for transition to a green economy – shares the view that it is counterproductive to fail to implement safeguards, especially when Chinese companies operate overseas. “The short term investment costs and difficulties for China because of social and environmental safeguards is completely out-weighed by the benefits to China of continued access to resource and market opportunities and risk-adjusted returns in the long-run,” he said.

With the realisation that it might better serve their interests, it may only be a matter of time before China’s banks embrace and implement safeguards.

The new regulations intended to govern Chinese investments, like the investments themselves, are in relatively unchartered territory. They continue to compound their risks through secrecy and inaccessibility. Yu Xiaogang believes that what matters is that banks “apply those lessons learnt at home and, whether at home or abroad, operate in the light.”

Sinohydro have announced an investigation into the accident at Coca-Codo. It remains to be seen whether the lessons of transparency take hold.