The $19 Billion Dam That Leaves Ecuador Deep in Debt to China
To settle the bill, China gets to keep 80 percent of Ecuador’s most valuable export — oil — because many of the contracts are repaid in petroleum, not dollars. In fact, China gets the oil at a discount, then sells it for a profit.
Pumping enough oil to repay China has become such an imperative for Ecuador that it is drilling deeper in the Amazon, threatening more deforestation.
Hobbled by the debts, President Lenín Moreno has slashed social spending, gasoline subsidies, several government agencies and over 1,000 public jobs. Most economists expect the country to slide into recession, stirring outrage.
“China took advantage of Ecuador,” said Ecuador’s energy minister, Carlos Pérez. “The strategy of China is clear. They take economic control of countries.”
The story of how the dam got built brings together two natural allies, both eager to change the course of the hemisphere and displace the United States as the unrivaled power in the region.
China made its plans clear a decade ago, when it swept into Latin America during the financial crisis, tossing governments an economic lifeline and vowing to “treat each other as equals,” a swipe at American dominance.
It worked. China, now South America’s top trading partner, has seeded the region with infrastructure and a trail of loans. It has reaped political benefits, too, getting Latin American nations to sever diplomatic relations with Taiwan.
Still, as the giant dam in Ecuador shows, the two sides were hardly equals.
Both nations were willing to overlook design flaws, questionable economics and warnings that the technical studies for the dam were decades out of date.
But using an approach it has applied to billions of dollars in loans across the developing world, China never faced much of a financial risk.
The gamble was all Ecuador’s, and now the country is looking for new loans to plug its many gaps, including more money from China.
Last month, Mr. Moreno flew to China to renegotiate some of his country’s debt — and borrow another $900 million.
“The Chinese put the hook in,” said Steve Hanke, a Johns Hopkins economist.
When Fernando Santos, an energy minister in the 1980s, found out that the Coca Codo Sinclair dam was being built, he could hardly believe it.
During his time in government, officials had rejected a much smaller version of the project. The whole idea was doomed, he said, because of the volcano nearby. A major earthquake had decimated oil infrastructure in the area in 1987.
Mr. Santos said that investing so much money “in such a risky location was nonsense.” There were other warnings. An independent review of the project in 2010, prepared by a Mexican government agency, warned that the amount of water in the region to power the dam had not been studied for nearly 30 years.
Since that time, Ecuador had suffered punishing droughts, and there were concerns that its glaciers were melting.
Despite the advice, Luciano Cepeda, the dam’s former general manager, said top Ecuadorean officials pressed ahead because “a new study would have taken several years” and they didn’t want to slow down.
A Chinese diplomat in Ecuador, who was not authorized to speak publicly, said he had doubts about the project.
“We didn’t give sufficient attention to the environmental reporting,” the diplomat said.
There were also bigger geopolitical forces at play. Ecuador’s president at the time, Rafael Correa, was a left-wing populist who had vowed to modernize his country and free it from the orbit of America.
Western financial institutions fell in Mr. Correa’s cross hairs. He denounced the International Monetary Fund, saying it put restrictions on his spending. Then in 2008, he defaulted on $3.2 billion of his country’s foreign debt and invited China to fill in the breach.
Mr. Correa suddenly had access to money, but a new crisis emerged: The country was running out of power. A drought was depleting the nation’s reservoirs, paralyzing its dams. Rather than look for another source, Mr. Correa doubled down on hydro power.
Officials say it was Mr. Correa’s electricity minister, Aleksey Mosquera, who first mentioned Coca Codo Sinclair: a megaproject that was supposed to provide a third of the country’s electricity.
It ended up being built right un- der the Reventador volcano — and nearly twice the size of the proposed dam that had been rejected decades before.
When it opened in late 2016, China’s president, Xi Jinping, flew to Ecuador to celebrate.
Yet only two days before the visit, the dam was in chaos.
Engineers had tried to generate the project’s full 1,500 megawatts, but neither the facility nor Ecuador’s electrical grid could handle it. The equipment shuddered dangerously, and blackouts spread across the country, officials said.
Today, the dam typically runs at half capacity. Experts say that given its design — and the cycle of wet and dry seasons — it could generate the full amount of electricity for a few hours a day, six months a year. That is, if everything worked.
Ecuador still has to pay back the debt, though. The $1.7 billion loan from China’s Export-Import Bank is lucrative for China: 7 percent interest over 15 years. Ecuador owes $125 million in interest a year.
Now, many Ecuadoreans say the burden falls on them.
Maria Esther Tello paid $ 60 in November to keep the lights on in her home, a shock given the government’s promises that electricity prices would go down. “Where have my old mother’s taxes gone?” asked her daughter, Isbela Nole, as she helped peel fava beans.
At an entrance to the dam is an inscription. “Jorge Glas Espinel, vice president of the republic,” it says. “For having forged and envisioned this monumental project.”
Mr. Glas sits in a cell in Ecuador, sentenced to six years in prison. He was convicted of taking bribes from China’s main competitor for infrastructure projects in much of Latin America: Odebrecht, a Brazilian construction giant. American prosecutors say Odebrecht paid $33.5 million in bribes in Ecuador to win business.
Now Ecuadorean officials are investigating whether the Chinese made payments to Mr. Glas and others around him. “I don’t think it’s a coincidence that all the same people managed all these projects,” said Mr. Pérez, the energy minister.
The officials include Mr. Mosquera, the former electricity minister, who is serving a five-year sentence for taking $1 million from Odebrecht; and Carlos Pólit, the former anti- corruption official, who was charged with receiving millions in bribes from the company. Ricardo Rivera, another associate of Mr. Glas, was also convicted of receiving payments from the Brazilians.
But evidence has emerged suggesting that officials took bribes from China as well.
Ecuadorean law enforcement officials say they have confirmed a secret tape recorded by an Odebrecht executive, given to Brazilian prose- cutors. In the recording, made at the house of Mr. Pólit, the two men discuss a Chinese bribe.
The recording has set off an investigation, particularly around Mr. Rivera, who presented himself as the vice president’s representative during visits to China, according to Ecuadorean authorities. They say they are examining 13 bank transfers worth $17.4 million authorized by Mr. Rivera to an HSBC account in Hong Kong.
Until recently, Attorney General Paúl Pérez was leading an investigation into corruption by the Chinese, and went to China in November for help.
But Mr. Pérez resigned after returning. He did not respond to interview requests.
A lawyer for Mr. Glas denied that his client had been involved in corruption with Coca Codo Sinclair. Mr. Correa, the former president, is in exile in Belgium, wanted for organizing the kidnapping of a rival. Mr. Polit’s lawyer said his client denied any wrongdoing.
The piles of debt have led the country’s new leaders to rail against China.
“We are not going to pay,” Mr. Pérez, the energy minister, said of the possible billion- dollar price tag to fix the dam.
China has already made some concessions to Ecuador, like paying 92 cents more per barrel of oil. The share of Ecuador’s oil going to the Chinese has also dropped — to 80 percent, from 90 percent.
But the government still needs $11.7 billion to finance its debt, analysts say.
Beyond China, the new government is going back to the institutions Mr. Correa demonized: the World Bank and the I.M.F. Some worry that Ecuador is seeking other financial masters. “We are addicted to loans,” said Mr. Santos, the former energy minister.
Leopoldo Gómez, who works at a water treatment facility built under Mr. Correa, agrees.
“Now we realize,” he said, “there’s things we didn’t need — like the dam.”