April 08, 1999	atimes.com

China Morgan Stanley investors take issue with Three Gorges financing By Abid Aslam WASHINGTON - Shareholders of a leading U.S. investment firm are mounting a small but determined effort to block financing of a Chinese dam dubbed ''the Chernobyl of hydropower." The investor challenge, by two small holders of common stock in Morgan Stanley Dean Witter, targets the Three Gorges Dam on China's Yangtze River. The company is among firms to have played middlemen in securing indirect financing for the dam. Three Gorges is one of the world's largest civil works and the reservoir that will back up behind the dam - expected to be more than 400 miles long - will be the world's biggest. The leading British medical journal The Lancet already has warned that malaria and schistosomiasis - both debilitating and potentially fatal diseases - could become endemic around the Three Gorges reservoir. If so, the dam would become ''the Chernobyl of hydropower,'' says the journal. Proponents say the Three Gorges Dam is essential to control floods and provide electricity. Critics counter that it will generate only questionable economic results but definite environmental and human rights problems. Morgan Stanley shareholders will be exposed to that debate at their annual general meeting April 9. On the agenda is a resolution warning that ''even through indirect involvement in the Three Gorges Dam, [the company] risks exposing itself to negative publicity and possible boycotts on its consumer business.'' This includes brokerage services and the Discover credit card. ''The risk of suffering a public relations hit is real,'' says Simon Billenness, senior analyst at Trillium Asset Management, sponsor of the resolution. ''All it would take is television footage of a riot by a farming community being brutally put down by the People's Armed Police." Work on the dam began in 1994 and is expected to end in 2010. Some two million people are being forced out of cities, towns and farms to make way for the dam and its reservoir. The displaced persons have complained to the government that promises of resettlement benefits have not been kept and skirmishes with security forces reportedly have ensued. Fears of a large-scale clampdown moved China's National People's Congress to drop the project in 1992 but legislators were overruled by then-premier Li Peng. Trillium, formerly Franklin Research and Development Corporation, is a ''socially-responsible'' money manager holding and tending portfolios on behalf of investors. It wrote the resolution on behalf of two clients, each of whom holds a small stake in Morgan Stanley. The resolution asks Morgan Stanley to ''issue a report to shareholders and employees by October 1999, reviewing the underwriting, investing and lending criteria . . . with a view to incorporating criteria related to a transaction's impact on the environment, human rights and risk to the company's reputation." The report should cover joint ventures such as the China International Capital Corporation (CICC). Morgan Stanley has a 35 percent stake in the Chinese firm, which reportedly is drawing up plans to issue stocks, bonds or both for the Three Gorges Project Corporation or other bodies involved in the dam. Morgan Stanley's board of directors opposes the resolution as a threat to the secrecy needed to preserve the company's competitive edge. ''The proposal would require the board to issue a report detailing the criteria the company uses to evaluate its investment banking transactions,'' directors note in a written recommendation that shareholders defeat the resolution. ''All the factors the company considers reflect the flexibility the company needs to conduct its business,'' they assert. ''A report discussing the factors could damage the company's competitive position and profitability, since its competitors do not disclose this information." Billenness counters: ''We wouldn't want the company to issue a report that contained proprietary information that could damage its competitive standing.'' But he sees deeper motives at play. ''They want to make sure that they are not constrained by environmental and human rights policies. They don't want this case to lead to that kind of systemic change,'' he argues. ''We are trying to make sure that the legacy of this effort is more than just stopping the Three Gorges project but changing the way these companies handle such issues in the future." Morgan Stanley's directors note that the company is not directly involved in Three Gorges and ''does not control CICC." In January 1997, however, the company underwrote $6 million in bonds for China's State Development Bank (SDB), part of a $330 million Yankee bond issue. SDB's second-largest unfunded loan commitment was to the Three Gorges Development Corporation, according to the bond prospectus. Efforts to raise money overseas have had to follow that ''indirect'' route, reflecting foreign investment firms' reluctance to be too closely tied to a project deemed politically sensitive and financially risky. No one thinks the resolution will pass outright but Billenness expects to marshal at least the three percent of shareholder votes needed to keep it alive for next year's general meeting. ''This would show the company that we're not going away and demonstrate to foreign investors that being involved in Three Gorges - even indirectly - is just more trouble than it is worth,'' he argues. (Inter Press Service)

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