Renewed Efforts For Reform In The Power Sector

In an industry where local government control has dominated for decades, documents issued in October 2000 show that Chinese policy makers are making renewed efforts to push ahead with reform in the power sector. This reform aims to separate production assets from government administration. Reform of the power sector has moved slowly since the framework and timetable for change was first announced with the State Economic and Trade Commission, Relevant Questions Concerning Intensifying the Reform of the Power Industry System Opinion, on November 27 1998.

Goals

The main goals for the four-stage reform of the PRC power industry announced in December 1998 include:

a) separation of government administration from business functions;

b) corporatization of all existing provincial and regional power bureaux; and

c) separation of the distribution and production functions.

The final stage of reform includes the establishment of a competitive electricity market. The first decisive steps in structural reform, which took place in 1997-1998, abolished the former Ministry of Power Industry and established the State Power Corporation of China (SPCC). However, achieving separation of functions and commercialization of the power industry among provincial and local bureaucracies has proven difficult.

Recent Reform

The full plan for reform in the power sector now appears to be under further development. In the Questions Concerning Structural Reform in the Power Industry Circular issued in October 2000, the State Council designated the State Development Planning Commission (SDPC) to take the lead in formulating a comprehensive plan for structural reform in the power industry, with the State Economic and Trade Commission (SETC) taking a supporting role along with a number of other relevant departments.

The State Council has also once again ordered local power bureaux and enterprises to transfer administrative duties to the local government agency in charge of economic management. Separation of government administration from business was a main goal of power sector reform as announced in 1998, and one which was to be completed in the second stage of the reform planned for 1998-2000. Although many power bureaux were changed in name to enterprises in the first round of reform in 1997-1998, their functions remained largely unchanged and enterprise management and regulatory administration continued to be combined. The 1998 notice aims to complete the separation of government from business operations. Further, in its recent notice, the State Council also prohibits the establishment of any local authority or agency for governing the power industry.

Following the State Council's October announcement, the SETC issued notices to support the State Council decision, and has taken steps to publicize the work of dismantling local power administrations. While efforts may have been stalled, some changes are becoming more evident. As of November 22 2000, the SETC had approved the closing of the power bureaux of Jiangsu, Hebei, Inner Mongolia, Guangdong and Hainan. Recent SETC announcements now indicate that the dismantling of provincial level power bureaux were supposed to have been completed by the end of 2000.

The Story to Date

Gao Yan, SPCC General Manager, gives us a view of the extent of power sector reform in his report for the SPCC 2001 Work Conference. While his report shows that more reform work has been occurring at the local level, it also shows that consolidating operating assets under the SPCC or its subsidiaries is a long process, and one which depends on local cooperation. Gao reports that structural reform of the power industry in rural areas has been taking place with the transfer of management of 1183 county companies to "authorized units" and 223 county companies transformed into joint stock companies. The SPCC has also completed reorganization of the main holding companies, East China Power Holding Group, Central China Power Holding Group and Northwest China Power Holding Group based on the experience of the Northeast branch in its experiment with restructuring.

On Hold

Other portions of the recent State Council Notice will have a more direct impact on foreign investors and lenders. The State Council Notice forbids the disposal of state-owned power assets in any form other than the restructuring or sale of assets as approved in accordance with the State procedures. Although this statement leaves room for the possibility that some plans for the restructuring or sale of power assets may be permitted if found to be "in accordance with State procedures," for the most part this has been understood as a complete ban on restructuring and the sale of power assets. Several reports have stated that this ban would be in place for at least one year. In the present environment, acquiring and upgrading existing power plants may be viewed as an economical approach to power projects in China. In light of the State Council Notice, however, plans for mergers and acquisitions in the power sector are now on hold.