Pull the Plug on Bailouts for Power Companies; The government gave billions in public funds to state-owned firms, a practice that would end if the market set electricity prices

03.11.2013 18:58

Closer Look: Pull the Plug on Bailouts for Power Companies

The government gave billions in public funds to state-owned firms, a practice that would end if the market set electricity prices

By staff reporter Pu Jun

(Beijing) – Last year reports that the State-owned Assets Supervision and Administration Commission (SASAC) might give 10 billion yuan to five major state-owned power companies started to circulate. On March 5, we learned the bailout happened.

The beneficiaries were China Huaneng Group, China Huadian Group, China Datang Corp., China Guodian Corp. and China Power Investment Corp.

A report submitted by the Ministry of Finance to the National People’s Congress shows that some of the profits that state-owned companies turned over to the central government in 2012 were given to the struggling companies. The report did not provide the exact amount and reasons for the bailouts.

SASAC gave 1.2 billion yuan to China Power Investment last year, company president Lu Qizhou said on March 7. He added that the five companies received the same amount from the regulator of state-owned assets.

This means SASAC gave 6 billion yuan to the power companies last year. Also, Caixin has learned that the commission expects to fund the companies for another two years.

SASAC did not publicly reveal the bailout. When an executive from one of the companies was asked about the matter, his answer was: “Our company is not a listed one.”

However, these state-owned companies, which are owned by the people, should disclose this information. Transparency is important because the public has the right to know the firms’ operating costs and how capital is used.

There have been criticisms over the monopolies enjoyed by state-owned firms and the preferential treatment they get. At the same time, the public wants the companies to turn over more of their profits to the central government, which would then use the money to improve peoples’ well-being.

It is likely that SASAC considered public opinion and chose to fund the firms in secret.

The asset-liability ratios of the five exceed more than 80 percent because their coal-fired electricity generation businesses have been in the red for several years. In 2011, the combined losses of the companies’ coal-fired power generation businesses rose to 31.2 billion yuan. In 2010, the figure was 12.2 billion yuan.

So, 1.2 billion yuan is just a drop in the bucket as these companies seek to improve their balance sheets.

Coal prices are directly linked to the performances of coal-burning power companies. Since 2004, coal prices have increased, but the price of electricity has been controlled by the government, which has kept it low.

The price of electricity should be set by the market, something that is an objective of electricity reform. Under current system, the enthusiasm of power companies to lower their costs is not high.

To change the situation sees these companies asking for subsidies or bailouts, China must continue with reform, and addressing electricity prices must be at the core of that.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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