Auditors Eye Hydropower Project Linked to Disgraced Mining Boss, Zhou Bin; Examiners want to know why state-owned CPIC paid premium for firm that planned to build hydroelectric plants that were never finished

05.29.2014 19:30

Auditors Eye Hydropower Project Linked to Disgraced Mining Boss, Zhou Bin

Examiners want to know why state-owned CPIC paid premium for firm that planned to build hydroelectric plants that were never finished

By staff reporter Yu Ning

(Beijing) – Government auditors in Harbin, in the northeastern province of Heilongjiang, are looking into large deals by state-owned China Power Investment Corp. (CPIC). The auditing started on April 17 and is to finish in July.

One of the projects under scrutiny is a 2.15 billion yuan purchase of Xingding Power Co., a hydropower project owned by Liu Han, a mining boss in the southwestern province of Sichuan who was sentenced to death on May 23 for running a “mafia style” gang that committed crimes including murder and gun trafficking.

Xingding Power was set up by Liu in 2007, and also involved Beijing businessman Zhou Bin, the son of a former top leader. Zhou Bin is embroiled in a corruption investigation himself.

The purchase of Xingding occurred in 2009 when the government was encouraging power companies to get more involved in clean energy. Many firms eyed small hydropower stations and paid dearly for them.

However, CPIC paid a lot even by the standards of the time. Liu also used some of Xingding’s equity as collateral to borrow 600 million yuan from China Development Bank (CDB). That move delayed the purchase, so CPIC had to use a model that saw it pay millions in rent and interest before the purchase was finished last year.

Big Deals

In 2003, Liu obtained the rights to develop hydropower stations along Maoergai River in Sichuan’s Aba Prefecture. Only a few private companies could get these rights at the time.

Liu’s project involved three hydropower facilities on the Maoergai River: the Jianke station, with planned installed capacity of 246,000 kilowatts, and a reservoir; the Qinglang facility with capacity of 180,000 KW; and the Xili station with capacity of 75,000 KW. Liu planned to invest 2.354 billion yuan, 1.1 billion yuan and about 700 million yuan, respectively.

He registered Xingding to control the project in 2007. Because provincial government’s regulations meant that Liu’s company, Hanlong Group, could not own all of Xingding, he asked Zhou to take a 20 percent stake.

Xingding started construction on the Qinglang station in November 2008. It had the support of local governments and it got the loan from CDB.

In 2009, Liu wanted to sell Xingding for cash to buy uranium producer Bannerman Resources Ltd. and iron ore producer Sundance Resources Ltd. in Australia.

Wang Xiangfu, 53, then the assistant general manager of CPIC and chairman of CPIC-controlled Guizhou Jinyuan Group, used the latter to reach a purchase agreement for Xingding in September 2009.

Wang resigned from CPIC in 2013, and its audit into him found he was corrupt because he allowed a company to pay his rent and bought a villa for half the market price.

Dueling Appraisals

The agreement for CPIC to buy Xingding said Liu’s company was responsible for finishing work on the Qinglang station. The deal also covered future investments.

As of August 31, 2009, Xingding was worth 1.315 billion yuan, according to an assessment by Beijing Pan-China Assets Appraisal Co. Ltd. However, Jinyuan Group agreed to buy its assets for 1.58 billion yuan, a premium of 20 percent.

“At that time, many companies competed for the purchase because all power companies wanted more small hydropower projects, and thus the prices rose a lot,” a senior source in the power industry said.

However, the purchase did not go smoothly. Because part of Xingding’s equity was collateral at CDB, neither side could finish the deal on time. Instead, they got CPIC to agree to rent the project before finishing the purchase.

CPIC first paid Liu 1.075 billion yuan in November and December 2009. In April the next year, CPIC paid around 430 million yuan in rent, money that came from a bank loan. CPIC had to pay more than 200 million yuan in interest on the rent by the time the deal was done in 2013.

By the time CPIC finished the transaction in 2013, it had paid 1.689 billion yuan for Xingding’s assets.

A report by Beijing-based China Alliance Appraisal Co. Ltd. said Xingding was only worth of 1.045 billion yuan at the end of 2012.

The higher appraisal by Pan-China Assets three years earlier included future profits to be earned by power stations. That assessment said Qinglang station would produce 898 million kilowatt hours (KWh) of electricity annually.

The prediction set the ratio of investment and output at 2.31 yuan per KWh. However, there were seven other deals for the hydropower stations in Sichuan around the same time, and the highest ratio among those was 2.28 yuan per KWh.

Pan-China Assets also predicted that the price of electricity would reach 0.325 yuan per kilowatt, about 13 percent higher than price in the province at the time.

China Alliance Appraisal’s report took into account the facts that the stations did not produce as much electricity as it predicted, and the price in 2012 was not as high predicted.

“To take over the project, CPIC spent 1.935 billion yuan on the transfer and 426 million yuan on rent,” said a person close to the purchase. “Only the Qinglang station produces electricity now, and the profits of the project are very low.”