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China to sell power plants to raise $2bn

Financial Times: China to sell power plants to raise $2bn

“investors including Royal Dutch Shell and Bechtel became mired in a dispute with local authorities”

By Francesco Guerrera in Hong Kong and Mure Dickie in Beijing

Published: August 18 2004 05:00 | Last updated: August 18 2004 05:00

* Disposal will provide crucial funds for upgrade

* Beijing is attempting to avoid energy crisis

China is preparing to sell up to 11 power plants in a move that could open its fast-growing energy market to foreign companies and raise some $2bn to alleviate electricity shortages.

The State Grid Corporation of China is believed to have appointed Goldman Sachs and UBS to manage the sale, which is expected to begin in the next few months.

The disposal is part of Beijing’s efforts to avoid an energy crisis that could threaten economic growth and dampen the enthusiasm of foreign multinationals for investing in the country.

China plans to build the equivalent of the UK’s total electricity- generating capacity in each of the next two years. In recent months, the voracious demand for energy has caused blackouts in cities and factories across the country.

Goldman Sachs and UBS declined to comment yesterday, but their appointment suggests the State Grid, one of two electricity distributors created in 2002, wants to sell the assets to overseas investors.

The sale of the power stations will provide funds badly needed to upgrade the electricity infrastructure.

It could also bolster the State Grid balance sheet ahead of a possible overseas listing, expected in the next few years.

International power generators have little presence in China, but have long hoped to gain a bigger foothold in the country because its rapid economic expansion is expected to fuel strong growth in energy demand.

Industry observers said the sale could raise up to $2bn. They also warned that it could take several years before all the disposals were completed.

State media has described the 11 power plants – which have combined capacity of 6,470 megawatts mainly in central northwest and eastern China – as being of relatively “good quality”.

However, international interest is likely to be tempered by the opacity and unpredictability of the regulation of China’s power industry. Previous investors fell foul of changes in price regulation.

In one project in south-eastern Fujian Province, investors including Royal Dutch Shell and Bechtel became mired in a dispute with local authorities after an unexpected local power glut made them unwilling to pay previously agreed tariffs.

Such difficulties could mean that most of the power stations to be sold could go to the Chinese state-controlled, overseas-listed power generation companies set up as part of an industry restructuring in 2002.

Hong Kong-listed Datang International told the FT in April that it planned to issue shares on the domestic Shanghai stock market before the end of 2005 to help it fund an aggressive expansion in capacity.

Datang, which raised $150m through an issue of convertible bonds last year, plans to add 2,600MW of capacity to its 8,110MW and bring a further 2,000MW online in 2005.

Officials have already moved to support electricity distributors with a price hike for end users of about 5 per cent, unveiled in June.

State Grid has said its revenues rose 20 per cent year-on-year in the first half to Rmb278bn ($33.6bn) while profits were up 16 per cent to Rmb3.3bn.

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