By staff reporters Li Qiyan and Wang Xiaobing
The recent privatization of Luneng Group, a formerly state-owned enterprise based in Shandong Province and one of China’s largest conglomerates, is embroiled in controversy. Critics are crying foul, charging that the process has been shrouded in secrecy and state assets may have been grossly undervalued.
In May 2006, Luneng completed the sale of 91.6% of its shares to Beijing Shouda Enegy (Group) Co. and Beijing Guoyuan Union Co., two little-known Beijing-based private companies, to the tune of 3.73 billion yuan (US＄ 478 million). However, with sprawling interests in power, mining, real estate, finance and sports, Luneng was valued at some 73.8 billion yuan (US＄ 9.47 billion). The transfer was conducted in such secrecy that even many Luneng and Shandong power industry insiders did not know the new shareholders’ names until the latter half of 2006.
Chen Guangjian, chairman of the Investment Association of China, has urged the State Council to launch an investigation into the probable corruption involved in the acquisition process.
Senior officials of the State-Owned Assets Supervision and Administration Committee (SASAC) and the State Electricity Regulatory Commission (SERC) have indicated they have yet to receive a stock-transfer application. However, Shouda and Guoyuan has been Luneng’s controlling shareholder for over a year and half, since completing registering the stock-transfer with the Shandong Administration of Industry and Commerce. Luneng’s nine-member board has also been reshuffled; five now come from Shouda and Guoyuan.
Luneng’s Meteoric Rise
Luneng grew out of the former Shandong Power Group in the late 1980s. In the less than twenty years since its founding, it rose from a company with only five employees and one office to become a giant conglomerate, thanks in no small part to its monopoly on the provincial power grid that that Luneng inherited from its state-owned parent, Shandong Power Group.
By 1998, Luneng’s assets were estimated at around 2.6 billion yuan (US4 333.8 million).
In the late 1990’s, Luneng started buying power-generation and other assets from its parent group. At one point, it controlled more than 30 generators, accounting for more than 10% of Shandong’s total power output.
But Luneng’s presence outside of Shandong is even more daunting. Over the years, it has come to control or own large stakes in dozens of giant coal mining-power generation firms across the country. These so-called “coal-power bases” were established in partnership with local power companies. Because of Luneng’s power grid assets, it can provide these power companies with a vital uplink to sell the electricity they produce, therefore they have been more than willing to cooperate with the Shandong firm.
“It is not difficult to generate electricity. It’s how to transmit it through the power grid that’s a tricky issue,” one senior executive with one of Luneng’s local partners, Zhunge’er Power Corporation in Inner Mongolia, told Caijing. Speaking on condition of anonymity, the executive explained that power generation firms without grid “connections” find it very hard to sell their power to the state-controlled power grids, or could only get discounted prices for their electricity.
“Ultra-High Voltage” Link
Liu Zhenya, the former chairman of Shandong Power Group, was promoted to general manager of the State Grid Corporation in late 2004. Since then, State Grid has pushed aggressively for plans to build controversial “ultra-high voltage” power grid networks across the country.
An official with the State Electricity Regulatory Commission who conducted a six-month investigation into the proposed ultra-high voltage grid project told Caijing that the starting points of the proposed network were in the same locations of many of Luneng’s “coal-power” bases. Therefore, if State Grid’s proposal eventually wins central government approval, Luneng would again benefit largely from the construction of this multi-billion yuan project.
The year 2001 witnessed the beginning of China’s power industry reform, which sought to separate power grid companies from power generation plants. Nationwide, most electricity generation assets were allocated to five state-owned national companies. However, Luneng’s remained an exception, its business not bifurcated.
After the reform, Luneng began to push forward with a plan to transfer the majority of the company’s stocks to its employees. By 2002, after several rounds of restructuring, Luneng became employee-owned, a status which enabled it to exploit several antitrust and other policy loopholes.
The plan generated considerable controversy, in part because it was in direct violation of a State Council order, “Document No. 67.” Issued in 2000, Document No. 67 prohibits any power industry assets from being sold or transferred without the approval by the central government.
Luneng was not the only company defying the State Council order. Many provincial power companies, including those from Shandong, Jiangsu, Guizhou, Sichuan, Hunan and Ningxia, were all shifting ownership from the state to their employees
In August 2003, the State-Owned Assets Supervision and Administration Commission issued an urgent notice reiterating the principle in document No. 67, in an attempt to halt the trend. The central government was deeply worried about the continuous loss of state-owned assets in a transfer process that was void of strict legal supervision and regulation.
To Privatize Luneng
In early 2006, the firm began to buy its shares back from its employees with very little premium, and sold them to the two new private shareholders from Beijing. Some employees were reluctant to sell their stocks, but most readily complied with the wishes of the company’s management.
Experts who argue that deal was not conducted transparently say that the assets should have been evaluated before the deal went through. State-owned assets that had illegally been absorbed into Luneng in the first place should have been separated, and a transparent mechanism used to set the offering price for the company’s stocks.
Government regulators have said they were not notified of the deal, which may involve the illegal privatization of state assets.
Guoyuan now owns 57.29% of Luneng, and Shouda, 38.59%. Guoyuan, established in March 2004, seemed to emerge from nowhere, its registered capital jumping from 30 million （US＄ 3.85 million） to 700 million yuan (US＄ 89.86 million) immediately before the deal went through.
Guoyuan’s capital structure also underwent a series of changes during the period when Luneng was privatized. New Times, a trust fund, paid 2.25 billion yuan (US＄ 289 million) for a 95% share in Guoyuan. However, according to its 2005 financial statements, New Times had reserve funds of only 58.5 million yuan (US＄ 7.5 million). A mysterious third party provided funds to fill the gap. The capital operation and ownership structure of Guoyuan and Shouda are so complicated, they make establishing a clear picture of Luneng’s privatization impossible.
Problems of Employee Ownership
Reform of the power industry started relatively late and it will take time to address many challenges, the problem of ownership for example, but experts urge the government to address this issue soon.. They point out that the privatization of Luneng, the largest employee-owned enterprise in China, may herald the privatization of other employee-owned enterprises, and with it, a huge exodus of state-owned assets to high-level managers exploiting legal loopholes and loose supervision.
Although it has become clear employee ownership will not work anymore, how to change the status quo has been a much disputed question. In the 1980s, when power was in short supply, the central government encouraged employees of state-owned power industry to raise money to operate electricity-generating factories independently, and negotiate the price of power-generation with power grids. Foreign investors and investors from other industries were also invited to set up their own independent enterprises. These policies successfully sped up the development of the power industry.
However, the market shifted in recent years, and there was an oversupply of electricity. Foreign investors began to sell off their factories because they had difficulty selling electricity o power grids, who had started purchasing power generators from the local, employee-owned enterprises instead.
However, the employee-ownership model is now an obstacle to market reforms. Luneng’s case showed that common employees, as shareholders, have no say in shaping operating decisions; they do not even have the right to choose whether to keep or sell their stocks. Senior managers have the real power, and they are the ones who benefit.
Experts have suggested that a better and more fair way to privatize would have been to publicly auction the stocks, compensating employees with income from the proceeds and leaving the rest under central government control. Such an auction also would have provided an opportunity to bring in strategic investors. Only by introducing investors that have no interest or connection with existing power grid companies can the shady link between power-generation and power distribution finally be severed.
English version by Zhu Hongbin and Jennifer Brea