Quality issues pose threat to Sinohydro's global ambitions

Toh Han Shih
Thursday, February 11, 2010

Originally published in the South China Morning Post

It may have helped build the monumental Three Gorges Dam, but Sinohydro Group's attempt to engineer a successful A-share listing is proving an equally tough task.

The engineering giant hopes the initial public offering in Shanghai - that could be one of the biggest share sales in the world - will establish it as a global brand. But holding back those ambitions is international criticism of its environmental and safety record as well as serious management problems.

Its parent firm - where President Hu Jintao worked in the 1960s and 1970s - has been fined by Beijing for shoddy work and has been criticised over its projects in places such as Myanmar and Africa.

Sinohydro, a subsidiary of state-owned Sinohydro Corp, is busy preparing a listing after an earlier plan was shelved in 2008 because of the global financial crisis.

But while the company boasts about becoming "a leading Chinese brand in the international hydroelectric construction industry", it has some serious fence-mending to do. Earlier this month, managing director Liu Qitao admitted the company had lax internal disciplinary system and was fighting corruption.

In 2004, Sinohydro and a number of other firms were fined by Beijing for shoddy construction work on flood control structures on the Yangtze River. That followed a scathing report by the National Audit Office.

In 2006, the State Assets Supervision and Administration Commission (Sasac), which manages state-owned enterprises, reprimanded Sinohydro in a performance review for safety or environmental pollution breaches.

Sasac gave Sinohydro a D rating, on a scale of A to E. Executives at D-rated firms face the possibility of salary cuts, transfers or dismissal.

Sasac used to publicise the ratings, but since the damning report of Sinohydro they were no longer made public, an international consultant said. "It's obviously sensitive information. I guess some companies were not happy with the ratings being published," the consultant said.

Yet the company still has the ears of the nation's most powerful officials, something that will certainly help its upcoming listing.

"Sinohydro is probably the most powerful government-linked company in China beside the Ministry of Railways," one venture capitalist said. "It has its own schools and bank. It is like a little kingdom."

Sinohydro will probably list in Shanghai, as the liquidity and capitalisation of its exchange is much bigger than the Shenzhen market, said Kenny Tang Sing-hing, of Redford Asset Management.

In June 2008, Fan Jixiang, the chairman of Sinohydro, said his company planned an A-share listing in Shanghai, and was "very likely" to have an H-share listing in Hong Kong after that.

At that time, Fan said more than 90 per cent of the parent's assets would be injected into the listing entity. Sinohydro has 102.2 billion yuan (HK$116.3 billion) of gross assets and 12.2 billion yuan of net assets, identical to Sinohydro Corp.

Sinohydro had planned to raise 45 billion yuan in 2008 and if the company raises a comparable amount this time, it will be one of the world's largest share offerings.

The world's biggest listing was ICBC's US$19 billion offering in Hong Kong and Shanghai in 2006. The biggest last year was China State Construction Engineering's US$7.3 billion deal in Shanghai. By the end of last year, Sinohydro's international orders totalled 74 billion yuan
and for the first time surpassed its domestic orders. Sinohydro currently has 211 projects in 48 countries including Malaysia's biggest dam, Bakun.

In October last year Sinohydro won a US$2 billion deal to build Ecuador's biggest dam, the largest overseas hydroelectric project ever undertaken by a Chinese firm.

"Sinohydro is becoming a more international company," said Peter Bosshard, a policy director of International Rivers, an international environmental non-government organisation.

"Through this IPO, they will present themselves to international investors and they have to position their mission and their brand. That includes the environmental quality of their work.

"They have to be more accountable in their commitments."

President Hu worked as an engineer at Sinohydro from 1969 to 1974, according to the book /China's New Rulers: The Secret Files/, by Andrew Nathan and Bruce Gilley.

The international consultant said: "During the Cultural Revolution, if you were ambitious, hydroelectricity was a safe career option. Mao had this love affair with hydroelectric projects. That is why hydroelectric power tends to be politically well connected."

Sinohydro has encountered international criticism of its projects in various countries, including a multibillion-dollar mine-for-infrastructure deal in Congo involving itself and China Railway Group.

Last year, the International Monetary Fund voiced concern at the deal, saying it would saddle Congo with billions of dollars of additional debt, which might prevent the IMF from forgiving US$10 billion of the African nation's debt. The matter was amicably resolved late last year, when the deal was scaled down from US$9 billion to US$6 billion.

However, Lizzie Parsons, a campaigner for Global Witness, a London-based non-governmental organisation, criticised the new deal as lacking in transparency.

"We can't see the new contract and that demonstrates the problem with the deal," she said. "It has not been done transparently. I haven't seen much improvement in the corporate social responsibility of Chinese SOEs like Sinohdyro."

The firm is also facing problems closer to home. In a petition to the prime minister of Thailand in September 2006, the Salween Watch coalition of NGOs, other organisations and individuals said: "We are gravely concerned about the likely environmental and social impacts from hydropower projects on the Salween River [in Myanmar], a joint project between the Thai and Burmese governments, Sinohydro Corp, and Thailand-based MDX subsidiaries."