Failed coal marriage highlights risk of public-private partnership

Losses from coal investment highlight risks of public-private partnerships

PUBLISHED : Tuesday, 02 September, 2014, 10:02am
UPDATED : Wednesday, 03 September, 2014, 12:36am

While Beijing is pushing for state firms to co-invest with private enterprises to create a more "mixed economy", the experience of a CNOOC subsidiary shows why such collaborations can be fraught with danger.

China BlueChemical posted a 53 per cent year-on-year drop in net profit for the year's first six months to 447.5 million yuan (HK$564 million), mostly from a 376 million yuan impairment loss on a 49 per cent stake it took in a private mining firm in Shanxi in 2009 for 637 million yuan.

Privately controlled Shanxi Hualu Thermoelectricity retained a 51 per cent stake in Shanxi Hualu Yangpoquan Coal Mining, after the stake sale.

China BlueChem had also agreed to pay 40.6 million yuan for a 51 per cent stake in Shanxi Hualu Thermoelectricity's coal-to-chemical unit, Shanxi Hualu Coal Chemical. The partnership had been forged because Shanxi Hualu Thermoelectricity has coal resources while China BlueChem has expertise in making chemicals from fossil fuel.

But in March 2012, China BlueChem said Yangpoquan Coal was "unable to resume production since its suspension of work in March 2010". The company did not elaborate.

China BlueChem said it had appointed Zhonglian Asset Appraisal Group to appraise Yangpoquan Coal, and came up with a value of 1.38 billion yuan, implying its 49 per cent stake is now only worth 653 million yuan.

At the time, China BlueChem chief executive Yang Yexin said the plan to build a plant with the annual capacity to turn coal into 1.04 million tonnes of urea, or nitrogenous fertiliser, had stalled because of a dispute between Shanxi Hualu Thermoelectricity and its coal mining contractor.

It was originally expected to come on stream in the middle of last year.

Yang said it was an "excellent project and its completion would have benefited all parties, since its integrated nature means it is highly competitive".

But the project stalled amid a dispute between Shanxi Hualu Thermoelectricity and the contractor for a reason unknown to China BlueChem, he said.

Chief financial officer Quan Changsheng said it would not be feasible for China BlueChem to use its own resources to pay off the debt and take over the project because the provincial government only allowed designated industry consolidators to do so.

Quan said the failed investment had taught China BlueChem a lesson in the importance of shareholding control when working with private enterprises.

"Each region has its culture and uniqueness when doing business," he said.

"Writing off several hundred million yuan now is better than losing more after the project is completed."