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Mark O'Neill

IT WAS A WEEK of good news, with German companies signing contracts to invest billions of dollars and media splashing the portraits of China's 100 richest people, the role models who have replaced the penniless but happy workers of the Maoist era.

The sub-text was that while Europe and North America sink into recession after the September 11 attacks and the war in Afghanistan, China has become an oasis of growth and stability in a chaotic world.

But one cloud darkened the blue sky - the news that one of the biggest investment projects in China by Taiwan's richest man is mired in losses and may never make a profit. If he does not know how to pick a winner in China, then who can?

Wang Yung-ching, 84, is chairman of Formosa Plastics, Taiwan's biggest private company. He has invested US$3.2 billion in China's biggest coal-fired power station, in the Houshi district of Zhangzhou in the south of Fujian province, the ancestral home of most native Taiwanese such as Mr Wang.

Since its first generator was switched on late in 1999, the plant has run at a loss, forcing the postponement of commercial operations of generators four, five and six.

It is a casualty of a power shortage suddenly becoming a surplus and the state's insistence on regulating prices.

The clock is ticking, because in 2016 Mr Wang has to give the plant, free of charge, to the state as he is running it under a 20-year build, operate and transfer (BOT) contract that began in 1996. It is wholly owned by Mr Wang.

When he conceived the plant, Mr Wang ordered that no expense be spared: He wanted the largest, most efficient, cleanest and most environmentally friendly coal-fired power station in the country.

The site chosen was a remote fishing village on the Fujian coast.

The location required Mr Wang to spend US$400 million to build a dedicated port, deep enough to receive ships of 100,000 tonnes that deliver coal to the plant.

It was built to a high ecological standard, with a closed network and cleaning system that processes the coal dust, sulphur and other pollutants. Its design is for six generators, each of 60,000 kilowatts.

It has five semi-circular coal warehouses, 65 metres high and 120 metres wide, and employs 500 people, about a quarter of the number required in a normal plant of the same size in China.

A project of such a size would need approval from Beijing, whoever the investor. The fact that he was Taiwan's most powerful businessman and the project was opposed by then-Taiwanese president Lee Teng-hui made it even more high-profile.

To avoid restrictions on mainland investment by his government, Mr Wang had to channel the money through a United States subsidiary.

Eager to attract such a big name from Taiwan, the central government rushed the approval through in record time.

Unfortunately for Mr Wang, the power shortage on which the plant had been predicated changed even before it was switched on. Around 1994, Fujian provincial government approved four other new power stations in the Zhangzhou area.

By 1996, demand and supply were in balance and from 1997 supply exceeded demand. Were all Houshi's generators to run at the same time, they would produce 3.6 million kilowatts an hour, equivalent to the demand for Fujian province at off-peak hours in 1996.

Over-supply is one major problem. Pricing is another.

Under its contract with Houshi, the Fujian power grid agreed to pay 0.5 yuan per watt for its electricity, but the price to the consumer in the nearby city of Xiamen, the plant's main customer, is 0.36 yuan per watt.

So Houshi has been forced to accept 0.3 yuan per watt, reasoning that a low price is better than no price.

'We are not happy with the pricing policy,' said a manager of the plant named Wu. 'The state sets the price of power and should treat all suppliers fairly, however they generate electricity. This year there was heavy rainfall in March and April, making hydro power cheaper.

'We are losing money now but could make a profit next year. We plan to connect with the grids of Zhejiang and Jiangsu. Mr Wang has no regrets because he sees this as profitable in the long term.'

The Financial Daily commented: 'The Houshi plant has not brought Formosa Plastics the return [it expected]. Nearly six of the 20 years in the BOT agreement have passed and it has no hope of achieving the power price set out in its original contact because of the market conditions. Wang is getting a better return on the Mailiao power station he has built in Taiwan.'

It said the heavy losses were a result of the structure of the power industry and the growth of demand in Fujian province.

'The aim of the reform of the power industry is to have market prices and a national grid,' it said.

'All Houshi can do is wait for that day. Only then will its excellent qualities become clear.'



Tycoon's ailing power play a cloud over oasis of growth