Beijing's proposal to scrap guaranteed-price purchase agreements to facilitate power-tariff reform had raised questions on China's rule of law and could deliver a further blow to weak investor confidence, industry executives said yesterday. Foreign investors and legal advisers warned that the Chinese government should ensure reasonable compensation where foreign investors suffer losses from contract renegotiation. The controversial move was revealed in a mainland media report last week which cited a China Electricity Regulatory Commission (CERC) source as saying Beijing's planned implementation of a competitive tariff scheme would mean the renegotiation of foreign investors' power-purchase contracts. It was aimed at encouraging greater competition, more efficient use of power assets and greater consumer benefits. Hong Kong-listed power and infrastructure plays CLP Holdings and Cheung Kong Infrastructure Holdings (CKI) and high-cost operators were exposed to the new policy, analysts said. Haarmann Hemmelrath counsel David Buxbaum, who has advised foreign investors on mainland business for 31 years, said: 'It is common that one has a contract but it is rarely enforced. But now, it's strange that they want to renegotiate the contract.' He said the tariff reform was a legitimate reason for contract renegotiation, but added: 'It is a question of how to compensate people properly.' The CERC source reportedly said a key principle of the re-negotiation process was that investors should be ensured a reasonable return. Income shortfall as a result of revised contracts would largely be compensated by raising funds from the sale of state-owned power assets. Richard Ho, the managing director of independent power producer (IPP) Global Infrastructure Company (Asia), warned of a crisis of confidence among foreign investors, with many overseas players still recovering from the repercussions of the Enron scandal. 'Mainland power reform turned a corner recently as long-term guaranteed-price purchase agreements are going to become history,' Mr Ho said. 'If this interesting issue is not resolved, many foreign investors are not going to invest in China in this economic climate.' Goldman Sachs analyst Stephen Oldfield said the proposed renegotiation of purchase agreements was negative to CLP and CKI, with the power plants in question accounting for 2.3 per cent of CLP's earnings and 6.6 per cent of CKI's. 'Returns in both companies' China portfolios could become lower or more volatile,' Mr Oldfield said. CLP's 3,000-megawatt plant in Shandong province is the firm's only project in China bounded by a power-purchase agreement. CLP spokesman Chiu Yeung said: 'The impact of the power reform on our projects is minimal. It is unfair to look at the performance of individual plants as each of them has a different set of terms.' CKI's four plants in Guangdong province, which generated an estimated combined HK$370 million earnings last year, are subject to contract review. 'The province is notorious for power shortages. Therefore, even if CKI does face a reduced return, the shortfall may be offset by stronger sales,' an analyst said. CKI did not return calls seeking comment yesterday. A senior manager of an American IPP with a mainland investment said: 'The biggest problem facing foreign investors is that they applied the western rule-of-law mind-set in China.'