The clinching of a deal which will see Towngas buy a significant stake in Shenzhen's gas monopoly has implications which go far beyond the Hong Kong company's drive to grab a bigger share of the mainland market. It will serve as a high-profile test of the mainland's commitment to reform its state-owned enterprises and, if successful, could pave the way for new and lucrative investment opportunities for local operations. Towngas fought off foreign competition to seal the much-anticipated agreement. The terms of the deal, which is expected to see a joint venture set up later this year, are encouraging. The 30 per cent stake obtained by Towngas is larger than had been expected, and the price of 271.5 million yuan (HK$255.2 million) is generally considered fair. This bodes well for the future. The deal also provides a good example of cross-border co-operation, boosting Pearl River Delta integration. State-owned Shenzhen Gas brings to the deal assets which include a 50-year franchise to run piped gas services in the special economic zone, while Towngas will contribute management systems and technical expertise. But whether this turns out to be a happy marriage will depend largely on how committed the Shenzhen government is to reforming the state-owned gas supplier. It is one of five prime assets put up for sale by the city with the declared aim of improving the state sector's efficiency, profitability and effectiveness. But the government will continue to hold 60 per cent of the enterprise. The remaining 10 per cent is held by a private mainland company. The joint venture will therefore be an intriguing combination of state-owned enterprise, Hong Kong utility and mainland private business. Whether this alliance can produce a high-performance company, providing a more efficient service and returning healthy profits for all concerned, will be the real test. In order to achieve this, it will need to embrace a more dynamic corporate culture - and that is where the real challenge lies. Will the new venture be able to shake off the old, inefficient ways which led state-owned enterprises into difficulties in the first place? It could turn out to be either a model of reform, or a half-baked style of privatisation. The Shenzhen government has held itself out as a trailblazer for change. If the joint venture is a success, and Towngas is happy with its investment, similar deals are likely to follow. Another of the assets Shenzhen plans to sell is in its public transport company - and Hong Kong's Kowloon Motor Bus is a frontrunner to buy a 45 per cent stake. Such a deal could have even more impact on integration, with the potential for co-ordinating routes on either side of the border. If these ventures succeed and act as a catalyst for similar deals to provide urban services in cities across the mainland, the potential for Hong Kong companies will be vast. This is obviously appreciated by Towngas, which sees access to the developing mainland market as the way forward. After 140 years in which the focus of its business has been Hong Kong, the company now realises its growth opportunities at home are limited. It has been investing heavily across the border, and in March sealed two 1.2 billion yuan deals to provide piped natural gas to the industrial cities of Nanjing and Wuhan - exploiting avenues which are opening up as the mainland moves away from coal and increases consumption of more environmentally friendly power. But it remains to be seen whether the company will succeed in its aim of replicating its Hong Kong business model on the mainland. The deal with Shenzhen Gas is a positive move. But the challenge to set new standards for state-owned enterprises has only just begun.