For decades China's power industry was a dull, state-owned operation run by unambitious civil servants overseeing the task of distributing electricity with fixed tariffs and no competition. This quiet world changed two years ago, when the government ended the state monopoly, but without the proper regulatory safeguards against malfeasance and graft. The bureaucrats were first to spot the loopholes, shedding their docility and moving quickly to set up private companies to take over valuable generation and distribution assets. From remote provinces such as Guizhou to major cities in the east, the former heads of power companies have acquired the assets at steep discounts. The problem became so serious that the central government last August banned such management buyouts, but to little effect. The practice may be continuing, thanks to China's soaring demand for power. This summer saw the worst power cuts for 20 years, striking 24 of China's provinces, with a peak shortage of 30 million kilowatts during the third quarter. This has prompted a flood of investment, with official estimates of 660 billion yuan a year between last year and 2010, of which half will go into transmission and distribution and half into generation. Much of this investment is likely to come from insiders. An official of the policy and research division of the State Electricity Supervision Commission named Sun said such takeovers were widespread. 'Managers set up investment companies which raise money and then take over power stations,' he said. 'This is not in line with regulations and against national policy. It is not good for competition and defeats our purpose in separating generation from transmission. It is very serious.' The asset-stripping began when Beijing ended its 50-year monopoly on power. In December 2002, the State Council dismantled the State Power Corporation (SPC), which had owned 46 per cent of China's generation capacity and 90 per cent of the supply system. The government used the assets to set up 11 smaller companies, including five power generation firms, each holding less than 20 per cent of the market. The power to approve new projects now rests with the State Development & Reform Commission, where a staff of less than 50 is responsible for approving a flood of applications. Beijing's aims were laudatory - to introduce competition, more investors and lower prices into the industry - but it has lacked the means to regulate the disposal of state assets and stop abuses. One much-abused policy encouraged power company staff to invest in their own firms, as a way to raise money for what was once a cash-strapped industry. Workers and managers later took full advantage of this policy to buy their firms from the state, turning a state monopoly into a private one, often at bargain-basement prices. One of the most blatant examples is the Jin Yuan Power Company of Guizhou, which controls 30.64 per cent of the province's power capacity, with sales last year of 2.73 billion yuan, profit of one billion yuan and total assets of 15.4 billion yuan. Since it was set up in November 2000, according to a report in the influential Caijing magazine, it has become the biggest power investor in the province. Jin Yuan is owned by 20,000 employees and managers of the former provincial power firm. It has prospered because of the close links its managers have with the power bureaucracy in Guizhou, giving it advance notice and privileged access to new contracts and easy access to loans from banks, which are eager to finance a sector with a guaranteed return, Caijing reported early this month. In another case, 35 managers of a power station in Changge city, Henan province, in December last year paid 15 million yuan to acquire the facility with a net worth of 65 million yuan. They received a 25 per cent discount because they paid in cash in one payment. The biggest shareholder now is the former factory manager who holds 19.46 per cent of the shares. In May 2000, in Shaoxing, Zhejiang province, 18 managers paid 480,000 yuan for an 8,000-kilowatt power station with a net worth of 31.42 million yuan. Qian Jin, of the economic research centre of the China Academy of Social Sciences, said that worker and management buyouts were not appropriate for a monopoly industry, which enjoyed government protection and a good return. 'They are a way for the employees to obtain state assets cheaply,' he said. The reforms are supposed to set up a fair and transparent information and bidding process for power projects but this has not happened. Contracts are awarded without public tenders or auctions and applications have to be approved by provincial power firms which give preference to companies with which they are associated. The biggest losers are foreign companies, which also spotted the great potential in the industry but have had difficulty competing with well-connected local insiders. The foreigners have invested US$2.3 billion in 39 joint-venture power projects in China , with a total capacity of 27 million kilowatts, accounting for 8.46 per cent of the market. Shao Bingren, vice-chairman of the State Electricity Supervision Committee, said that most contracts were awarded in a non-public fashion, with many defects in the approval process. 'What we need is an open tender process, with equal competition for state and non-state firms, which encourages different forms of capital and leads to the lowest costs for electricity on the grid.' He said. In a report published in June, the Auditor-General named electricity as one of the most corrupt sectors in China, with the SPC involved in illegal transactions totalling an astonishing 21.1 billion yuan, including 2.97 billion yuan in state assets illegally transferred. Former SPC chairman Gao Yan, 62, apparently fled the country in 2002 to escape arrest on corruption charges and the authorities have been looking for him ever since. In early September this year, a court in Wuhan sentenced Gao Xinyuan, Gao's son, to five years in prison for paying HK$100,000, US$9,000 and a Rolex watch worth 28,000 yuan to two power company officials in exchange for contracts. An even more vivid example of the institutionalised corruption emerged during the trial of Li Mingxue, 37, head of the purchasing department for the electricity bureau of Zhengzhou, capital of Henan province, who admitted accepting bribes totalling 10.06 million yuan in his 13-year career. A court in Zhengzhou is hearing his case. 'I became accustomed to salesmen and managers carrying red envelopes,' he told the court. 'As the amounts got bigger, so I became numb to money. I accepted the bribes without thinking about it,' he said. Not to take the money would have angered the donors and make it impossible for Li to continue working at his post, since it is an essential part of the business culture.