Chinese State Firms Battling Distrust Abroad

From Corporation, Page 25, Issue 379, August 4, 2008
Translated by Liu Peng
Original article: [Chinese]

An alliance formed by five Chinese state-owned firms failed to win a long-expected deep-water port construction contract in Austrialia recently.

Market observers said the latest failure echoed several previous attempts by Chinese firms to secure buyouts and projects abroad. It also highlighted the distrust facing companies affiliated to the Chinese government, which was eyed suspiciously by foreign ones.

Losing the Bid
On July 29, the state government of Western Australia announced that Oakajee Port and Rail Company (OPR) had emerged as the preferred developer for its 1.5 billion Australian Dollar (9 billion yuan) deep water port project in Oakajee.

The OPR is jointly owned by Japanese trading company Mitsubishi and Australian mining company Murchison Metals, each holding 50% stake.

Losing out in the bid was Yilgarn Infrastructure Limited, an Australian-registered company with Chinese stakeholders.

China Railway Materials Commercial Corporation (CRMC) holds 16.7% stake in Yilgarn, and another four Chinese state-owned firms, namely Sinosteel Corporation, China Railway Engineering Corporation (CREC), China Communications Construction Company and Anshan Iron and Steel Group Corporation (AISGC) planned to raise their stakes in Yilgarn to 50% if the bid came through.

To a certain degree, the battle for the Oakajee deep-water port project was a showdown between Japanese and Chinese investors behind the Australian local companies.

The Oakajee deep-water port is part of an infrastructure development project in Australia's mid-west aiming to fully exploit the mining resources in the region. Apart from the port, the plan also included an industrial estate and two rail links to iron ore mines in the mid-west.

The local government hoped that the entire project, with an estimated total investment of 3 billion Australian dollars (18 billion yuan), would realize export potential of up to 35-million tons of iron ore to be shipped out yearly upon completion in 2012.

The Oakajee deep-water port has been Australia's biggest infrastruture project in recent years, and the limited bidding process had taken some nine months to accomplish. It was also the first time Chinese companies formed an alliance to bid for an oversea project.

In October last year, the Western Australian state government initiated tender process by inviting two local iron ore miners, Murchison Metals Corporation and Midwest Corporation, to each nominate one infrastructure construction company for the bidding.

The former recommended its affiliated company OPR while the latter nominated Yilgarn, backed by the above-mentioned five Chinese companies.

Yilgarn was confident from the very beginning. Its executive chairman John Saunders told the EO in May this year that the company enjoyed several advantages, including that of funding and support from major iron ore purchasers like Sinosteel and AISGC, unlike the Murchison-Mitsubishi alliance, OPR, that possessed few.

It was learned that China's state-owned Export and Import Bank had agreed to grant 1.5 billion US dollars (nearly 10.3 billion yuan) of loan to Yilgarn provided that the latter won the bid.

However, after a series of assessment considering commerce, legal, social, engineering and environment factors, the Western Australia state government concluded that the proposal submitted by OPR better met the requirement.

Upon the announcement, OPR said it believed that its advanced technologies and experience in sourcing finances were the main reasons for winning the deal. As of press time, Yilgarn had yet to respond to the EO over its failure in the bid or its next step of action.

Behind the Scene
Some believed that neither technical nor funding factors were the main hurdle for Yilgarn, instead, it was the Chinese sponsors behind it that soured the deal.

A source who had followed the process said the result was "not surprising", as the backing by Chinese state-owned firms raised the alarm on the Australian side, which worried that its resources and infrastructure market would be controlled by China.

Presently, China's Sinosteel was striving to buyover Midwest Corporation and would likely attempt taking a stake in Murchison Metal. If these attempts became a reality, China would have a greater say in the exploitation of mining resources in Australia, and that would also lead to more Chinese enterprises, both state-owned and private ones, to actively participating in the mining sector of Australia.

According to Kong Linglong, director of foreign funds usage department of China's National Development and Reform Commission, Chinese investment in Western Australia's iron ore, natural gas, and other mineral sector in 2007 amounted to nearly 2 billion dollars (about 13.7 billion yuan).

The increasing influx of Chinese investments had raised concerns among Australians and local companies, as they feared Chinese government-sponsored firms and sovereign wealth fund would gain controls over their national resources and infrastructure facilities.

The Australian media had over time highlighted the concern, which to a certain extent represented public opinion, and local government officials would consider such opinion when making strategic decision.

Media reports said that the Australian government had in this year slowed down the approval rate for foreign investments. For instance, the EO learned that about 10 Chinese enterprises had withdrawn their applications to the Australian foreign investment review board this year.

A source familiar with the administrative proceeding in Western Australia told the EO that: "When developing overseas markets, Chinese enterprises are facing a new challenge, that is to eliminate suspicion, and to win local understanding and support."

Back in 2005, China National Offshore Oil Corporation attempted to buyover American Unocal Company, and despite the former hiring an international public relation company to lobby for its cause, it failed to gain the vote of confidence by the U.S. government.

Previous experiences and the latest failure highlighted the distrust mounting on Chinese enterprises, especially those seeking investments in natural resources and the energy sector abroad. An effective solution to allay such suspicions has yet to be found.

Other Opportunities
Though OPR has won the Oakajee deep-water port contract, not all is lost for Yilgarn, as the latter still stands a chance to participate in the rail links contruction project, with tracks planned to measure between 600 and 800 kilometers long and likely to cost around 1.5 billion Australian dollars (9 billion yuan) to build.

Both the OPR and Yilgarn had expressed interests in bidding for the rail links project, paving the way for another round of competition between the two.

A source who was involved in the previous bidding process said Yilgarn's success rate in winning the rail links bid depended heavily on support from major iron ore clients like Sinosteel and AISGC.

A market analyst, who specializes in resources and energy sector investment in Australia, told the EO that it was unlikely for two seperate companies to handle the development of rail links and the port. For effective coordination and management, the source believed OPR would be entrusted to plan and develop the port and all its related facilities, such as the rail links.

The source, however, said exception might be made to balance the interests of various parties. In that case, he said Yilgarn might still stand a chance as sub-contractor but its role would be minor in the whole scheme of things.

"Even if China gains part of construction project, it will face uphill challenges," the above analyst said, adding that mainly caused by strict Australian regulations in limiting foreign labor.

That would restrict Chinese companies from deploying Chinese railway construction workers, thus losing their major advantage of having skilled and cheap labor.