Chinese Models

Dam good going

Why Sinohydro is China’s second most successful firm overseas

CHINA/

Sinohydro’s most famous project to date: the Three Gorges Dam

When it comes to dreams of global expansion, China Railways Construction and China Overseas Engineering Group both offer cautionary tales. China Railways Construction (CRC) first grabbed headlines when it announced that it was building a railway in Saudi Arabia in 2009. At the time, the Mecca Light Rail was feted as a crucial infrastructure project, owing to the large volumes of pilgrims it would be required to transport. Zhao Guangfa, president of CRC, admitted to reporters that the project was more a political mandate than a purely commercial affair, adding that failure was unthinkable. A few years later, the railway was finished but at a price, resulting in Rmb4.2 billion ($686 million) in losses for CRC (see WiC84).

China Overseas Engineering Group’s experience in Poland was possibly worse. A subsidiary of China Railway Group, China Overseas signed a contract to build a 50km highway in Poland. It won the 2009 bid with a $450 million offer that was roughly half what the Polish government had estimated the road would cost.

And it turns out that the Poles were better at their sums than the Chinese. Halfway through construction, the project ran into a cashflow crisis and payments to subcontractors were delayed. They protested furiously. With the road already hopelessly behind schedule and work at a standstill, the Polish government fired the Chinese firm and sued it for $265 million in compensation.

Standing against these high-profile failures there are the quieter success stories. Huawei has rolled out impressive telecommunications infrastructure in a number of countries, for instance. But much less is said about Sinohydro, which generated the most revenue abroad after Huawei last year, according to the Ministry of Commerce.

Sinohydro was the state-owned firm responsible for building the gargantuan Three Gorges Dam. Since then it has bulked up, signing Rmb126.4 billion of new contracts in the first eight months of this year alone. Of these about 40% were outside China and the company now has projects spanning more than 60 countries, ranking as the 14th biggest civil engineering contractor by global revenue, ahead of Japanese construction firms like Kajima Corp and Obayashi Corp.

What is Sinohydro and where does it do business?

The Shanghai-listed firm grew out China’s now-defunct hydropower ministry (whose most famous employee was former president Hu Jintao, a water engineer by training). Ties continue to be strong. “The state is the biggest investor in infrastructure construction and the biggest client of our company,” its prospectus admits. That has helped Sinohydro build more than half of the dams in China but it now works much further afield too, enjoying more than half of the global market for building hydropower stations.

Like many Chinese contractors, Sinohydro has had some of its greatest success in less developed countries where rivals like South Korea’s Hyundai and Japan’s Penta-Ocean have often shied away.

But that means it also has to struggle with greater political risk, coping with projects in war-torn areas like Libya, Mali and Afghanistan. In fact, it was forced to pull out of Libya in 2011, cancelling most of its $1.8 billion in projects because of the civil war. The lost contracts accounted for some 12% of its overseas project revenue at the time.

“After the Libya experience, Sinohydro became more conservative in choosing its overseas projects,” Kathy Liu, Beijing-based analyst with Global Water Intelligence told the Financial Times.

More recently, it has been expanding in Africa again, where it is involved in more than 70 hydropower projects. That includes a return to Libya, although it has adapted its approach since Gaddafi was toppled.

“The projects in Libya are large in scale but the risks are also big,” Wang Zhiping, spokesman for Sinohydro, told the Economic Observer. “Because of this we would rather sacrifice a few percentage points in margin but make sure the Libyan government raises the proportion of our advance. We are talking about an advance ratio there of around 25%. This is unthinkable for the domestic Chinese market, which usually pays about 10% up-front.”

The company has also grown more cautious on the kind of projects it tries to win. “We now bid for projects which have the approval of either the World Bank or the Asian Development Bank,” Huang Baodong, the company’s vice president, told Global Power Report.

But that also means that Sinohydro has to adhere to the stricter standards demanded by the two financial institutions. That’s forced the firm to upgrade its technology and the quality of its management, another contractor told the Economic Observer. He says the firm no longer wants to win bids merely on the basis of coming in at the lowest cost.

What’s next?

Sinohydro’s bosses say their new goal is to move beyond emerging markets. “The European and American markets are our next focus for international business,” says Wang. “We want to be a world-class contracting company.”

The transition is unlikely to be straightforward. Dams are sensitive items of infrastructure, meaning Western governments may not allow Chinese state firms to build them. Sinohydro will also have to overcome some of the stigma of the Made in China label, as well as the more publicised cases in which Chinese firms have failed to deliver (just ask the Polish government). One of Sinohydro’s strengths will be less applicable in these markets too as Western nations will be more reluctant to allow thousands of low-paid Chinese engineers into their countries – which has been the norm for projects in Africa.

But there is optimism too. “Just as British and American companies built the world’s infrastructure 30 and 40 years ago, followed by the emergence of Japanese and Korean construction companies, Chinese companies are following the same trend,” says Shourav Lahiri, a lawyer at Pinsent Masons who advises on Chinese infrastructure deals.

If Sinohydro can win over what is likely to be a particularly sceptical audience, the US market is an enticing commercial target. Last month President Obama signed two bills into law aimed at boosting hydropower. Last year hydro provided the majority of the country’s renewable electricity, says the National Hydropower Association, with an installed capacity of 100,000 MW. But the power body believes that American rivers and waterways have the scope to deliver more, perhaps as much as 60,000 MW in additional hydropower.


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