Portuguese and Chinese Companies Team Up For Energy Development

10 January 2014

Energy development is crucial for developing countries, especially those that are witnessing rapid economic growth. China has seen great strides in boosting its energy production – and now Chinese firms are looking beyond the country’s borders to make similar efforts in overseas markets. They often do this by teaming up with companies from other countries, such as Portugal.

Chinese firms are finding that such links can lead them to Portuguese-speaking nations in Brazil and Africa, in particular Angola and Mozambique. Brazil is a relatively more mature market, while the African countries provide great potential in particular for hydropower, despite difficulties involving legislation and investment guarantees. Joint Portuguese-Chinese ventures are therefore very much on the cards, based on the Portuguese cultural connection and Chinese financing. Both sides are able to offer expertise.

Chinese firms forge links in Portugal

Chinese companies have already started moving into Portugal. In December 2011, China Three Gorges Corporation (CTG) bought a 21.35 percent stake in the main Portuguese power company EDP in a privatisation exercise in response to the country’s financial crisis. The Chinese corporation beat off competition from German and Brazilian companies, paying 2.7 billion euros to become the largest shareholder in EDP.

The president of CTG, Cao Guangjing, hailed the deal, saying that it would be beneficial to both parties, “especially in international markets”. EDP’s president, António Mexia, said the deal would give the Portuguese energy firm greater financial muscle, as well as creating a new bridge for the Chinese firm to Portuguese-speaking countries.

In June this year, the EDP administrator responsible for managing the partnership with CTG, João Marques Cruz, told the publication Dinheiro Vivo in Lisbon that the Portuguese company was interested in directing CTG towards the Brazilian market. He said his firm already had a presence in Brazil, adding: “It is normal for large Chinese companies that focus on hydropower, like Three Gorges, to be drawn to Brazil.”

The administrator also stated that when it comes to joint investment, “the rule is that it happens in a market in which EDP has a presence” and that the companies are studying various projects with priority in Brazil and Africa.

Another example of a major Chinese corporation buying into a Portuguese energy supplier took place in February 2012, when the State Grid Corporation of China – the country’s largest energy supplier – acquired a controlling 25 percent stake in the Portuguese company REN for 1.4 billion euros in investment and credit. This in turn opened the door for the State Grid Corporation to become involved in a major project in Mozambique.

Chinese electricity giant, Sinohydro, is also establishing contacts and forming business partnerships in Portugal. The Chinese firm has expressed an interest in building dams in Portugal. It has established contacts with the Portuguese electricity supplier Endesa Portugal. The Lisbon-based newspaper Expresso says Sinohydro has been trying to form partnerships with companies that already have concessions to build dams in Portugal. These also include EDP and Iberdrola.

These talks are likely to pave the way for using these partnerships as a bridge to Portuguese-speaking countries in the southern hemisphere. The president of Endesa Portugal, Nuno Ribeiro da Silva, confirmed these partnership links to Macao magazine, as well as Sinohydro’s intention to take advantage of existing relationships in Portugal to move into the Portuguese-speaking countries in Africa. “We talked with them and they expressed this intention clearly,” he said.

Chinese firms move into African countries

Sinohydro has already stated its clear intention to invest both in Portugal and former colonies, particularly in South America and Africa. China Three Gorges Corporation will also become involved in Africa, given that investments in Mozambique and Angola are on EDP’s agenda for 2015.

A researcher with the Singapore-based S. Rajaratnam School of International Studies, Loro Horta, said there were several reasons for interest from China. “The Portuguese side has the market knowledge and culture,” and companies such as EDP are “at the forefront in renewable technologies”. He said Portugal may be useful to China and “could become a ‘hub’ for the Chinese in Western Europe”.

He continued: “Although it is not large, Portugal has some advantages in areas such as technology, renewable energy, telecommunications and civil engineering. Portuguese construction companies have a global presence, well beyond the Portuguese-speaking countries in the world. From Guyana to Israel, Portuguese construction companies have gained immense contracts. In contrast, many Chinese companies are criticised for alleged lack of quality.”

In terms of Sinohydro’s involvement in Portugal, the researcher said this allowed the company to become familiar with the European market while opening doors to lucrative markets such as Brazil and Angola.

There are also benefits for Portuguese companies. With China Three Gorges’ purchase of a stake in EDP, the Portuguese company gained strong financial backing. As Antonio Mexia said, CTG´s entry gave added muscle and access to new funding sources. “We strengthened our capital resources by 2,000 million euros,” the EDP president stated in a company publication.

The president of Endesa Portugal spoke about the “relative ease with which Chinese companies are able to finance themselves”.

An unquenchable thirst for electricity

The energy market in Africa is coveted for its huge potential. Figures released by international institutions show that two thirds of people in sub-Saharan Africa have no access to electricity. This is a continent with large reserves of natural resources for energy production. There is a structural gap, as well as a large untapped market.

A recent report published by The Economist, in partnership with the African Capacity Building Foundation, highlighted that a lack of infrastructure in Angola and Mozambique constitutes a significant obstacle to economic development and investment. The situation is changing, however. Mozambique, thanks to the Cahora Bassa dam, which was built in the 1970s, is now a major producer of electricity, even exporting much of its power to South Africa. The report states that investment, especially in hydropower, may turn Mozambique into the main regional energy supplier, and Africa’s largest supplier.

Electricity demand in Mozambique is expected to increase by about 14 percent per year, and demand through the regional Southern African Power Pool (SAPP) will increase by around 1,500 megawatts a year between 2012 and 2020, according to recent analysis by consultants Frost and Sullivan cited by the website Luso Monitor. Mphanda Nkuwaand, a new power facility project, will come on stream in 2019 and 2020, providing 5,000 megawatts from 2020 onwards.

At the moment, transmission is a problem. Electricity generated at Cahora Bassa, for example, has to be routed to Mozambique through South Africa at a higher cost, since there is no direct link from the dam to the capital Maputo. That is set to change with help from the State Grid Corporation of China, which plans to invest US$1.7 billion in a project in the south-central region to transmit energy produced at Cahora Bassa to major consumption centres. In 2009, the Export-Import Bank of China pledged to finance expansion at Cahora Bassa.

The battle for influence in Africa

China’s role in developing Africa has been well documented. That is most likely why United States president Barack Obama unveiled his “Power Africa” initiative in July. Obama used a visit to the continent to announce a US$7 billion project aimed at increasing access to electricity in sub-Saharan Africa. Mozambique is part of this plan through the search for new oil and natural gas reserves and the construction of related infrastructure. In this race for influence, actors such as Portugal do not want to fall behind.

The president of Endesa Portugal, Ribeiro da Silva, considered investment in Portuguese-speaking countries in Africa from two perspectives. He said those countries had raw energy in the form of oil, gas, large hydroelectric potential and conditions for the production of biofuels. He also said they had “great potential for consumption growth” because of the small number of people with access to electricity and the key need for energy access. “We all know that the issues of electricity supply are critical to the development of these countries,” he maintained.

The chairman of EDP’s supervisory board, Eduardo Catroga, also said there were market opportunities for his firm. “Demand is developing in the most dynamic economies, such as Latin America, Africa, Brazil and certain countries in Asia. EDP must be open and awake to these opportunities.”

Loro Horta stressed that with the rapid growth of Angola, Mozambique and Cape Verde there is a need for “infrastructure to support this growth … The energy sector in Mozambique, for example, still has plenty of room to grow. In Angola the situation is similar”.

EDP’s chairman pointed to the regulatory difficulties in providing electricity for Angola and Mozambique, but added that his firm would still become involved. “We are now giving this process priority, so that we can have more growth options from 2015 onwards,” he confirmed.

Potential risks

The president of Endesa spoke about the risks involved in investing in Angola and Mozambique, particularly in hydroelectric development. Da Silva noted that investors were mostly interested in oil and natural gas. Only when they had explored those areas, he said, would they consider renewable energy and hydropower. He noted that a poor electrical distribution network could produce uneven energy levels, adding that some consumers did not pay for their electricity, implying that certain consumers were effectively ‘stealing’ their energy supply. But he also noted that a lack of regulation meant that charges could be set at a level that compensated for the investment.

According to Endesa’s president, national companies in Angola, Mozambique and Cape Verde are subsidised, which lowers prices to levels that make it uneconomical for a foreign organisation to make an investment. He said the authorities would have to provide safeguards for investors.

He also said that both Endesa and EDP had been studying the “legal framework for the production of renewables” in Angola and Mozambique, and that “there must be a legal framework that gives comfort” to ensure companies will be “remunerated for the power added to the system”. (macauhub)