24 March 2019
Sinopec can only sell up to 30 percent of its equity in the retail business
Sinopec can only sell up to 30 percent of its equity in the retail business

Does co-ownership structure work for SOE reform?

China Petroleum & Chemical Corp. (Sinopec) (00386.HK, 600028.CN) has received board approval to restructure its retail business and invite private capital. The Hong Kong Economic Journal’s EJ Tactics column examines the potential results of this co-ownership structure.

A hybrid shareholding structure blending state-owned and private capital was introduced a couple of years ago by the State Council, which sought to attract private funds into the oil and natural gas sector.

Last month, Sinopec injected its retail assets into a newly formed and wholly owned subsidiary. In fact, the restructuring plan aims to showcase the government’s efforts to institute reforms in oligopoly sectors such as energy and resources.

However, the plan is expected to see vigorous opposition from vested interests as previous attempts to reform state-owned enterprises (SOEs) would show.

There are more than 90,000 gas stations nationwide, of which Sinopec operates some 30,000. It is doubtful whether the operational efficiency of these stations can be raised if they are run and funded by private sources.

Introducing a co-ownership structure to allow private firms to participate in a state-backed oligopoly business is intended to improve the profitability of SOEs while opening up the market.

But in the case of Sinopec, the company can only sell a maximum of 30 percent of its equity in the retail business, which means the state will continue to be the controlling shareholder. This raises the question of how private funds are used.

In a previous case, an SOE subsidiary partnered with a private enterprise, with the state-backed firm supplying land and technology and the private firm providing funds. The private firm, however, barely had a say in running the firm, and in the end, it sold its entire shareholding to the state-owned partner.

Hybrid ownership is crucial in pursuing SOE reform. But for many state-backed enterprises, such as those in the resources sector, the most pressing issue is how to trim losses amid cyclical downturns and oversupply.

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