Promoting “Belt and Road” power infrastructure construction is a concrete practice for promoting global energy interconnection, a new historical opportunity to expand the international development space, and the core of State Grid Corporation of China’s internationalization strategy. State Grid International Development Limited (SGID), as an important platform for State Grid Corporation of China (SGCC) to implement overseas power and energy assets investment and operation, has been actively carrying out overseas mergers and acquisitions (M&A) of existing assets, greenfield project development, and overseas asset operation in the power and energy sector in recent years, striving to become a leader among central government enterprises in “going out.”

Development path

As China becomes more and more deeply integrated into the economic globalization wave, internationalization has become an inevitable choice for Chinese enterprises. However, the market environment is more complex than the local one, and Chinese enterprises are facing enormous challenges as they venture overseas.

Since 2008, SGID’s internationalization has gone through a development process of “going out, standing firmly, and taking big steps,” and has achieved an upward spiral in its own international competitiveness by continuously expanding and deepening its international operations. “Going out” means exploring through practice a progressive and synergistic path to internationalized development with horizontal and vertical integration. “Standing firmly” means that overseas companies are controlled effectively and given proper authority after acquisition, and all overseas projects are profitable without any losses. “Taking big steps” means seizing opportunities, investing directly, and reinvesting with the help of overseas project platforms, so as to achieve leapfrog growth of overseas assets. After nine years of development, SGID’s overseas book assets have reached RMB 280.8 billion (as of the end of July 2017), an increase of 131 percent year-on-year, generating an annual profit of about RMB 8 billion (comparable to a large domestic provincial power company), and achieving the overseas extension of SGCC’s core business, while also driving SGID to upgrade from traditional product and labor exporting to technology, management, and culture exporting.

Business development model

Progressive. In terms of investment market selection, SGID has adopted a progressive internationalization path, starting from neighboring countries, the familiar first and then the unfamiliar, from near to far, first easy and then difficult, and upgrading gradually. The path overseas began in China’s neighbor, the Philippines. SGID seized the opportunity presented by the privatization of National Grid Corporation of the Philippines (NGCP), and acquired 40 percent of its shares. After that, the company took another step in the emerging market of Brazil, acquiring 100 percent of the equity of seven power transmission concessionaires. After accumulating successful experience, it extended its reach to mature markets, acquiring 21 percent equity of HK Electric in Asia, 25 percent of Portugal’s national energy grid company REN, 35 percent of energy grid company TERNA under Italy’s CDP RETI S.p.A., and 24 percent of Greece’s national grid operator ADMIE in Europe, as well stakes in ElectraNet Pty Ltd, SGSP (Australia) Assets Pty Ltd, and AusNet Services in Australia. The company has thus achieved a reasonable distribution of assets in Asia, South America, Europe, and Oceania.

Synergistic. In terms of investment entry mode, SGID has formed a synergistic development model of existing asset acquisition and greenfield development. Operating uncertainty is low after the acquisition of existing assets, which helps enterprises enter target markets quickly, and it can yield quick investment returns at lower risk. However, there may be differences between the acquirer of the existing assets and the acquired enterprise in terms of business ideas and management systems and methods, resulting in adaptation costs and cost of trust for both parties. Under the greenfield development model, enterprises can choose appropriate geographic locations for investment and have high controllability of capital investment and expenditures, but development cycles are long and operational risks are high. After understanding the policy, legal, and industrial environments of the Brazilian power market, SGID relied on State Grid Brazil Holding Company S.A. (“SGBH”) to develop greenfield projects. These complemented the acquired assets, made the business structure more diversified, and boosted business expansion capacity and risk resistance.

Horizontal and vertical integration. Horizontal M&A allow capital to be concentrated in the same market area or sector, while vertical M&A connect upstream, middle, and downstream portions of the production chain. SGID has used horizontal M&A in the field of power transmission to open up international markets. Investment assets are currently distributed in eight countries on four continents. The company has further extended its indirect investment projects via overseas affiliated companies, achieving horizontal expansion and increased market share. It indirectly holds assets in Spain and Chile through REN in Portugal, and assets in France, the UK, and Belgium through TERNA and Snam S.p.A. in Italy. In terms of vertical M&A, SGID has successfully entered into fields overseas such as power and natural gas transmission and distribution through the projects of REN in Portugal, SGSP (Australia) Assets Pty Ltd., and AusNet Services, gradually lengthening its business chain. In Brazil, after acquiring the transmission concession assets, SGID acquired CPFL in 2017 through a vertical acquisition, creating good synergies between different assets and achieving comprehensive coverage in the power generation, transmission, distribution, and sale fields in the Brazilian market. CPFL is the second largest privately owned power generation company in Brazil. In addition to hydropower, its asset types include solar energy, biomass energy, wind power, and other new energy sources.

By continuously developing horizontal and vertical integration, SGID has gradually enriched the business types and income composition of its overseas investment.

Profit model

Using brand value to achieve low-cost financing, SGCC has strong core competitiveness and brand influence, which convey a superior level of international credit. SGID has in turn translated the intrinsic advantages of an A-grade credit rating into the external advantage of low-cost financing in overseas markets, injecting strong financial support and competitive strength into its existing asset M&A and greenfield project development. Against a background of domestic power reform, SGID has promoted the overseas extension of SGCC’s core business, expanded the development space by translating brand value into financing advantages, and played an active role in improving quality and efficiency and cultivating profit growth points for the group. At the same time, SGID has actively performed its shareholder duties, operated existing overseas assets efficiently and steadily, achieved stable income from existing asset investment projects, and steadily promoted greenfield construction projects. This has driven the further enhancement of SGCC’s international brand value.

Gaining stable income by investing in regulatory assets. With low-cost financing abroad and investment in overseas transmission and distribution regulatory assets, SGID’s overseas businesses have gained stable income and realized a virtuous cycle with “both ends of the business overseas.” Power and gas transmission and distribution are natural monopolies enabled by economies of scale. In mature overseas markets, regulatory mechanisms based on revenue cap or price cap models are adopted in the energy transmission sector, so pricing is transparent and reasonable. After caps are set on the annual revenue or regulatory tariff of transmission companies, such companies can lower their expenditures below predicted values by improving internal operational efficiency, etc., which will in turn enhance their actual return on net assets, and the regulatory revenue will also be adjusted along with changes in inflation rates. Under mature investment environments and industry policies of overseas markets, SGID can make the most of SGCC’s comparative advantages in technology, operations, and talent to reduce costs and increase efficiency, thereby achieving stable operating income from overseas investments.

Governance model

Positioning as a long-term investor. From a macro perspective, SGID is committed to being a long-term strategic investor. This is not only necessary for serving the national “Belt and Road” strategy, but also a prerequisite for taking full advantage of its own strengths. As a long-term strategic investor, SGID has actively participated in the governance of overseas companies in many fields, forming situations of mutually beneficial win-win cooperation with acquired parties. For example, as the single largest shareholder of NGCP in the Philippines, SGID has assisted in the construction of the technical standard system; as the largest shareholder of Portugal’s REN, SGID has established a joint venture R&D center with REN and encouraged REN to improve its international credit rating; and as a shareholder of ADMIE in Greece, SGID has actively promoted the Greek islands interconnection project to improve the interconnected scale and power supply capacity of the Greek grid. With the support of our international headquarters, SGBH was twice named the “best company in the Brazilian electricity industry,” in 2012 and 2014.

Scientifically controlled overseas companies. At the micro level, SGID scientifically sets up the control and governance structures of overseas companies. It strives for rights corresponding to its shareholding percentage to set up key positions and nominate managers, and manages overseas project companies through shareholders’ meetings and boards of directors according to company shareholders’ agreements and articles of association. SGID’s foreign-based team of senior managers is deeply involved in the decisionmaking for major operational matters of overseas holding companies, such as strategic planning, business plans, financial budgets, and senior management appointments and removals, putting the advanced management concepts and excellent technical experience of SGCC into effect in the development planning and daily work of the overseas companies. SGID headquarters has set up an overseas operations management committee to focus its professional strengths on the major issues of overseas companies and elevate the refinement level of their operations management. Some 632 important issues were analyzed and addressed in the first half of 2017 alone. In addition, SGID has established an overseas asset operation monitoring (measurement) center, which realizes real-time control of key indicators and early warning of changes through an informatized system, comprehensively strengthening the online monitoring of overseas assets.

Development achievements

Since 2008, SGID has made overseas investments totaling over USD 15 billion, forming book assets of RMB 280.8 billion (as of the end of July 2017) and annual profits of about RMB 8 billion, equivalent to replicating a large provincial power company overseas. In addition, international development has also accumulated considerable intangible asset value for the company: By building a two-way exchange platform, it has exported superior domestic UHV technology and mature grid operation and management experience, and introduced the advanced management methods and concepts of its overseas companies, using international benchmarking of distribution assets as a “demonstration plot,” and boosting SGCC’s overall internationalization. In the course of its overseas business expansion, the company’s international competitiveness and influence have continuously expanded, and the harvest has been bountiful.

Spurring “going out” as group by going global with ultra high voltage. In implementing the national “going out” development strategy, SGCC has clearly defined the strategic goal of “going out” with UHV technology and has striven to promote the global application of UHV transmission technology, specifications, and standards. Brazil is the largest country in South America. It has a vast territory, and primary energy and resources are far from the load centers. After entering the Brazilian market in 2010, SGID keenly grasped Brazil’s objective need for north-south power transmission in the context of rapidly growing power loads. It aggressively followed and participated in the demonstration and research of a technical proposal for the 11 million kilowatt Belo Monte Hydropower Station in the Brazilian Amazon River Basin, ultimately persuading the Brazilian government’s energy and power authorities to select the UHV DC transmission technology solution for Belo Monte.

In February 2014, SGID, together with Brazil’s national power company, won the bid for the Belo Monte Phase I project, which successfully realized “going out” for UHV. A year and a half later in July 2015, based on the successful experience of the Belo Monte Phase I project, the company won the bid for the Belo Monte Phase II project, which achieved the “going out” of integrated UHV investment, construction, equipment, and operation. According to preliminary estimates, the company’s investment in the construction of the Belo Monte Phase I and Phase II projects can drive the “going out” of nearly RMB 5 billion in domestic high-end power equipment and EPC services. The Belo Monte Phase I project is expected to achieve single-phase electricity pilot operation by the end of 2017.

Creating a new benchmark for low-cost financing abroad. Financing is an important tool for supporting the rapid development of international business. The continuous expansion of international business creates greater financing requirements: larger scale, more currencies, and faster turnover. For this reason, SGID has constantly improved its financing system, and has achieved cost reductions and efficiency increases by improving its international credit rating, broadening overseas financing channels, and applying different kinds of financial instruments.

SGID’s credit rating has risen year after year since its first international credit rating was carried out in 2012, and now SGID’s main credit ratings by the three major agencies have all entered the Grade A ranks. On that basis, the company has continuously broadened overseas financing channels and reduced financing costs: In the currency market, it has expanded financing from bilateral to multilateral and syndicated financing, and in the capital markets, it has advanced from a single capital market to multiple capital markets. SGID also helped the head office issue a total of more than , and issued its own one billion euro bond. At the same time, it has directed and assisted its subsidiaries in financing debt issues in the Australian and Brazilian capital markets.

This year, for the first time, SGID has used financial instruments to raise approximately EUR 800 million in zero and negative interest rate financing. In the financing scheme for the acquisition of 24 percent equity interest in Greece’s national grid operator, using its high quality credit rating, and taking advantage of Europe’s negative interest rate monetary policy, the company innovatively applied cross-currency swaps to swap floating-rate U.S. dollar loans into fixed-rate euro loans, and 90 percent of the settled funds achieved -0.29 percent interest rate financing. Not only were loans successfully obtained, but about EUR 850,000 in interest was earned from banks in one year as well.

Building an internationalized professional talent team. Being globally oriented, whole-grid oriented, and practice-oriented, SGID has introduced and cultivated composite teams of multi-skilled talents with international vision and cross-cultural communication ability. As of August 2017, SGID had 320 Chinese employees and 126 employees stationed overseas, and the total number of Chinese and foreign employees under management had reached 17,000.

By means of internationalization, a two-way learning and exchange platform of “inviting in” and “going outl” is increasingly being formed. With the assistance of National Electric Power Dispatching and Communication Center, State Grid Technology College, Advanced Training Center of SGCC, and other units in the system, SGID arranges for senior managers of NGCP in the Philippines to attend training in China, and invites technical experts from SGSP (Australia) Assets Pty Ltd. to conduct technical exchanges in China. On the other hand, backed by the technical advantages of SGCC, we have joined with other units in the system to establish counterpart technical support mechanisms, such as experts from China Academy of Electric Power and State Grid Tianjin Electric Power Company going to diagnose power grid operation in Brazil’s SGBH, and technical experts from State Grid Jiangsu Electric Power Co., Ltd. going to assist in post-typhoon reconstruction in the Philippines. This allows employees within the system to improve their quality and ability to work abroad while making the most of their technical strengths, which contributes to the company’s international development.

Demonstrating a responsible corporate image. In serving “Belt and Road” construction, SGID attaches great importance and value to the company’s overseas brand image, respects the culture, religion, and customs of the countries (regions) where it conducts international business, operates strictly in compliance with the law, strengthens local operations, and fulfills its social responsibilities, winning the recognition and respect of host governments, partners, and all sections of society.

SGID’s Brazilian affiliate SGBH has made full use of local “tax incentive” policies to sponsor public-spirited projects such as the “China-Brazil Culture Month,” the “Rio de Janeiro Four Seasons Long-distance Race,” and a youth orchestra in Rio’s Maré area. In December 2013, SGBH won UN Global Compact’s SABERA award for best practices in socially responsible management. NGCP has provided funding to typhoon-hit areas in the Philippines, actively carried out social assistance and public welfare projects, and supported the construction of community education, cultural, medical, and other service facilities. SGSP (Australia) Assets Pty Ltd. has helped energy users with financial difficulties examine their household energy consumption and provided solutions to reduce energy expenses. HK Electric actively carries out social care activities, provides volunteer services, and visits elderly shut-ins. SGID has continuously strengthened soft power construction, demonstrated the image of a responsible international enterprise, and enhanced brand influence.

Future development

At present, the enterprise’s international development is still in a favorable period of strategic opportunity. The “Belt and Road” initiative is driving Chinese enterprises to enter a new stage of comprehensive and pragmatic foreign direct investment. The government actively supports overseas investment in infrastructure that is conducive to peripheral connectivity, as well as overseas investment that drives the export of superior production capacity, high-quality equipment, and technical standards, so as to deepen international production capacity cooperation. By relying on SGCC’s overall advantages, SGID has built up a certain scale of overseas operations and accumulated international development experience.

However, it is also necessary to see that “reverse globalization” and international competition pose multiple challenges to enterprises “going out.” First, the international situation is complicated. Political and security conflicts and turmoil, refugee crises, terrorism, and other regional hotspots and global challenges have enlarged overseas security risks. There are many countries along the “Belt and Road,” with huge differences in investment environment. Investment protectionism is on the rise in developed markets, and uncertainties persist in the political environments of emerging economies, so investment risks should not be underestimated. Second, business development faces challenges. On one hand, the willingness of developed countries to sell their power and energy assets has decreased, quality projects are scarce, international competition for capital is fierce, and high-premium M&A squeeze the room for revenue; on the other hand, countries are increasingly strict in conducting foreign investment and anti-monopoly reviews, especially for Chinese central government enterprises, and the difficulty of obtaining host country approval has increased. Third, the pressure to improve efficiency has increased. The conditions overseas on the replacement of regulatory assets in operation continue to be tightened, and there is a downward trend in regulatory business income.

Facing both opportunities and challenges, SGID will seize the first opportunity, forge ahead, and strive to be a leader in serving “Belt and Road” construction.

Continuously expanding the scale of international business. With development as the first priority and efficiency as the goal, we will continue to develop the path of overseas business expansion. We will: Take the initiative, continue to actively integrate into target markets; communicate and interact with potential partners, infrastructure funds, and the Ministry of Commerce, Ministry of Foreign Affairs, etc., to broaden the channels for obtaining project information and enrich project pipeline; and take advantage of the platform role of overseas affiliates to break through investment barriers, extend our international market development capacity, and strive to become bigger.

Working to optimize the international development layout. Rooted in excellence, we will comprehensively balance the proportions of existing asset M&A and greenfield investment, and mature market business and emerging market business, so as to optimize the investment layout. We will: Actively carry out existing asset M&A business in developed countries with stable political environments, sound legal systems, and transparent regulatory mechanisms; increase investment in greenfield projects in regions with high demand for investment and construction and relatively stable political environments; and appropriately select local partners for joint development who share the company’s investment philosophy and have complementary strengths.

Striving to improve the quality of international development. We will: Support overseas companies in appropriately developing new non-regulatory businesses to hedge against the impact of downward adjustments in regulatory rates of return; and flexibly generate profit strategies, considering the strategic value, economic value, short-term value, and long-term value of projects, and focusing on investment opportunities with high growth potential despite their current poor financial performance, so as to achieve a combination of long and short term, and regulatory and non-regulatory businesses, expand the scale of assets, continuously build strength, strive to improve overall returns, and ensure the value preservation and appreciation of state-owned assets.

Continuously strengthening the party-building work of overseas units. Party-building work provides political leadership and organizational assurance for the standardized and steady development of international business. Insisting on building the Party organization wherever international business is developed. We will: Give full play to the Party organization’s role as a bastion for making important decisions and safeguarding the safety of assets and personnel; comply with local laws and regulations, organize Party activities according to local conditions, and unite people’s hearts and minds; strengthen the leadership teams of overseas units, conduct regular talks on integrity, and carry out integrity risk checks, so as to effectively ensure that the cadres of overseas teams are clean. We will continue to deepen the party-building work in overseas units and build overseas Party member teams into the front-line vanguard of international development.

Looking back to the past and forward to the future, under the strong leadership of SGCC’s Party group, SGID will seize opportunities, control risks, expand international markets, operate existing assets steadily, fulfill overseas social responsibilities, create economic, social, and environmental value, be a leader in “Belt and Road” construction, and help SGCC’s internationalization grow bigger, better, and stronger.