Download General Serial No. 204

No. 7 of 2015 (General Serial No. 204):
Audit Results on the Financial Revenues and Expenditures
of the State Grid Corporation of China for the Year 2013
(Announced on June 28, 2015)
Pursuant to provisions of the Audit Law of the People's Republic of China, in 2014, the National
Audit Office (CNAO) conducted an audit on the financial revenues and expenditures of the State
Grid Corporation of China (hereinafter referred to as SGCC). The audit focused on the head office
of SGCC and 16 second-level units including Jiangsu Province Power Company (hereinafter
referred to as Jiangsu Power), Henan Province Power Company (hereinafter referred to as Henan
Power), SGCC Yingda International Holdings Corporation Ltd. (hereinafter referred to as Yingda
Group), SGCC International Development Co., Ltd. (hereinafter referred to as International
Company), etc., and conducted extended and follow-up audits on relevant matters.
I.
Overview
SGCC was established in December 2002 and as of the end of 2013 had a registered capital of 200
billion yuan. It has 1,433 wholly owned or controlled subsidiaries and 208 joint stock companies,
is mainly engaged in power grid construction and operation, power purchase, sales and supply,
power trading and dispatching, etc.
As shown in its consolidated financial statements, at the end of 2013, SGCC had total assets of
2,570.07 billion yuan, total liabilities of 1,465.07 billion yuan, owners’ equity of 1,105 billion
yuan, current; year operating income of 2,049.8 billion yuan, net profit of 51.73 billion yuan,
asset-liability ratio of 57.01%, 4.85% return on equity, and a state-owned capital appreciation rate
of 105.5%.
Ruihua Certified Public Accountants (special general partnership) audited the company's
consolidated financial statements for the year 2013 and issued a standard and unqualified audit
report.
The CNAO’s audit findings show that, SGCC organized and developed a power grid strategic
planning, defined the enterprise’s development goals; promoted the transformation of the
company’s development and management approach, improved the enterprise’s management and
control capabilities; deepened power supply services, and fulfilled its social responsibilities quite
well. The audit also found that SGCC still had some irregularities in operating performance,
development potential, business integrity, etc.
II. Major Problems Found in the Audit
(A) Operating performance.
1. Financial revenues and expenditures.
(1) From 2005 to 2013, SGCC and 12 of its affiliated units including Jiangsu Power, etc., listed
“assistance” funds which should have been included in non-operating revenue, as capital reserves,
and listed interest expenditures which should have been capitalized, as current period financial
expenses, etc., resulting in overstating 10.805 billion yuan and understating 9.191 billion yuan of
revenue, overstating 11.348 billion yuan and understating 424 million yuan of costs, together with
overstating 339 million yuan of profits due to insufficient offset in the consolidated financial
statements, thereby resulting in understating 8.971 billion yuan of profits over 9 years, among
which, 828 million yuan of profits were overstated in 2013.
(2) From 2005 to 2013, SGCC and 4 of its affiliated units including SGCC Electric Power
Research Institute, Sichuan Province Power Company (hereinafter referred to as Sichuan Power)
etc., failed to list as paid-in capital the user assets they took over and the state-owned capital
operating budget capital expenditure funds they received, etc., overstated long-term equity
investments, failed to include some funds in the unified financial accounting, etc., resulting in
overstating 33.3604 million yuan and understating 55.0837 million yuan of assets, understating
336.295 billion yuan of paid-in capital, and overstating 336.295 billion yuan of capital reserves.
(3) As of the end of 2013, its affiliated Sichuan Power failed to promptly turn over in accordance
with provisions 74.8386 million yuan of Three Gorges Project construction funds, electric power
construction funds, reservoir resettlement support funds, reservoir construction funds, etc., that it
collected on behalf of other authorities.
(4) As of the end of 2013, SGCC failed to pay stamp duty for the increase in capital reserves from
2004 to 2007; the amount underpaid totaled 41.8468 million yuan.
2. Implementation of the state’s macro-economic policies, decisions and arrangements.
(1) Irregularly used for commercial development land that was intended for education, research
and design. In 2012, its affiliated North China Power Grid Co., Ltd., in the name of constructing a
"smart grid research and development exchange center", submitted to authorities a project
land-use plan, and in the same year obtained approval; total land area of the project was 59,300
square meters, of which 27,800 square meters was for education research and design, and 31,500
square meters requisitioned urban public land. Prior to this, SGCC made a decision for its
affiliated Luneng Group Co., Ltd. and North China Power Grid Co., Ltd. to jointly develop on the
project’s land a set of high-end hotels, apartments, office, commercial and exhibition buildings in
one large urban complex, with a planned total investment of 7 billion yuan and construction area
of 510,700 square meters. As of February 2014, a cumulative total investment of 1.288 billion
yuan had been completed on the project.
(2) Irregular construction of office buildings, auditoriums, halls and guesthouses. In April 2009,
SGCC approved the construction of North China Power Grid Co., Ltd. Advanced Research
Institute (actually construction of the State Grid Management College). From 2009 to 2013, the
authorities approved a total of 189,900 square meters of land for phases 1 through 3, including
174,600 square meters of land for education, research and design. In September 2013, after the
state called for an end to the construction of new facilities or premises with accommodation,
conference, catering and other hospitality functions in the name of "college" or "center", etc.,
SGCC still approved initiation of the phase 3 project, with an investment estimate of 694 million
yuan, mainly for the construction of an integrated multi-functional hall, student apartment
buildings and logistics staff building, etc.; as of June 2014, 27.5583 million yuan had been
expended for design, land acquisition, demolition and resettlement, etc.
(3) Failure to strictly implement the State Council’s electric power system restructuring policies.
(i) As of the end of 2013, SGCC had 23 pumped storage power plants in operation or under
construction, with an installed capacity of 16.37 million kilowatts; 96 non-pumped storage power
plants in operation or under construction, with an installed capacity of 14.2016 million kilowatts,
of which 44 were newly constructed or incorporated into SGCC from 2005 to 2013, and in 2013,
the average number of power generation equipment utilization hours of 7 plants were above the
national average; the above practice of failure to timely dispose of power generation assets is
inconsistent with the requirement of "separation of plant and grid”.
(ii) In November 2006, SGCC required Jiangsu Power to devolve its 70.3% stake held in Jiangsu
Province Electric Power Fuel Group Co., Ltd. As of June 2014, Jiangsu Power failed to devolve,
which is inconsistent with the requirement of "separation of major and auxiliary business".
(4) Failure to strictly implement the state’s stipulated electricity charges and captive power plant
charges and relevant policies.
(i) From 2010 to 2013, its affiliated Shanghai Municipal Electric Power Company (hereinafter
referred to as Shanghai Power) sold electricity to some enterprises at less than the electricity
charges stipulated in the national sales catalog, under-collecting a cumulative 1.469 billion yuan of
electricity charges, of which 399 million yuan occurred in 2013.
(ii) From 2008 to 2013, 26 of its affiliated provincial power companies including Zhejiang Power
Company under-collected 3.769 billion yuan of governmental funds and surcharges for electricity
generated and used internally by captive power plants, of which 2.358 billion yuan occurred in
2013.
3. Internal management.
(1) In 2010, its affiliated Beijing Municipal Electric Power Company (hereinafter referred to as
Beijing power), without the approval of SGCC, signed a 50-year land contract with relevant units,
contracting 3182.82 mu (212.188 hectares) of land, mainly for the construction of "smart grid
research demonstration projects and vineyards". From 2010 to 2011, Beijing Power paid 308
million yuan of compensation fees for attachments to the land, land rental fees, consulting fees, etc.
As of July 2014, except for the construction of a distributed power supply pilot project being
planned, the other projects have not yet been launched.
(2) From 2007 to 2013, to circumvent examination and approval by SGCC, its affiliated Henan
Power and Shanghai Power took the approach of breaking 4 projects into parts for project
initiation and approval, involving 189 million yuan, of which 57.4111 million yuan occurred in
2013.
(3) From 2009 to 2012, its affiliated Henan Power Supplies Company irregularly entrusted the
production of tender documents, etc. to employee stock ownership enterprises, involving contract
amounts of 29.1128 million yuan.
(4) From 2005 to 2013, 28 of its affiliated units including Shandong Province Power Company
(hereinafter referred to as Shandong Power), signed 32.342 billion yuan of contracts for
construction projects which should have been tendered but failed to do so, failed to conduct open
tender, or in violation of tender provisions, of which 733 million yuan occurred in 2013.
(5) From 2005 to 2013, 16 of its affiliated units including Sichuan Power Transmission and
Transformation Construction Company irregularly subcontracted engineering projects undertaken,
involving contract amounts of 2.406 billion yuan, of which 372 million yuan occurred in 2013.
(6) In 2007, 3 projects including the UHV test base carried out by its affiliated China Electric
Power Research Institute, started construction without obtaining state-owned land use permits and
other licenses, involving an amount of 1.219 billion yuan.
(7) SGCC’s "Three Gorges-Shanghai HVDC Transmission Project" was completed in 2006 and
put into operation; the project had a cumulative expenditure of 6.805 billion yuan, but as of the
end of 2013, the completion final account had yet to be carried out.
(8) From 2005 to 2013, 19 of its affiliated units including Jiangsu Power in the procurement of
goods and services, failed to conduct tender or failed to conduct open tender in accordance with
provisions, involving contract amounts of 3.371 billion yuan, of which 121 million yuan occurred
in 2013.
(9) In 2009, its affiliated Jiangsu Power, in the wire type material procurement tender process,
irregularly allowed all 10 companies participating in the tender to win bids, involving contract
amounts of 1.012 billion yuan.
(10) From 2011 to 2013, its affiliated Xinjiang Electric Power Company and Henan Power were
lax in examining the qualification of bidders, resulting in unqualified bidders winning bids,
involving contract amounts of 298 million yuan.
(11) In October 2011, SGCC in the acquisition of office space, in accordance with the commercial
residential housing sale and purchase agreement signed with the developer, and knowing that 7
real estate units failed to obtain commercial residential housing presale permits, still purchased
6,034.67 square meters of housing, totaling 415 million yuan. As of July 2014, due to failure of
the developer to obtain initial registration of housing ownership, SGCC was unable to obtain proof
of ownership of the above property, and failed to collect 150 million yuan in liquidated damages
receivable.
(12) In June 2011, its affiliated CET Shandong Electrical Equipment Co., Ltd. purchased 1520.77
mu (101.38 hectares) of land for construction of an electrical equipment industrial park. According
to the land transfer agreement, construction project on the land parcel should start before May
2012 and be completed by November 2013. As of June 2014, as some projects in the electrical
equipment industrial park failed to be built, causing 916.62 mu (61.108 hectares) of land being
idle, involving 264 million yuan of land charges.
(13) In 2012, Yingda Group invested 2.1 billion yuan in China General Nuclear Industry
Investment Fund (Phase II, with a total scale of 3 billion yuan) .The fund managers investment
committee decided to use 1.5 billion yuan and together with another company, jointly set up 5
joint ventures, wherein 2 of the joint ventures were to contribute 608 million yuan and 418 million
yuan respectively, and had already contributed 248 million yuan and 171 million yuan respectively
during the first phase. The above decision by the fund managers exceeded their limit of authority
whereby cumulative total investment in the same target project shall not exceed 300 million yuan.
Yingda Group exercised poor control over the investment decision process and failed to take
appropriate measures.
(14) In 2010, its affiliated Pinggao Group Co., Ltd., without obtaining a complete and effective
asset inventory list, and without conducting appropriate audit procedures, wrote off raw materials,
finished goods in inventory and other non-performing assets and corresponding tax withholdings,
totaling 250 million yuan.
(15) From 2010 to 2013, 3 of its affiliated units including Shanghai Power irregularly distributed
155 million yuan of subsidies through their sponsored collective enterprises.
(16) Among the information systems currently used by SGCC head office and its 27 affiliated
provincial power companies, 2 information systems failed to timely apply for information system
protection level rating.
(17) As of the end of June 2014, SGCC head office had 897 research projects under its
management, with a total budget of 12.43 billion yuan, of which 271 projects were overdue and
failed to carry out acceptance, involving budget amounts of 5.785 billion yuan, accounting for
46.54% of the total budget amount.
(B) Development potential.
1. From 2010 to 2013, its affiliated Yingda Media Investment Group Co., Ltd. invested in equity
of 3 media enterprises including Shanghai First Financial Media Co., Ltd., with a total investment
of 295 million yuan, of which 250 million yuan occurred in 2013. The above mentioned non-core
business investments failed to be reported to the SASAC for approval.
2. In 2012, its affiliated Shanghai Power invested 186 million yuan to acquire the entire share
capital of Shanghai Xinguang Investment Co., Ltd., thus indirectly holding a 34% stake in
Shanghai Development Real Estate Co., Ltd. (developer of the Shanghai One Lujiazui Building
project). The above activity is a non-core business investment, and failed to be submitted to the
SASAC for approval.
3. From 2010 to 2011, the International Company’s affiliated SGCC International Development
Co., Ltd. subscribed to 3 initial public offerings (IPO) of H shares as a cornerstone investor, but
failed to submit to SASAC for approval, involving 1.021 billion Hong Kong dollars (equivalent to
RMB 810 million yuan) of subscription.
4. In 2014, the International Company’s affiliated SGCC Brazil Holding Company (hereinafter
referred to as the Brazil Company) invested 30.18 million Brazilian Real (equivalent to RMB
83.36 million yuan) to set up a project company in Brazil to acquire the assets of the Brazil Sports
Center, with Shandong Power’s Luneng Sports Culture Branch Company responsible for the
follow-up operational management. Delivery of assets of the Brazil Sports Center was completed
in April 2014. The said offshore non-core business investment failed to be submitted to the
SASAC for approval.
5. In 2011, its affiliated Brazil Company invested 209 million Brazilian Real (equivalent to RMB
838 million yuan) to acquire an office building in Rio de Janeiro, with a floor space of 14,114
square meters, of which units within the SGCC system (including Brazil Company) occupied
6,676 square meters. The said offshore investment failed to be submitted to the SASAC for
approval.
6. From 2011 to 2013, 6 of its affiliated provincial power companies including Jiangsu, Shandong,
etc., irregularly connected to the grid 13 power generation enterprises which had not obtained
power generation business permits, involving 26 power generator units (of which 17 generator
units were built without approval by government authorities), 61.316 billion kwh of billed
electricity and 25.494 billion yuan of electricity charges, of which 8.301 billion yuan of electricity
charges were billed in 2013.
7. From 2007 to 2013, its affiliated Sichuan Power and its subsidiaries, in violation of SGCC’s
guarantee management measures, provided guarantees for 5 loans of its subsidiary Qimingxing
Aluminum Co., Ltd. As of the end of 2013, the guarantee balance was 814 million yuan, and
Sichuan Qimingxing Aluminum Co., Ltd. was insolvent, with 435 million yuan of overdue loans,
and the remaining loans successively becoming due. Because of joint and several liabilities,
Sichuan Power faces the risk of assuming obligations.
(C) Business integrity.
1. In 2013, SGCC’s 11 leadership team members received holiday subsidies totaling 220,000 yuan
above and beyond total compensation authorized by SASAC.
2. Mid-level and higher management staff of some affiliated enterprises irregularly held shares
and profited there from. (i) From 2008 to 2013, some mid-level and higher management staff of its
affiliated Sichuan Power failed to close out equity held in ESOPs in accordance with provisions,
instead through transferring shares held personally or by relatives to others to be held on their
behalf, continued to hold shares in disguise and collected 45.0737 million yuan in dividends. (ii)
In 2009, its affiliated Jiangsu Power received 121 million yuan of dividends from Suyuan Group
Co., Ltd. returned by 209 mid-level and higher management staff. In 2010, Jiangsu Power’s Party
committee decided to use that money to arrange for personal five-year CD’s for the
above-mentioned 209 staff.
3. In 2013, its affiliated Zhejiang Province Power Company’s business hospitality fees were
2.7106 million yuan over budget, and conference fees were 1.1779 million yuan over budget.
III. Rectification of Issues Found in Audits of Previous Years
The CNAO’s audits of SGCC since 2005 found issues of inaccuracies in some financial
accounting, failure to strictly implement electricity pricing policies, under-collecting captive
power plant governmental funds and surcharges, project bidding irregularities, weaknesses in
internal management of funds and assets, etc. Of which, in 2013 and 2014, CNAO made public
announcements respectively regarding issues found in the audit on the Three Gorges power
transmission project completion final account and the audit on the West-East power transmission
project. The current audit found that similar issues still exist, and a few issues failed to be fully
rectified.
IV. Audit Measures and Rectification
With respect to the audit findings, the CNAO in accordance with law has submitted an audit report
and issued audit decisions. SGCC will announce the specifics of its rectification to the public.
Leads to suspected economic violations of law and discipline found in the audit have been
transferred to relevant departments for further investigation.