State Grid grows presence in Chile with CGE purchase

Lawmakers question State Grid’s acquisition, set to be approved in February, as the debate about foreign state-owned companies resurfaces

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Chile State Grid

Power transmission towers in Chile's Atacama desert (image: Alamy)

In November 2020, Chinese state-owned company State Grid announced that it would buy Chilean electricity distributor CGE for over US$3 billion. The Chilean government will likely approve the deal in February despite concerns over foreign control of what is considered an industry of strategic importance for national development.

US$3 billion

The amount State Grid will pay for CGE

Ricardo Riesco, director of the Public Prosecutor's Office, which is in charge of reviewing the deal, told a congressional economic commission that he only has legal power to stop the deal if it is deemed to interfere with the "promotion, defence and protection of free competition”.

Riesco can approve the purchase as proposed, approve with certain conditions, or reject it outright. So far, of 135 agreements supervised by the Public Prosecutor's Office, 120 have been approved, 12 approved with conditions and 3 rejected, suggesting that the chances of total rejection are slim.

This is not the first time that State Grid has invested in Chile. In early 2020, it bought Chilquinta, another local electricity distributor, for over US$2 billion. China Southern Power Grid, which owns 30% of local transmission firm Transelec, Italy's Enel and Canada's Brookfield also submitted bids. 

If the purchase of CGE goes through, State Grid would own two of Chile's four largest electricity distributors and serve 57% of the country's consumers. It would cover the entire network in the north of the country, where a large part of Chile’s mines are located, and the regions of Biobío, Maule and O'Higgins in the centre-south.

Socialist MP Jaime Naranjo, who chairs the Economy Committee of the Lower House and is one of the main opponents of the deal, has expressed concern about the "concentration" of Chinese companies in strategic sectors.

Naranjo is part of a cross-party group that presented a bill aimed at regulating and raising the standards for foreign state-owned companies seeking to invest in Chile. If approved, these investments will have to be approved by two-thirds of Congress. 

State Grid’s investment strategy in Chile

In addition to the purchase of CGE, State Grid and other Chinese companies have expanded their influence in the Latin American energy sector in recent years. 

While State Grid has investments in Brazil worth US$12.4 billion - some 60% of the company's investments outside China - Three Gorges, another Chinese state-owned company, operates 17 hydroelectric plants and 11 wind farms across Bolivia, Brazil, Chile and Ecuador. 

For Fernando Reyes, director of the Latin American Centre for China Studies at Andrés Bello University, the purchase of CGE by State Grid is consistent with China's current foreign investment policy which focuses on energy, telecommunications and digital networks.

"This also responds to the policy that Chile has had for years, promoted by both former President Michelle Bachelet and current President Sebastián Piñera, of encouraging Chinese investment in the country," says Reyes, who is also a former Chilean ambassador to China.

One prior, controversial example of a Chinese company gaining a new foothold in Chile was Tianqi’s  2019 purchase of 24% of the Chilean company SQM. Tianqi manages the world's largest lithium reserves and many Chileans saw the acquisition as a threat to the country’s resource sovereignty. 

Such transactions are part of a much larger investment plan, according to Yun Tso Lee, director of the Center for International Relations Studies at the Universidad del Desarrollo. "China has to invest the large profits of its companies, both state-owned and private, to obtain attractive returns. And to achieve this it goes where the investment opportunities are," he says.

What is not being understood in Chile is the true nature of state bodies in China and how, under an economic logic, they encourage companies - state-owned or semi-state-owned - to compete with each other

Yun Tso Lee says Latin America is currently experiencing a wave of investment from China that focuses on Argentina, Brazil and Chile, after first concentrating on Ecuador and Venezuela. "Investment is much more professionalised and standardised in terms of how risk is measured," he says. 

A recent analysis by Bloomberg revealed that Latin America has become a favoured location for mergers and acquisitions by Chinese companies. In 2020, transactions in the region were worth US$7.7 billion, surpassing those of Europe and the US combined. This is while global purchases by Chinese companies are at their lowest level since 2007. 

Critical infrastructure

Chilean lawmakers argue that power distribution facilities are considered critical infrastructure and use this as a basis to oppose the sale of CGE. Yet, since Chile has no law to protect this, there is little that official bodies can do to block the transaction.

Claudio Huepe, head of the Energy and Sustainable Development Center at the Diego Portales University, says that the sale could trigger a wider reflection in Chile on the role played by electricity transmission and distribution companies.

"The system is designed to be transparent with respect to ownership," explains Huepe. In Chile, the national government gives energy distribution companies contracts for different parts of the country, which means there’s no competence between each other. Prices are set by the Ministry of Energy and the National Energy Commission.

For Huerpe, it wouldn't be surprising if there were a foreign owner in the country's electricity market or if it had public functions. "The current discussion is more general. It's about whether there should be a limit to the investment that certain companies can make in certain strategic areas," he said.

Reyes says that there are fundamental issues about Chinese investment to be discussed beyond local lawmakers’ suspicions: "What is not being understood in Chile is the true nature of state bodies in China and how, under an economic logic, they encourage companies - state-owned or semi-state-owned - to compete with each other."

Yun Tso Lee says Chinese state enterprises do not take orders directly from the central government, but rather the provincial governments. One of the objections that has been raised by Chilean lawmakers since November when the purchase was announced is that CGE would end up being run by the Chinese state. 

According to Yun Tso Lee, the overseas performance of publicy-owned companies reflects back on the provincial leadership in a meritocratic way. "It is these officials who are interested in obtaining good numbers. And they do that under the logic of private enterprise and competition," says Yun Tso Lee.

Experts say there is another political aspect at work in the rejection of the sale of CGE to State Grid, one that is international in nature. Like other Latin American countries, Chile has found itself in the middle of the US-China trade war. China is Chile’s number one trade partner and a main buyer of agricultural commodities. 

Despite the change of government in the US, Tso Lee believes that anti-China sentiment that has arisen as a result of trade tensions will persist, although with nuances and in a less aggressive manner than before. "This is already in the political discourse," he says.

Officially, the Chilean government has issued assurances that the country is open to foreign investment, regardless of where it comes from, as long as it complies with regulations and free competition.