* Sinopec upfront about corruption in blunt 2012 memo
* Rival PetroChina and parent CNPC now in spotlight
* Corruption not just confined to energy sector
* Focus on engineering, procurement and construction
By Charlie Zhu
HONG KONG, Sept 27 In March last year, after
getting government approval to go ahead with a $900 million
refinery expansion in China's southeastern Fujian province,
state-run oil giant Sinopec Corp warned the team
handling the project against taking bribes.
"Project engineering and construction has been a main area
for corruption at Sinopec," the Fujian unit of Asia's largest
refiner said in a blunt memo, according to a Sinopec source who
read it to Reuters. "All members, especially those in key posts,
must treasure their positions, stay guarded and resist
The memo underscores what experts say is one of the biggest
challenges facing President Xi Jinping and his drive to tackle
corruption - rampant graft in engineering, procurement and
construction contracts awarded by state firms.
Graft in the state sector has been acknowledged before but
shot to the headlines recently when authorities stunned the
energy industry with an investigation into five former senior
executives at state-run oil and gas behemoth PetroChina
and its parent firm China National Petroleum Corp.
That investigation has raised questions about how far Xi
will go to root out graft in an industry that ranks as one of
the most powerful corners of the state-owned corporate sector.
Virtually all senior officials at state firms are members of
the ruling Communist Party, whose power is largely unchecked.
And there is a lot of money on the table.
According to the European Union Chamber of Commerce in
China, state enterprises issued tenders for goods and services
worth 9.26 trillion yuan ($1.51 trillion) in 2011.
It's not clear how much of this was for engineering,
procurement and construction contracts, commonly referred to as
EPCs in the industry. Nor are there any figures for graft
investigations into EPC contracts.
But China's petrochemical engineering market should be worth
$40 billion by 2016 alone, according to industry data. China is
also investing $65-$80 billion between 2012 and 2016 to expand
its oil refining capacity.
"It's inevitable to have the corruption problem because of
the high concentration of power at the top," Chen Weidong, chief
energy researcher at CNOOC Group, parent of Chinese offshore oil
giant CNOOC Ltd, said of graft in tenders for energy
EPC contracts in China.
"They hold public tenders for projects but the process of
choosing winning bids is not open."
EX-RAILWAYS MINISTER CONVICTED
China has taken steps to curb graft in public procurement.
It passed laws in the early 2000s requiring tenders for
state-funded projects with an estimated construction contract
value of more than two million yuan or where the purchase of
equipment would exceed one million yuan.
It has also sought to improve transparency with online
platforms for purchases, although this cannot always be used
because not all local governments or state entities have the
system and a unified national procurement programme has yet to
But industry officials and analysts say the process is still
riddled with graft partly because China's rapid economic growth
has fuelled a surge in fixed asset investment by the government
and state firms that has often escaped proper oversight.
They say officials at state firms involved in tendering
often accept bribes to award contracts or select companies run
by relatives or friends. Irregularities include splitting a
major project into pieces to dodge the tender process, they add.
One recent example was former railways minister Liu Zhijun,
who was given a suspended death sentence this year for graft.
Liu was found to have helped 11 people win railway contracts or
get promotions in return for 64.6 million yuan in bribes between
1986 and 2011, official media said.
The party's top graft buster, the Central Commission for
Discipline Inspection, last week called for an overhaul of how
transactions take place for public resources - such as
procurement and land transfers.
It gave no details and did not explain what prompted the
commentary on its website, although it referred to the
anti-corruption campaign Xi launched when he became party chief
Officials from the commission or the agency overseeing major
state-owned enterprises could not be reached for comment.
FIRST SINOPEC, NOW PETROCHINA
Sinopec vowed to step up its fight against graft after
former chairman Chen Tonghai was given a suspended death
sentence in 2009 for taking $32 million in bribes.
It has been relatively open about the problem - part of the
2012 memo was cited in a report posted on its website, including
the following quote: "The number of major corruption cases at
Sinopec has been on the rise, especially in the area of project
tendering, contracting and sub-contracting and procurement."
Sinopec did not respond to a request for comment.
Its refinery expansion is taking place at a $6.5 billion
refinery and petrochemical complex run jointly with Saudi Aramco
and Exxon Mobil. The project is scheduled to be
completed by the end of this year. There have been no public
reports of any irregularities.
The focus, instead, is on PetroChina after the government in
late August and early September said several of its former
senior executives were being investigated for "serious
discipline violations" - shorthand used to describe graft.
No details of the investigation have been released.
PetroChina also did not respond to a request for comment.
Similarly, Chinese authorities have released no details
about a probe into Wison Engineering Services Co Ltd,
a private contractor whose major customer in recent years has
"Public procurement corruption is not limited to energy. It
is across the board," said Lin Boqiang, director of the China
Centre of Energy Economics at Xiamen University in Fujian and an
adviser to China's National Energy Administration.
"The energy sector gets more attention as the projects they
build are mostly huge."
EU CRITICAL OF CHINA PUBLIC PROCUREMENT
The European Union has criticised China for the murkiness of
its public procurement and has called for a further opening of
the market to foreign players.
"The bidding process ... still cannot be fully executed
online, which inhibits optimal information sharing and
transparency of the various entities' processes," the EU said in
its 2013/14 annual China position paper.
To try to address some of the concerns, China's Finance
Ministry is developing a nationwide government procurement
system that will have a shared database and more e-commerce
related functions to enable online bid appraisal and payments.
Still, some industry insiders don't believe a clean system
will emerge anytime soon in the absence of a transparent
"Some of the tenders are conducted behind the curtain," said
a Chinese oil industry official with knowledge of the public
procurement process in the energy sector.
"It is not about whether there are rules and regulations.
It's about implementation."