Governance generally has three dimensions: policymaking, governance, and regulation, and this discussion also applies to energy governance. In China, energy policymaking is centralized at the top leadership level, but the process of formulating it involves a wide range of actors in a pyramid structure that is a key feature of decision-making in this country. Different ministries and institutions with diverse and sometimes conflicting economic and social functions are all involved in key stages of the energy policymaking chain, which has led to increasing complexity and fragmentation in energy governance.
The establishment and rapid growth of state-owned enterprises began in the 1950s, after the Communist Party came to power. Through the nationalization and expropriation of companies and assets originally owned by capitalists and foreign investors, state-owned enterprises quickly came to dominate all aspects of the Chinese economy, and they continued to dominate for several decades under the planned economy. This process continued until 1978, when most Chinese companies were state-owned, which led to them being run through administrative means and under a unified, collective-based management system, and were ranked according to the relevant level of government, the size of the company, and its affiliation. The managers of these companies did not enjoy independence in business activities and could not benefit from the profits made from successful business operations, so they had no incentive to improve business management. Since the independence of managers and their administrative ranks depended largely on the size and economic resources of the company, managers tended to expand the size of the company while paying little attention to its business performance. In the same year, with the reforms implemented by the National Congress of the Communist Party of China, which stipulated the revitalization of state-owned enterprises and increasing their productivity and efficiency through structural redesign, the situation changed and the reform of the management mechanism of state-owned enterprises began.
Since 1987, reforming the operating mechanism of state-owned enterprises has become one of the top priorities of the reform of these enterprises. Based on the principle of separation of ownership and management, fundamental changes were made in the business operating models of state-owned enterprises and a system based on contractual liability was established. In December 1993, China passed the Enterprise Law, defining its basic economic system in such a way that state ownership is recognized as its main feature, while various forms of management are developed jointly, thereby laying the foundation for the formation and implementation of corporate governance in Chinese state-owned enterprises. China’s approach to corporate governance is different. China has developed a unique form of governance for both state-owned enterprises and its independent enterprises. In the early stages of market-oriented reforms, ideas were borrowed from the experience of Western countries, which were encouraged by the World Bank and the Organization for Economic Cooperation and Development. But over the past 20 years, China has developed its own form of corporate governance, befitting a country where the law, judiciary, and courts serve the state and are not, as in most democracies, an independent check on the legislature. Moreover, China’s corporate governance has become a fluid learning system, rather than the set of rules, regulations, and voluntary codes that are common in many other countries.
Looking at the governing institutions in China’s energy governance, this trend can be seen in the establishment of the Ministry of Petroleum Industry as the energy affairs body in 1978. Then, in 1980, the National Energy Commission was established to comprehensively manage the oil, coal, and electricity industries. Two years later, this merger was abolished and the Ministry of Petroleum Industry was re-established. In 1988, the State Council established the Ministry of Energy as the authority for managing the oil industry in its institutional restructuring. In 1998, the Petroleum and Chemical Industry Administration was established under the State Economic and Trade Commission instead of the Ministry of Energy, and of course, this administration was also abolished in 2001. In 2003, the Energy Bureau was established as the predecessor of the National Energy Administration. In 2008, the National Development and Reform Commission launched the National Energy Administration. In 2010, the State Council established the National Energy Commission to be responsible for strategic decisions and overall coordination of the energy sector.
As is clear, China’s institutional structure has been constantly changing and reforming to meet the country’s new conditions. Changes in the institutional frameworks of China’s energy sector depend on the development of markets. These frameworks have been affected by the transition from the integrated relationship between the government and companies under China’s planned economy to a market-based system. Of course, the strengthening of the party’s control over the government through constitutional amendments has also shaped energy governance in China. Changes in the institutional structure of China’s energy governance over the past four decades have changed the functions of these institutions in line with changing conditions, and have made the need for data and analysis updates for other countries that are China’s partners in this sector more important.
By examining energy governance in China, we reach the following points:
1- The existence of a gradual approach in China has been able to smooth the path of separating the duties of policymaking, regulation, and governance, and such separation has occurred over a long period, which has led to an improvement in the quality of governance in the country’s energy sector.
Lessons learned for Iran: The lack of sufficient separation between the three aforementioned areas in Iran is one of the main challenges of energy governance. Following China’s gradual approach in separating tasks and creating specialized institutions for each sector could pave the way for reforms in Iran.
2- In the Chinese governance system, regulatory institutions have a special place in the energy governance structure, and due attention has been paid to the role and function of these institutions as intermediary institutions for energy policy-making and responsible for implementing affairs.
Lessons learned for Iran: In Iran, strong and independent regulatory institutions, especially for regulating relations and financial affairs in industries, have a weak presence. As a suggestion, the creation of an advisory regulatory institution could help the proper functioning of the energy sector.
3- China had a fragmented energy structure in the past, which caused delays in decision-making and uncoordinated implementation, but this fragmented energy structure was gradually reformed and the National Energy Commission was formed for overall coordination.
Lessons learned for Iran: The Iranian Ministry of Oil could be strengthened by creating an independent central agency, such as the National Energy Administration, to oversee the entire oil chain (from exploration to distribution). This would reduce fragmentation between the National Iranian Oil Company, the Ministry of Energy, and the Environmental Protection Agency.
4- As mentioned, China’s reforms of the 1990s targeted commercialization, and to prevent monopolies and enhance competitiveness, the State-owned Assets Supervision and Administration Commission was established to control ownership.
Lessons learned for Iran: The Ministry of Oil, as the custodian of Iran’s oil industry, could use the Chinese model to separate ownership from management and create an institution like the China State-owned Assets Supervision and Administration Commission to oversee the four subsidiaries of the Ministry of Oil, which are the most important state-owned companies in Iran in terms of revenue and expenditure, to increase competition, facilitate private sector entry, and prevent corruption.
In summary, a review of the evolution of energy governance in China shows that over four decades, by adopting a gradual and flexible approach, the country has been able to shift its energy structures from a fully state-owned and centralized system to a hybrid and efficient model with a relative separation of policymaking, regulatory, and entrepreneurial functions. China’s experience shows that the establishment of specialized institutions, strengthening independent regulation, establishing coordinating agencies at the national level, and separating ownership from management in state-owned enterprises have played a decisive role in improving efficiency, reducing monopolies, increasing competitiveness, and speeding up decision-making. These reforms, which have occurred in the context of structural, economic, and legal changes, also bring important lessons for Iran: from the necessity of gradually reforming energy governance and eliminating functional overlap between institutions, to the necessity of establishing independent regulators and strengthening coordination between relevant agencies. The Chinese model shows that reforms should be carried out according to local conditions, but with a strategic and continuous perspective, so that they can lead to increased efficiency in the energy sector and improved governance at the national level.
Resources:
OECD (2011), “The corporate governance framework in China”, in Corporate Governance of Listed Companies in China: Self-Assessment by the China Securities Regulatory Commission, OECD Publishing, Paris.
Chen, D., Mollet, P., & Efird, B. (2019). Energy Governance in China: The Structures and Processes of Government Decision-Making. King Abdullah Petroleum Studies and Research Center.
Tricker, Bob and Li, Gregg.(2019) Understanding Corporate Governance in China, Hong Kong: Hong Kong University Press.
Liang, N. and Useem, M. (2009). Corporate Governance in China, in Handbook of international corporate governance, Institute of Directors, United Kingdom, pp.167-175.
Wang, JiangYu,(2014), The Political Logic of Corporate Governance in China’s State-Owned Enterprises. Cornell International Law Journal, Vol. 47, No. 3.