Chinese money flows into UK

Chinese companies are increasingly investing in the United Kingdom's infrastructure sector, with the potential to invest 105 billion pounds ($170 billion) in the energy, property and transport sectors by 2025.

A report released in October by the UK law firm Pinsent Masons and the Centre for Economics and Business Research in London comes at a time when there is a yawning gap between the UK's current infrastructure needs and the UK government's planned investment.

The National Infrastructure Plan drawn up by the UK government identified close to 400 billion pounds of investments that need to be made through 2020, though the report identified real infrastructure needs to be closer to 500 billion pounds.

In the years following the outbreak of the global financial crisis, Chinese companies and sovereign wealth funds have invested in UK infrastructure projects as financial investors.

In 2012, China Investment Corp, the country's sovereign wealth fund, bought an 8.68 percent stake in Thames Water Utilities Ltd and a 10 percent stake in Heathrow Airport Holdings. In 2011, Cheung Kong Infrastructure Holdings purchased the UK utility company Northumbrian Water for 2.4 billion pounds.

But since then, Chinese companies have changed course and are now bidding for contracts to use the UK's infrastructure sector as a springboard to demonstrate their technical expertise and expand globally.

Opportunities

Nuclear energy, high-speed rail and commercial business parks are all important areas in which Chinese investors are seeking investment projects.

Two Chinese nuclear power companies have reached an agreement to invest in the UK's first nuclear power stations over the next two decades.

The two planned reactors are at Hinkley Point C in Somerset. Led by France's EDF Group, the pair of reactors will cost 14 billion pounds. China General Nuclear Power Group and China National Nuclear Corp are expected to have a combined 30 to 40 percent stake in the consortium, with Areva taking another 10 percent.

Another high profile project is the HS2, the UK's highspeed rail network plan that has attracted Chinese interest, although the bidding process for the project has yet to begin. The first phase of construction should last from 2017 to 2026. The first train services will run between London and Birmingham from 2026.

"As for nuclear power and high-speed railways, China's technology and experience are abundant. China can prove its strength in both fields by taking part in the UK projects," says Zhou Xiaoming, minister counselor with the economic and commercial office at the Chinese embassy in London.

"In such projects, China's expertise is building them quickly and maintaining quality."

In addition to energy and transport projects, many Chinese real estate and construction companies have invested heavily as both investors and contractors in greenfield and redevelopment projects in the UK.

Beijing Construction Engineering Group's 800 million pound investment in the Airport City Manchester project is one such high-profile project. The Chinese construction company will take on a 50-50 split of the project's construction with UK construction company Carillion.

Another is the Chinese developer Advanced Business Park's $1.51 billion project to transform 14 hectares of the historic Royal Albert Dock in London into an office complex over the next decade.

Alongside these large-scale infrastructure investments from China, many Chinese construction companies, project design companies and supply-chain related companies plan to grow into the UK.

These include China Building Technique Group Co, a construction company that is a subsidiary of the China Academy of Building Research Architectural Design Institute, known to champion innovative building methods.

Another is CIMC Modular Building Systems, which supplies modular building units to UK projects.

Before the Labour Party came into power in 1997, most UK infrastructure projects were funded by the government. Since then, however, there has been greater demand on the central and local governments to find private sector money for projects, says Julia Court, co-head of construction at the law firm King & Wood Mallesons.

This trend accelerated after the 2008 recession, when there was greater pressure on public sector spending in the UK. This coincided with China's emergence on the international scene as an investor, Court says.

With the UK government recognizing the important role Chinese investors could potentially play in the nation's infrastructure sector, UK Trade and Investment has been active in China promoting these opportunities to Chinese investors.

Court says the UK's infrastructure sector is an attractive investment target because of its relative stability and long-term sustainable returns. On average, the returns for both public sector utility infrastructure and private sector infrastructure projects range between 8 and 15 percent.

The returns for greenfield projects, which are new construction projects, are likely to be higher because of the risks associated with building a new project.

Court says investors in UK infrastructure include pension funds, private equity, sovereign wealth funds, individual investors and more recently construction companies.

Traditionally, construction companies only focused on the construction aspect of a project, which generates returns of about 4-5 percent. But in the past 20-30 years, they have become investors in UK infrastructure. By becoming the financial investors in a project, construction companies can maximize their returns.

Challenges ahead

Despite great potential for Chinese investment in UK infrastructure, challenges still persist, one of them being a negative perception of Chinese investment, especially in the nuclear sector.

Last year, Mark Pritchard, an MP and a member of the UK's Joint Committee on the National Security Strategy, was quoted by the Financial Times as saying that Chinese companies should take only a "minor" role in sensitive sectors such as energy.

Encouragingly, the UK government has dismissed these doubts and fears about Chinese nuclear companies and have given them a level playing field to compete against other international nuclear companies for UK projects.

Ed Davey, British minister for energy and climate change, said in a previous interview with China Daily that Britain's energy market is completely open to Chinese investors both as minority and majority investors.

Tony Ward, UK head of power and utilities at EY, a global consultancy, says there is an international lack of confidence in Chinese nuclear technology, although there is no evidence to support that concern. This is a challenge the Chinese need to overcome by proving themselves step by step in international projects, he says.

"There is a perception internationally that the ability to build complicated reactors in China might be a consequence of corners being cut somewhere. There is no evidence of that."

Another challenge is Chinese companies' lack of understanding of the regulatory system within the UK infrastructure sector, says Richard Laudy, head of infrastructure at Pinsent Masons, an international law firm.

Laudy says bidding companies have to supply a large amount of information in a timely manner and in a structured format to satisfy the needs of the UK infrastructure procurement process.

"The challenge is understanding how the process works. Challenges range from labor market regulations, to the planning process and how to operate within the framework of EU regulations," Laudy says.

Investors bid competitively for UK infrastructure projects, meaning each company or consortium submits a separate application.

Fact file

-- From 2014 to 2025, a total of 105 billion pounds ($170 billion) of Chinese investment could flow into UK infrastructure and real estate sectors, including 43.5 billion pounds into energy infrastructure, 19 billion pounds into transport and other infrastructure, and 36 billion pounds into real estate.

-- Chronic under-investment in the UK has created an infrastructure need of about 500 billion pounds, more than the 383 billion pounds called for in the UK's National Infrastructure Plan.

-- China's economy is forecast to become the world's largest by 2030. Chinese savings are expected to reach $12 trillion in the coming decade, representing more than 30 percent of global savings.

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