UK infrastructure attracts Chinese company investment

Chinese companies are increasingly investing in the UK's infrastructure sector, as a way to generate long term sustainable return and also to gain valuable experience of operating infrastructure projects in mature economies.

This trend is largely enabled by the UK's mature and transparent infrastructure industry, and the country's willingness to accept foreign investment into strategically important sectors like nuclear, high speed rail, airports, utilities, amongst others.

This attitude is very different from many other European countries and makes the UK a good entry point for Chinese companies to expand into mature countries' infrastructure sector, as it allows them to establish a good track record.

Danae Kyriakopoulou, Senior Economist at the think tank Centre for Economics and Business Research, says that Chinese investment in the UK has encountered a shift towards more technology-based investment.

"Chinese companies are now using their capacity to invest abroad as an opportunity to not only make lucrative financial returns, but also to get hold of valuable know-how in terms of project management in the operation of key infrastructure and other projects," Kyriakopoulou says.

In earlier years of Chinese investment in the UK's infrastructure sector, it was common for Chinese investors to act as financial investors only. 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 bought the UK utility company Northumbrian Water for 2.4 billion pounds.

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

Beijing Construction Engineering Group's 800 million pound investment in the Airport City project in Manchester 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.

Charlie Cornish, CEO of Manchester Airport, says BCEG's international perspective made it unique in the bidding process, where different construction consortiums bid for the opportunity to build the Manchester Airport City.

"If you are a global company, you look at various construction management processes and different designs, and you're more prone to look at how you innovate approaches to meet construction standards," Cornish says.

The Manchester Airport City project is one example of infrastructure projects in England's manufacturing regions, and many more opportunities exist as the British government is currently supporting the development of the UK's ‘Northern Powerhouse' to generate growth.

When British Chancellor George Osborne visited China in September, he shared with potential investors his vision for the Northern Powerhouse and encouraged Chinese investors to look into the opportunity.

The Northern Powerhouse is a proposal to boost economic growth in the North of England particularly in the "Core Cities" of Liverpool, Manchester, Leeds and Sheffield. The proposal is based on urban agglomeration and aims to rebalance the UK economy away from London and the South East.

SerkanBahceci, head of infrastructure research at JP Morgan Asset Management, says that because the UK government has given its support to the Northern Powerhouse, it would be attractive to Chinese investors as an overall idea, although investors would still need to wait for further details about specific projects to assess risk and returns of their investment.

"At this point at the very high level it looks attractive, but we need to see more details at the asset level, and they're still waiting to be worked out. In a few months' time, they will announce asset level plans, which means the rules of investment would be set," Bahceci says.

Huw Jenkins, a project finance partner in the London office of Clifford Chance, says that Chinese investors are ideally placed to take advantage of infrastructure opportunities in the UK because they have done the ground work in developing their technological and manufacturing capabilities in key areas such as rail.

But to successfully bid for UK projects, Chinese investors still need to develop more experience in managing the life cycle costs of projects procured on a public private partnership basis, so for these projects they are well placed to partner with existing market participants who have that expertise, Jenkins says.

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.

Richard Marshall, an infrastructure analyst at BMI Research, says that the prestige of working on infrastructure projects in the UK would help Chinese companies go global.

"Reputation is a key consideration, which could see Chinese firms go for projects less profitable or popular among other construction firms, so as to seem committed to the UK market and willing to take on more challenging projects, which would win them market share and put them in good standing with project developers," Marshall says.

Another attraction is the UK's positive long term growth prospects both economically and demographically, therefore the operation of infrastructure assets over a multi-decade time horizon is extremely attractive in terms of long-term stable returns.

"As such, if Chinese investors can get into a project early on in its lifecycle and build it, its operation can either earn them a solid revenue stream, or provide the opportunity to sell the operation contract on to another infrastructure investor for substantial profit," he says.

To contact the reporter: cecily.liu@mail.chinadailyuk.com