UK opens arms for Chinese deals

Updated: 2011-12-06 07:52

By Zhang Haizhou, Cecily Liu and Li Xiang (China Daily)

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LONDON / BEIJING - The United Kingdom is welcoming Chinese investment in its infrastructure sector.

"I believe Chinese companies are capable of getting involved in these opportunities," Susan Haird, deputy chief executive of UK Trade and Investment, told China Daily.

"Infrastructure investments themselves are very stable and the UK government will guarantee transparency," Haird said.

The UK government plans to invest 200 billion pounds ($312 billion) to develop the country's infrastructure in the next five years.

Hopes of persuading the private sector and foreign investors to help rebuild Britain's aging infrastructure have received encouraging signs from China Investment Corporation, China's sovereign wealth fund.

Lou Jiwei, chairman of the fund, said in a recent article in the Financial Times that his fund "is keen to team up with fund managers or participate through a public-private partnership in the UK infrastructure sector as an equity investor".

"Traditionally, Chinese involvement in overseas infrastructure projects has just been as contractors. Now Chinese investors also see a need to invest in, develop and operate projects," he wrote.

Richard Wellings of the London-based think tank Institute of Economic Affairs said UK infrastructure projects may generate good financial return for Chinese investors, but cautioned that significant policy risks exist.

"Profitability is subject to government policies, which could change a lot quicker than an infrastructural project can finish. The UK government currently gives yearly subsidies of 5.2 billion pounds to our rail system, which is out of the control of rail investors," Wellings said.

A buyout by Transport for London of private contractor Tramtrack Croydon is one example.

Tramtrack Croydon won a 99-year contract to build and maintain a tramway system in South London in 1996. But subsequent fares and ticketing policy changes forced Transport for London to pay Tramtrack Croydon yearly compensation of 4 million pounds under the terms of the contract. Transport for London bought back the project for 98 million pounds to avoid these payments.

"Chinese investors may be considering investing in UK infrastructure due to a current lack of investment opportunities with decent returns elsewhere," Wellings said.

China has a staggering $3.2 trillion worth of foreign exchange reserves. Low yields and volatile stock markets are prompting China to look for opportunities in traditionally unattractive places, creating opportunities for countries with relatively more stable currencies and regulatory schemes such as the UK.

Enterprises from the two countries are discussing dozens of infrastructure programs, the Chinese newspaper 21st Century Business Herald reported in early November.

The two countries signed a landmark Memorandum of Understanding on infrastructure in September.

"Foreign investment will increase competition in the UK's infrastructure market and drive down the cost of capital," said Stephen Glaister, director of RAC Foundation, a London-based motoring advocacy group.

He said that the UK's infrastructure needs significant long-term investments in areas such as power, water, telecom and transport systems "to replace aging assets".

While policy risks make investments in projects such as railways a challenge, they are less applicable to projects such as roads that "need to be built or maintained regardless of what happens".

Foreign investment in the UK's infrastructure is not new. EDF Energy, a subsidiary of the French company EDF Group, is the UK's largest producer of low-carbon electricity and generates around one-fifth of the UK's electricity.

China is the seventh-largest investor in the UK by number of projects, with 1,471 jobs associated with Chinese investment, according to UK Trade and Investment.

But Zhou Xiaoming, minister counselor from the economic and commercial office at the Chinese embassy in London, said it's not easy for Chinese investors to get UK infrastructure projects due to "high market-entry barriers".

It is difficult for Chinese laborers to work in the UK due to high visa requirements, he said, adding Chinese companies may lose a lot of their competitiveness if they use local workers.

Feng Pengcheng, a professor at the University of International Business and Economics in Beijing, said investing in the UK's infrastructure is a reasonable way to diversify China's mounting foreign reserves.

"The risk of investing in the infrastructure sector in developed countries is usually smaller because of the mature investment and legal environment compared with developing economies," he said.

But Feng warned that government-initiated investment schemes may raise foreign suspicions about China's motive, which could result in high market-entry barriers for Chinese investment.

"So China should allow and encourage more private enterprises to get involved in infrastructure projects in developed countries," Feng said.

China Daily

(China Daily 12/06/2011 page1)