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China’s contractors and investors eye British infrastructure projects and seek UK firms for JVs

China’s biggest contractors have visited UK construction sites as they look for ways into the UK market – including joint ventures with British firms on the country’s largest infrastructure projects.

A number of UK construction firms have also expressed interest in exploring tie-ups with Chinese contractors and are due to visit China this summer.

Construction advisers said the Chinese investment stream would mean a steady flow of work for UK firms, with the potential to form partnerships with state-owned Chinese contractors with hefty balance sheets that can also open doors to other overseas markets.

Chinese investment would also go some way to tackling construction risk – a central barrier for UK pension fund investment – both in terms of forward funding by state-backed Chinese contractors and shoring up the credit ratings of projects to entice institutional investment.

International law firm Pinsent Masons hosted a delegation from the China International Contractors Association at the end of 2012. CHINCA includes major contractors such as CITIC Group, which visited several UK sites including London 2012 Olympics venues.

State-backed CHINCA boasts 3,000 members, is the most powerful construction group in China and the country’s portal to overseas work; Chinese firms wishing to operate overseas must be a CHINCA member and acquire a licence for foreign work.

The 20-strong delegation included the Industrial and Commercial Bank of China and the China Investment Corporation, the sovereign wealth fund that has bought stakes in Thames Water and Heathrow Airport.

The visits have taken place against the backdrop of inward investment agreements and memorandums of understanding between the UK and the Chinese in 2011, when prime minister David Cameron spoke of how the UK “has the goods and services, experience and skills to match China’s ambition to move up the value chain”.

The UK government wants to invest £400 billion in Britain’s infrastructure by 2020 under the National Infrastructure Plan and would welcome Chinese input.

The Chinese state delegation had a particular interest in the £4.1bn Thames Tideway Tunnel ‘super sewer’. There were also discussions around UK labour laws, design standards, construction costs, the bidding process, how to win jobs and the idiosyncrasies of the local market.

Pinsent Masons told CN that any joint ventures would be heavily weighted towards UK companies, with Chinese firms looking to them to lead, but with a view to “technology transfer” that would take skills and knowledge back to China.

Chinese investors and contractors are also likely to want to use Chinese materials and supplies, equipment and kit, and potentially technology.

Pinsent Masons global business consultant Graham Robinson said debt funding was crucial. Chinese institutions want to make more investments backed by currency reserves now worth $3.3 trillion.

“Investment is seen as a point of entry into the market,” said Mr Robinson, whose firm has worked with CHINCA for 15 years.

“The fact that China has invested in Thames Water, the fact that it has now invested in airports – it’s another signal to the market of strategic infrastructure stakes, and that they do view the UK market as an attractive market because it’s got meaty projects coming up.

“What I don’t think they will be doing is building stuff on the ground; they’ll be managing and learning.”

He said the move should be seen not as a threat but as an opportunity, one which can open up funding streams and a long-term workflow here and abroad. He also said it represented an “exciting challenge” for UK firms to manage an international supply chain.

Matthew Walker, associate director of global infrastructure, China markets at KPMG, which co-hosted CHINCA, said there has been a general trend by Chinese firms to move up the value chain as margins tighten in third-world countries.

That has led to moves into the Middle East and America along with interest in PPP markets, with the UK an “extension of that”.

Mr Walker said the timing of entry will depend on when major projects come on line, but said “some [Chinese contractors] would be interested in taking a JV approach”.

“The Chinese can bring liquidity and an alternative financing solution which, once it gets going and the UK has worked out how to tap that finance stream, will be very important for driving projects forward.”

But he added: “Chinese banks, particularly development banks, like to see substantial Chinese involvement in projects. The question is: if you want to have access to Chinese debt and finance, what’s the best way to get the Chinese involved? That comes back to tie-ups.”

Thames Tideway Tunnel chief Phil Stride said his team had been engaging with the markets in the UK, Europe and China as they seek investors and contractors.

He told CN that Chinese contractors have expressed interest in UK work but had not had discussions on the Thames Tideway.

Skanska chief financial controller Roger Bayliss, who worked in Hong Kong and China for 10 years before becoming BAA’s construction director, pointed to Chinese cladding work on the Cheesegrater.

“The reality is that [UK construction] has been using Chinese suppliers for some time. What people have now started to talk about is will the contractors themselves come over here?”

Projects of Chinese interest:

Rail: Crossrail 2 and High Speed 2 are being mooted by investment specialists as potential targets.

Water: The Thames Tideway Tunnel super sewer is said to be of particular interest. China Investment Corporation owns 9 per cent of Thames Water.

Roads: Potential road privatisation has led investment consultants to believe there is Chinese interest here, along with UK consortia and French and Spanish firms. Chinese companies have already bid for roads in Europe.

Commercial: State-backed fund Gingko Tree is understood to have taken a 49 per cent stake in £142m Co-op Manchester headquarters, while Chinese skyscraper specialist Yuanda secured a £300m cladding contract on the Cheesegrater.

Nuclear: China Guangdong Nuclear Power Corp has already held talks with EDF over a proposed partnership after the exit of Centrica from new nuclear projects.

Aviation: CIC has taken a 10 per cent stake in Heathrow Airport, which it bought from Spanish giant Ferrovial. Aviation is seen as a major long-term asset of attraction to the Chinese.

Readers' comments (1)

  • An interesting viewpoint. The construction industry and its supply chain must indeed move with the times, but it is critical that the procurement process for Government infrastructure projects recognises the benefits to the UK economy of UK-based firms carrying out the work. These benefits range from quality and health and safety, to sustainability and economic advantages for the industry and for the UK more broadly.

    Based on the multiplier effect, the National Infrastructure Plan could provide a boost to the UK economy of more than £100bn, but economic benefit of this scale won’t be seen if UK firms are sidelined. It is likely that such investors will bring their own supply chain with them. If UK firms don’t play a major part in infrastructure delivery, parts of the construction industry and its supply chain could be decimated. The BCSA’s campaign is raising awareness of just this issue.

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