China’s private infra push a signal to foreigners

The country’s economic slowdown has prompted the government to look to private sources for a third of its infra funding, but it’s unlikely to meet that target.

In order to meet the demands of the $1.5 trillion in infrastructure investment needed, China’s government has begun to turn to private investors, especially foreign ones. At this point, however, the international market is viewing China’s steps as more a positive signal than an actual change in the status quo, market sources indicated to Infrastructure Investor.

In 2011, China’s 12th Five-Year Plan estimated that the Communist country would need $1.5 trillion in infrastructure investment before 2015. An estimate based on that plan predicts that private capital will have to make up about one-third of that, according to Ben Way, senior managing director of Macquarie Infrastructure and Real Assets.

Although that ambitious goal got mouths watering, manager at OC&C Strategy Consultants Henry Stannard told Infrastructure Investor that the country is unlikely to meet that target.

“It was really a big sign to the market, more of a signal to foreign investors,” Stannard said. China has basically shown that it wants to attract foreign investors who are interested in long-term investment, but so far he hasn’t seen much increase, and for now expects domestic private companies will do most of the heavy lifting.

The Chinese government, which historically controlled most infrastructure in the country, has turned to private funding after realising demand exceeded its own funds, according to a domestic infrastructure asset manager. With the economy slowing down, China’s tax revenue has been decreasing, and recently domestic campaigns have been pushing to decrease public spending.

In order to maintain the scale of infrastructure it wants, however, the Chinese government needs a “huge budget”, the domestic asset manager explained. The answer, then, is non-government sources of funding. The domestic manager has actually found local governments to be less and less concerned with where the money is coming from.

The problem that foreign private players will face in China, Stannard added, is that the Chinese state has been a “premier-league infrastructure investor” for so long, it has already put a vast amount of capital to work in the best projects for years. Several foreign investors – especially the Canadians and French – have been looking diligently for projects and so far haven’t invested in any, according to Stannard.

“From a private investor’s perspective, everything that would give returns has already been done,” Stannard said. Since foreign investors can no longer be “rewarded for just having capital”, they need to bring in good expertise and select projects that have the right control mechanisms and a higher guarantee of return.

“The government is really looking for whether you’re willing to put your best people out there,” Stannard added. What China most wants from foreign investors is not capital, but skills and capability that it has not developed domestically, he explained.

Yet Vincent Ko, chief executive of Singapore’s Keppel Telecommunications & Transportation China business unit, insisted that breaking into Chinese infrastructure will not be impossible, adding that local governments will be “instrumental” in the process. While he said governments will be selective in their partners, he highlighted Keppel was recently able to close an RMB 166 million (€21 million; $27 million) port deal with the government of Guangdong.