Turning inward

“In the past 15 years, China focused on developing its coastal area, due to its export model. In the next 15 years, we can expect the central provinces to be the centre of infrastructure development, as the economy is undergoing a restructuring and a shift to domestic consumption.”

That comment from Huang Yukon, advisor to the World Bank and Asian Development Bank (ADB) and the World Bank’s former country director for China, was spoken on the sidelines of Credit Suisse’s recent Asian Investment Conference and neatly encapsulates the Chinese infrastructure opportunity going forward.

As Yukon pointed out, the need for infrastructure upgrades, especially in transportation and urban development, can now be found across China’s second- and third-tier cities, driven by the demands of a large population residing in areas with potential connectivity to Central Asia and Europe.

To facilitate private investments into infrastructure, China’s Ministry of Finance launched an ambitious PPP programme in 2013 to diversify funding sources and reduce reliance on local government financing. According to the country’s PPP Centre, 7,704 projects, worth 8.77 trillion yuan ($1.35 trillion; €1.2 trillion), have been included in the centre’s database.

These projects cover 19 industries ranging from energy and transportation to water utilities and urban construction. More than half of them are located in five inland provinces – Guizhou, Shandong, Sichuan, Henan and Xinjiang. Only 351 projects are currently being implemented, however, with 5,542 projects still at a very early stage.

Last year, the country’s National Development and Reform Commission unveiled a list of 1,043 planned projects with a total investment value of about 2 trillion yuan. Three batches of tenders have been issued to call for private sector participants.

Unlike the BOT model widely used in the past, the proposed PPP framework reduces the stake directly owned by local governments in the project companies that will build these projects. To fill that equity gap, a number of PPP funds have been established by various Chinese institutions, including banks and insurance companies, as well as local governments.

In March, a 180 billion yuan PPP fund was officially launched by the Ministry of Finance, with contributions from ten top Chinese institutions, to leverage private sector investments and lower financing costs for projects. China Construction Bank and China State Construction Engineering Corporation have also jointly set up a 100 billion yuan PPP fund. In addition, Ping An Insurance plans to establish a fund management company, with PPPs as its main target. Local governments, such as Hunan and Sichuan, also have plans to set up billion-dollar PPP vehicles.


Despite the deluge of projects to come, water easily emerges as the most attractive sector for private capital providers.

What is unique about the water sector in China is that it is not dominated by state-owned enterprises, offering both domestic and international investors the chance to tap into a rich pipeline. At present, water utilities and environmental protection-related projects account for around 10 percent of China’s PPP programme.

Last April, China’s State Council issued an action plan for the prevention and control of water pollution, known as the Water 10 Provisions. The plan aims to accelerate market-oriented reforms and promote diversified investments. With new pollution control policies in place, urban water supply and distribution, as well as wastewater treatment and related industries are expected to benefit.

Analysts described China’s water sector as “highly fragmented” and expect that growth opportunities will result in intensifying competition and consolidation. According to a Moody’s report, there were 1,346 industry players at the end of 2014, with the top 10 accounting for an estimated 15.1 percent of the market only.

“There are no regulatory barriers to foreign entrants. The construction and operation of water and wastewater facilities is classified as an encouraged sector under the foreign investment catalogue and foreign investors can own up to 100 percent of individual projects,” Steve Gross, senior managing director at Macquarie Infrastructure and Real Assets, told Infrastructure Investor in a previous interview.

Having invested in the sector since 2012, the firm views China as the single largest opportunity for private water developers and operators in Asia. Gross noted that as competition increases, the ability to leverage local teams with a proven track record in the industry is increasingly important to win projects. “It is likely to become harder for new foreign entrants to come into the market over time,” he added.

Multilateral organisations, including the International Finance Corporation and the ADB, have also been providing financing to Chinese water utilities. In January the ADB teamed up with 18 commercial banks to lend $200 million to the China Water Affairs Group, to help fund a water project catering to underserved areas.

Still, the sector is not without its problems. For example, while the government has been pushing for tariff increases in the industry, the actual pace of reforms has been disappointing, with the planned increases caught up in political concerns. Once higher tariffs are secured, though, they should act as a catalyst for further private sector investment in the sector, a Chinese investor told us.

That means that, like in many other infrastructure sectors in China, it is now up to the government to act as the driving force for reform if it wants to bring more private capital to the table.

Wind: blowing meekly

China dominates the global wind energy market, with no less than 30.8GW out of the 63GW of new global capacity installed last year, according to the Global Wind Energy Council. To put that into perspective, China so far has more than 145GW of wind power installed — more than all the wind capacity connected across the European Union.

The Council projects that wind power installations will nearly double in the next five years, led by China. But when it comes to actually investing in China’s wind sector, the country’s curtailment of wind power has become a key concern for investors wanting to access the world’s largest wind market.

In 2009, China’s National Development and Reform Commission standardised grid tariffs for wind farms based on four broad locations, matching tariff levels to wind resources. Zone I-III locations are largely based in the windier north, carrying lower tariffs, while Zone IV is largely comprised of China’s central, eastern and southern provinces.

Chinese regulations require all wind power to be accepted by the grid. However, due to insufficient local grid capacity, some wind farms, particularly those in Zone I-III, have been put on standby. According to China’s Wind Energy Association, the curtailment of wind power amounted to 34 billion kW/hours in 2015, costing wind power companies a total of 18 billion yuan. As a result, China’s wind industry is reportedly considering legal action against government ministries in three Chinese provinces, in an attempt to force the country to use more wind energy.

The curtailment also had a chilling effect on foreign players like Equis, Asia’s largest renewable energy investor. Having spent a year studying the Chinese renewable energy market, Equis chief executive David Russell concluded it was “highly unattractive”.

“We couldn’t get comfortable with the risk and return dynamic,” he said, arguing the wind curtailment, the contracting regime in general and payment delays by local governments meant China’s risk profile compared unfavorably with some of the other Asian countries in which Equis invests.

For Raymond Fung, chief executive and chief investment officer at CGN Private Equity, investing in China’s wind sector requires localised strategies. The firm, backed by China’s largest nuclear power operator, has recently invested in 300MW of wind projects in two Chinese provinces, where local curtailment rates are negligible. “The power generated from the new build projects will be locally consumed,” he said.

Fung is also bullish on the sector because of larger drivers, such as China’s desire to wean itself off fossil fuels. Coal is a case in point. Accounting for 84 percent of power generation in 2007, it has steadily declined over the past seven years to 73 percent. “The trend is clear: nuclear and renewables will play an increasingly important role in China’s power mix,” he said.

Plus, there may be some reprieve soon for the curtailment regime which has frustrated investors, with a recent Credit Suisse report highlighting that a new ultra-high voltage connection, together with the introduction of a renewables quota system, could alleviate the problem in Zone I-III. That might be a good start to getting the world’s largest wind market back on track.