China flows into UK infrastructure tipped to soar
Chinese direct investment into UK infrastructure is set to see a huge jump over the next decade, according to a report* published last week.
Mainland firms will account for £105 billion ($167.8 billion) of direct investment into UK infrastructure (including property) between 2014 and 2025, said the study by law firm Pinsent Masons and UK-based organisation the Centre for Economics and Business Research (CEBR) (see figure 1).
The UK attracted just £24 billion of direct investment (including non-infrastructure-related direct investment) from China from 2005 to 2014. It is the third most attractive destination for Chinese investment into infrastructure, after the US and Japan, according to an index designed for the report.
The UK’s national infrastructure plan set out in 2013 envisages £383 billion of investment over the period from 2014 to 2024, with 60% expected to come from sources not related to the UK government. Pinsent Masons and CEBR argue this figure underestimates the true need, which they put at £500 billion.
The report forecast that the biggest share of Chinese investment will go into energy infrastructure such as nuclear power plants (£43.5 billion), followed by real estate and transport (£25.5 billion).
Some 40% of Chinese investment into UK infrastructure and real estate to date has been made by sovereign capital, said Ian Laing, Pinsent Masons’ Asia head. Examples include China Investment Corporation’s investment in Thames Water and Heathrow Airport in October 2012.
An example of a vertically integrated project would be one where investing companies provide machinery and materials as well as funding. There are big opportunities for Chinese firms to take this approach this in the UK, noted Laing, just as they have in Asia and Africa.In what he called “private investment with Chinese characteristics”, Laing said he expected to see more vertically and horizontally integrated infrastructure projects.
Horizontally integrated projects are those involving investment in infrastructure in tandem with property developments. One example is the Nine Elms mixed-use project on the south bank of the Thames being developed by real estate firm Wanda.
“Some of the most innovative [entities] in terms of funding infrastructure investment are the Chinese companies,” said Laing. Having advised mainland state-owned enterprises on many projects in Asia and Africa, he noted that they have been willing to take on construction risk, whereas UK institutional investors have not. The money raised by UK investors tends to be go into secondary market opportunities such as brownfield assets, he said.
That said, Chinese investment in UK infrastructure has so far largely targeted existing, cashflow-generating brownfield assets, said Laing, but he sees this mix changing, with more greenfield assets being developed.
He cited as an example Thames Water’s £4.2 billion Thames Tideway Tunnel, which was approved by the UK government in September this year. Chinese companies have been courted to bid for contracts to build the a 25-kilometre tunnel that will transport sewage from London to the coast.
* China Invests West: Can Chinese investment be a game-changer for UK infrastructure?