8/18/2019 Chinese Infrastructure - Plenty to Play For (Infrastructure Investor, June 2009)

1/2

 

MAKE NO MISTAKE: with its economy still

projected to grow at 6.5 percent this year

despite the global recession, China’s infra-

structure demand is not going to stall in the

near future.

For international infrastructure investors,the outlook is intriguing. Speaking at an in-

frastructure roundtable at the recent Private

Equity International Forum: Asia 2009 in

Hong Kong, Daniel Liew, Hong Kong-based

 Asia managing partner at international law

firm SJ Berwin, said “the sky is the limit in

most infrastructure sectors” in China. Liew

qualified this bullish statement by noting two

exceptions: basic telecommunications and

passenger railways, where foreign ownership

of infrastructure assets is limited to 49 per-

cent. In all other sectors, no such constraintsexist.

WATER, ROADS, RENEWABLES

China is of course one of the two largest

markets in Asia for private investment in in-

frastruture. India is the other. As Saud Sid-

dique, joint managing director of Srei Infra-

structure Finance, an Indian infrastructure

finance and investment company, noted at

the roundtable, the two countries will ac-

count for some 80 percent of all infrastruc-

ture investments in the Asia-Pacific region.

China has a population north of 1.3 bil-

lion and much remains to be done in terms

of providing adequate basic infrastructure

to its people. According to Liew, the sec-

tors hungriest for capital in China are water, waste water, railways and toll roads.

Siddique agreed. He said that the water

sector in China is one of the most developed

in the region and the country plans to spend

about $200 billion to $300 billion in water

projects alone. Given the sector’s conducive

regulatory framework, there will be opportu-

nities for private investors to participate in

build-operate-transfer projects, he said.

 Another sector discussed in depth at the

roundtable was renewable energy. “Renew-

able energy is very interesting in China as

the government is actively encouraging in- vestment,” said Andrew Yee, joint chief ex-

ecutive officer of Standard Chartered IL&FS

Infrastructure Growth Fund (SCI Asia), an

$800 million pan-Asian infrastructure pri-

 vate equity fund.

Standard Chartered and SCI Asia together

own a 50 percent stake in Meiya Power Com-

pany, through which the firms have focused

on hydro and wind power generation where

“the government provides attractive tariffs

and priority dispatch [meaning as long as

the company operates, it will be paid irre-spective of demand],” said Yee.

 Yet another growth segment, arising from

the country’s continuing urbanisation is the

road sector, said Tony Adams, a managing

director with JPMorgan Asset Management,

 where he co-manages a fund focused on

 Asian infrastructure.

Historically, it has been difficult to invest

in Chinese road projects that produce a rea-

sonable rate of return, added Yee, though

 with the current downturn, valuations are

coming down. Adams said that his firm does

Plenty to play forThe relative slowdown in its economy notwithstanding,

China will continue to offer investment opportunitiesto private investors in the infrastructure sector,

writes Siddharth Poddar

Private Participation in Infrastructure

projects in China

By number of projects

Three Gorges Dam: produces the energy of 15 nuclear power plants

8/18/2019 Chinese Infrastructure - Plenty to Play For (Infrastructure Investor, June 2009)

2/2

not assume tariff rates will increase when it

enters a deal. It looks for returns that come

from organic growth rather than tariff in-creases. “You’re making a bet on [traffic

growth] rather than higher tariffs,” he said.

Everyone at the roundtable agreed that

the infrastructure requirement in China

is so huge that the state cannot fund it on

its own. So while there are several state-

controlled companies dominant in certain

sectors such as energy and transport, there

are substantial opportunities on offer for

private players as well.

Neverthless, the government will continue

to play a key role in addressing the infra-structure need, the panelists agreed. There

 was consensus among the panelists that the

economic stimulus package worth almost

$600 billion announced by the Chinese gov-

ernment last year will benefit private players

in infrastructure, particularly considering

that about 70 percent of that capital has

been marked for infrastructure.

“The government is now targeting the

domestic economy”, said Yee, as opposed to

export-driven industries. The focus is there-

fore on roads and railways as opposed toports, he added. While it continues to pro-

mote both, “there is a subtle move inwards”,

 Yee remarked.

The easing of monetary policy in the

country is also good for private investors in

infrastructure, as liquidity is now freely avail-

able for quality projects and developers with

established track records, primarily from

large local banks.

  “Debt financing is available, but one

should focus on local sources of financing,”

 Adams said. Panelists also suggested it wasunlikely that “marginal” projects will be fi-

nanced.

But while there seems to be plenty of in-

frastructure investors interested in China

to work on, there is one potential pitfall.

“A combination of state-owned enterprises

having a very low return requirement or be-

ing more focused on growing market share

than profitability, and overly tight focus on

returns by the regulators [for example when

determining tariffs] could restrain future

private sector investment,” Yee warned. ¥

SCI Asia

The Standard Chartered IL&FS Asia Infrastructure Growth Fund invests in China, India

and Southeast Asia. It focuses on traditional infrastructure sectors such as toll roads,

power plants and power distribution. Standard Chartered and Infrastructure Leasing

& Financial Services, an Indian infrastructure development and financial services com-

pany, are the fund’s co-sponsors and have committed a total of $300 million. The fund

saw a second close on $601 million in March.

 Asian Infrastructure & Related Resources Opportunity Fund

 A private equity infrastructure fund managed by JP Morgan Asset Management. The

fund, which has a 10 year term with an optional two year extension, focuses on invest-

ments in China, India and other Southeast Asian countries. The fund is targeting com-

mitments of $1.5 billion and had topped $600 million in commitments as of February.

Morgan Stanley Infrastructure Partners

Morgan Stanley Infrastructure Partners is a global infrastructure fund that closed on

$4 billion in May 2008. The fund has teams in Beijing, Hong Kong, New York, London

and Mumbai. When the fund closed, its stated remit was to invest 20 percent in Asia. It

targets investments in transportation, energy and utilities, social infrastructure and com-

munications.

International Finance Corporation

The private sector arm of the World Bank has been an active investor in China since 1986.

Since then, the firm has arranged more than $4 billion in financing for 160 projects, in-

cluding several in the infrastructure sector, where the IFC has made direct investments in

renewable energy and energy efficiency businesses. It has also committed to clean energy

focused funds such as Aloe Private Equity.

CLP Group

Established in 1901 as the China Light and Power Company, Hong Kong-based CLP

Group is one of Asia’s largest investors in, and operators of, electric power projects. In

mainland China, the company is a developer, investor, manager and operator of power

assets. Its investments in China include generating assets and Greenfield projects in more

than 12 provinces across various power sources such as coal, hydro, nuclear, wind and

biomass. The company is also engaged in the exploration of renewable energy resources.

Dedicated capital

Several infrastructure investors have made Asia a priority region,

including the five featured here

Big on China infra (l-r): Adams, JPMorgan Asset Management; Siddique, Srei Infrastructure

Finance; Yee, Standard Chartered IL&FS Asian Infrastructure Growth Fund; Liew, SJ Berwin