country report china

Plenty to play for

The relative slowdown in its economy notwithstanding,
China will continue to offer investment opportunities
to private investors in the infrastructure sector,
writes Siddharth Poddar
Three Gorges Dam: produces the energy of 15 nuclear power plants

Make no mistake: with its economy still

projected to grow at 6.5 percent this year
despite the global recession, Chinas infrastructure demand is not going to stall in the
near future.
For international infrastructure investors,
the outlook is intriguing. Speaking at an infrastructure 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 percent. In all other sectors, no such constraints
exist.
Water, roads, renewables
China is of course one of the two largest
markets in Asia for private investment in infrastruture. India is the other. As Saud Siddique, joint managing director of Srei Infrastructure Finance, an Indian infrastructure
finance and investment company, noted at
the roundtable, the two countries will account for some 80 percent of all infrastruc-

32

ture investments in the Asia-Pacific region.

China has a population north of 1.3 billion and much remains to be done in terms
of providing adequate basic infrastructure
to its people. According to Liew, the sectors 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 sectors conducive
regulatory framework, there will be opportu-

Private Participation in Infrastructure

projects in China
By number of projects

nities for private investors to participate in

build-operate-transfer projects, he said.
Another sector discussed in depth at the
roundtable was renewable energy. Renewable energy is very interesting in China as
the government is actively encouraging investment, said Andrew Yee, joint chief executive officer of Standard Chartered IL&FS
Infrastructure Growth Fund (SCI Asia), an
$800 million pan-Asian infrastructure private equity fund.
Standard Chartered and SCI Asia together
own a 50 percent stake in Meiya Power Company, 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 irrespective of demand], said Yee.
Yet another growth segment, arising from
the countrys 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 reasonable rate of return, added Yee, though
with the current downturn, valuations are
coming down. Adams said that his firm does

infrastructure investor

june 09

china country report

not assume tariff rates will increase when it

enters a deal. It looks for returns that come
from organic growth rather than tariff increases. Youre 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 statecontrolled 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 infrastructure need, the panelists agreed. There
was consensus among the panelists that the
economic stimulus package worth almost
$600 billion announced by the Chinese government 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 therefore on roads and railways as opposed to
ports, he added. While it continues to promote 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 available 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 was
unlikely that marginal projects will be financed.
But while there seems to be plenty of infrastructure 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 being 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.

june 09

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

Dedicated capital
Several infrastructure investors have made Asia a priority region,
including the five featured here
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 company, are the funds 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 investments in China, India and other Southeast Asian countries. The fund is targeting commitments 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 communications.
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, including 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 Asias 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.

infrastructure investor

33