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Over £100bn in Chinese investment could be "game changer" for UK infrastructure, experts say

Out-Law News | 28 Oct 2014 | 12:39 pm | 3 min. read

Chinese investment into UK energy, real estate and transport projects could become a "game changer", with £105 billion expected to be invested into UK infrastructure by 2025, according to new research by Pinsent Masons, the law firm behind Out-Law.com.

According to a new report by Pinsent Masons and the Centre for Economics and Business Research (CEBR), much of this investment will be driven by an increase in joint ventures and partnerships between UK firms and their Chinese counterparts. However, experts called for more policy certainty from government to ensure that the UK could make the most of the "wave" of incoming investment from China.

"As the need to modernise the UK's major infrastructure gets greater by the day, the projected influx of Chinese investment into UK infrastructure is expected to be a welcome boost to the construction industry in particular and the UK economy as a whole," said infrastructure expert Richard Laudy of Pinsent Masons, the law firm behind Out-Law.com.

"Our report finds that this level of investment is going to be a game-changer for UK infrastructure … However, with UK public finances still under pressure, uncertainty around government support for infrastructure is still a key concern from the infrastructure sector. If the UK wants to unlock Chinese investment to fill in the funding gap to modernise its aging infrastructure, the UK government will need to address issues around policy and further develop the pipeline for investment – delay and lack of clear commitment on policy will only create uncertainty for investors," he said.

The report, which is due to be published on Wednesday, will find that China already invested £18bn into UK projects between 2005 and 2013, including sovereign wealth fund China Investment Corporation's acquisition of a 10% stake in Thames Water, the UK's biggest water utility. However, this "trickle" of Chinese investment will turn into a "major wave" over the coming decade, as Chinese firms seek more opportunities within advanced economies such as the UK in order to increase the value of their own offerings.

The CEBR and Pinsent Masons research found that the UK was the third most attractive destination overall for Chinese outbound foreign direct investment (FDI) behind the US and Japan. This enabled them to assign the UK a proportion of China's anticipated FDI until 2025, which was then further broken down into sectors based on UK investment priorities set out in the National Infrastructure Plan. The findings were then tested and adjusted following interviews with leading figures in the infrastructure from both the UK and China, including UK infrastructure expert Sir John Armitt and the Industrial and Commercial Bank of China.

According to the report, the UK energy sector will be the biggest target for Chinese investment with up to £43.5bn of the anticipated £105bn likely to be invested in projects including offshore wind farm development and other renewable power networks. This investment will pick up pace towards the end of the review period. Real estate projects, which are already benefitting significantly from Chinese investment, could receive £36bn.

The report also found that Chinese investors could invest as much as £19bn into transport projects, such as roads, rail and airports. However, this investment would not be immediate due to policy uncertainty on public ownership, planning policy and funding mechanisms, particularly in respect of project finance and investment returns, discouraging investors from making this type of investment until the end of the forecast period covered by the report.

Those interviewed as part of the research said that they are already observing an increase in the number of joint ventures between UK and Chinese firms, including those involved in massive London real estate developments at Royal Albert Docks in East London and Nine Elms in Battersea. Richard Laudy said that this type of alliance would be a "catalyst" for investment, and would itself transform the shape of the UK construction sector.

"Over the past few years, we have seen China's role as an investor evolve from making indirect investments through sovereign wealth funds: Chinese businesses are now becoming co-funders, co-developers and co-contractors in major UK infrastructure projects," he said.

"Over the coming decade, we expect a significant increase in direct investment from the Chinese coming through in the shape of joint ventures and strategic alliances. Four out of five of the world's largest construction and engineering companies are now Chinese with a growing appetite for infrastructure investment and with the potential to invest vast amounts of capital in advanced economies in Europe," he said.

Laudy added that greater participation by Chinese companies in the UK market would also create "significant sector opportunities to provide expertise on how to operate in the UK market effectively - from labour market regulations to the planning process and how to operate with the framework of EU regulation".