Since the late 1990s, China has sought to internationalise in order to enhance its competitiveness on the global stage. Its increased focus on overseas acquisitions has been a progressive approach to build on existing capabilities and create access to new markets, which has been further emphasised in China’s 13th Five-Year Plan announced last year.
From the Growth Markets Centre’s conversations with the Chinese players, we have found that they continue to be keen on partnering with global players, especially those from developed markets. Such partnerships not only help further push the boundaries of capability development for Chinese enterprises, but also offer a way to work with experienced companies across the value chain, in order to drive the optimisation of asset management. Partnering with other international players which have prior experience in markets can help Chinese enterprises benefit on many fronts.
Collaboration between China and foreign companies on B&R projects offers benefits for both parties in two main categories: ‘knowledge exchange’ for Chinese SOEs and ‘access to new mega projects’ and the associated ecosystems for foreign companies.
With this in mind, we believe that foreign companies, MNCs and financiers can partner with Chinese companies in B&R activities on three levels: supplies, construction partnerships, and financing and/or divestment.
1. Investment of assets
International investors and financiers can also tap into the opportunity to partner with Chinese companies by providing capital and investments. Belt & Road projects are usually explicitly or implicitly backed by the Chinese state and therefore there is an improved risk-return ratio in many situations. Furthermore, given that host governments along the B&R will have received significant financing and support from China and multilateral banks, these governments will take more care to minimise disruptions. However, it must be acknowledged that not all B&R projects are guaranteed sound investments, even with Chinese and host country support, as some projects will be deemed strategically important even if they are not obviously profitable. Nevertheless, it has been seen that China does welcome investment support, to bridge the funding gaps on many infrastructure projects.
For example, Qatar’s Al-Mirqab Capital partnered China’s SOE SINOHYDRO Resources with a 49% share in the construction of a thermal power plant in Port Qasim, Pakistan under the US$ 46 bn China – Pakistan Economic Corridor owing to the attractive returns and significantly mitigated risks made possible because of backing by SINOSURE to cover a wide scope of risks. As a result, the ‘multilateral publicprivate partnership (PPP)’ project built on a Build-Own-Operate (BOO) basis offered attractive returns with significantly mitigated risks, attracting further investments from Qatar’s Al-Mirqab Capital.
Foreign MNCs can also explore opportunities to invest in Chinese instruments such as entering into limited partnerships in a Silk Road Fund or CITIC fund, or by coinvesting
in Chinese led projects.
There have been several examples of private equity funds set up to invest in B&R projects, such as the US$4.8bn Green Ecological Silk Road Investment Fund. This is the first ever Chinese PE fund aimed at improving the environment, backing projects on solar panel construction, clean energy and ecological remediation in China and B&R countries. Investors were made up of top Chinese enterprises such as China Oceanwide Holdings Group, Huiyuan Group and Sino-Singapore Tianjin Eco-city.
General Electric has pledged a US$1bn infrastructure fund in Africa to help finance projects in the continent following the growth of its orders from Chinese SOEs and its increasingly close cooperation with Chinese EPC firms in the electric power, railway, and healthcare sectors in Africa.
Similarly, Maersk Group, a Danish container shipping and oil conglomerate, also has plans to co-invest to offer transport services to its Chinese partners on B&R projects in the next ten years. The company sees the B&R initiative as a platform to tap into growth opportunities both inside and outside China, after being hard hit by the decline in container freight rates and oil prices in recent years. One of its first ventures was with China’s Qingdao Port Group to jointly invest in a new port terminal in Vado Ligure in Italy, due to be opened in 2018.
China is also currently Maersk’s largest export market, accounting for 35% of the Danish company’s export volumes. It is seeking to further ‘develop closer links with Chinese companies involved in these two trading routes’. Its terminal arm, APM Terminals, is also working with the state-owned China Communications Construction Co. (CCCC) to build a port in Tema, Ghana, and has awarded lead contractor status to a subsidiary of CCCC.
2. Partnerships in Engineering, Procurement and Construction (EPC)
The B&R initiative also provides foreign companies with the opportunity to be an EPC partner with enterprises from both China and countries along the B&R in order to share their globally renowned technological expertise. This experience is even more valuable when it relates to knowledge of certain key geographies along the Belt and Road, which companies from China and the B&R countries might be new to. This has been seen to be successful with traditional Spanish partners in Latin America or French companies in Francophone countries.
Global partnerships also offer Chinese SOEs legitimate opportunities to learn about cutting-edge standards, technologies and solutions for developing markets. For example, foreign MNCs’ best practices on the environmental front – featuring environmentally-friendly designs and engineering, efficient buildings, advanced waste processing and energy-efficient transportation hubs. Chinese players can benefit and gain a competitive edge with host governments and constituents that increasingly care about the environment.
The benefits certainly go beyond the B&R project itself on both sides. The partnerships which are formed on the B&R project can often extend in home countries to provide foreign companies with strong partners for access to the China market and vice versa. It is necessary to strike a balance between collaboration and competition from a long-term perspective.
In other cases, partnerships with local EPC firms are sometimes favoured. KazMunayGas (KMG), a Kazahstani oil and gas company involved in the exploration, production, refining and transportation of hydrocarbons, has made a joint venture with the CEFC China Energy Company (CEFC China) to develop oil refining and gas station networks in Europe and Silk Road countries. Apart from possessing critical knowledge and experience of local EPC firms with infrastructure construction in their own countries, partnering with Chinese players also supports technology and know-how transfer, making it possible for the local firm to also eventually operate and manage the infrastructure.
In another example, Northern Railways, a subsidiary of Aspire Mining, an Australian exploration company focused on Mongolia, won the contract to build and operate a 546km railway to extend Mongolia’s national rail network from the city of Erdenet to to Ovoot, the site of the Ovoot Coking Coal Project, a large scale project in Mongolia. The project has since been included in the Northern Rail Corridor connecting Tianjin port on China’s east coast with Russia via Mongolia, and opens up the possibility of funding by the SRF and China Export and Credit Insurance Corporation (SINOSURE), etc.
3. International Project Management
The need for strong project management is even more pronounced when infrastructure projects straddle multiple territories or are based in remote locations. Although many enterprises from those countries along the Belt and Road, including China, may have plenty of experience in constructing large and complex infrastructure projects in one country, they might not have as much experience in doing so across multiple countries in remote locations. It is in this instance, that foreign companies with the experience of overseeing and managing complex infrastructure projects involving multiple countries and stakeholders have a potential role in partnering with companies along the B&R.
In remote locations, the regional community might have limited experience in supporting large projects with adequate services, such as sub-contracting work, supplying equipment and providing international banking services. Furthermore, lapses in the data communication infrastructure could potentially hinder communication between the work site and the decision making office. Given these risks, partnerships with foreign companies with proven experience in the delivery of cross-territory projects in remote locations will be critical for success.
4. Supplying construction equipment and machinery
Chinese EPC players have already been working closely with foreign MNCs on B&R projects, especially those which possess global expertise in manufacturing technologically advanced equipment and solutions as well.
Equipment and technology suppliers can support Chinese companies’ overseas infrastructure and industrial projects in much the same way as they have been supporting Chinese customers’ projects within China for the past decades.
General Electric, which supplies construction equipment to Chinese EPC companies, reported that its total orders from Chinese EPC companies – of which 40% of equipment will be manufactured in China – have increased threefold from a year ago. Its involvement and cooperation with Chinese SOEs is also deepening, from being an equipment supplier to an integrated solutions provider in financing and operations.
General Electric’s most recent order was to supply equipment including steam turbines, boilers and generators for a power plant along the China–Pakistan Economic Corridor. According to the general manager of the joint venture established for this project, General Electric was chosen for its ‘global expertise in manufacturing key equipment for coal-fired power plants’ and ‘proven track record in Pakistan’.
Such partnerships with Chinese customers outside China, as described above, can sometimes bring benefits to foreign companies’ business inside China.
5. Operation of assets
The experience and skills needed in constructing a new railroad, highway, dam, port or airport as compared to operating it efficiently and profitably are very different. This is accentuated in Belt & Road projects due to the numerous geographies, governments and stakeholders involved. This therefore provides an opportunity for operators with experience in managing such complex facilities. For example, the operators of foreign airports such as in Europe, may find that their knowledge and expertise is of value to governments along the Belt & Road, who have built new airports, but need support in running them effectively and profitably.
Operators can bring their expertise in managing not only the infrastructure facility itself, but also aspects of the supporting ecosystems such as key suppliers, labour unions and key customers. Experience in effectively managing these aspects will help to ensure that the facility operates effectively, meets its expected targets and also is well maintained, thereby ensuring its projected lifespan is met. Both of these factors lead to the increased effectiveness and profitability of the facility.
6. Divestment of assets
In addition to supplies and sales, foreign companies can also leverage Chinese outbound investments as sources of financing for their divestments. This falls in line with China’s progressive acquisitions to enhance capability in its enterprises, and at the same time offers the foreign company a way to liquidate its assets for financing.
For example, Gamesa Corporacion Tecnologica, a Spanish manufacturing company principally involved in the fabrication of wind turbines and the construction of wind farms, sold its 28MW Barchin project to one of China’s five largest state-owned electricity providers, China Huadian Group Corporation, at US$161mn. The Barchin project, located in Cuenca in east central Spain, features 14 Gamesa G90 2MW turbines and began operating in 2012. For Gamesa, the deal was a way to unload its assets and reduce debt. Beyond this, the deal could also help Gamesa cement its ties with Huadian, another long-standing customer and partner in China, possibly even opening up access to China’s growing offshore wind market.
This article was firstly published in the PwC report “Repaving the ancient Silk Routes” June 2017 issue. Please click to read the full article.