From China, with love

China is set to plough more than £100bn of investment into UK infrastructure over the next 10 years. This level of investment will not just help to bring our ageing and over-used infrastructure up to scratch but is expected to be transformative for the sector in the coming years.

Consistent under-investment by successive governments has landed the country with a massive infrastructure shortfall, so much so that the World Economic Forum ranks the UK only 27th in the world for the overall quality of its infrastructure. This puts us behind Barbados, Oman and Malaysia among others. For a country with the world’s sixth largest economy, that’s not good news.

Investment in infrastructure is an essential pillar of economic growth and prosperity. Without economic arteries, such as modern and efficient roads, railways and airports, as well as the energy needed to power the economy, productivity will deteriorate and we will be less able to compete effectively for access to the world’s fast-growing emerging market economies.

Unfortunately, while policy makers have now grasped the economic and social importance of infrastructure investment, we don’t exactly have much public money to play with right now. Add to that the fact that the traditional sources of investment finance have a limited appetite for construction risk, and we have something of a quandary.

There are only so many roads, bridges, railways and schools that a country needs - even one as big as China - and its contractors are now running out of things to build. In short, they need new markets

The Chinese investment will not solve this problem on its own, but it will give it a shot in the arm that will hopefully be a catalyst for further private sector investment. China, unlike institutional investors such as pension funds, has proved to be more willing to take construction risk on its infrastructure investments. Chinese investment would provide vital funding in the early stages of projects - when finance has traditionally been more difficult to secure - allowing more projects to get off the ground, and creating the opportunity for other investors to inject funds later on.

So, it looks like good news for our infrastructure sector, but what does this mean for companies in the construction industry? There will undoubtedly be great opportunities for UK construction companies, but it would be disingenuous to suggest that there will not be some concerns. China will be looking for more than just a financial return from its investment; it will want to create opportunities for its own construction industry.

Why is this? In essence, it’s because China has been a victim of its own success. The inexorable growth of the Chinese economy and the massive building programmes for transport, schools, hospitals and real estate have allowed its construction contractors to grow to truly gargantuan sizes. However, there are only so many roads, bridges, railways and schools that a country needs - even one as big as China - and its contractors are now running out of things to build. In short, they need new markets because the pace of construction in China will not be able to continue to sustain contractors with turnovers approaching $100bn.

Therefore, as part of their investment, we can expect to see Chinese companies involved in the delivery of UK infrastructure. This is unlikely to be limited to the supply of materials; it is inevitable that we will see Chinese construction contractors operating in the UK market in the near future.

The more enlightened organisations in the industry very much see this as an opportunity. It is clear from our research that UK business leaders are already engaging with Chinese contractors and developers. For some, entry by China into the UK market will create significant sector opportunities to provide expertise to China on how to operate effectively in an advanced economy - from labour market regulations to the planning process and how to operate within the framework of EU regulations. For others, partnering with one of China’s colossal construction contractors may give an opportunity to increase their footprint and better compete in a European market as well as export UK expertise such as PPP experience and BIM know-how.
Either way, over the next five to 10 years, we should expect to see Chinese businesses form alliances and joint ventures with UK real estate investors and developers, contractors, consultants and suppliers to deliver infrastructure and real estate investments financed by Chinese money. Indeed, if you look closely, you’ll see it happening already.

Chris Hallam is an infrastructure partner at international law firm Pinsent Masons