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Chinese corporations are continuing to expand their investment into overseas markets and have announced plans detailing their involvement in the UK nuclear energy new build programme. China General Nuclear Power Corporation (CGN) have signed a Strategic Investment Agreement with France’s Électricité de France (EdF), taking a 33.5% share of the £24.5 billion Hinkley Point C project and joint development of new nuclear power plants at Sizewell in Suffolk and Bradwell in Essex.
EdF which is majority owned by the French government already owns and operates nearly all of the UK nuclear fleet. CGN plans to take a two-thirds stake in the Bradwell plant and a 20 percent stake in the Sizewell power station. In order to move forward with Bradwell, the two companies will form a joint venture to seek regulatory approval for a Chinese-designed Hualong One reactor, which the Chinese see as a major step in pursuing their civil nuclear reactor export ambitions.
Exports and foreign investments are strategically important for China’s economic growth. As the Chinese economy has slowed and manufacturing has witnessed a decline their government has encouraged firms to acquire overseas. A particular focus has been on gaining knowhow, patents and brands, securing influence over resources and finding markets for sectors where their corporations have developed an international competitive advantage or where capacity exceeds domestic demand. Incentives in host countries including tax breaks, feed-in tariffs, or bilateral cooperation agreements also pull Chinese inward investment enabled by financial support from Chinese banks.
Since 2005, China has significantly increased its outward foreign direct investment reaching a level of US$103 billion in 2014, which now exceeds inward foreign direct investment for the first time. The rapid investment growth in recent years is influenced by sustained trade surpluses resulting in an accumulation in foreign exchange reserves, currently estimated to be in the order of $3 trillion and a decision to prioritise overseas investments as part of its “Go Global” strategy. This strategy marked a significant shift from the 1970’s as the Chinese government moved from forbidding outward foreign direct investment, to legalising and encouraging it, and now treating it as a national strategic priority in the 12th Five-Year Plan (2011-2015).
Investment has also been driven by China’s perceptions of security related to oil, gas and minerals. China is a resource-rich country, satisfying 90% of its energy needs through domestic supplies, however, its rapid economic growth has led to China changing from being an oil-exporting to an oil-importing country in the early 1990s. During 2009 and 2010 China’s national oil companies spent more than $45 billion in major acquisitions and license deals.
More recently Chinese companies are investing in new sectors beyond resource extraction. The China Global Investment Tracker which documents Chinese investments of $100 million or more since 2005 details over 750 investments and over 800 construction and engineering contracts. The combined value of China’s global investment and construction since 2005 is $1.1 trillion, and is estimated to exceed $3 trillion by 2025. The following table summarises the investment since 2005 by sector in US$ billions.
|Energy & Power||261||216|
|Real Estate & Construction||61||46|
The locations for Chinese investment are also changing from resource-rich developing countries to developed countries that provide access to advanced technologies, recognised brands, industry expertise and distribution networks. Since 2005, the United States has drawn US$90 billion, the largest amount of any recipient country, with Britain fifth having received investment of US$28.5 billion.
Existing infrastructure gaps and high levels of government debt are driving the need for private participation in infrastructure projects. The battle for the public’s hearts and minds continues to create debate, as overseas ownership is a politically charged topic and plays into the narrative of a Britain in decline. As the private sector takes on an increasing role in the funding, construction and operation of infrastructure, questions are raised on who controls the assets, what role governments should play and the impact on consumers and users.
The challenge is in understanding what level of control needs to be retained in order to achieve public expectations, while attracting private sector investment and allowing owners to manage an efficient operation profitably. Regardless of who actually owns the infrastructure, the fact remains that government will always retain the primary public service obligation and therefore, generally by way of regulation, will maintain some level of control should agreements fail, services not be delivered to an acceptable standard, or prices be perceived as unaffordable.
Significant changes have already occurred in UK ownership. Two-thirds of the UK's electricity is generated by overseas firms. Chinese firms have acquired Wales and West Utilities and companies which control 8% of oil and gas production in the North Sea. Australian, Dutch, Hong Kong-based, Malaysian and French investors own the UK water companies, including the Northumbrian Water Group, and an 8% stake in Thames Water. Britain’s railways have owners from France and Germany, while High Speed 1 is owned by a pair of Canadian pension funds. HS2 may also look to attract foreign investors.
Most Chinese infrastructure companies are relatively unknown in the western business community pushing a partnership approach with local companies to bridge the trust and experience gap. UK companies are typically looking for Chinese capital, access to the large China market, and to leverage other competitive advantages brought by the Chinese partner. In turn, Chinese companies rely on a local partner’s business connections, knowledge to mitigate operational risks and to build a positive image. The potential for acquisitions in the UK construction sector are increasing in the wake of Chinese contractors winning work. China Harbour Engineering Company was recently selected to carry out the £300m marine works contract on the 320 MW Swansea Bay Tidal Lagoon power generation project.
China became a member of the World Trade Organisation in 2001 and recent outreach from the government has smoothed the way for Chinese involvement in the UK. In 2014 the UK and China agreed £14 billion of trade and investment deals taking the form of both green-field investments and mergers and acquisitions.
Balancing the principles of an open investment environment against the need to protect national security interests has been a delicate issue for Western economies. Foreign investment in critical infrastructure is subject to high levels of scrutiny where the investment originates from a state-owned entity or a country that may pose a security risk. The UK government’s embrace of a Chinese stake in Hinkley Point and provision of technology in Bradwell signals an acceptance of Chinese state-backed investment into a sector with very sensitive commercial and national security implications.
There have been instances of countries pulling back from Chinese investments on fears of locking up supplies of resources, cyberespionage and concerns of stolen intellectual property. Canada passed a law restricting foreign state-owned enterprises and the US blocked a bid for the purchase of a US oil company. There will be an on-going risk that any negative event could mean Chinese companies are found guilty simply by association, and political opposition could spike.
One of the greatest challenges of private sector involvement is attracting investors and there has been little appetite among UK utilities to finance the enormous costs of building new nuclear plants. These large infrastructure projects require long-term and committed investors who have the appetite for accepting relatively high levels of risk and engaging the Chinese is seen as necessary for the UK nuclear power programme to proceed.
The UK government recognises that regulations need to strike the appropriate balance between the needs of consumers and the needs of investors through acceptable returns and allocation of risk, leading to a strike price arrangement being put in place which guarantees future pricing for both investors and consumers. The benefits perceived by China include the regulatory and political acceptance of its reactor design by an internationally respected member of the nuclear community that may help to accelerate the export of Chinese technology.
Investors do have the responsibility of being good stewards of the assets they own or control ensuring that competition doesn’t drive overly aggressive assumptions. It only takes a few high-profile examples of badly structured deals or failures to stoke anti-privatisation sentiments.
While concerns remain on the national security implications of foreign investment in critical infrastructure, private investment in infrastructure programmes is set to continue. The experience Chinese companies have gained from a 30-year infrastructure boom enables them to be globally competitive in areas such as energy and transport. With almost £1 trillion in overseas investment expected over the next decade, China seems set to increase its presence as a global and UK investor.
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