Broadening the Scope of Cooperation in Pan-PRD Infrastructure Sector

							Broadening the Scope of Cooperation in Pan-PRD Infrastructure Sector

Following the signing of the "9+2" Pan-PRD Regional Cooperation Framework Agreement in
June 2004, the provinces and regions concerned have identified infrastructure development as a
priority sector for cooperation. Government leaders have agreed to launch extensive cooperation
in the energy, transportation, and oil and gas pipeline construction sectors. To prepare for speedy
integration with the Pan-PRD region, the provinces and regions have embarked on a new round
of infrastructure development projects since the signing of the agreement. Hong Kong companies
with rich experience and advantages in raising capital, project operation and management, and
the provision of engineering and technical services are well placed to capitalise on opportunities
in the Pan-PRD infrastructure sector. The implementation of the agreement, coupled with China's
investment system reform, is set to generate unprecedented opportunities for Hong Kong
infrastructure industry players in the mainland market.

Highlights of areas for cooperation in the infrastructure sector specified in the agreement are as
follows:

Energy: All parties will proactively promote long-term, continuous cooperation in the Pan-PRD
energy sector. They will actively implement state energy development strategies such as west-
east electricity transmission, expedite cooperation and development of energy projects,
encourage inter-provincial cooperation in the production and sale of energy products such as coal
and natural gas, and achieve synergy between resources and market demand within the region.

Transportation: With the support of the relevant government authorities and in accordance with
unified planning of the state, efforts will be stepped up to build a comprehensive transport
network to meet the needs of regional cooperation and development. The goal is to bring about a
unified transport network for the region.

Roads: Strengthen the development planning of cross-province highways, national highways and
provincial highways, and their convergence with road networks in Hong Kong and Macau. Speed
up the construction of cross-province and cross-boundary roads and passages leading to the sea.
Build and improve the road transport network in the region.

Railway: Further improve development planning and build a fast and efficient railway system in
the region. Speed up the construction of cross-province (region) railway projects that are
designated as key state projects such as the Yunnan international railway and the one along the
southeastern coast of China. Expedite the construction of the Guangzhou-Shenzhen-Hong Kong
express railway and the inter-city railway in PRD, as well as linking with Hong Kong and Macau.

Aviation: Step up cooperation among airlines and airports, introduce more flight routes, and
promote express service for both passenger and cargo in the region.

Shipping: Carry out studies and formulate plans for the development of shipping in the region.
Promote the development of river transport and sea transport, and the convergence of different
transport systems. Speed up the planning, discussion and construction of the Hong Kong-Zhuhai-
Macau Bridge.

Pipelines: Actively promote the construction of pipelines for oil and gas transmission in
accordance with state planning.

Furthermore, the investment project approval system has been reformed in accordance with the
Decision on Investment System Reforms announced in July 2004. Investment projects which do
not involve government funds are no longer subject to government approval and they only require
registration. Government approval is only needed for key projects and projects under the
restricted category in a bid to protect public interest. Other projects are only subject to registration
regardless of their scale. The enterprise concerned should make its own decisions and bear the
risks concerning market prospect, economic benefit, source of funds, and product and technology
solutions. The scope of investment has also been relaxed for social capital which can now
participate in infrastructure facilities, public utilities and other industries and sectors provided that
the projects are not prohibited by law. Social capital is encouraged to participate in profit-making
public welfare undertakings and infrastructure facilities construction in the form of wholly-owned
venture, joint venture, cooperation, joint operation and project finance through various means
such as capital injection, loan interest subsidy and tax concession.

The implementation of the agreement has given an impetus to infrastructure construction across
the Pan-PRD region. The various provinces and regions not only have speeded up the
construction and increased the scale of infrastructure projects but also strengthened convergence
and cooperation in such projects. The development is set to unleash enormous opportunities.
With investment system reform underway, Hong Kong investors should find the mainland market
even more accessible as more market entry options are now available in the infrastructure sector.
Hong Kong companies are advised to tap into these opportunities

Participating in Pan-PRD Infrastructure Development

The Pan-PRD provinces and regions have all been expediting infrastructure development
following the signing of the agreement. In addition to making improvement to the infrastructure of
individual provinces and regions, efforts are also made to achieve better convergence with one
another's infrastructure facilities. These include:

Fujian will invest Rmb15 billion in the construction of infrastructure facilities in 2005. The province
plans to complete the construction of the Fujian section of the Beijing-Fujian Highway by
completing the section linking Shaowu in the north with Sanming in the northwest within this year.
It also plans to complete the Fuan line of the Fuzhou-Ningde Highway. Other highway projects
which will be launched include the Pucheng-Nanping Highway, Quanzhou-Sanming Highway, the
Putian-Xiuyu branch line of Fuzhou-Quanzhou Highway, and the bridge in Wanbian, Fuzhou
along the Tongjiang-Sanya Highway. As for regular roads, Fujian plans to construct new roads
totalling 5,500 km in length in 2005. Efforts will be made to renovate the provincial road network
and improve overall coverage. For water transport, Fujian will expedite the construction of large
deep-water wharves at Xiamen Bay, Fuzhou port and Meizhou Bay, as well as give priority to the
construction of large- and medium-sized berths at the ports of Quanzhou, Zhangzhou and
Ningde. Other projects under construction include: phase one of Meizhou Bay public channel,
Douwei channel, Xiamen's Dongdu harbour area, channel expansion at Haicang harbour area,
and deepening of Minjiang channel at Fuzhou port.

In Jiangxi, a number of large infrastructure projects have been planned and approved, including
the Ganzhou-Shaoguan Railway and Ganzhou-Shaoguan Highway. As implementation of these
projects has now begun, the time is right for Hong Kong companies to enter this sector. The 194
km Ganzhou-Shaoguan Railway will have 18 stops and cost an estimated Rmb3.5 billion to build.
The section in Jiangxi will be 65.7 km long and cost about Rmb1.35 billion. Other infrastructure
projects in Jiangxi such as those on energy are generally in great demand of private capital. For
instance, the utilisation of wind power resources at the Panyang Lake district will present a host
of opportunities for qualified Hong Kong companies.

Hunan aims to attract social investment to its infrastructure construction in three major areas.
First, the transport sector with emphasis on upgrading highways and roads in counties and
villages. The province targets to build new highways totalling 1,000 km in length, improve existing
roads totalling 13,000 km in length in counties and villages, and press ahead with other key
projects such as building the Zhuzhou avionics hub, the Hunan section of Wuhan-Guangzhou
Highway, expansion of Huanghua Airport, and construction of major roads. Second, energy
projects with emphasis on adjusting the power structure. New power generators with a total
capacity of 5 million kw will be installed. In addition to speeding up electricity generation projects,
the construction of key power grids and power grids in counties and cities will be expedited. Third,
municipal projects designed to boost capacity and improve service quality will be given priority.
The construction of roads, water and fuel gas supply networks, and garbage and sewage
treatment projects will be accelerated in various cities and counties. Based on the above
priorities, Hunan has identified 90 projects involving a total investment of Rmb82.1 billion. Among
these, 23 are energy related which involve a total investment of Rmb43.3 billion. They include the
Xiangnan coal-fired power plant in Chenzhou, the Xinhua coal-fired power plant in Loudi, and the
Tuokou hydropower plant in Huaihua, all of which are at the planning stage. Another 25 transport
projects involve a total investment of Rmb28 billion which include the Yueyang-Changde
Highway, Changsha-Liuyang/Dongfengjie Highway, Zhuzhou-Lusong Bridge and Honggang
Bridge. The completed Shimen-Changsha Railway is currently seeking interested investors to
take over ownership. The 42 basic urban infrastructure projects involve a total investment of
Rmb10.7 billion. They include 25 water supply projects (Rmb5 billion) such as a water catchment
project in Changsha and 15 sewage treatment projects (Rmb3.1 bilion) such as the one in
Shaoyang. The two economic integration projects slated for the Changsha-Zhuzhou-Xiangtan
region will cost Rmb2.7 billion. Hong Kong companies should find many opportunities arising from
these projects.

In the set of opinions released by Guangdong on promoting cooperation and development of the
Pan-PRD region, infrastructure is identified as a priority sector and the west-east electricity
transmission is a key task in the energy sector. By the end of 2005, the transmission volume is
expected to top 10.88 million kw and the major pipelines should be completed. During the 11th
Five-year Plan period, an additional 10 million kw capacity will come on stream. In the transport
sector, highway construction will be speeded up. The province targets to complete the
Guangdong section of the Chongqing-Zhanjiang Highway between Zhanjiang and the boundary
of Guangxi by the end of 2005. Guangdong will then achieve the goal of linking up with all its
neighbouring provinces and regions by highway (except Hainan). Guangdong aims to complete
all the planned highways leading out of the province by 2007. From 2004 to 2010, development
priority is given to speeding up the construction of a network of modernised deep-water channels
in PRD, as well as channel information and channel support and maintenance systems. Major
channels in the mountainous regions will also be developed in an appropriate way. The target is
to enable the direct sailing of 2,000-tonne class vessels to Guangxi. Other projects in the pipeline
include the passenger freight service between Wuhan and Guangzhou (including the new
Guangzhou station), the inter-city express railway system in PRD, the Cenxi-Maoming section of
Luoyang-Zhanjiang Railway, and the four new lines of Guangzhou-Shenzhen Railway. The
province also targets to commence construction of the Guangzhou-Shenzhen dedicated
passenger line, and the new second line of the Hecun-Zhanjiang section of Litang-Zhanjiang
Railway in 2005.

Efforts are being made by Guangxi to achieve the goal of connecting with Guangdong by inter-
province first-class roads and build one highway and six second-class roads within two years. In
terms of urban development, Guangxi has proposed to work with Guangdong to improve the
environment of the Pearl River drainage area.

Hainan has earlier released a basic framework for Hainan-Hong Kong cooperation aimed at
strengthening bilateral cooperation in the construction and management of port, electricity and
urban infrastructure facilities. Under the framework, Hainan authorities encourage Hong Kong
companies to establish wholly-owned, contractual and equity joint ventures in the province to
engage in offshore oil and gas exploration, chemicals manufacturing and other newly developing
industrial projects. Hong Kong companies can participate in the exploration, development and
utilisation of oil and gas resources in Hainan. The province hopes to leverage on Hong Kong's
advantages as an international fund raising platform to attract large conglomerates to engage in
the prospecting and exploitation of offshore oil and gas resources, as well as refining and
producing oil and gas by-products. The goal is to build a petrochemicals industry park.

Sichuan plans to invest a total of Rmb15 billion in urban infrastructure facilities in 2005 to raise its
degree of urbanisation. In terms of specific targets, it is hoped that 40% of sewage will be treated;
45% of household garbage will be treated; 30% of the province will be covered by greenery; and
70% of municipal public services will undergo restructuring.

As a key player in the west-east electricity transmission project, Guizhou is stepping up efforts to
develop its energy sector, especially electricity and related industries. These new and large
energy related projects are keen to attract investment from Hong Kong companies.

Yunnan plans to invest Rmb200 billion to Rmb300 billion to build the "New Kunming City". The
initiative encompasses urban development and infrastructure facilities such as roads, water
supply and sewage treatment. All these welcome foreign investment. The key urban development
projects that are seeking investment include the Rmb120 million sewage treatment plant at
Luolong River in Chenggong New Town, the Rmb73.41 million transformation of the Kunming
City Sewage Treatment Works No.2 Plant, an ocean and greenery ecological park in
southwestern Kunming, and an ecological wetland in Dianchi Lake Area. In addition, the new
Kunming airport will involve a total investment of Rmb10 billion. Projects related to the new airport
will depart from the traditional model of 100% government investment, construction and
operation. Instead, active investment promotion will be launched overseas to seek strategic
partners. This also bodes well for Hong Kong companies interested in entering this market.

Entry Options

    1. Provide project planning and design services. The strength of Hong Kong's infrastructure
       firms lies in project design and planning. Design and planning at the initial stages are a
       crucial part of an infrastructure project. Interested Hong Kong companies should
       familiarise themselves with the long-term development plan of the region in advance.
       Given that they are well informed on issues such as the geographical characteristics of
       the specific projects and their design objectives, Hong Kong companies are well placed
       to offer design services. Environmental protection planning and design should be the
       focus during the overall design process.

    2. Participate in project implementation and supervision. Different projects involve different
       implementation methods and technologies. Technology content, to a large extent, affects
       the quality of a project. In this regard, Hong Kong companies could bring in their
       international experience in project supervision while familiarising themselves with the
       rules and regulations concerning project supervision on the mainland.

    3. Participate in the design of financing plan. Government finances are no longer able to
       satisfy the huge capital needs of infrastructure projects in China. To ease fiscal deficit,
       many local government authorities are now seeking private and foreign investment to
       fund infrastructure projects. Hong Kong companies should find plenty of opportunities in
       this sector. Hong Kong has long been a leading financial centre in Asia and the world.
       Many of the top-notch financial services firms operating out of Hong Kong specialise in
       investment and financing for large infrastructure projects. In addition to offering
       investment consultancy service, these firms can also make use of their edge in capital
       raising and management to provide financing service to infrastructure projects in the
       mainland.

    4. BOT investment model. Hong Kong companies may adopt the BT (build-transfer) model
       in participating in Pan-PRD infrastructure projects if they wish to recoup their investment
       as quickly as possible. Companies may also adopt the BOT (build-operate-transfer)
        model if they intend to increase their investment and expand the scope of participation in
        the mainland infrastructure sector. Under the BOT model, the government allows
        investors in infrastructure projects to charge fees on users, and the investors should work
        out if the cash flow during the operating period can satisfy their investment return targets.

    5. Deeper involvement in operation and management. Hong Kong's infrastructure services
       providers have a strong international profile and offer a pool of high-calibre professionals
       with unique insights in running large projects and world-class management skills. These
       companies should develop new businesses while participating in the operation of existing
       projects. At the same time, they should create the right environment to protect these new
       businesses. Involvement in management will help bring innovative approaches in
       personnel structure, business workflow, marketing and sales planning.


Points to Note

BOT and BT are both at their initial stage of development in the mainland and the government
may still be maintaining numerous controls and restrictions. As such, Hong Kong companies
participating in mainland infrastructure projects should take note of the following:

Fully understand the relevant local regulations in advance. There are currently no uniform rules
on BOT/BT in the mainland. Most of the BOT/BT projects are launched on a pilot basis or
governed by tailor-made rules. Therefore, the operating mechanisms for BOT/BT differ across
industry sectors and among various localities. Hong Kong companies are accustomed to BOT/BT
operations that conform to international practice and follow a uniform set of procedures. However,
when investing in mainland BOT/BT projects, Hong Kong companies should first familiarise
themselves with the relevant rules and regulations and be prepared to adopt more flexible
measures.

Screening the projects. Payments on some of the BT projects are settled by the government on
instalment basis. As for BOT projects, repayment is often made in the form of government
granting the investor a licence to operate. For returns on such projects, investors need to re-
assess the feasibility of the project in order to avoid potential risks associated with the investment
and operation. A common principle is to participate in projects where a company enjoys
comparative advantages.

As mainland enterprises have the advantage of being local enterprises, Hong Kong companies
should proactively promote their strengths before submitting their tender for project management
and operation in order to increase their chance of success.

(The above section is adapted from the first issue of the report on Consultancy Study on Socio-
Economic-Political Trends in Pan-Pearl River Delta Region compiled by the Central Policy Unit of
the HKSAR Government)

Source: Business Alert – China. Issue 06, 2005