Pinsent masons and cebr infrastructure report by ACEXIE

M a k in g B u sin e ss S e n se

China Invests West Can Chinese investment be a game-changer for UK infrastructure? A Pinsent Masons Global Infrastructure Sector Strategic Insight Report

M a k in g B u sin e ss S e n se

Pinsent Masons LLP 30 Crown Place Earl Street London EC2A 4ES United Kingdom +44(0)20 7418 7000

Centre for Economics and Business Research 4 Bath Street London EC1V 9DX United Kingdom +44(0)20 7324 2850

www.pminfrainvestmentreport.com Published on 29 October 2014 Copyright: All rights, including copyright, in the report are owned by Pinsent Masons LLP and the Centre for Economics and Business Research. Disclaimer: All information provided in this report is for information purposes only. Although reasonable skill and care has been used in the reportâ&#x20AC;&#x2122;s preparation, no warranty is given as to the accuracy of the information or data it contains. Further, it does not comprise legal or investment advice, and should not be relied upon for any decision-making purpose whatsoever. Independent professional advice should be sought before making any investment or like decision in relation to its subject-matter.

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Acknowledgements This report has been prepared and written by a team of experts in infrastructure and economics, from Pinsent Masons LLP and the Centre for Economics and Business Research. Pinsent Masons LLP Graham Robinson, Global Business Consultant, Pinsent Masons LLP Centre for Economics and Business Research Charles Davis, Director, Centre for Economics and Business Research Danae Kyriakopoulou, Economist, Centre for Economics and Business Research The team consulted UK and Chinese business leaders in writing this report, whom we thank for their views and opinions. Martin Gilbert, co-founder and Chief Executive Officer, Aberdeen Asset Management Gershon Cohen, Head of Infrastructure Funds, Aberdeen Asset Management Andrew McCaffery, Global Head of Alternatives, Aberdeen Asset Management

Ian Hawksworth, Chief Executive Officer, CapCo Professor Douglas McWilliams, Executive Chairman, Centre for Economics and Business Research

Keith Howells, Group Chairman, Mott MacDonald

Ju Fang, Business Manager, China Communications Construction Company

Mike McWilliams, Global Head of Hydropower, Mott MacDonald

Zhen Yang, Investment Department Assistant Manager, Citic Construction Co

Sir John Armitt CBE, Chairman, National Express Group

City of London Corporation

Helena Chen, Partner, Pinsent Masons LLP

Tony Bickerstaff, Chief Financial Officer, Costain

Vincent Connor, Partner, Head of Hong Kong Office and Head of Sectors, Asia, Pinsent Masons LLP

Matthew Harris, Divisional Finance Director, Costain Sean Latus, Head of Investments, Costain Mathew Riley, Partner and Global Head of Infrastructure, Industry and Utilities, EC Harris Michael Spencer, Partner, EC Harris Rob Mansley, Head of Capital Markets, UK Green Investment Bank

Matt Bennion, Corporate Development Director, Arcadis

Industrial and Commercial Bank of China

Alan Brookes, Chief Executive Officer, Arcadis UK

Graham Mather, President, The Infrastructure Forum

Tim Neal, Global Director, Buildings, Arcadis

George Wright, Policy Analyst, The Infrastructure Forum

David Sparrow, Global Director, Multi-National Clients Program, Arcadis

Dr Geoff Baldwin, Deputy Director, Infrastructure UK, HM Treasury

Dr Menno Middeldorp, Senior Economist, Bank of England

Richard Threlfall, UK Head of Infrastructure, Building and Construction, KPMG

Wang Wei Bo, Executive Director, Beijing Construction Engineering Group International

Richard Reid, London Chairman, KPMG

Tim Roberts, Executive Director and Head of Offices, The British Land Company Charles Butters, Director, British Land Properties

Richard Abel, Managing Director, Macquarie Infrastructure and Real Assets, Europe

Anna Stewart, Group Chief Executive Officer, Laing Oâ&#x20AC;&#x2122;Rourke Mark Reynolds, Chief Executive Officer, Mace Group

Richard Ford, Partner and Head of Planning and Environment, Pinsent Masons LLP Jon Hart, Partner, Pinsent Masons LLP Ian Laing, Partner and Head of Asia, Pinsent Masons LLP Richard Laudy, Partner and Sector Head, Global Infrastructure Sector, Pinsent Masons LLP Arthur Lovitt, Partner and Sector Head, Core Industries and Markets Sector, Pinsent Masons LLP Fraser McMillan, Partner and Group Head, Construction Advisory and Disputes, Pinsent Masons LLP Nick Ogden, Partner and Head of Client Relationships, Global Infrastructure Sector, Pinsent Masons LLP Robbie Owen, Partner, Parliamentary Agent and Head of Infrastructure Planning and Government Affairs, Pinsent Masons LLP Michael Watson, Partner and Group Head, Projects, Pinsent Masons LLP Ellen Zhang, Partner, Pinsent Masons LLP

Mark Castle, Deputy Chief Operating Officer, Construction, Mace 3

Foreword Mr. Diao Chunhe

n recent years, China-United Kingdom‘s bilateral economic and trade cooperation has deepened, with strong momentum in infrastructure investment. Both countries signed a ‘Memorandum of Understanding on Enhancing Cooperation on Infrastructure’ in 2011. This framework contributed to establishing the first roundtable conference among British and Chinese infrastructure business leaders, with the intention of promoting close cooperation in the infrastructure sector. In June 2014 the Chinese Premier Li Keqiang visited the UK, and signed a number of governmental and commercial agreements worth over $30 billion in the sectors of finance, technology, education, energy and infrastructure. This provides a significant opportunity to build further cooperation between China and the UK. After decades of progressive development, Chinese enterprises have become an important global force in the field of international infrastructure investment and construction. Chinese enterprises have acquired key capabilities and a track-record in airports, railways, water treatment, offshore wind power, nuclear power plant and other projects. Within the infrastructure and real estate sectors, Chinese and British enterprises are capable of complementing one another. Strengthening bilateral exchanges and cooperation would be in the common interest of both China and the UK, with the potential benefits being far reaching. To enhance and facilitate large scale cooperation in the infrastructure sector between China and the UK, and to assist Chinese enterprises to fully understand the UK investment market, Pinsent Masons LLP, the Centre for Economics and Business Research and CHINCA have undertaken research and studies in relation to the subject of “Chinese Investment in UK Infrastructure and Real Estate”, during which interviews have been conducted with relevant authorities, financial institutions, real estate developers, contractors and others. The results are summarised in this report. The report examines the macro-economic environment, explains the UK’s infrastructure need, gives forecasts of future investment by China in UK infrastructure and real estate and examines the potential for cooperation between British and Chinese enterprises. China’s investment in UK infrastructure is consistent with the increasing demand for UK infrastructure investment and constitutes the deepening of cooperation between China and the UK. We hope that this report provides guidance and a significant point of reference in relation to mutual cooperation between Chinese and British enterprises in the infrastructure and real estate sectors. Mr. Diao Chunhe President CHINCA – China International Contractors Association

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Foreword T

he sheer scale of investment from China is expected to be a game-changer for UK infrastructure and could potentially propel Britain back into the global infrastructure “premier league”.

We expect China to invest over £100 billion into Britain’s infrastructure over the next decade.

Richard Laudy

This level of investment from China could not only help bring Britain’s ageing and over utilised infrastructure up to an international standard, but could also be transformative for the UK infrastructure sector. Investment in modern and efficient infrastructure is an essential pillar of economic growth and prosperity. Without economic arteries, such as Britain’s roads, railways and airports, as well as the energy needed to power Britain’s economy, productivity will deteriorate and the UK will be less able to compete effectively for access to the world’s fast growing emerging market economies. Underinvestment over several decades has meant that Britain has a significant accumulated infrastructure shortfall and is now ranked 27th in the world, according to the World Economic Forum. There is an urgent need for Britain’s infrastructure deficit to be addressed. Britain is a highly attractive infrastructure investment market for China. Our new Global Infrastructure Investment Attractiveness Index ranks Britain third in the world, after the US and Japan. But, we gauge that Britain potentially has the edge, presenting a really exciting opportunity. What sets China apart from many other investors is that China is willing to shoulder construction risk as a key part of its investment in Britain’s infrastructure, whereas many other investors are not. From China’s perspective, assuming the construction risk gives it an ideal market entry point for its huge engineering and construction industry and its vast manufacturing supply-chain. It is clear from our research with business leaders from both the UK and China that strategic alliances and joint-ventures, bringing together the skills that both nations can provide, are the way forward, creating opportunities for British companies to work with their Chinese counterparts. But it is not all plain sailing. Consistency of policy across successive governments, delays in bringing projects to market, and the challenge of paying for the investment are all difficult questions that need to be thought through, if we are to benefit fully from the potential scale of investment. Pinsent Masons is a Global Top 100 international law firm, with offices around the globe. We are a leader in infrastructure and have been a leading advisor in Asia for over 30 years. Our strong relationships in the infrastructure field both in the UK and in China have enabled us to bring this powerful and thought provoking report to you. I would like to thank the Chinese International Contractors Group as well as the many UK and Chinese business leaders that contributed their expert views to our study, and also thank the Centre for Economics and Business Research for providing invaluable support. I would also like to thank my many colleagues in the Pinsent Masons infrastructure team across the UK and China who have provided their own market knowledge to the benefit of this report. We hope our report provides a valuable and clear insight to the opportunities for all involved in infrastructure investment and development in Britain and China. Richard Laudy Sector Head, Global Infrastructure Sector Pinsent Masons LLP

Contents 09 Executive Summary 14 1. Macroeconomic context

1.1 Global economy recovering after financial crisis, but what about China?

1.2 Despite slowing growth China on track to become world’s largest economy by 2030

1.3 Chinese economic expansion is extraordinary even in hard landing scenario

1.4 Rebalancing of Chinese growth model will lessen tendency to save

1.5 Chinese savings pile likely to peak in 2020s

1.6 Rising cash piles in China increasingly likely to flow abroad

19 2. Where will China focus its attention over the next decade?

2.1 Financial liberalisation will encourage China’s greater global presence

2.2 Existing Chinese investment heavily focussed on natural resources

2.3 Chinese investment expected to broaden from natural resource focus

21 3. Will the UK be attractive for future Chinese investment?

3.1 Which combination of factors will attract Chinese investment over the coming decade?

3.2 Sovereign Wealth Funds expected to remain most active Chinese investors

3.3 Chinese investment has been focused on infrastructure and real estate

24 4. How big is the UK’s infrastructure need?

4.1 Investment in infrastructure crucial for economic development

4.2 Market often fails to provide optimal levels of infrastructure investment

4.3 The UK has underinvested in infrastructure

4.4 Consistent underinvestment has left UK with serious shortfall

4.5 UK clearly outside of global infrastructure “premier league”

4.6 UK Infrastructure need is widely acknowledged

4.7 UK public finances a big challenge for funding infrastructure investment

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31 5. How much Chinese investment could be directed at UK infrastructure?

5.1 Chinese total outbound investment to rise six-fold

5.2 UK to gain increasing share of Chinese outbound investment

5.3 Chinese investors show appetite for construction risk but are UK schemes clearly funded?

5.4 Two thirds of Chinese investment to flow into infrastructure and real estate

36 6. What are the challenges to increased Chinese investment becoming reality?

6.1 Closing the UKâ&#x20AC;&#x2122;s infrastructure gap will be a great policy challenge

6.2 What sets Chinese investment apart?

6.3 What are the potential stumbling blocks for Chinese investment in the UK to materialise?

6.4 How will the architecture of potential deals affect success?

39 7. What is this going to mean for the UK infrastructure and real estate sectors?

7.1 H ow does the UKâ&#x20AC;&#x2122;s construction and engineering sector compare globally and why China is important

7.2 What is the likely form of investment from China into UK infrastructure and real estate?

7.3 How could China become involved in helping to build the infrastructure Britain needs?

46 Conclusions 49 Appendix: Methodological note on construction of composite index measuring infrastructure FDI attractiveness 51 Appendix: Note on Foreign Direct Investment (FDI) definitions 52 Appendix: List of Chinese Foreign Direct Investments into the UK, 2005-2014 54 References

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Executive Summary

Can Chinese investment be a game-changer for UK infrastructure? China’s inexorable rise will see it become the world’s largest economy by 2030. Its GDP is forecast to almost triple from around $9 trillion today to almost $30 trillion by the end of the next decade. We will also witness the rise of Chinese savings that will become a fast-growing part of world savings. Gross national savings are forecast to rise to almost $12 trillion by 2025, representing more than 30% of total world savings. Given the diminishing returns available from investment in China – a trend that is gradually developing – an increasingly large part of these savings is destined to search for yield outside China. Total outbound investment from China is forecast to rise six-fold from its 2013 level to $600 billion by 2025. Over the last decade China has heavily invested in natural resources needed to support its manufacturing- and export-focused economy. As the Chinese economy matures and the services sector gains more importance, foreign investments will increasingly aim to satisfy the search for long-term yields and the acquisition of know-how and innovation to help China make the transition into an advanced economy and for its businesses to move up the value chain. This means that future investments will be more heavily directed towards opportunities and innovative companies within advanced economies, such as the UK.

Britain is a key destination for investment from China and the UK’s infrastructure sector is proving to be highly attractive. Richard Laudy Partner and Sector Head Global Infrastructure Sector Pinsent Masons LLP

If the potential investment from China is realised then this would help unlock growth for the UK economy. The challenge for Government and the private sector alike is to come together to make this happen. Martin Gilbert Co-founder and Chief Executive Officer Aberdeen Asset Management

The UK gains third place worldwide in a composite index measuring the attractiveness of different Chinese investment destinations. Not only is the UK shown to be highly attractive, but given its size as the world’s 6th biggest economy it provides a large market which China is taking seriously as an investment proposition. Trade cooperation between China and the UK has been bolstered by successive bilateral Trade Agreements with an emphasis on investment in Britain’s infrastructure During the Sixth ChinaBritain Economic and Financial Dialogue (EFD), September 2014, Chinese Vice Premier Ma Kai said he expected trade and investment cooperation between China and Britain to deepen in such fields as nuclear energy, high-speed rail, wind power generation, photovoltaic power generation and urbanisation. Infrastructure offers long-term investment opportunities but many large investors have traditionally been put off by construction risk. Notably, this aversion to construction risk has held back the expansion in UK institutional investment from pension funds and insurance companies. Crucially, we have found that Chinese investors are more willing to take construction risk in exchange for long-run returns.

Left: MAG. Artist’s impression of Airport City. Right: Crossrail Limited. Over 44 million working hours have been completed on the Crossrail project so far. 9

Britain has always had a strong relationship with China and with the City of London’s emerging role as a major RMB centre we expect to see greater collaboration between Britain and China in the investment and construction of Britain’s infrastructure.

The UK has a huge infrastructure need. Decades of underinvestment in Britain’s infrastructure means that the quality of overall UK infrastructure is low compared to other advanced economies. Britain ranks 27th in the world in terms of the overall quality of its infrastructure, according to the latest World Economic Forum Global Competitiveness Report 2014-15, with Britain’s roads and airport infrastructure ranked worse. This puts Britain’s infrastructure ranking behind that of Oman, Bahrain, Malaysia, and Taiwan as well as many of its peers among advanced economies.

Graham Mather President The Infrastructure Forum

This means that there is a huge potential for investment to close the gap between the present state of infrastructure and the level needed to successfully support the operation of a modern, competitive economy.

The key difference is China’s ability to take a much longerterm view of risk than the UK.

The UK’s massive infrastructure need has been emphasised in particular by the Coalition Government, leading to the ‘National Infrastructure Plan’, a government document that sets out a comprehensive list of projects needed to fill the UK’s infrastructure need, valued at £383 billion and covering the period beyond 2020.

Sir John Armitt CBE Chairman National Express Group

The UK has a massive infrastructure deficit, from decades of underinvestment. Chinese investment could help unlock much needed infrastructure development to support the UK economy. Gershon Cohen Head of Infrastructure Funds Aberdeen Asset Management

In reality, the National Infrastructure Plan underestimates the UK’s infrastructure need. Pinsent Masons and Cebr estimate Britain’s infrastructure need is much higher at around £500 billion, covering the period beyond 2020. There is a broad consensus that the UK’s infrastructure need is heavily concentrated in the energy sector, closely followed by the transport sector. There are also significant opportunities in the real estate sector which have already been grasped by Chinese investors, particularly in London but also nationwide. Given the structurally low levels of house building in the UK, the continued status of the UK as a strong place for real estate investment internationally, and the relative lack of building activity through the financial crisis, there is potential for further increases in investment in new real estate assets, and Chinese investors and developers have been actively beginning to play a leading role in this. Combining the analysis of China’s macroeconomic prospects and the UK’s infrastructure need, we show that there is great potential for Chinese investment flows over the next decade which has the potential to be hugely transformative for the UK economy. The UK’s share of total Chinese outbound investment is forecast to rise from 3.7% during the period 2005-13, to 8.1% over the period 2014-25. This means that annual investment flows from China to the UK are forecast to rise to £30 billion in 2025, and over half of these flows will be directed at infrastructure and real estate. We estimate that over £105 billion of investment will flow into UK infrastructure and real estate from China between now and 2025. This includes £43.5 billion of investment from China that we estimate will flow into UK energy infrastructure between now and 2025. Over £25.5 billion of investment will flow from China into UK transport and other infrastructure between now and 2025.

Left: Heathrow. The sculpture will be a striking focal point for Heathrow’s new Terminal 2. Right: Crossrail Limited. Canary Wharf Crossrail station. 10

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Over £36 billion of investment will flow from China into UK real estate between now and 2025. However, there are also notable policy challenges for this flow of investment to be realised. The mechanisms for funding major projects need to be clarified. The Committee of Public Accounts has described the National Infrastructure Plan as an expensive wish list that is not properly funded.1 Therefore, policymakers in the UK need to provide clarity over the mix of funding for new UK infrastructure. With consumers having faced a sustained decline in real incomes in the aftermath of the late 2000s financial crisis, there is reluctance for consumers to fund investment through higher bills. At the same time, UK public finances are still stretched with borrowing over £100 billion in 2013-14. Hence, the next UK parliament will see major fiscal consolidation so a sustained programme of public investment is a major challenge. Hence, the UK may need to look for innovative funding and financing packages to support a programme of much-needed infrastructure investment that will prevent the UK dropping further outside the premier league of infrastructure. The pipeline of infrastructure projects in the UK relies upon the speed and efficiency and the time it takes for major infrastructure projects to be transformed into a cogent market opportunity, which in turn relies upon skilled and resourced procurement teams. Evidence gathered in this research suggests that if policymakers can reduce the levels of uncertainty over long term infrastructure decisions this would unleash inward investment from China that could ultimately finance a significant proportion of Britain’s proposed infrastructure projects. This level of investment from China is expected to transform the UK infrastructure and real estate sectors. There is a clear acknowledgement that investment from China is targeted at greenfield as well as brownfield infrastructure where China is looking to deploy its significant global construction and engineering capability. Four out of five of the world’s largest construction and engineering companies are now Chinese. The three largest Chinese contractors in the world each have annual revenues approaching $100 billion. Evidence from this research suggests that China is keen to use its vast domestic manufacturing capability and capacity to export equipment and materials when investing in UK infrastructure and real estate projects. China has a role to play not only in investing in Britain’s infrastructure but increasingly in the delivery of major programs and projects within the UK. Evidence from our research suggests that both UK and Chinese business leaders expect that strategic alliances and joint ventures will be established with China’s massive construction and engineering contractors and real estate investors and developers to deliver some of Britain’s largest infrastructure and real estate projects.

1 UK Parliament Public Accounts Committee (2013)

China has a significant future role to play in the UK infrastructure and real estate sectors. Anna Stewart Group Chief Executive Laing O’Rourke

Inward investment could principally involve joint-ventures. Tony Bickerstaff Chief Financial Officer Costain

The need for these alliances is clear – China needs the skills to navigate Britain’s complex regulatory environment and Britain needs access to China’s money. China’s wall of money is tempting, but our research also shows there is much more on offer from China. It is clear from our research that UK business leaders are seeking to establish partnerships with China in the form of joint ventures. For some, entry by China into the UK will 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 within the framework of EU regulations. Looking ahead, to the end of this decade and beyond, we would expect China to acquire the skills it needs to operate effectively in Britain and in other western markets. Larger European contractors who already operate in the UK and who have a much larger footprint could make interesting partners in the longer term for China. Specialised businesses with a global footprint may be less likely to cede their independence. However, they will still seek the opportunities that massive investment from China will bring. Ultimately, capacity bottlenecks in the sector could act as constraints on the eventual impact of investment from China – skills shortages are already a problem, even at a relatively early stage in the cycle. Additionally, the skills needed to procure and implement a significantly larger public-sector led program of investment in Britain’s infrastructure is also a challenge. In many cases, the reality is that partnership with China will ultimately be about creating ever more opportunities for China to export equipment and materials to the UK and into other western markets.

Left: Crossrail Limited. Construction of striking lattice timber roof above Canary Wharf Crossrail station. Right: Crossrail Limited. The Boring Machine ‘Elizabeth’ breaks through into Whitechapel Station. 12

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Key Findings

• China’s economy to become world’s largest, approaching $30 trillion by 2030 • Chinese savings to reach $12 trillion in coming decade, representing more than 30% of global savings • Outbound direct investment flows from China to rise to $600 billion per annum in 2025 • China to increasingly seek investments in advanced, innovative economies • UK ranks third globally, out of 144 countries, in the Pinsent Masons and Cebr Infrastructure Investment Attractiveness Index • 8% of Chinese FDI to go into UK between 2014 and 2025 – equivalent to £30 billion p.a. in 2025 • Chronic underinvestment has created an infrastructure need close to £500 billion in the UK, more than the £383 billion of projects set out in the UK’s National Infrastructure Plan

China will acquire the necessary operational skills and integrated operational management capability from high-end projects. Ju Fang Business Manager China Communications Construction Company

Attractive projects will be the ones that require strong technical skills and high production standards. Wang Wei Bo Executive Director, Beijing Construction Engineering Group International

• UK’s strained public finances and pressured household incomes create problem of affordability for infrastructure • Between 2014 and 2025, a total of £105 billion of Chinese money will flow into UK infrastructure, including a total of £43.5 billion into energy infrastructure, £25.5 billion into transport and other infrastructure, and £36 billion into real estate • Joint ventures and strategic partnerships with China’s massive construction and engineering corporations to play a catalytic role to make this a reality, transforming UK construction sector.

As outbound investment red tape reduces Chinese enterprises should be encouraged to invest outside of China. Ellen Zhang Partner Pinsent Masons LLP

1 Macroeconomic Context 1.1 Global economy recovering after financial crisis, but what about China? Almost six years after the financial crisis engulfed the global economy in 2008, global economic prospects are improved albeit that fragilities remain. World economic output is expected to rise by 3.3% in 2014 according to the IMF’s latest estimate – its fastest pace since 2010. Overall, challenges remain, particularly in the Eurozone, but ultra-low monetary policy is supporting the recovery. In China, however, the picture is different. In 2013 Chinese GDP rose by 7.7% – its slowest pace in 14 years – as the economy struggled with excessive capacity, diminishing returns to investment, and growing levels of debt. Growth is forecast to decelerate further in the coming years as China enters a period of rebalancing and reform. Such reforms include the non-trivial task of financial sector liberalisation and transition from a middle-income to an advanced economy with a greater share of consumption and lower share of investment. This, together with the unfavourable demographic legacy of the “one child policy”, is likely to gently slow growth further over the coming years: growth is ultimately forecast to fall to 5.7% by 2025. 1.2 Despite slowing growth China on track to become world’s largest economy by 2030 Even so, the longer term prospects for China continue to be extraordinary: Economic output is forecast to almost triple from $9 trillion in 2013 to $25.4 trillion in 2025. This implies that China will have overtaken the United States as the world’s largest economy by 20302. Crucially, as Figure 1 demonstrates, China and the US are forecast to race ahead of everyone else, with their economies approaching $30 trillion each by the end of the next decade. This will be more than five times the value of the Japanese economy, which is forecast to occupy the third place at $5.8 trillion by 2025. 1.3 Chinese economic expansion is extraordinary even in hard landing scenario Naturally, risks to this central forecast remain. Notably, rapid credit growth and an accumulation of liabilities in the Chinese shadow-banking sector could lead to a Chinese credit crunch and consequently to a hard landing of China’s rapid growth. This would lead to a sharper slowdown than currently forecast. Moreover, the prospect of an emerging markets crash poses risks to China’s heavily export-led growth. The scaling back of the Federal Reserve’s quantitative easing programme (QE) has raised returns to investments in the US and partially contributed to capital outflows from emerging markets. This in turn has illuminated weaknesses in some emerging market economies. Finally, there are risks associated with the management of China’s transition towards more liberalised financial markets. The Chinese administration announced an ambitious programme of financial market liberalisation reforms in the 3rd Plenum held in 2013. While these are aimed at aligning investment incentives with returns, they may in the first instance create friction and lead to financial sector shocks. However, even under the more dismal scenario of a harder landing, our calculations show that China’s GDP will comfortably have risen to above $20 trillion by 2025. Seen in perspective in Figure 1 this appears to be an extraordinary prospect.

2 In USD current prices; according to the IMF October 2014 World Economic Outlook China overtakes the US on a purchasing power parity basis in 2014.

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Figure 1: GDP projections for top 5 global economies Current USD trillions

With the gradual reform of China’s capital account and the increasing liberalisation of capital, as well as the progressive saturation of China’s domestic market, overseas investment is a key measure for future development adopted by Chinese enterprises.

30 25 20 15 10

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Source: Cebr World Economic League Table 1.4 Rebalancing of Chinese growth model will lessen tendency to save As China switches towards a more sustainable growth model supported by consumption rather than investment, another key defining characteristic of its economy is bound to start changing: its extraordinarily high savings ratio. China’s savings ratio – an economic variable measuring the proportion of GDP that is saved across the public, private, and household sectors, rather than spent – ranks among the highest in the world at 51.5% in 2014. This partly reflects the largely undeveloped state of Chinese financial markets, such as the lack of pension funds or other assets to store wealth. This has led to the phenomenon of Chinese “target savers”, whose rate of saving is determined by the attainment of a specific target in cash-terms. This is desirable in order to support a stable path for consumption throughout their lifetime and during retirement in particular in the face of occasional fluctuations in income. While these trends are bound to change only slowly, we do expect that the transition into a more mature and financially liberalised economy will lead to a gradual decline in the savings ratio, as seen in Figure 2. We forecast the savings ratio to fall from 2018 onwards, with a sharper drop in 2022 as the current account moves into deficit and the value of China’s imports begins exceeding that of its exports. Even so, this will still remain incredibly high compared to other economies. The UK economy for example currently only saves 16.6% of its GDP. The UK ratio is forecast to stay below 20% throughout the forecast period until 2025, less than half of what it will be in China. Comparing savings in absolute terms provides for a yet more striking comparison given the size of the Chinese economy.

Figure 2: National savings ratio % 60% 50% 40% 30% 20%

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Source: IMF WEO, Cebr analysis 1.5 Chinese savings pile likely to peak in 2020s This fall in the Chinese savings ratio, which is expected to remain above 45% by 2025, is expected to take place as the Chinese economy rebalances towards a more consumption-led growth model. Hence, consumption is expected to grow faster and the rate at which savings are accumulated will slow. Consequently, the trend of expanding reserves will start to reverse. The gradual decline of China’s forex reserves will further be driven by changes in China’s exchange rate policy. So far, China has been heavily investing in dollar-denominated assets, in order to increase the scarcity of dollars in international markets and consequently their value, in turn making RMB relatively less valuable and Chinese exports more competitive. However, it is becoming increasingly clear that China’s continued foreign exchange accumulation needed to keep RMB weak is neither sustainable nor desirable. We expect RMB to strengthen against the dollar in coming years as China’s relatively strong economic growth, higher interest rates, and investment opportunities attract the interest of overseas investors. Meanwhile, there will also be pressure on the dollar to strengthen following the end of asset purchases (quantitative easing) by the US Federal Reserve in October 2014, and the expectation for further monetary tightening in the form of higher interest rates in 2015. This will naturally slow the pace of RMB appreciation, reducing the need for currency market intervention by Chinese authorities. As monetary policy tightening raises the value of the dollar in global forex markets, the cost of depressing the value of RMB through dollar purchases will also rise, making attempts to prevent appreciation a more costly exercise to the Chinese authorities. The forecast reduction in currency intervention, together with the gradual decline in the savings ratio, is expected to put a lid on the fast-paced accumulation of reserves. As Figure 3 shows, we expect foreign exchange reserves to have reached a peak of about $4.5 trillion by 2020 following the gentle decline in the Chinese savings ratio.

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Figure 3: Chinese foreign exchange reserves Current USD trillions 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0

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Source: China state administration of foreign exchange, Cebr analysis Yet, despite the fall in the savings ratio (measured as savingsâ&#x20AC;&#x2122; share of GDP), total Chinese savings in absolute terms are forecast to continue rising as GDP keeps expanding. As shown in Figure 4, savings are estimated to rise from $4.8 trillion in 2013 to $11.9 trillion by the end of the forecast period in 2025. Chinese savings are forecast to become increasingly important as a share of world savings: Our research shows that they will likely constitute a share of over 30% of world savings in 2025, compared to 26% in 2013. Figure 4: Chinese gross national savings Current USD trillions 12 10 8 6 4

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Source: IMF World Economic Outlook, Cebr analysis

1.6 Rising cash piles in China increasingly likely to flow abroad This steady rise in Chinese savings is expected to accentuate the search for profitable investments. We expect profitable investments within China to take a long time to become more attractive compared to the current state of low interest rates and lack of fully-fledged capital markets offering yields to investors. As such, an increasing proportion of investment is forecast to flow abroad. We expect the flow of outward Foreign Direct Investment (FDI)3 from China to mark a six-fold increase within the next decade from $100 billion in 2013 to almost $600 billion in 2025, as in Figure 5. Meanwhile, the stock of FDI is expected to stand at $4 trillion in 2025, more than six times as high as in 2013’s $600 billion figure. Figure 5: Chinese total investment, decomposed Current USD trillions 14 12 10 8 6 4

Investment ex. FDI

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Source: UNCTAD, IMF WEO, Cebr Analysis Given these extraordinary numbers and the potential for countries outside China to receive this investment, we ask “where is all this investment likely to flow”? In the next section, we explore this by looking at the history of Chinese foreign direct investment and revisiting the criteria that may be driving Chinese investment decisions going forward.

3 For a more detailed exposition of the type of investment flows projected in this report please consult the Appendix.

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2 Where will China focus its attention over the next decade? 2.1 Financial liberalisation will encourage China’s greater global presence Rapid economic, productivity, and incomes growth in China is expected to support a growing pool of savings as its citizens become wealthier and the portfolios of private and institutional investors grow in line with the overall increase in wealth. Such changes are set to happen alongside China’s financial sector opening and increasing integration into global markets. As Figure 6 shows, although outward capital flows from China have been historically low – below $50 billion until 2008 – this has been changing in recent years, with corporates and official fund managers looking for ways to improve investment returns and diversify risks by investing savings into foreign assets. The annual flow of Chinese outbound FDI has almost doubled since 2008 to reach $100 billion in 2013, and is expected to rise six-fold to $600 billion by 2025. As a result, China is expected to become an increasingly important source of investment capital in global markets going forward – the World Bank estimates that China will account for 30 percent of global investment by 20304. Figure 6: Flow of Chinese outbound FDI Current USD billions 700 600 500 400 300 200

2025

2020

2015

2010

2005

2000

1995

1990

1985

1980

100

Source: UNCTAD, Cebr analysis 2.2 Existing Chinese investment heavily focussed on natural resources Looking back at Chinese foreign direct investment (FDI) flows abroad between 2005 and 20145, we observe that China has so far been investing into both advanced markets, which offer a wide range of financial products and investments, as well as into other emerging markets, where both returns and risks can be higher. Among the advanced economies, the UK ranks as one of the top destinations for Chinese investment. It attracted just under $24 billion worth of investment over the period, receiving 4.5% of the total. But Chinese FDI has so far also been heavily-weighted towards resource-rich countries such as Australia and Canada, and emerging markets such as Brazil, Russia, Kazakhstan, and Indonesia. Figure 7 presents a ranking of the top ten recipients of Chinese FDI flows between 2005 and 2014. 4 World Bank, Global Development Horizon (2013), Capital for the future: Savings and investment in an interdependent world. 5 Data available until June 2014 from the Heritage Foundation’s China Global Investment Tracker

80 70 60 50 40 30 20

ce an Fr

ne si a

Ru ss ia n

Pe ru

n Fe de ra tio n

kh st a

za Ka

zil Br a

na Ca

Zhen Yang Investment Department Citic Construction Co. Ltd

Figure 7: Chinese FDI flows 2005-2014 (June) Top 10 recipients, USD billions

Au To st ta ra lE lia ur op e (e x. U K)

Only by constant innovation and industrial upgrading, can China maintain its relatively rapid growth. The UK has advantages in capital-intensive and hightechnology sectors which can hardly be matched by other countries.

Source: The Heritage Foundation, Pinsent Masons and Cebr analysis 2.3 Chinese investment expected to broaden from natural resource focus It is questionable whether this trend of investing in heavily resource-endowed economies is likely to continue. In 2013 the Chinese services sector overtook the manufacturing sector in size for the first time since 1961. This is changing the shape of Chinaâ&#x20AC;&#x2122;s economy, which is moving away from heavy manufacturing, export-led growth towards a more mature economy. Apart from this general maturing effect, rising wages are posing a challenge to Chinaâ&#x20AC;&#x2122;s manufacturing sector, and a focus on quality and innovation will be needed to raise productivity and overcome this. The need for higher productivity in manufacturing and greater innovation to help the services sector grow further are important in understanding where China will focus its attention over the next decade from an FDI perspective. As China transforms into a service-based economy, we expect emerging economies and commodityrich countries to lose importance, and innovative and technologically advanced economies to become key recipients of Chinese FDI.

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3 Will the UK be attractive for future Chinese investment? 3.1 Which combination of factors will attract Chinese investment over the coming decade? The destination of Chinese investment in the future is expected to be determined by a variety of factors ranging from geopolitical and strategic concerns to the quality of the business environment, the potential for long-term infrastructure investment, and the availability of financial and non-financial returns such as importing expertise and intellectual property.

Understanding the politics associated with FDI is crucial. The US may not be as relevant a destination as its attractiveness index score suggests. Tony Bickerstaff Chief Financial Officer Costain

We combine the above factors into a composite index in order to construct the Pinsent Masons and Cebr Index of Infrastructure FDI Attractiveness.6 The results place the UK third worldwide after the US and Japan. Taking into account geopolitical concerns such as the traditionally tense relations between China and Japan, and the prediction that China will come to challenge US supremacy as it races to overtake it as the worldâ&#x20AC;&#x2122;s largest economy, this leaves the UK in a relatively favourable position as a destination for Chinese investment going forward. Plotting country score in the Infrastructure FDI Attractiveness Index against country size in Figure 8 shows that the UK appears in the desirable top-right quadrant, together with the US, performing better than presently more favourable destinations for investment from China such as Canada and Australia. Figure 8: Overall score in composite indicator measuring infrastructure FDI attractiveness and country size score among selected countries that are major recipients of FDI from China 1-10 (best) 10

Japan

USA

9 Germany

8 7 France

6 5

Brazil

Russia Canada

Australia

Switzerland

2 South AfricaSingapore 0

Kazakhstan

5.2

Indonesia

Peru

5.4

5.6

5.8

6.0

6.2

6.4

6.6

6.8

Source: Pinsent Masons and Cebr analysis of publicly available data such as from the World Economic Forum and The Heritage Foundation

6 For a full exposition of the inputs and methodology behind the composite Index, please consult the Appendix.

The pursuit of an open market approach is one of the main advantages of investment in the UK. Ellen Zhang Partner Pinsent Masons LLP

The UK will be viewed as a key destination for investment from China because of its fairly mature and robust legal system and the high transparency in the market environment. Ju Fang Business Manager China Communications Construction Company

3.2 Sovereign Wealth Funds expected to remain most active Chinese investors To complete the picture of Chinese foreign investment flows, we now shift the focus from “where” and onto asking “by whom” and “in what”. That is, which are the entities within China that will be taking these investment decisions, and what type of assets are they likely to favour in the coming decade? Investment from China can be broadly divided into three categories as follows: i. Institutional investment of government wealth (e.g. sovereign wealth funds or reserve managers) ii. Institutional investment of private wealth (e.g. insurance and mutual funds) iii. Non-institutional investment (e.g. Foreign Direct Investment from private Chinese corporations) Out of these, SWFs and foreign reserve managers enjoy the most conducive environment to invest abroad in terms of regulations and pool of funds. Investment from other sources has high potential for growth as China begins to liberalise its financial sector, but it will likely take long before insurance and other funds diversify their portfolios and start making global investments. Therefore, at least in the medium term, direct investment from official sources will be the main form of outward investment from China. 3.3 Chinese investment has been focused on infrastructure and real estate The two main official investors are the China Investment Corporation (CIC), and the State Administration of Foreign Exchange Investment Company (SAFE-IC), which manage part of China’s exchange reserves. Thanks to a continuing trade surplus and high levels of inward investment, China’s foreign reserves are currently worth $3.9 trillion. The advantage of access to the world’s largest pool of reserves is clearly mirrored in the FDI figures quoted earlier: Out of the $23.4 billion invested in the UK between 2005 and 2014, $3.6 billion came from SAFE and $3.8 billion from CIC, leading to a combined share of around 40% of the total Chinese FDI into the UK. A closer look at CIC’s investment portfolio reveals that following its establishment in September 2007, the CIC has made substantial investments in a variety of asset classes, gradually shifting focus from US fixed-income and cash funds and towards direct investments, institutional real estate, and infrastructure. The UK has attracted nearly 10% of total CIC funds in the period 2007 to 2014 mainly through its real estate and infrastructure sectors. As Table 1 shows, 22% of this share has been directed towards real estate and 43% towards infrastructure. Table 1: CIC Investments in the UK Date

Asset

Sector

Value

07/2009

1% stake in Diageo

Agriculture

$370 million

08/2009

19% stake in Songbird Estates (Canary Wharf)

Real estate

$450 million

02/2010

2% stake in Apax Partners

Finance

$960 million

01/2012

9% stake in Thames Water

Water

$920 million

10/2012

10% stake in Heathrow Airport

Transport

$730 million

11/2012

100% ownership of Deutsche Bank London HQ

Real estate

$400 million

Source: The Heritage Foundation, Pinsent Masons and Cebr analysis

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As for SAFE-IC, the Hong Kong subsidiary of the State Administration of Foreign Exchange, this opened in 1997 and has traditionally mainly invested in US treasury and corporate bonds. More recently, it has followed CIC’s lead in investing in private equity, real estate, and infrastructure. The US and the UK have attracted the largest share of its alternative investments – 31% and 25% respectively. As demonstrated in Table 2, most of SAFE-IC’s investment in the UK has been in real estate and infrastructure. Table 2: SAFE-IC known investments in the UK Date

Asset

Sector

Value

04/2008

1% stake in BP

Energy

$2.01 billion

05/2012

100% ownership of Drapers Gardens

Real estate

$440 million

06/2012

10% stake in Veolia water

Water

$200 million

12/2012

49% stake in One Angel square

Real estate

$110 million

02/2013

40% stake in UPP group holdings

Real estate

$840 million

Source: The Heritage Foundation, Pinsent Masons and Cebr analysis While the importance of Chinese SWFs in the global FDI arena has so far been unrivalled, we expect private investors to also start seeking to diversify their portfolios as China’s economy matures, growth stabilises, and domestic capital markets deepen. Currently, only institutions are allowed to invest abroad under the Qualified Domestic Institutional Investors (QDII) scheme. On October 9th 2014 however, Wang Dan of the People’s Bank of China announced that the central bank is working a QDII2 scheme that will allow individuals to make direct investments in overseas markets. In addition to the QDII2 scheme, a RMB Qualified Domestic Institutional Investors, or RQDII scheme, is also in the making. This would allow qualified investors to use the Chinese yuan when making investments abroad, without having to convert into local currency.7 The announcement of these schemes suggests that even though inbound and outbound investments in China are still subject to many restrictions, there are some clear efforts to gradually liberalise cross-border flows and the cross-border use of the RMB for investments abroad.

The real estate and infrastructure sectors are the two most important markets for investment from China into the UK. Infrastructure demonstrates similar characteristics of achieving stable returns as real estate. Zhen Yang Investment Department, Citic Construction Co. Ltd

Municipal construction, public and environmental projects will be the most attractive types of investment. Strategically, investment decisions depend on whether there is an attractive match between risks and returns. Ju Fang Business Manager China Communications Construction Company

In the UK real estate market, there have already been significant further Chinese investments, particularly in London. For example, the £1.2 billion total investment in the Ram Brewery, Wandsworth, London; and the Hertsmere Development site in Canary Wharf, London by Greenland Holding Group; the £1 billion Asia Business Park in London’s Royal Albert Dock by ABP, and the Dalian Wanda Group’s £700 million One Nine Elms development, a luxury hotel and apartment building on the South Bank, London. Further potential investments are also being considered, such as Zhongrong Holdings potential £500million Crystal Palace re-build and Chinese bids for the £multi-billion Brent Cross, Cricklewood, London scheme of at least 7,500 new homes plus significant commercial space8. The extent to which private investors then participate in global investment depends on the governing regulatory framework and the attractiveness of the opportunities available elsewhere. In the next section we look into how fertile the UK would be for Chinese investment in infrastructure and into the pipeline for infrastructure projects of which Chinese investors may be interested in becoming a part.

7 http://english.peopledaily.com.cn/n/2014/1010/c90882-8792610.html 8 For a complete list of investments from China in the 2005-2014 period please consult the appendix

4 How big is the UK’s infrastructure need?

It is more likely that investment from China will flow into existing assets. China will be keen to increase its stake to potentially create leverage over future direction. Tony Bickerstaff Chief Financial Officer Costain

4.1 Investment in infrastructure crucial for economic development Investments in infrastructure such as energy, water, transport, communications, and waste management facilities are essential inputs for the success of a competitive economy. Economic research shows that investment in infrastructure is complementary to many other forms of investment and can raise the value of economic resources such as property and labour, ultimately helping accelerate economic growth and sustain development in the long-run.9 UK economic policy also acknowledges the importance of infrastructure investment: the Green Book and the National Infrastructure Plan (NIP) emphasise the importance of investing in infrastructure for the future growth and productivity of the UK economy. In its latest World Economic Outlook, the International Monetary Fund (IMF) concluded that “in countries with infrastructure needs, the time is right for an infrastructure push”, urging advanced economies to engage in heavier spending on infrastructure. This recommendation was based on research findings by IMF staff that showed that for every dollar spent on public investments, these economies can expect an increase of 40 cents of GDP in the first year and $1.50 after four years10.The G20 has also identified the provision of infrastructure as one of its key priorities for 2014, in particular through boosting private sector involvement in infrastructure development11. 4.2 Market often fails to provide optimal levels of infrastructure investment Even though the benefits of investing in infrastructure are clear in terms of improving economic development, implementing such projects proves very challenging in practice. This often results in underinvestment and the sub-optimal provision of infrastructure in many countries, including the UK. What sets infrastructure apart from other types of investment is the combination of very high initial sunk costs, the need for long-term investment and the lack of immediate returns. This makes such investments highly risky for private investors, not least because of the lack of policy guarantees and the uncertainty over whether projects will go ahead in the end. This makes it inevitable that governments will play a vital role in planning, delivering, and (to some extent) financing such projects. However, the fact that the fruit of such investments is usually enjoyed much later than the typical five-year political cycle means that governments often do not put infrastructure investment at the top of their policy agendas.

9 See for example Aschauer (1989), Barro (1990), Department for Transport (2006), and Crafts (2009) 10 http://www.imf.org/external/pubs/ft/weo/2014/02/pdf/c3.pdf 11 https://www.g20.org/g20_priorities/g20_2014_agenda

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4.3 The UK has underinvested in infrastructure Historic data demonstrate that the UK has been consistently underinvesting in infrastructure. Compared to other major OECD countries, public investment as a share of GDP has been very low12. As shown in Figure 9, infrastructure output in particular fell to as low as 0.5% of GDP in the “boom” years. This is extremely low in the context of what eminent economists regard as the growth-maximising level of infrastructure output’s share of GDP, which approximates 2.5%13. While it is well-known that public and private investment rates have been slashed in the wake of the global financial crisis (with public investment falling from £51.1 billion in 2009/10 to £26.7 billion in 2011/12), investment levels had been low in the UK for many decades before that. Figure 9: UK Infrastructure Output as a share of UK GDP % 2.5%

2.0%

1.5%

Growth-maximising infrastructure output share

2013

2010

2005

2000

1995

1990

1985

0.5%

1980

1.0%

Actual share

Source: Office for National Statistics 4.4 Consistent underinvestment has left UK with serious shortfall This consistent under-investment in infrastructure has in turn led to an accumulated infrastructure output shortfall. Compared to what the ideal accumulated level of investment would have been today, had the UK been investing the optimal 2.5% of GDP per year in infrastructure since 1997, the present figure reveals a shortfall of £266 billion. Figure 10 graphically represents the gap between the ideal “2.5% share course” for infrastructure investment and the actual historical path for infrastructure output, using GVA as a measure for infrastructure output

12 Egert, B., T. Kozluk and D. Sutherland (2009) 13 Crafts, N. (2009)

Figure 10: Cumulative infrastructure output, actual and modelled as 2.5% of GDP Current GBP billions £600 £500 £400 £300 £200

Infrastructure output - actual

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1997

£0

1998

£100

Infrastructure output - modelled

Source: Office for National Statistics, Pinsent Masons and Cebr analysis In practical terms, this poses huge transport and energy risks for the UK. With more than a fifth of the UK’s electricity capacity set to be out of commission over the next decade, the government’s regulator for gas and electricity markets (Ofgem) has warned of power shortages by 2015.14 In terms of transport, the Eddington report findings from 2006 show that many projects with high benefit-costs ratio (BCR), such as programmes of road building and road pricing with big welfare gains and high tax revenue prospects, have not been followed. 4.5 UK clearly outside of global infrastructure “premier league” As a result of this consistently weak investment in infrastructure, growing evidence suggests that the UK performs poorly in terms of the quality of its infrastructure by international standards. In the 2014 World Economic Forum report on global competitiveness, the UK was ranked only 27th for “quality of overall infrastructure”. This means that the UK has slipped 8 ranks since occupying the 19th position globally in 2007, and brings it outside the global infrastructure “premier league” behind Oman, Bahrain, Barbados, Malaysia, and Taiwan, among others.

14 Ofgem (2013)

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Figure 11: UK rank in â&#x20AC;&#x153;quality of overall infrastructureâ&#x20AC;? versus other major economies Ranking out of 144 countries 64 66

China 56

Italy Australia United Kingdom

United States

Canada

12 9 10

Japan Spain Germany

France

Infra quality WEF GCI rank 2014-2015

Infra quality WEF GCI rank 2006-2007

Source: World Economic Forum Global Competitiveness Index Research by Cebr for EC Harris corroborates this view: Consistent under-investment in infrastructure has left the UK with levels of built asset wealth per capita that is almost 30% lower than its peers, according to the EC Harris/Cebr global built asset wealth index for 2013. This is a serious issue for businesses, who continue to be pessimistic about the outlook for infrastructure quality. According to the KPMG/CBI infrastructure survey for 2013, the net balance of businesses answering on whether transport will improve or deteriorate over the coming 5 years was -44 for overall transport infrastructure15. Figure 12: Stock of built assets per capita by country in 2012 Selected countries in USD at 2012 prices and exchange rates 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000

Russia

Mexico

Malaysia

Saudia Arabia

Italy

France

Netherlands

Spain

USA

Germany

Canada

Australia

Japan

Singapore

20,000

Source: EC Harris Global Built Asset Wealth Index 2013, Cebr analysis

15 CBI/KPMG infrastructure survey 2013

Policy orientation will be one of the influencing factors of utmost importance. If the UK intends to attract investment from China, it is encouraged to pursue an open approach by providing more convenient conditions, favourable policies and reduced restrictions and barriers. Ju Fang Business Manager China Communications Construction Company

4.6 UK Infrastructure need is widely acknowledged Successive governments in the UK have emphasised the importance of infrastructure investment. The National Infrastructure Plan values the quality of a nation’s infrastructure as “one of the foundations of its rate of growth and the living standards of its people”16. The document itself is designed to express the government’s long-term commitment to infrastructure investment through setting out a list of projects needed to fill the UK’s infrastructure need extending to 2025. According to the NIP, the UK’s infrastructure need amounts to £383 billion.17 However, there has been widespread criticism of the National Infrastructure Plan which lacks an overall longer-term infrastructure strategy and blue-print for the nation. The attractiveness of the infrastructure pipeline highlighted in the National Infrastructure Plan is going to be dependent on the speed and efficiency in which the projects it lists are capable of coming to the market. In this area there is still much progress to achieve. The length of time it takes for a “mega project” such as HS2, Britain’s new high speed rail project, to pass from design concept stage, through parliamentary and planning processes to a position where it is capable of delivery to the market contrasts unfavourably with many other competitor markets. Outside the private real estate sector, less high profile projects than HS2 have been subject to different criticisms, of poorly skilled and resourced procurement teams, political uncertainty in relation to project viability and expensive tendering processes. This position has arguably worsened since the down turn in the UK PFI/PPP market place, with a flight of both public and private sector expertise, and whilst certain of the key players in the regulated utilities sector have notably raised their game in terms of project delivery, there still remains much to do in terms of instilling confidence as to the proper deliverability of many of those opportunities identified in the National Infrastructure Plan. Professor Dieter Helm, a leading infrastructure expert at the University of Oxford, argues that the NIP underestimates the UK’s true need, which he prices to be closer to £434 billion18. Pinsent Masons and Cebr estimate the need to be around £500 billion. There is broad consensus that the UK’s infrastructure need is heavily concentrated in the energy sector, closely followed by the transport sector. Figure 13: UK’s total infrastructure requirement 2012-13 prices, GBP billions 600 500 400 300 200 100 0

National Infrastructure Plan Energy

Pinsent Masons and Cebr Transport

Other

Source: National Infrastructure Plan, Pinsent Masons and Cebr analysis 16 National Infrastructure Plan 2013 17 In 2012/2013 constant prices 18 Dieter Helm (2009)

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4.7 UK public finances a big challenge for funding infrastructure investment Despite the UK’s massive infrastructure investment need being documented, funding this is a major policy challenge. The market failures identified earlier make it inevitable that government involvement will be required to achieve the optimal amount of investment. But are the UK’s public finances able to fund the ramp-up in investment required? As shown in Figure 14, the government’s independent forecasting body the Office for Budget Responsibility (OBR) expects that total public expenditure in the UK will fall from nearly 45% of GDP in 2014-15 to less than 40% of GDP in 2018-19 as the government seeks to reduce its annual borrowing requirement. Figure 14: Government spending (consumption plus investment) levels Real GBP billion £450 £400 £350 £300 £250 £200 £150 £100

2025

2023

2024

2021

2022

2019

2020

2017

2018

2015

2016

2013

Government investment

2014

2011

2012

2010

2009

2007

2008

2005

2006

2003

2004

2001

2002

£0

2000

£50

Government spending

Source: Office for National Statistics, Cebr analysis There is widespread consensus among economists and clear acknowledgement across political parties that major fiscal consolidation will be needed whichever party or coalition of parties governs after the 2015 general election. Inevitability, a significant portion of the effort required to reduce the UK government’s annual borrowing requirement will come from spending cuts. The significance of devolution of political and spending power to the UK’s nations, cities and regions has been made clear by the recent referendum vote for Scottish Independence. The Non-Profit Distributing (NPD) model was developed and introduced as an alternative to and has since superseded the traditional Private Finance Initiative (PFI) model in Scotland.    Scottish Future Trust’s NPD pipeline of projects is one of the biggest of its kind in Europe after the Scottish Government in its budget asked SFT to deliver a £3.5bn pipeline of revenuefinanced infrastructure projects. The projects will be delivered using both the hub and NPD in partnership with public sector partners.

In Cebr’s “UK Prospects” forecast, the fiscal consolidation introduced is expected to lead to a slowdown in economic growth from 2015. As such, even though the UK has been regarded as a relative safe-haven by global investors, keeping borrowing costs incredibly low by historical standards (20-year gilt yields currently stand at 3%), public funding is unlikely to cover the costs of investing to meet the UK’s estimated infrastructure need. This implies that there will be a funding shortfall for UK infrastructure. With the UK’s infrastructure need estimated to fall within the range of £383 billion (National Infrastructure Plan) to £500 billion (Pinsent Masons/Cebr)19, and output in the construction sector forecast to only reach £225 billion, we estimate an infrastructure funding shortfall of around £220 billion to have built up by 2025. Figure 15: Cumulative construction sector infrastructure output and cumulative costs of infrastructure projects Current prices, GBP billion 500 450 400 350 300 250 200 150 100 50 0

2014

2015

2016

2017

2018

2019

2020

Cumulative spending based on narrow definition of construction output

2021

2022

2023

2024

2025

Cumulative need based on National Infrastructure Plan

Source: Office for National Statistics, National Infrastructure Plan, Pinsent Masons and Cebr analysis With the UK public finances under serious pressure, could there be an increased role for the private sector in financing infrastructure projects? In the next section we consider whether the expected increase in Chinese foreign investment could help to support the UK’s infrastructure need.

19 In 2012-13 prices

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5 How much Chinese investment could be directed at UK infrastructure? 5.1 Chinese total outbound investment to rise six-fold As China continues to grow over the coming decade to become the world’s largest economy worth $30 trillion, its cash pile and pool of savings looking for profitable investments abroad will also rise exponentially. Our estimates see annual outbound FDI flows from China rising from about $100 billion in 2013 to $600 billion in 2025. This will bring the total stock of Chinese outward FDI to the impressive level of $4 trillion. 5.2 UK to gain increasing share of Chinese outbound investment At the same time, our FDI attractiveness analysis suggests that the UK’s share of this growing investment pile is very likely to rise. Our base case scenario sees the UK’s average 3.7% share of total Chinese outbound FDI in 2005-13 rising to 10% by the year 2025. Combining these forecasts allows us to arrive at estimates for the size of Chinese FDI flows into the UK. Three scenarios, a bullish, a bearish, and a base case scenario, of this are presented in Figure 16. Under the base case scenario, total stock of FDI into the UK is forecast to rise eight-fold from £18 billion between 2005 and 2013 to £144 billion between 2014 and 2025. Figure 16: Total FDI flows from China into the UK Current GBP, billions £40 £35 £30 £25 £20 £15 £10 £5 £0

2005

2010 Bear Case

2015 Base Case

2020

2025

Bull Case

Source: The Heritage Foundation (2005-14), Cebr (2014-25)

5.3 Chinese investors show appetite for construction risk but are UK schemes clearly funded? Infrastructure represents the core physical and organisational structures as well as the facilities and services necessary for the well-functioning of an economy. This encompasses an array of assets from transportation and water distribution networks to electricity transmission grids and telecommunications. Such assets are typically long-lasting, and their financial performance is usually not as sensitive to the business cycle compared to other asset classes. This is because demand for infrastructure-related services is generally not very responsive to price changes. This means that a change in price should not have a big impact on consumption. Empirical evidence from the United States and elsewhere supports the claim that tolls, or electricity, gas, or water rates can generally increase without a significant impact on demand20. This provides the core source of their attractiveness to investors, as infrastructure assets are generally able to deliver returns throughout their life cycle, and provide a good diversification against other assets (especially when property and equities are closely correlated) as well as inflation and interest rate hedges. Figure 17 clearly illustrates the advantage of investing in regulated assets, with the regulated rate on equity for electric utilities achieving a fairly consistent spread of 500-600 basis points above five-year US Government Treasuries. Figure 17: Electric Utility Regulated return on equity vs. Five-Year Treasury Rate 1970-2007 % 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Five-year Treasury Rate

Electric Utility Regulated ROE

Sources: Electric Utility ROE: Hyman, Leonard S., Andrew S. Hyman, and Robert C. Hyman, “America’s Electric Utilities: Past, Present, and Future, 8th ed. (Vienna, VA: Public Utilities Reports, Inc.). Treasury rate: US Federal Reserve Board, Selected Interest rates21 Looking into the UK in particular, returns on infrastructure assets have been also stable and steadily increasing by looking at consumer spending on infrastructure-related essentials such as electricity, transport, and communications. As Figure 18 shows, spending levels on these items for the typical household have risen significantly in recent years, from less than £2,000pa in 1997 to almost £4,000pa according to the latest data from 2013.

20 See for example Weisdorf, M (2007) for evidence from the New Jersey Turnpike and the Queens Midtown Tunnel in New York City 21 As seen in Weisdorf, M. (2007)

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Figure 18: Annual infrastructure-related spending per household GBP, current prices and as a share of total household disposable incomes £4,500

12%

£4,000

10%

£3,500

£3,000 £2,500

£2,000 £1,500

Richard Threlfall UK Head of Infrastructure, Building and Construction KPMG

£1,000

£ levels

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

£500 £0

The biggest risk is around the political debate over customer affordability and therefore the return on private capital.

% share

Source: ONS Consumer Trends, ONS National Accounts, Cebr Analysis This rise in energy and other bills in absolute levels, together with the sustained decline in households’ real incomes seen in the UK through the late 2000s financial crisis and its aftermath has meant that spending on infrastructure-related essentials has risen significantly not only in absolute terms, but also as a share of consumers’ disposable incomes. Spending on infrastructurerelated essentials in 2013 constituted about 10% of disposable income for a typical UK household. Even though real incomes have now slowly started to pick up again, there is little scope to fund investment in infrastructure through higher bills to consumers given the already high level at which they are now. At the same time, as we outlined earlier in this report, the present state of UK public finances creates an urgent need for fiscal consolidation to be implemented in the new Parliament in 2015. This challenges the option of the government stepping in with heavy public investment in infrastructure. These two realities accentuate the need for innovative funding and financing models to fill the UK’s huge infrastructure need. If public sector and households cannot afford the infrastructure Britain needs, then innovative funding models that include increased business funding, with models such as Tax Incremental Financing (TIF), as used for London Underground’s Northern Line Extension, and Infrastructure Levies, need to be implemented more comprehensively, as currently these new models for funding infrastructure contribute only a minor amount of the total funding needed Further innovative models for local funding of infrastructure will be needed as the UK is set on further devolution.

Infrastructure will prove to be one of the most attractive classes for Chinese investment into the UK, which follows a very open market approach.

5.4 Two thirds of Chinese investment to flow into infrastructure and real estate Bringing together the arguments for expansion of investment from China, the attractiveness of infrastructure assets to Chinese investors with appetite for long-term assets, and the UK’s huge need for infrastructure investment, we conclude that almost half of total Chinese FDI into the UK will flow into infrastructure between 2014-2025.

Helena Chen Partner Pinsent Masons LLP

In value terms, this amounts to a cumulative of £69 billion flowing into UK infrastructure alone during the forecast period. Within infrastructure, the energy sector is forecast to receive the lion’s share of Chinese investment as shown in Figure 19. The total for energy is projected to amount to £43.5 billion, with the rest £25.5 billion going into transport (£19 billion), communications (£2.6 billion), water and flood management (£3.5 billion), waste management (£0.4 billion), and intellectual capital (£0.2 billion). In terms of the distribution of inflows over time, we expect investment in energy and other infrastructure to pick up significant pace in the latter half of our forecast period. This shape is driven by two main factors: the potential for huge projects to materialise later, as set out by the National Infrastructure Plan, and the higher potential for Chinese investment in the post 2020 period as the Chinese capital account and financial flows in general are expected to see substantial liberalisation only then. Real estate is also forecast to receive a considerable share of inward Chinese FDI, averaging 24% of total FDI between 2014 and 2025. Strong population growth in the UK as well as the continued lack of supply to match demand are expected to keep returns in the property market attractive. Population growth in turn will be driven heavily by migration: the UK’s expected economic success relative to weaker neighbouring economies – especially the Eurozone – as well as the continued improvement of London’s status as a global hub for financial services should continue to attract labour inflows from abroad. The shape here however is more stable, with real estate attracting a higher share in the beginning of the forecast period. Later on, as the “low-hanging fruits” are gone and competitive returns in the sector diminish, we expect the real estate’s share of overall Chinese FDI into the UK to start declining. From 22% in the 2005-2013 period, real estate’s share of Chinese FDI is forecast to first steadily increase, peaking at almost 37% in 2019, before steadily declining to reach 13% in 2025. However, given the growth in the overall size of Chinese FDI into the UK, despite the decline in real estate’s share, absolute values will keep rising to reach just under £4 billion in annual flows terms in 2025. Together, infrastructure and real estate assets are forecast to make up two thirds of total Chinese FDI into the UK in 2025, up from 57% in the 2005-2013 period.

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Figure 19: Investment from China into UK infrastructure 2014-2025 Current GBP, billions £12 £10 £8 £6 £4 £2 £0

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Source: Pinsent Masons and Cebr Presenting this in the context of the UK’s extraordinary infrastructure need, and the potential for the UK construction sector to partly cover this, suggests that Chinese investment is set to represent an important input to the mission of improving UK infrastructure. Figure 20: Investment from China into UK infrastructure, cumulative values, 2014-2025 Current GBP, billions £120 £100 £80 £60 £40 £20 £0

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6 What are the challenges to increased Chinese investment becoming reality? 6.1 Closing the UKâ&#x20AC;&#x2122;s infrastructure gap will be a great policy challenge Overcoming the challenge of bringing UK infrastructure up to a standard where Britain becomes competitive will be incredibly demanding and costly.

The ability of Chinese investors to provide finance immediately is always pivotal when competing for infrastructure projects where finding finance at an early stage can be very difficult. This will be especially important for the UK. Mike McWilliams Global Head of Hydropower Mott MacDonald

The market failures involved mean that there tend to be disincentives for the private sector to invest. In the absence of policy interventions, the level of infrastructure investment delivered by the market alone will be sub-optimal relative to UKâ&#x20AC;&#x2122;s long run efficiency and competitiveness. There are four distinct sources of these market failures: i.

The uncertainty over future policies in relation to regulated assets and their impact on revenue streams create significant risks for the private sector, which make it difficult to achieve early stage funding without explicit guarantees from the public sector.

ii. Long-term infrastructure investments require a steady revenue stream and long-run guarantees over the returns associated with such high-risk, high-fixed costs investments. These are difficult to deliver in the face of lack of certainty over government policy and the instability associated with the electoral cycle even in advanced political systems such as the UK. iii. The fundamental uncertainty over a policy regime is a major challenge, with even minor changes in policy risking rendering a project unviable â&#x20AC;&#x201C; e.g. in relation to energy and environmental policies. iv. Current procurement practices, skills and resources within UK public-sector. 6.2 What sets Chinese investment apart? Our discussions with key industry players conclude that the main factor that makes Chinese involvement in construction projects stand out is price competitiveness. China has the capability and vast capacity to deliver the most demanding and complex of engineering and construction programs and projects. On many occasions this has meant that European and US contractors have had to withdraw from international markets because of competition from China. This price competitiveness is in turn fuelled by a relatively heavier appetite for construction risk compared to other investors. This has meant that the market failure22 described above simply does not hold when it comes to Chinese investors where risks are backed by a state with a long-term view. This is especially the case with large sovereign wealth funds that are backed by a vast balance sheet looking for long-term yields. The second important factor in ensuring the success of Chinese investors has been the ability to bring finance to projects. A key feature of Chinese investment is the ability to finance projects more cost effectively. This is especially important for the UK market and for infrastructure projects in general where investment at an early stage can often be very hard to obtain.

22 The presence of initially high sunk costs and the long-term horizon over which returns are made tend to inhibit investment by the private sector and governments being bound to five-year electoral cycles.

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6.3 What are the potential stumbling blocks for Chinese investment in the UK to materialise? Potential challenges to the flow of Chinese investment come from uncertainty over policy. For example, the nuclear sector is one in which barriers to investment may have been expected given the national security concerns associated with a such a strategically important sector. However, remarkably, this is a sector where most progress has been made. Moreover, in recent years UK politicians seem to have enthusiastically embraced potential Chinese investment. However, remarkably, this is a sector where most progress has been made. Perhaps, the greatest challenge to potential investments in new assets being realised is the uncertainty over how schemes will be funded and the long term, binding commitments that need to be made to facilitate progress. What is certainly not on the table is the notion that the Chinese would invest without expecting a return on their investment. Hence, there needs to be clarity over how major infrastructure projects will be paid for – will they supported by government guarantees, will further privatisation take place or will bills be raised to pay for the investment? In recent years, given the longstanding squeeze on real incomes for UK households, raising bills ever higher has become particularly unpalatable politically. Recent Bank of England research showed that UK households suffered the longest squeeze on real incomes since the mid-1800s as the cost of essential goods and services rose consistently faster than pay.23

None of it can happen without the government setting a conducive scene. There needs to be a mechanism to ensure the returns. Tony Bickerstaff Chief Financial Officer Costain

Drivers and blockers of Chinese investment flows into the UK Drivers

Blockers

More openness in China

Visa restrictions

UK openness to overseas investment

Complexity of regulatory environment, including procurement, planning and labour laws

UK’s innovative environment

Policy uncertainty

UK’s “safe haven” status

Lack of capacity in UK construction sector

Expenditure related to infrastructure-providing sectors make up a notable proportion of household spending. This comes in addition to taxes which collectively also help to fund infrastructure. If the government finances are too strained to fund infrastructure directly through public spending, then will households need to foot the bill – either through higher taxes or higher bills? The government of the day is likely to avoid tax increases wherever possible – so can the private sector bear the cost, essentially by passing costs onto the consumer? Figure 21 shows that household spending on services that ultimately fund infrastructure (i.e. utility bills24) has increased significantly in recent years and already make up around 10% of household disposable incomes. Our analysis shows that if household bills were increased in line with their average growth over the last 15 years – total infrastructure related spending by consumers will reach 12% of household income by 2025, up from 10% today. But is this sort of increase likely to be enough given that funding challenges persist despite the growth in utility and transport bills over the last decade or so? Our projection for infrastructure related spending by consumers implies total household spending will reach £203 billion in 2025, up from £113 billion in 2014. Will this £90 billion increase be enough? With the scale of projects that need funding it is easily possible that household spending on utility bills will surpass 15% of disposable income i.e. £1 in every £7 consumers spend – and this doesn’t include the tax contribution consumers make towards infrastructure investment through direct and indirect taxes.

23 ‘Twin Peaks’ speech given by Andrew G Haldane, Chief Economist, Bank of England at the Kenilworth Chamber of Trade Business breakfast, Kenilworth, 17 October 2014; www.bankofengland.co.uk/publications/Documents/speeches/2014/speech764.pdf 24 The sum is derived from Office for National Statistics Consumer Trends data summing household expenditure on Water and miscellaneous services; Electricity, gas and other fuels; Transport services; and Telephone and telefax services.

Given the ongoing political narrative around the cost of living and the extremely negative reaction to rising household energy bills, whether funding investment through consumers would be politically possible is a major question. These uncertainties over policy and how new developments will be funded are perhaps the biggest obstacle to the worldâ&#x20AC;&#x2122;s future biggest economy becoming an even bigger shareholder in UK plc than it already is.

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Figure 21: Annual infrastructure-related spending as share of total household disposable incomes %

Household bills % disposable income actual Household bills % disposable income continuation of trend Household bills % disposable income alternative projection

Source: ONS Consumer Trends, ONS National Accounts, Cebr Analysis 6.4 How will the architecture of potential deals affect success? Any discussion on Chinese investment flows into UK infrastructure needs to address the financial considerations. The challenging nature of the UKâ&#x20AC;&#x2122;s public finances means that there are major constraints in funding infrastructure investments directly from the public purse. As such, UK consumers and businesses will likely have to bear higher costs in order to fund infrastructure investment. Discussions with industry players concluded that the most likely outcome is for investment to take place on a lease basis, whereby newly-created infrastructure assets are leased to the organisation responsible for running it. This would be the lowest-risk system, seeing as it guarantees stable returns to the investors involved, with only some construction risk remaining in place. In effect, the less risky an investment would be evaluated, the lower the price that would have to be paid to investors in terms of returns. Another option would be for investments to be handed over to be operated under a 15-20 year concession. However, this would likely prove less appealing to Chinese investors who are concerned with more long-term returns. Sovereign wealth funds in particular were identified in our discussions as having the greatest appetite for long-term investments. As such, the decision to go ahead with an investment at all will also largely depend on the structure of concessions offered and the time horizon over which they can expect to enjoy returns.

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7 What is this going to mean for the UK infrastructure and real estate sectors? In this section we explore the likely form of Chinese investment in UK infrastructure and how this might impact the structure of the UK infrastructure and real estate sectors. We look into what form Chinese outbound investment has taken in the past: has Chinese expansion occurred mostly through the acquisition of foreign companies, or are joint ventures like the Carillion plc / Beijing Construction Engineering Group (BCEG) / Greater Manchester Pension Fund (GMPF) more popular? Looking into the future, we assess the impact under different scenarios of the form of Chinese involvement. There is growing acknowledgment across UK business leaders that the impact of Chinese investment is increasingly significant and that this trend is only set to accelerate over the coming decade as China moves to become the world’s largest economy and an increasingly active investor in overseas markets.

Investment from China into UK infrastructure and real estate is set to become a significant trend and partnering with China could help UK construction and engineering companies enter new markets. Anna Stewart Group Chief Executive Officer Laing O’Rourke

We have seen a wave of new investment from China into the UK with the lion’s share of this investment into real estate and infrastructure. There is also a clear acknowledgement that investment from China is targeted at greenfield as well as brownfield assets where China is looking to deploy its significant global construction and engineering capability. 7.1 How does the UK’s construction and engineering sector compare globally and why China is important The recently published Engineering News Record (ENR) Top 250 Global Contractors list recognises that four out of five of the world’s largest construction and engineering businesses are now Chinese. Almost 60% of the ENR Top 250’s total domestic 2013 contracting revenues came from Chinese contractors. The three largest contractors in the world which are all Chinese each have annual revenues approaching $100 billion. ENR also publishes its Top 250 International Contractors list, which measures the amount of international revenues, based upon contracting revenues earned by contractors from projects outside of their home countries. This list highlights that Chinese contractors have a long way to go to compete against their Spanish, German, US and French counterparts. Here, only one Chinese contractor makes it into the ten largest international contractors and only two within the top twenty, measured by international contracting revenues. According to ENR’s Top 250 International Contractors list, published in September 2014, no UK contractor sits within the top 50 contractors in the world. Britain’s contractors also lack top ranking positions in ENR’s key international construction and engineering end markets, including transportation, power and other key sectors measured by market share.

The UK infrastructure market is one of the most accessible in the world, in terms of its openness to private and overseas capital, though there are some sectors such as road and rail where public capital looks set to remain the default. Richard Threlfall Head of UK Infrastructure, Building and Construction KPMG

China appears to be ambivalent between greenfield and brownfield infrastructure in the UK, so long as there is a long term positive cash flow. Keith Howells Group Chairman Mott MacDonald

The global construction market is forecast to grow by 70% by 2025, according to the Global Construction 2025 report published by Global Construction Perspectives and Oxford Economics, but contractors are facing increased pressure to deliver projects at a lower cost. The UK report into the cost of Britain’s infrastructure, published by Infrastructure UK, a unit within the UK Treasury, concluded that significant savings can be made in the delivery of infrastructure programs and projects. China has a role to play not only in investing in Britain’s infrastructure assets and the companies that own and operate these assets such as in Heathrow Airport and Thames Water, but increasingly also in the delivery of major programs and projects within the UK. There are some sectors, such as road and rail, where China has expressed a clear appetite for investment, but existing funding models act as a significant barrier to foreign and private investment. Britain has a pipeline of infrastructure projects worth an estimated £500 billion in sectors such as electricity generation and transmission, transportation, utilities, and the delivery of other infrastructure networks and systems. Much of Britain’s infrastructure is ageing and underdeveloped with capacity bottlenecks. Our research shows that the overall quality of Britain’s infrastructure is ranked low by the World Economic Forum compared to other developed nations. This puts Britain at a major disadvantage in its overall competitive position compared with other neighbours in Europe and further afield. It is difficult for Britain to compete for trade in the global economy with poor quality infrastructure. The World Economic Forum includes infrastructure as a key pillar of any nation’s ability to compete effectively for world trade. Although around 70% of Britain’s infrastructure is financed by private investors, infrastructure in sectors such as water, telecommunications, and airports are regulated. China has the appetite to invest billions into Britain’s infrastructure and real estate as we have already seen in this report. A difference between China investing in new build infrastructure projects and other sources of long-term investment, is that China is prepared to invest in early stage development and construction of Britain’s infrastructure. The government sponsored Pension Infrastructure Platform (PIP), which was originally established to invest up to £20 billion into UK infrastructure, has recently announced it is looking into investing in secondary market assets, and in building new schools and hospitals. However, it has stated that larger and more complex infrastructure projects carry too much risk during their construction phase. Britain’s largest insurers also pledged to invest up to £25 billion in UK infrastructure. However, much like Britain’s pension funds, Britain’s insurers do not have the level of experience and expertise to invest in building infrastructure which often takes years and sometimes decades to complete. Other institutional investors also tend to look at the prospect of investing in infrastructure projects as too risky unless balanced with their perceived lower risk of holding existing brownfield infrastructure assets. The UK Guarantee Scheme has been successful in providing state guarantees against certain risks that cannot be adequately provided for by the market. The UK Guarantee Scheme provides guarantees based upon normal commercial terms and was set up as a short-term

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solution in helping to get Britain’s infrastructure built. The £40 billion scheme was launched by Chancellor George Osborne in 2012 to help encourage private sector investment and has to date led to the completion of five schemes totalling £1.5 billion. The focus has so far been heavily concentrated on the energy sector, which lends itself better to private sector involvement compared to road and rail investments which have traditionally been constrained to the public sector’s realm, usually for political reasons. There are a further 21 pre-qualified schemes embedded in the process currently, with the Hinckley Point C Power Station being by far the biggest. Even so, this leaves much room for more projects to be added until the Scheme’s expiry (in December 2016 at the earliest). One big advantage of the UK Guarantee Scheme is its flexibility and openness to direct proposals from potential investors. China has the ability to bring significant construction and engineering commitment to the UK, along with the ability to invest in infrastructure. 7.2 What is the likely form of investment from China into UK infrastructure and real estate? Trade agreements between China and Britain are already significant with state-owned China Development Bank wanting to invest in Britain’s high speed rail and next generation of new nuclear power stations. Another area of interest is in Britain’s telecommunications infrastructure. Our estimates show that the predominant infrastructure asset class for investment from China is energy assets where there is a clear need to add more capacity. This includes North Sea oil, along with investment in delivering a new fleet of nuclear power stations, as well as conventional and renewable power generation and transmission networks. China is keen to explore further investment into Britain’s new nuclear program. China has already invested billions into real estate and property in the UK with projects such as Airport City at Manchester Airport, Royal Docks in East London’s docklands and the development at Nine Elms, Battersea in London all being notable investments. Transport, including airport infrastructure, is high on China’s list of investment with China Investment Corporation having already taken a significant stake in London Heathrow Airport. China has also said that it would like to invest in Britain’s planned High Speed Rail network, as well as other key mega projects, such as the Thames Tideway Tunnel. Initial bids for the UK’s £4.2 billion Thames Tideway Tunnel project are due from prequalified parties in November 2014, including from China which is bidding for the project. Our research also shows that transportation and other infrastructure such as road, rail, airports, water and sewers are also of key interest to China. Britain has developed an openness in its policy towards developing trade between Britain and China and has fostered successive bi-lateral economic and trade cooperation between the two countries. Britain is determined to be a key part of the global growth story, which in the next several decades will be heavily driven by rising economic prosperity as well as growing populations and urbanisation across Asia. UK business leaders accept that developing strategies to work with investors from China and helping China realise projects in all sectors is currently a key part of their Boardroom agendas.

Huge efforts will need to be made to achieve integration. Anna Stewart Group Chief Executive Officer Laing O’Rourke

The UK has advantages in capital-intensive and hightechnology sectors which could hardly be matched by other countries. Zhen Yang Investment Department Citic Construction Co Ltd

Our research also shows that China is mindful that the best of Britain’s infrastructure and real estate businesses have a tremendous amount to offer to investors and partners from China. China is concerned about a number of key factors when investing in infrastructure and real estate projects in the UK, but this is not to do with China’s engineering and construction capabilities – here China has capability in spades. Top of the list for China is gaining the skills in understanding and navigating Britain’s complex regulatory environment in terms of delivering engineering and construction projects in the UK. This also includes the necessary skills to understand EU procurement, which Britain is a part of, and which upholds the principles of open competition across members of the European Union, as well as Britain’s complex planning system. Other key issues revolve around Britain’s immigration policies, labour laws and taxation and the need for visas and access when Chinese investors and companies operate within the UK The question of how this will change the nature, size and shape of the infrastructure and real estate sectors across Britain is a critical one for Britain and China. 7.3 How could China become involved in helping to build the infrastructure Britain needs? It is clear from our research that both UK and Chinese business leaders expect that strategic alliances and joint venture companies will need to be established, especially if China is to play its role in investing in and developing complex major construction and engineering projects. The need for these alliances is clear – China needs the skills to navigate Britain’s complex regulatory environment and Britain needs access to China’s money. Although China’s wall of money is tempting, our research also shows there is much more on offer from China. China’s economy is changing as we have already emphasised in this report and China is seeking new end markets for its products and services. High on its list are innovative and open western economies. Britain’s economy has already become one of the fastest growing in the developed world, along with the US. As a consequence the UK construction market, according to Global Construction 2025, is expected to grow at twice the pace of the rest of Europe over the next decade to 2025 and will eventually rival Germany’s huge construction market. As we have already explained Britain is and will continue to be one of the world’s most attractive destinations for investment in infrastructure and real estate from China. Our research shows that China has identified that Britain has attractive industries and products and services in capital-intensive and high-technology sectors that stand out amongst other western economies. China could set-up research and design centres in the UK, taking advantage of Britain’s strength in innovation and the development of leading-edge technologies. This attractiveness also hasn’t escaped the attention of other nations. Korea has also announced its intentions to increase investment into Britain’s economy, with infrastructure and real estate high on its list. Britain’s innovative industries and services sectors underpins our attractiveness index, as China turns its attention away from the resources it needs to fuel domestic investment, toward innovation and technologies needed to help China transform its domestic economy into a higher-end service-led economy.

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Our research, which includes interviews with some of the largest investors and contractors from Britain and China, concludes that China is keen to supply equipment and materials for infrastructure and real estate projects in the UK. China on the other hand does not intend to put many boots on the ground, as it has in Africa, to help it deliver projects in the UK. Equipment and materials from China need to comply with Britain’s regulatory requirements as well as pass stringent testing and meet high quality standards. This is especially so, if, for example, equipment and materials are to be incorporated into sensitive installations and projects, such as nuclear power stations or Britain’s high speed rail program.

Building an investment track record in a mature and stable market such as the UK will provide Chinese investors with experience and a reputation for high quality standards that they can use globally. Rob Mansley Head of Capital Markets UK Green Investment Bank

Equipment and materials must also be designed into infrastructure and real estate projects to meet the technical standards required. Having access to China’s vast manufacturing capacity and capability could potentially lower the end cost of Britain’s infrastructure and real estate projects if carefully handled and planned. China is also expected to acquire the skills to deliver large and complex infrastructure and real estate projects as an entry point to expand further into other highly regulated western markets and to consolidate its position in Britain. Our research indicates that the acquisition of the skills needed by China extends beyond the skills needed for the design and construction of large scale infrastructure and real estate projects within highly regulated markets and goes further into acquiring the necessary integrated operational management skills needed to operate and maintain infrastructure and real estate assets. We estimate investment into Britain’s infrastructure and real estate from China is expected to reach an accumulated £105 billion over the next decade to 2025. This includes over £43.5 billion of investment from China that we estimate will flow into UK energy infrastructure between 2014 and 2025. Almost £25.5 billion (of which £19 billion is transport related) of investment will flow from China into UK transport and other infrastructure between 2014 and 2025. Over £36 billion of investment will flow from China into UK real estate between 2014 and 2025. Our estimates for growth in investment in UK infrastructure and real estate from China takes account of the liberalisation of China’s vast capital, but assumes the process of liberalisation will be relatively slow with much of the flow of capital from China happening later than our forecast period to 2025. There are of course risks. The key risks are that a new financial crisis in China mainly as a result of high shadow banking liabilities will cause high profile failures within some sectors of China’s economy. These risks are not considered to form a part of our central estimates, but nevertheless are risks to the downside. It is true that economic growth in China will slow but China’s economy will still continue growing and is expected to become the world’s largest economic powerhouse by 2030. China’s economy is also changing and is already shifting towards becoming a more consumer driven service-based economy.

Apart from long-term returns, China is motivated by the opportunity to increase construction exports by bringing its supply-chain into Britain to complete projects.

Britain, and in particular London, is considered an attractive destination for China as London is one of the world’s leading financial hubs.

Mark Reynolds Chief Executive Officer Mace Group

China will invest and diversify investment of its vast foreign currency reserves to reduce its reliance on low yielding investments, including US national debt, and invest in tangible assets. Infrastructure and real estate are typically asset classes that can provide long-term stable returns.

China is willing to take construction risk on investment, but wants a slice of the action. Andrew McCaffery Global Head of Alternatives Aberdeen Asset Management

London will be the base for the first clearing bank outside Asia for RMB, supporting Britain’s push to be the leading western centre for RMB trading. People’s Bank of China has appointed China Construction Bank as the UK’s first clearing bank for RMB. London is competing with New York, Paris and other financial centres to be the top western RMB centre outside Asia.

Our research has given a greater depth and insight into how China views investment into Britain, and particularly into UK infrastructure and real estate. Apart from London being a global trading hub for RMB, China considers the UK to be one of the most competitive European countries in terms of corporate and personal tax and considers there are fewer labour regulations in the UK compared to the majority of other European economies. The openness of Britain’s economy and the relative relaxation in regulations has let the UK to be considered as the most favourable commercial environment among European economies. The UK is considered by China to be a safe and stable environment for investment, with a strong and stable legal system. China considers the UK to be the best entry point for China to learn how it will operate in the highly regulated markets of western countries. Like all investors, China looks at the balance of risk and reward, but the ability for China to supply equipment and materials into major programs and projects, using its vast manufacturing capacity and capability, is one sweetener that provides China with a balanced return, in exchange for taking the risk of early stage investment in large and complex infrastructure and real estate projects. Recent analysis by KPMG25 shows that UK contractors’ cash position has been seriously eroded during the period of the global financial crisis, and is likely, if anything, to get worse, due to a combination of a lack of pricing power in some markets and increased input prices from suppliers and subcontractors. China has a large cash position, making it easier to invest in infrastructure and real estate assets and invest capital into providing equipment, materials and resources for projects. Procurement of infrastructure, where narrow procurement definitions prevail, is very often not considered by China to provide a level playing field. China’s strength is in providing an end-toend solution, including finance, engineering and construction, operations as well as equipment and materials. Our research indicates that China will acquire the necessary skills it needs to operate in western markets, working in partnership with highly respected brand names, with easily recognisable standards of operation, management and quality, relevant to western markets. However, strategic alliances and joint-venture arrangements between China and British companies is in all likelihood the first step in China operating in the UK.

25 Analysis by KPMG of UK’s largest contractors, Building Magazine, 19 September 2014

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The UK’s links to China have consistently strengthened in recent months. In October 2014, the UK became the first western economy to issue debt denominated in renminbi. The debut government bond was hailed as a “great success” by the UK’s Chancellor George Osborne, after it attracted orders of nearly six billion renminbi (£600 million).26 It is clear from our research that UK business leaders are seeking to establish partnerships with China in the form of joint ventures. For some, entry by China into the UK market will 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 regulations. Our view is that over the next five to ten years, China will form alliances with UK real estate investors and developers, contractors, consultants, and suppliers to deliver infrastructure and real estate investments financed by China.

As Chinese investment into UK infrastructure has just begun, Chinese enterprises may look favourably towards the formation of joint ventures as they can provide many potential benefits. However, from cumulative lessons learned from international experiences, strategic alliances will gradually transform into independent investment.

Looking further ahead, to the end of this decade and beyond, we would expect to see China acquiring the skills it needs to operate effectively in Britain and other western markets.

Industrial and Commercial Bank of China

The larger European contractors could potentially make interesting partners in the longer term to China. As we point out, from the ENR Top 250 Global and International lists, European contractors have a much larger footprint, particularly in international contracting revenues, and also rival the larger contractors from China in terms of overall size.

Supply chain capacity bottlenecks are a real issue in the UK, and could ultimately be a constraint in the impact of investment from China.

There has been in the past a clear correlation between the size of any nation’s domestic construction and engineering market and the size of its domestic contractors. History shows that when Japan’s construction programs were larger, so too were the larger Japanese contractors. Today China dominates because of the sheer size and scale of its domestic construction and engineering market. International contracting revenues have increased the size of some of Europe’s top construction and engineering companies, along with those in the US. There are other nations coming up the rankings including from Turkey and with Korean contractors developing strategies for international expansion.

Keith Howells Group Chairman Mott MacDonald

Real estate investors and developers from China are similarly massive, with many owning and managing much larger portfolios of real estate assets, compared with UK counterparts. But, specialised businesses with a global footprint may be less likely to cede their independence – however, they will still seek the opportunities that massive investment from China will bring. For others, cash injections in exchange for equity, skills and know-how could prove attractive given the lack of liquidity. Skills shortages are already creating a bottleneck, even at a relatively early stage in the cycle. The worry is that the capacity isn’t there and there is a limit to how much Chinese investment can bolster capacity – i.e. China can’t bring the labour it may need into Britain – and this could be an ultimate constraint on the ability of Chinese investment to result in transformative growth of the sector. This could be where the might of China’s vast offshore manufacturing capability and capacity might help. In many cases, the reality is that partnership with China will ultimately be about creating ever more opportunities for China to export equipment and materials to the UK, and beyond into other western markets. The trend towards Chinese players being ever more important in the UK supply-chain seems inexorable.

26 http://www.ft.com/cms/s/0/8d157620-5388-11e4-929b-00144feab7de.html#axzz3GCibzGHl

Conclusions UK government and infrastructure policymakers will ultimately need to come up with a clear set of policies for investors to engage in Britain’s infrastructure; the need is clear, and the appetite is there. The UK is a very attractive marketplace for infrastructure investment, but “policy risk” remains a key barrier. Nick Ogden Partner and Head of Client Relationships, Global Infrastructure Sector Pinsent Masons LLP

The Chinese economic miracle is a well-versed story but it can be difficult to fully grasp its widespread implications. While a slowdown from the incredible sustained, double-digit growth in the size of the Chinese economy is unavoidable, even with a more sedate pace of growth China is still on course to become the world’s largest economy by 2030. The model of Chinese growth is shifting towards domestic consumption and with that in the direction of a more services orientated economy. This will mean that the rate at which it builds up cash reserves will slow, but this is from a massively expanded base and is still hugely significant. The research presented in the study illustrates the scale by which the stock of Chinese savings is likely to increase over the coming decade. This point appears hard to disagree with. But where will Chinese cash end up given capital controls and a still developing financial system in China? Commodity rich economies will still be in play for outbound Chinese investment but the emphasis seems likely to shift towards advanced economies, which have developed sophisticated skills and know-how. These will be increasingly valued highly by China as it looks to move up the value chain in moving from middle income towards advance economy status over the coming decades. Long run investment opportunities will be sought after and construction risk is not a problem for the Chinese, so infrastructure is an asset class that seems to fit the bill. The UK has suffered from chronic underinvestment in infrastructure and stands outside the global infrastructure premier league. A rapidly growing and ageing population means infrastructure challenges are only going to become more acute. The National Infrastructure Plan identified close to £400bn of investments that need to be made through to 2020 but we think the real infrastructure need for the UK is closer to £500 billion. Bringing everything together, the UK comes right up there as a destination that – by reasonable criteria – the Chinese would seek to invest in. The UK economy is finally entering a robust recovery following the financial crisis, has a sound business environment, an incredibly open economy and leading political figures that are increasingly seeking to embrace the opportunities that foreign investment brings. Hence, over the last couple of years we have started to see the beginnings of a major trend as a trickle of major Chinese investments has turned into a wave. Interestingly, the investments up to now have been in both existing assets – such as the holdings taken in Heathrow and Canary Wharf Group – but also injecting capital into new assets like the Manchester Airports Group and East London Royal Albert Docks deals. Our analysis suggests that this flow of investment will only accelerate over the coming decade, with the UK energy sector becoming a huge target for Chinese investment. We also expect significant increase in real estate, transport and utilities investment though expect growth in real estate investment to cool towards the end of the decade. Investment brings with it China’s massive construction and engineering corporations, and the opportunities this presents in the form of joint ventures with UK companies and the sourcing of equipment and materials from China’s vast manufacturing industries.

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There are major challenges ahead that could de-rail or at least delay the likely ramping up of investment from China. Most critically, how does the UK work out how to pay for its infrastructure needs? In a Parliament that will still be focussed on government deficit reduction, public investment in infrastructure is going to be subject to constraints no matter how much of a priority it is. Major tax rises to see infrastructure investment paid for out of the public purse seem unlikely â&#x20AC;&#x201C; so the buck will be passed to consumers and businesses through higher bills. But for all of this to happen major decisions from policymakers will have to be made, because the Chinese will only invest if returns are available and the rules of engagement are clear. There is no doubt that investment from China could transform the UK infrastructure and real estate sectors, but do policymakers have the answers to the policy challenges that lie in the way?

Right: Thames Tideway Tunnel. Boring machine, Lee Tunnel. 47

48 48

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Appendix: Methodological note on construction of composite index measuring infrastructure FDI attractiveness Pinsent Masons and Cebr’s Global Foreign Direct Investment (FDI) Attractiveness composite index, designed and produced exclusively for the purposes of this report, assesses the landscape of 146 economies and their potential to attract FDI flows for infrastructure projects from China in particular. Assessing a selection of key macroeconomic indicators across countries, we examine where Chinese global investment funds are likely to be headed. The final index is the result of a threestep process as follows: Step 1: Identifying relevant indicators We take into account the variety of factors that matter to investors by including a weightedaverage of many different components, each measuring a different aspect of attractiveness. These components are grouped into the following pillars: First pillar: Financial returns We identify the Compound Annual Growth Rate (CAGR) of real Gross Domestic Product (GDP) between 2013 and 2025 – as given by the economic model behind Cebr’s proprietary World Economic League Table (WELT) – as the most suitable indicator for capturing the importance of financial returns to investment. The indicator further acts to add a forwardlooking element to the rankings. In terms of output, it ranges from -2.1% for the slowestgrowing economy in the period (Equatorial Guinea) to 10.7% for the fastest-growing economy in the period (Bhutan). The equivalent figure for the UK is 2.0%, placing it among the fastestgrowing advanced economies in Europe, in front of the likes of the Netherlands, Germany, France, Spain, and Italy. The growth rates are then translated to fit a 1-10 scale in the second step of the methodology. We also include country size as a relevant indicator, to give an additional boost to countries that have sufficient scale to constitute a serious investment proposition. Country size is given by the Cebr’s WELT, with the UK expected to remain the world’s 6th largest economy in 2014.27 Second pillar: Non-financial returns Our estimates take into account the recent trend that has seen Chinese companies become increasingly concerned with reaping the non-financial returns to investment such as importing expertise and intellectual property. To capture this we have included an overall score for innovation to arrive at a country’s overall attractiveness score. This is given by the World Economic Forum’s (WEF) Global Competitiveness Index (GCI) score for technological innovation. It is based on a range of indicators, including soft data such as the public’s perception of companies’ capacity to innovate in a given country, of the quality of scientific institutions and the availability of scientists and engineers, of the extent to which companies spend on research and development (R&D) and collaborate with universities on R&D, and of the extent to which government purchasing decisions foster innovation. It further includes hard data such as the number of applications filed under the Patent Cooperation Treaty (PCT) per million population. Scores for individual countries range between 1 and 7 (best). The UK ranks 12th worldwide with a score of 4.9, again beating key advanced European economies such as France, Spain, Italy, and Norway.

Left: Crossrail Limited. Construction of Canary Wharf Crossrail station. 27 In current USD terms. For more information consult the WELT report here: http://www.cebr.com/reports/cebr-world-economic-league-table/

Third pillar: Business environment Foreign investment is more likely to flow to countries where there is a sound macroeconomic, legal, and competitive background to facilitate investment. We therefore include indices such as the Heritage Foundation’s Index of Economic Freedom, and the World Economic Forum’s Global Competitiveness Index (GCI) to measure overall competitiveness of the business environment, a quality valued significantly by investors. The Index of Economic Freedom focuses on four key aspects of the economic environment over which governments typically exercise some policy control such as the rule of law, government size, regulatory efficiency, and market openness.28 The UK ranks 14th globally with a score of 74.9%. The GCI is aimed at measuring competitiveness and encompasses 12 pillars: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation.29 The UK ranks 10th worldwide with a score of 5.37 (on a scale of 1 to 7). Fourth pillar: Potential for infrastructure investment We invert countries’ score on quality of overall infrastructure – as measured in the WEF GCI infrastructure pillar – in order to uncover where there is potential for sustained, long-term infrastructure investment. The UK, while one of the world’s most advanced economies, ranks very poorly in terms of its infrastructure quality. It comes 27th overall with a score of 5.4 (on a scale of 1 to 7), behind Oman, Bahrain, Barbados, Malaysia, and Taiwan, among others. We further look into the necessity of external funds to improve infrastructure quality. This is proxied by the inverted capacity to meet infrastructure needs with domestic funds, as measured by the national savings ratio. The UK has a relatively low national savings ratio of 10.8%, meaning that external finance will be a key factor in driving improvement in the quality of infrastructure. Step 2: Harmonising indicators to a comparable scale, taking account of outliers The second step of constructing the composite index involves re-basing all different indicators to fit a harmonised scale of 1-10. The objective of this scoring process is to make comparable the indicators originally measured in different scales. In order to do this, we adopt a formula approach, where the maximum (10) and minimum (1) values are attributed to the highest and lowest score respectively. The span between the two floors is split evenly according to the following formula: 9*((country value x less minimum value) / (sample maximum less sample minimum)) + 1 In those cases where the higher values indicate lower attractiveness (such as quality of infrastructure and national savings ratio), then the order has to be inversed for scoring with the following formula: -9*((country value x less sample minimum) / (sample maximum less sample minimum)) +10 We account for outliers (extreme values), defined as those exceeding three times the median value of the sample by giving them the top score value. For example, when we measure country size, the US, China, and Japan are all given a score of 10, with Germany following with a score of 8.02. This ensures that the average score of the 146 countries remains in the middle range. Step 3: Bringing indicators together to build the composite index, assigning different weights to different indicators according to their importance The final step involves aggregating the individual indicators to an overall composite index. This is done by assigning different weights for each indicator, before eventually aggregating them to form the FDI attractiveness Index. The quality of overall infrastructure has been given a double-weight compared to all other indicators to emphasize the importance of serious longterm potential for investment in assessing attractiveness. 28 Source: http://www.heritage.org/index/book/methodology 29 Source: http://reports.weforum.org/global-competitiveness-report-2014-2015/

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Appendix: Note on Foreign direct investment (FDI) definitions According to the standard definitions used by the United Nations (UN), the Organisation for Economic Cooperation and Development (OECD), and the UK Office for National Statistics (ONS), which are followed in this report, Foreign Direct Investment (FDI) refers to an investment made to acquire lasting interest in or effective control of enterprises operating outside the economy of the investor. FDI net inflows (outflows) are the value of inward (outward) direct investment made by nonresident (resident) investors in the reporting (external) economy, including reinvested earnings and intra-company loans, net of repatriation of capital and repayment of loans. FDI stock at a given point in time refers to all direct investments while corresponding flows related to investment during a period of time. Foreign Portfolio Investment (FPI) refers to foreign investments of a more temporary nature such as investments in stocks and bonds that are easily traded and not necessarily associated with the ownership of shares in the company that is being invested in. This type of investment is not considered as part of our research here. Finally, there is an “other” category in official statistics that includes trade credit, financial derivatives, and reserve assets. These are also not considered as part of our research here.

Right: Thames Tideway Tunnel. The Thames Tideway Tunnel will tackle discharges from London’s largest combined sewage overflow at Abbey Mills Pumping Station in Stratford. 51

Appendix: List of Chinese Foreign Direct Investments into the UK, 2005-2014 Date

Value ($m)

Asset

Investor

Sector

July 2005

100

Nanjing Auto

Transport

November 2006

800

Anglo-American

China Development Bank

Metals

July 2007

3040

Barclays

China Development Bank

Finance

April 2008

2010

SAFE

Energy

July 2009

370

Diageo

CIC

Agriculture

August 2009

450

Songbird Estates

CIC

Real estate

August 2009

880

Emerald Energy

Sinochem

Energy

February 2010

960

Apax Finance

CIC

Finance

January 2011

510

INEOS Britain

CNPC

Energy

January 2012

920

Thames Water

CIC

Other

Weetabix

Bright Foods

Agriculture

May 2012

1940

May 2012

440

Drapers Gardens, London

SAFE

Real estate

June 2012

200

Veolia Water

SAFE

Other

July 2012

1500

Talisman Energy

Sinopec

Energy

October 2012

410

Heathrow Airport

CIC

Transport

November 2012

400

Deutsche Bank HQ

CIC

Real estate

December 2012

110

One Angel Square

SAFE

Real estate

February 2013

150

Manganese Bronze

Geely Auto

Transport

February 2013

840

UPP Group

SAFE

Real estate

March 2013

750

Ropemaker Place

SAFE

Real estate

May 2013

1590

Royal Albert Dock

ABP

Real estate

June 2013

1090

One Nine Elms

Wanda

Real estate

June 2013

500

Sunseeker

Wanda

Transport

July 2013

390

Lloyds Building

Ping An

Real estate

October 2013

200

Ipswich R&D Centre

Huawei

Technology

October 2013

220

Airport City, Manchester

State Construction Engineering

Real estate

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Date October 2013 November 2013

Value ($m) 762 1240

Asset

Investor

Sector

Crystal Palace

Zhongrong Holding Group

Real estate

Chiswick Park office

China Investment Group

Real estate

January 2014

770

Standard Bank

ICBC

Finance

January 2014

980

Ram Brewery

Greenland Group

Real estate

March 2014

200

Emerald Automotive

Geely Auto

Transport

March 2014

990

Hertsmere Development, Canary Wharf

Greenland Group

Real estate

April 2014

790

House of Fraser

Sanpower

Other

June 2014

187

111 Old Broad St, London

China Construction Bank

Real estate

June 2014

950

Songbird

China Life

Real estate

July 2014

Xmos

Huawei

Technology

Source: Heritage Foundation and Pinsent Masons

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Eddington, R. (2006), ‘The Eddington Transport Study: The case for Action’, HM Treasury

House of Commons Committee of Public Accounts (2013), ‘HM: Treasury: Planning for economic infrastructure’

Barro, R.J. (1990), ‘Government Spending in a Simple Model of Endogenous Growth’, Journal of Political Economy

Egert, B., T. Kozluk and D. Sutherland (2009), ‘Infrastructure and Growth: Empirical Evidence’, OECD Economics Department Working Papers, No. 685, OECD Publishing

Infrastructure UK (2014), ‘Infrastructure cost review 2014’, HM Treasury

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Engineering News Record (2014), ‘ENR The Top 250 Global Contractors’ Engineering News Record (2014), ‘ENR The Top 250 International Contractors’ Global Construction Perspectives and Oxford Economics (2013), ‘Global Construction 2025, a global forecast for the construction industry to 2025’, A report sponsored by the world’s largest construction and engineering corporations

International Monetary Fund World Economic Outlook (October 2014), ‘Is it time for an infrastructure push? The macroeconomic effects of public investment’ KPMG (September 2014) Analysis of UK’s largest contractors, Building Magazine, 19 September 2014 Knight Frank LLP (2014), ‘Global Cities, The 2015 Report’ National Infrastructure Plan 2014, September 2014 update HM Treasury

G20 (2014), ‘A G20 Agenda for Growth and Resilience in 2014’

Office for Budget Responsibility: Economic and Fiscal Outlook (2014), HM Treasury

Haldane, Andrew, ‘Twin Peaks’ speech given at the Kenilworth Chamber of Trade Business breakfast, Kenilworth, 17 October 2014, Bank of England

Office for National Statistics (2013), ‘The Pink Book’

Helm, D., J. Wardlaw, and B. Caldecott (2009), ‘Delivering a 21st Century Infrastructure for Britain’ The Heritage Foundation (2014), ‘Index of Economic Freedom’ The Heritage Foundation (2014), ‘China Global Investment Tracker’

Right: Crossrail Limited. Artist’s impression of the new Paddington Station. 54

Ofgem (2013), ‘Electricity Capacity Assessment Report 2013’ United Nations Conference on Trade and Development, ‘Foreign direct investment flows and stock’ Weisdorf, Mark A. (2007), ‘Infrastructure: A Growing Real Return Asset Class’, CFA Institute World Economic Forum (2014), ‘Global Competitiveness Report 2014-15’

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