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Asia-PacificJuly 31 2007

China: words not deeds

China, the fastest developing country in the world, with a 10.7% gross domestic product (GDP) growth in 2006, is a very indicative example.
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“The Chinese market is interesting for its size,” says Edward Farquharson, assistant director at Partnerships UK and in charge of advising countries around the world on PPP models. “Nonetheless, nobody underestimates the complexity and difficulty of the market, especially if you are asking someone to get into a 25-year contractual relationship with the public sector.”

John Mobsby of PPP consultancy Mobsby Associates says: “I was involved in a water project in China and it was a bit of a nightmare. They just get into a mess for all sorts of bureaucratic and political reasons.” So, what do investors and lenders need to make PPPs in emerging markets worth their effort?

One key aspect is political support. China seems to welcome partnerships with the private sector but it seems to be a promotional effort, limited to seminars and meetings to discuss PPP in the country.

“PPP is a growing area in China,” says Richard Wageman, attorney at Beijing-based law firm Lehman, Lee and Xu. “From our particular practice, we see a large number of private equity businesses and companies that are coming to China hoping to develop projects under this model. [PPP] gives them stability of their investment and a reasonably good level of returns. In the past couple of months, we have seen government’s encouragement to promote these kinds of [deals].”

Despite the interest that Mr Wageman has witnessed, it is difficult to encounter PPP projects in the country – or at least PPP projects where international investors are participating. China, as well as other emerging markets, has sufficient liquidity and local banks have the capacity to lend to local providers.

“China hasn’t had to bother much with international constructors or lenders, apart from in some exceptional cases where particular specialised technology is needed, like with the magnetic levitation [Transrapid] train in Shanghai, developed by Siemens,” says Mr Leatherdale. “That is proprietary technology that Siemens has and it could possibly create a financing opportunity for the supplying company, its lenders and – when export credit cover is required – the export credit agency, such as Hermes of Germany. But these examples are fairly rare.”

Siemens is one of the few foreign investors that is active in Chinese PPP. Siemens Financial Services has set up an equity investment company, Siemens Project Ventures, to invest in infrastructure projects around the world. Its latest project is a partnership with the Tongji University, which includes German facility manager Asklepios Kliniken, for the development and management of a hospital in China.

Siemens Project Ventures, however, acknowledges that not all PPP projects are successful according to the private sector side of the partnership because the political and legal framework conditions keep changing, raising the possibility that existing agreements can be invalidated.

“Healthcare in China has until now been very much regulated,” says Wolfgang Bischoff, managing director of Siemens Project Ventures. “Obtaining a licence requires quite a long discussion with authorities.” However, the company has seen developments in the country’s legal system that could encourage foreign investment.

“China has made important progress in regulating private infrastructure investments,” says Björn Blüml, vice-president and project director at Siemens Project Ventures. “We observe trends, including increased legal safeguards and improving protection of private property, along with the country’s desire to boost the economic efficiency of investments. These developments may create a positive future for PPP projects in China.”

The healthcare project will receive an investment of more than €100m and the partnership has been approached by numerous lenders, both international and local, says Siemens. The company anticipates it will include an export credit agency tranche in the deal – as for other project finance deals, ECAs can provide both debt lending and some insurance against political risk.

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