Foreign firms look north from Hong Kong

Companies like Serco establish bases in the city as Beijing opens the bidding for US$55b of work

PUBLISHED : Saturday, 14 September, 2013, 12:00am
UPDATED : Saturday, 14 September, 2013, 4:25am

Hong Kong could be set for a surge in the number of foreign infrastructure firms setting up in the city after a landmark decision by Beijing's Municipal Commission of Development and Reform to allow overseas companies to bid for US$55 billion worth of projects.

British firm Serco, the world's biggest services company with particular expertise in transport projects, became the latest international company to relocate its regional headquarters to Hong Kong, following General Electric, the American infrastructure, technology and finance giant, which moved its global operations office to Hong Kong in June.

[Beijing] is careful in directing where it wants foreign funding

Management consultancy McKinsey calculates that mainland spending on infrastructure between 1992 and 2011 reached 8.5 per cent of gross domestic product, compared to an average of 5.5 per cent in the developing world. The largest share of that spending went on roads, the power industry, railways and water; investment in those areas has until now been dominated by state capital.

Financial advisory firm KPMG noted in a report released earlier this year that with the Chinese government aiming for 7 per cent annual GDP growth for the period up to 2015 and turning to alternative sources of finance, infrastructure investment was becoming increasingly open to private capital.

London-based Serco, which operates Hong Kong's Cross Harbour and Aberdeen tunnels and maintains all red-light traffic enforcement cameras installed at intersections in the city, is eyeing that trend as it seeks to boost its global businesses, which last year generated revenues of some US$4.5 billion.

Rod Chisholm, Serco managing director for Asia, said his priority was to grow the group's business on the mainland, targeting infrastructure along with healthcare.

"The Chinese government has seven or eight rapid transit systems in second-tier cities under construction now, and construction on another 11 is due to commence in the next two or three years. So what we hope to do is share the success we have had elsewhere," said Chisholm, referring to Serco's management of London's Dockland Light Railways and Dubai's metro.

Half of the infrastructure projects approved by the National Development and Reform Commission last year were for rail transit and intercity railways, according to KPMG.

In July, the State Council raised the 2013 target of railway fixed-asset investment - from state and private money combined - to 690 billion yuan (HK$874 billion), after it reached 200 billion yuan in the first half.

Foreign companies have until now not been permitted to have a controlling interest in the construction or operation of rail networks or passenger services.

But the Ministry of Railways announced in May last year that private capital would be given equal market entry access in an effort to make its railways more competitive.

Moreover, qualified foreign institutional investors (QFII) are now allowed to hold railway bonds, and the amount of assets under management to be eligible for QFII status was reduced from US$5 billion to US$500 million in July last year.

As a result, a significant number of new players are entering the financing market, though foreign players may find themselves pitted against the vested interests of state and private players alike.

Seung Chong, an M&A partner at law firm Orrick, said that while foreign investment in the rail sector was encouraged, it was welcome in specific sectors only.

"The government is careful in directing where it wants foreign funding and, in some cases, foreign investment is restricted and PRC shareholders must be in control," Chong said. "This reflects China's overall approach of balancing need and access."