Hong Kong investors have emerged as a force in mainland efforts to build more highways, a sector that has been lagging behind economic development. Their interest, primarily in toll-road construction, has lifted the financial burden for infrastructure investment from the shoulders of the budget-strapped central government and provincial and city administrations. In return, Beijing has been forced to offer foreign investors guaranteed favourable rates of return and other profit guarantees. Hong Kong companies have taken the bait. China Merchants Holdings (International) managing director Sun Yin said the advantages of toll-road investment included strong cash income, good returns, and low risk. Red-chip CMHI began investing in the sector in the middle of last year. To date, the company has placed HK$3.54 billion in five toll roads in Guangdong, Fujian, Zhejiang, Guangxi and Guizhou provinces. Its parent, China Merchants Holdings, has spent an additional HK$6 billion on four other roads. Internal rates of return for CMHI's toll roads average 15 per cent, with co-operation tenures extending between 25 years and 30 years. 'The return periods of other investments, such as manufacturing, are not particularly short, but they bear more risks from production and sales problems,' Mr Sun said. 'Toll roads are different. Once they are open to traffic, they will bring in cash income every day.' Toll roads, in fact, had overshadowed shipping as the group's largest asset sector, and this year might become the largest profit contributor as well. Yet even before CMHI entered the mainland toll-road market last year, the sector was stacked with Hong Kong investors. New World Infrastructure, the infrastructure arm of New World Development, boasts heavy exposure in mainland toll roads, complementing its investment in other infrastructure, such as power plants. The company has invested in 28 roads in Guangdong, Guangxi, Hebei, Jiangsu and Sichuan provinces. By the end of last year, the value of that commitment amounted to US$993 million. For the year to June last year, New World Infrastructure's toll-road projects recorded an attributable operating profit of HK$210 million, generated by 13 operational projects, accounting for 30.8 per cent of the company's attributable operating profit. Internal rates of return for NWI's projects are believed to be higher than those of CMHI. An NWI spokesman said the company's strategy was to maintain a minimum rate of return of 18 per cent for its road projects. Competition in the field was increasing because investors were showing increasing interest in the toll-road sector. 'The intensive competition has caused some impact on contract negotiations, such as the terms of rate of return, investment cost and shareholding in the projects,' the spokesman said. Among the competitors are Road King Infrastructure, which has invested HK$5 billion in 20 road projects, and Cheung Kong Infrastructure (CKI), which said it had invested HK$6.4 billion in 17 road projects. CKI refused to disclose its internal rates of return, but group managing director Kam Hing-lam said most of its projects had contracted minimum guaranteed returns and foreign exchange protection. 'The minimum returns have formed a floor - not a ceiling - on the return structure, and are generally supported by existing cash flow or projected cash flow generated from the projects themselves,' he said. Nearly all of the company's returns were denominated in US or Hong Kong dollars to safeguard against foreign exchange risk, Mr Kam said. CKI's strategy is to invest in projects which are operational or under construction, to avoid the construction uncertainties faced by green-field projects. 'Operational projects are able to offer immediate cash flow and return on investment, making them a preferable choice,' Mr Kam said. Mr Kam also said CKI's wide-ranging infrastructure investments benefited from synergy between its investments and projects operated by its parent, the Cheung Kong group. In Shantou, for example, CKI has investment in road and power plants, while Hutchison Whampoa, another member of the group, operates a container terminal. 'These industries are vital to Shantou's import-export economy, providing the city improved overseas transportation through the port, and better inland transportation through CKI's road network. 'As the projects grow and expand, they provide benefits for each other, and they facilitate the city's economic development as a whole,' he said. Other Hong Kong toll-road players include Hopewell Holdings, the pioneer of the sector, which in the 1980s took part in the construction of Guangzhou-Shenzhen Superhighway. Meanwhile, red-chip Guangzhou Investment has spun-off its mainland toll-road arm, GZI Transport, and Guangdong Investment has set up a toll-road joint venture with the commercial arm of the Guangdong Provincial Communications Department. Newly listed Beijing Enterprises and Tianjin Development also have included toll roads in their asset portfolios. China Travel International Investment, Minxin Holdings, China Overseas and Shanghai Industrial Holdings all are involved in mainland toll-road investment. China Travel International jumped into the market last year, investing $337 million on a toll road in Tianjin and three toll bridges in Fuzhou jointly with its parent China Travel Service (Holdings). Executive director Zheng Hongqing, also director and deputy general manager of the parent, said: 'We are optimistic of the mainland's toll-road market as it is one of sectors supported by the state. 'As the Chinese economy will develop steadily in the future and the living standard will be improved, a better road network is needed to cope with increasing traffic flow,' he said. Despite the keen competition, some players are calling for the central government to provide preferential treatment to infrastructure investors - such as exchange-rate guarantees as an incentive to foreign companies - especially in the wake of the regional financial crisis which has focused depreciation pressure on the yuan.