Infrastructure in China

Transcription

1 INFRASTRUCTURE Infrastructure in China Sustaining quality growth kpmg.com/cn

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3 Sustaining quality growth Infrastructure in China 3 Contents 4 Introduction 6 12 th Five-Year Plan 10 Roads 14 Railways 18 Metro and light rail 20 Ports 24 Airports 28 Water and waste 34 Energy 42 KPMG s Global Infrastructure practice

4 4 Infrastructure in China Sustaining quality growth Introduction Both the world economy and the Chinese economic landscape have faced major challenges since 2009, in the aftermath of the global financial crisis. Gross domestic product (GDP) growth continued in 2009, 2010 and 2011, bolstered by support from the RMB 4 trillion government stimulus package announced in late 2008, but growth rates slowed from the double digit annual rates previously achieved. Moreover, the continuing weak recovery of many economies overseas and the impact of tighter domestic monetary policy and other administrative measures, implemented to tackle China s hot property sector in particular, resulted in generally tougher business conditions in 2011, which continued into However, growing signs could be seen in the latter part of 2012 of a more stable Chinese economy emerging which resulted in fourth quarter GDP growth of 7.9 percent and which helped bring the annual GDP growth for 2012 to 7.8 percent. In this publication we outline the key trends and developments in the Chinese mainland infrastructure sector since 2009, a period in which the sector benefited significantly from the acceleration of infrastructure projects as part of the above stimulus package. We also discuss the implications of the latest Five-Year Plan ( ), which sees a shift in emphasis from the rapid economic growth of previous years to higher quality, sustainable growth for the future. The recently closed 18th Party Congress saw a new generation of leadership coming to the fore, who are set to steer China s development for the next 10 years. Among many other important initiatives, the new leadership announced building an ecological civilisation as an official policy initiative, together with economic, political, cultural and social developments. In addition, an ambitious goal was set that by 2020, both GDP and average individual income would double their current levels. These initiatives convey a message of creating a high-quality standard of living for the citizens. Demand for infrastructure, particularly those related to people s livelihood and the environment, will be strong. We are seeing greater opportunities for both domestic and foreign players to invest private sector capital in infrastructure projects. The fiscal constraints faced by local governments on the frontline of infrastructure construction and development are creating conditions that may encourage faster development of the alternative financing and procurement methods seen in mature Western economies. Central government support and policy initiatives in this area will be areas to watch in the medium term. Over half of the population now live in urban areas (681 million people out of a total 1.34 billion at the end of 2011) and the United Nations forecasts that the proportion of urban dwellers will reach 75 percent by 2050 (another 300 million plus individuals). 1 Whether the pace of urbanization will continue as expected over the next 30 to 40 years is uncertain, but it is likely there will be continuing demand for more and better infrastructure as new urban areas develop and existing cities expand. As China moves ever closer to being the largest economy in the world, its growth and development will remain at the top of the agenda for politicians, business leaders, economists and scholars, both inside and outside the country. Enhancing infrastructure such as water, power, transport, communications, education and healthcare, which are needed to support nearly all aspects of modern life, will be vital ingredients for achieving sustainable, high quality growth in the future. Stephen Ip Partner and Head of Government & Infrastructure sectors, KPMG China Peter Fung Global Chair, KPMG Global China Practice 1 World Urbanization Prospects: The 2011 Revision (

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6 6 Infrastructure in China Sustaining quality growth 12 th Five-Year Plan

7 Sustaining quality growth Infrastructure in China 7 On 14 March 2011, the National People s Congress approved a new national development program for the five years to The plan marks a turning point in China s economic development; no longer is the emphasis on headline growth. Rather China seeks higher quality growth. Having raised the living standards of hundreds of millions in the last 30 years, China is now seeking sustainable growth through overcoming challenges such as pollution, intensive energy use and resource depletion. To achieve this higher quality growth, the government intends to move China s production capabilities up the value chain, reduce the disparity between differing social and geographic groups, and promote domestic consumption, and, by doing so, make more efficient use of the country s resources. 2 The 12 th Five-Year Plan identifies seven priority industries for public and private sector investment, the aim of which is to move China up the value chain and promote better energy efficiency and sustainable use of resources: New energy Energy conservation and environmental protection Biotechnology New materials New IT High-end equipment manufacturing Clean energy vehicles. Key infrastructure developments The 12th Five-Year Plan targets a continuation of the shift in focus to domestic consumption seen over the last five years and production of higher value-added products. This should see changes in transport and logistics needs, as well as reduced emphasis on investment opportunities in export-oriented industries. However, it will also lead to more opportunities for improving technology levels and quality in the transport service industry. Sustainability and a lower carbon economy are also key focuses of the latest Five-Year Plan. This is likely to have further implications for the transport and logistics sectors, as they are both heavy emitters of carbon dioxide. The corresponding challenges and opportunities involve embracing the greater demand for domestic logistics arising from the added focus on internal consumption-led growth. Coal-based power generation and other carbon-intensive industries will be the most affected by sustainability targets, although more opportunities in the renewable and clean energy sectors should be evident. With the 12th Five-Year Plan s seven percent annual GDP growth target for the period up to 2015 and the government starting to look more closely at alternative sources of finance, infrastructure investments are increasingly being opened to private capital. Relaxed rules on Qualified Foreign Institutional Investors and other forms of direct and indirect investment have improved the outlook. Foreign investments have traditionally been welcomed where technology or expertise are lacking in China. For example, renewable energy and nuclear power have seen substantial injections of local and foreign capital for that reason, with French firm Areva and onshore wind power manufacturers such as Vestas and Suzlon all participating in the Chinese market. 3 The 12th Five-Year Plan focuses on moving China up the value chain and to a more sustainable model of quality economic growth, and many opportunities are emerging in higher value-added technologies. Substantial investments in roads, railways, and other kinds of economic infrastructure have been integral to the Chinese growth story, and seem likely to continue to be so as China seeks to become less reliant on exports, and more reliant on the domestic market. On 5 and 6 September 2012, the National Development and Reform Commission (NDRC) approved the launch of 55 major infrastructure projects (see table on page 8). Ten environmental protection projects have been approved, nine of them initiated in western China, while seven projects have been initiated for port construction and channel reconstruction, five in the east and two in central China. There are a total of 13 highway construction projects, evenly disbursed throughout the eastern, central and western regions of China. Finally, 25 rail transit and intercity railway projects have been approved, 16 in the east, six in the west and three in central China. The majority of NDRC-approved infrastructure projects (45 percent) are for rail transit and intercity railways. The eastern region still leads the central and western region in terms of infrastructure development and approved projects. 2 12th Five-Year Plan 3 Business Monitor International China Infrastructure Report; Q2 2012

8 8 Infrastructure in China Sustaining quality growth Infrastructure projects announced by NDRC in September 2012 Region Industry East Middle West Total Environmental protection Port construction and channel reconstruction Highway construction Rail transit and intercity railway Total Source: National Development and Reform Commission (NDRC) The following information is related specifically to each individual provincial plan. These plans have been approved but their funding has not been initiated. In 2012, many provinces and cities also officially announced major construction plans in the infrastructure field. In July, Guangdong province announced 44 new projects with a total investment of RMB billion. Traffic and urban construction account for close to 60 percent of these projects. In August, Guizhou approved development of its ecological culture tourism industry and close to RMB 100 billion will be used for transportation, hospitals and other infrastructure construction. One of the most ambitious investment plans has come from Sichuan province with an announcement on 25 September 2012 to spend as much as RMB 3.7 trillion by The plan specifies 2,242 key projects including around RMB 1.5 trillion for infrastructure construction with other industrial projects and projects for people s well-being, and social welfare and environment accounting for the balance. Including Sichuan, the total announced expenditure by other regions and cities up to September 2012 is over RMB 10 trillion. 4 The local government s investment plans in the past several months can be attributed to the central government s plans to focus on transportation infrastructure and construction. Nearly 20 percent of funds focus on environmental protection and new energy. Transportation infrastructure investment has a strong impact on improving domestic demand from traditional industries, such as steel and cement. Presently, these traditional industries face a serious over-capacity problem, but the stronger demand will help reduce the negative effects of production over-capacity. On the other hand, environmental protection and new energy have become major components of China s 12th Five-Year Plan. Significant investment plans in these industries show the increasing attention from local governments on the importance of stimulating domestic demand in the short term and sustainable growth in the long term. To ensure high quality economic growth, upgrading industries has gradually become a common approach of local governments. We can observe that most of the investment focuses on the key provinces and cities of the Great Western Development Strategy ( 西 部 大 开 发 ), and the development of the western regions in China in the next five to ten years. Inner Mongolia, Shaanxi, and Gansu are provinces where most of China s resources lie but at the same time are major provinces that face serious pollution problems. Investments in environmental protection and highway construction in these regions fit the local development characteristics, and also help local governments create more potential investment demand. On the other hand, transport construction within the eastern cities is concentrated on rail transit; the key purpose is to ease traffic congestion and shorten intercity travel time. At the same time local governments are also paying more attention to the quality of economic growth, and trying to solve local problems encountered in the process of developments. Limited financing channels, fund shortage, low investment returns and recurring construction are key challenges that local governments are currently facing. In order to ease financing pressures, the Ministry of Housing and Urban-Rural Development (MOHURD) has issued a notice which lays out the implementing opinions (the opinions ) on further encouraging private capital into municipal public utilities. The opinions state that private investment in the construction of municipal public utilities will be eligible for the same treatment as other types of investment, and not subject to any additional conditions. 4 Shanghai Daily 25 September 2012 Sichuan invests US$582b to lead local spending 2Binvests%2BUS582b%2Bto%2Blead%2Blocal%2Bspending/

9 Sustaining quality growth Infrastructure in China 9 MOHURD s opinions state that direct investment of private capital is encouraged to be made, through wholly-owned companies, equity and cooperative joint ventures as well as asset acquisition, in the construction and operation of projects in urban gas supply, heat supply, sewage treatment and household garbage disposal. Private capital is encouraged to participate, through equity and cooperative joint ventures, in the construction of transport facilities like roads in cities, bridges, railways and public car parks. The opinions stress that based on the characteristics of different sectors and circumstances in different regions, the government can resort to methods such as shareholding or appointment of public-interest directors to retain the necessary control over these utilities. Furthermore, the opinions emphasize that the government should strengthen the monitoring of prices and costs of municipal public goods and services. A regular supervision system on the costs of goods and services should be instituted to collect updated information on enterprises operating costs. Such information will be used by the government as a basis for setting prices, with a view to putting in place a scientific, reasonable price setting mechanism to prevent unreasonable hikes in costs and prices. 5 5 HKTDC, 1 August 2012, Policies to encourage private investment in municipal public utilities

10 10 Infrastructure in China Sustaining quality growth Roads

11 Sustaining quality growth Infrastructure in China 11 Years of continual growth in road construction have given China a vast network of highways and expressways, especially in the eastern regions of the country. Since 2000, China s expressway network has grown annually by over 16 percent, 6 now making it the second largest in the world at over 75,000 km by The 11 th Five-Year Plan outlined an increase in the National Trunk Highway System (NTHS) to 65,000 km by However, helped by the 2008 government stimulus package, at the end of 2010 the NTHS network was over 74,000 km. The 12th Five-Year Plan has outlined further expansion, targeting an increase in the NTHS to 83,000 km by 2015, 8 linking at least 90 percent of cities with populations of over 200,000. The proportion of Class 2 or above highways is expected to increase from 62 percent of the total highway network to 70 percent, comprising a total of 650,000 km by 2015, 9 an increase of 45 percent from 2010 levels. 10 New vehicle registrations in China With the slowdown seen in China s GDP growth rate in 2012, there was a small decrease in the proportion of road investment in the first half of 2012 comprising 4.4 percent of total fixed asset investments in China for the period, down from 5.3 percent in H Nonetheless, various factors suggest more construction is still needed in the years ahead: Increased focus on domestic consumption, driving increased freight and logistics transport within China, and the need to reduce the costs of such transport. Forecast annual GDP growth of seven percent or more beyond Demand for vehicles is still substantial; China is already the world s largest car market, but per capita ownership is significantly lower than more developed nations. Highway investment is an important factor in supporting the success of China s Go West policy. 180 Number of new vehicle registrations (in hundred thousands) Passenger Truck Others Source: China Statistical Yearbook 2011, Vehicle Registrations On the supply side, the national highway plan is structured around a 34-trunk network; seven highways radiating from Beijing, nine north-south vertical expressways and 18 horizontal expressways. 12 The system will connect more than one billion people around China, as well as major ports and railway infrastructure. There are also a number of smaller rural road constructions planned, with the 12 th Five-Year Plan stating that by 2015, all townships and 90 percent of villages will be accessible by road. 6 KPMG Analysis 7 Business Monitor International China Infrastructure Report; Q th Five-Year Plan 9 Transportation 12th Five-Year Development Plan KPMG Analysis 11 China Bureau of Statistics, Investment in Fixed Assets, July th Five-Year Plan

12 12 Infrastructure in China Sustaining quality growth Private sector involvement The majority of highway and expressway construction and maintenance are traditionally conducted by local city governments; but this poses significant pressures on their fiscal budgets. Since the establishment of the first Build, Operate and Transfer (BOT) concession in the 1990s, the private sector has been more actively courted to participate in the toll roads sector. However, while there are now more than 70 percent of the world s toll roads within China, 13 the private sector still plays only a minor role in Greenfield construction, accounting for a mere seven percent of expressway financing in China. 14 Nevertheless, there has been an increasingly active secondary market, as local authorities and domestic construction companies start to look to release capital from their assets. Previously this was facilitated through initial public offerings (IPOs); the Jiangsu, Zhejiang, Anhui, Shenzhen, Huayu and Sichuan Expressway companies are all listed on the Hong Kong Stock exchange as H-shares. Much of the capital raised through an IPO is targeted for reinvestment into building more expressways. Infrastructure focused funds and other operators have also begun to invest in Brownfield assets, although deals have often been aborted due to valuations that needed to be supported by overly optimistic traffic forecasts. However, fundamentals appear strong, with a large recovery in traffic in 2010, and double digit growth in revenues for the Jiangsu Expressway, Zhejiang Expressway, Shenzhen Expressway and Sichuan Expressway. 15 The July 2012 China Insurance Regulatory Commission (CIRC) decision to allow insurance companies to invest up to 10 percent of their balance sheets in both real estate and private equity, 16 as well as expected growth in infrastructure investments from other pension and equity funds, means pricing for good operating assets is becoming increasingly competitive. Nonetheless, with private sector investment in fixed road assets increasing 39.7 percent year-on-year for the first half 2012, 17 solid growth in the roads sector looks likely to continue. Growth of expressways in China Total length of expressways (in ten thousand kilometers) Source: China Statistical Yearbook 2011; 12 th Five-Year Plan 13 Xinhua News Agency, 6 August Thomas White Global Investing: BRIC Spotlight Report: Toll Roads in China, June Thomas White Global Investing: BRIC Spotlight Report: Toll Roads in China, June Asian Venture Capital Journal; 26/7/ China Bureau of Statistics

13 Sustaining quality growth Infrastructure in China 13 The Ministry of Communications planning department said that present highway construction funding is sourced as follows: 6 7 percent from central financial investment, percent from local governments, and the remainder from commercial banks and policy bank loans, as well as foreign capital and private capital investment. Introducing private capital played a very significant role in easing pressure from other sources and allowing the government to redirect funds elsewhere. Guizhou is one example of maximizing the degree of private investment related to traffic construction. When deciding on the construction model, Guizhou adopted BOT combined with EPC (engineering, procurement, construction) as a means to assist the government. By Guizhou introducing private capital into the construction of highway infrastructure, the local operation increased the diversification of funds and helped solve the problem of fund shortage. It also helped break up any monopolistic competition and improved the industry s management standards and efficiency.

14 14 Infrastructure in China Sustaining quality growth Railways

15 Sustaining quality growth Infrastructure in China 15 The November 2008 government stimulus package and the 12 th Five-Year Plan both place railways at the center of China s long-term infrastructure development strategy. In 2009, there were significant investments in high-speed rail, and a target of 120,000 km of total track by was outlined during the stimulus program. The 12 th Five-Year Plan has continued on with this investment pipeline, with a total high-speed track of 40,000 km set to be completed by 2015 and the total track target of 120,000 km brought forward to To attain these ambitious targets, annual investments of RMB 800 billion into railway infrastructure were previously announced. 20 However, the July 2011 Wenzhou rail incident caused a substantial revision of planned expenditures. The fallout from the incident began to raise fears over the safety and reliability of the system, as well as the financial health of the Ministry of Railways (MoR). Total debts of RMB 1.9 trillion 21 raised concerns that the central government would have to step in and work at a large number of sites were either stopped or slowed down. Investment for the year was reduced to a planned RMB 400 billion, 22 investments in fixed railway assets shrank 36.9 percent in the first half of 2012, down from 1.9 percent of total investment expenditure to just one percent. 23 The sector was reported to have recorded a RMB 7 billion loss in the first quarter of There have also been some positive developments with the central government supporting the MoR through actions like halving the rate of tax paid on interest earnings of bond holders. 25 There has also been a rebound in planned investment throughout the year, with an increase from RMB 400 billion to a planned RMB 516 billion, 26 although much of this has not been deployed yet. 27 Of the worksites stopped as a result of the Wenzhou incident, around 70 percent have resumed construction, and three successful bond issues throughout the year by the MoR have improved their fundraising outlook substantially. It is expected that they will use their allowance of RMB 150 billion in bond issues for 2012 to continue the recovery in construction. Despite the MoR s difficulties, in July 2012, the state council reiterated targets of 40,000 km of high-speed track by 2015, and a total of 120,000 km of track by One of the goals of the high-speed rail program is to free track capacity for freight logistics. A vital aspect of the rail freight network is the transportation of coal and minerals. In 2010 coal accounted for 50.6 percent of total freight traffic, and metal ores another 12 percent. 28 This is likely to be adversely affected by the sustainability targets in the 12th Five-Year Plan and a reduction on China s dependence on coal-fired power generation. However, this will be accompanied by increases in domestic consumption and its need for freight transport, as evidenced by the four percent year-on-year increase in the June freight traffic. 29 Despite these medium-term difficulties, the longer term fundamentals of railway development appear strong. The 12th Five-Year Plan s focus on sustainability and freight rail s nature as a relatively lower carbon emission mode of transport, and the success of the Go West policy is dependent on building effective transport links and rising domestic consumption needing increased logistical capabilities all suggest that there is still significant room for continued rail investment. China s railway fixed asset investment Source: China Bureau of Statistics; China Daily China to Cut Railway Investment in 2012, 2011/12/24; Ministry of Railways Source: World Bank Railway investment expenditure (in RMB billion) 18 KPMG Infrastructure in China: Foundation for Growth th Five-Year Plan 20 Business Monitor International China Infrastructure Report; Q Ministry of Railways Bond prospectus July Business Monitor International China Infrastructure Report; Q China Bureau of Statistics 24 Ministry of Railways Bond Prospectus 25 Xinhua News Agency; China s railways ministry auctions CNY30bn Bonds 8/11/ Ministry of Railways, Bond Prospectus July Ministry of railways, China Bureau of Statistics 28 China Bureau of Statistics 29 China Bureau of Statistics

16 16 Infrastructure in China Sustaining quality growth China s high-speed railway network plan Harbin Changchun Lanzhou Chengdu Baotou Baoji Hohhot Shijiazhuang Taiyuan Zhengzhou Xi an Lanzhou Wuhan Chongqing Changsha Beijing Jinan Hefei Jiujang Shenyang Qinhuangdao Tianjin Dalian Yantai Xuzhou Bengbu Anqing Nanchang Qingdao Nanjing Shanghai Hangzhou Ningbo Wenzhou Maximum speed of railway 350 km/h (220 mph) km/h ( mph) Source: Ministry of Railways and KPMG analysis Guizhou Liuzhou Kunming Guangzhou Nanning Macau Zhanjiang Haikou Fujian Shenzhen Hong Kong Xiamen Fuzhou Private sector involvement There have been limited methods to invest directly into railway for the private sector, as foreign companies are not permitted to have a controlling interest in the construction or operation of rail networks or passenger services. However, due to the MoR facing more financial challenges, there are an increasing number of opportunities for the private sector. The MoR announced in May 2012 that private capital will be given equal market entry access in an effort to make its railways more market competitive. This is good news for local firms as there is substantial opportunity to invest in China s railway infrastructure, by tendering contracts to build and operate segments of track, or through more indirect means. Qualified Foreign Institutional Investors (QFII) are now allowed to hold railway bonds and with a July 2012 China Securities Regulatory Commission (CSRC) announcement to reduce the level of assets under management to qualify for QFII status from USD 5 billion to USD 500 million, there are a significant number of new players entering the financing market and new methods to invest in the railway sector.

17 Sustaining quality growth Infrastructure in China 17 Source of funds for railway investment Others 11% Self-raised funds* 34% Foreign investment 1% State budget 12% Domestic loans 42% * Self-raised funds refer to extra-budgetary funds for investment in fixed assets received during the reference period from central governments, enterprises and institutions Some foreign firms have also begun tendering contracts from the government, such as GE, Bombardier and Kawasaki Heavy Industries. However, in many of these cases there has only been an opportunity to supply componentry, rather than into railways more directly. For foreign or private investment to enter the market, the hope is that they can recapitalize their investment in three to five years. However, due to specific characteristics of railway construction, the return cycle is usually between 15 to 20 years. If the government wants to attract more funds from non-state capital into the infrastructure projects, they need to spend more time solving the dilemma of their monopoly over the railroads, and the unclear distinction between the function of government and enterprises. These problems can dampen foreign investors interest in entering this field. Under the current conditions, foreign enterprises are only able to capture limited opportunities in spare parts, control equipment, and other ancillary equipment manufacturing aspects. Source: Weighted Average of Railways Investment Sources , China Statistical Yearbooks

18 18 Infrastructure in China Sustaining quality growth Metro and light rail

19 Sustaining quality growth Infrastructure in China 19 Metro and light railway are critical in alleviating urban traffic congestion which is becoming increasingly prominent in China s large and emerging cities. In 2011 Shanghai and Beijing carried over two billion passengers in 2011, placing them alongside Guangzhou in the top six busiest metro systems in the world. 30 Due to constantly increasing demand for metro links, the 12 th Five-Year Plan has outlined extensions to the Shanghai, Guangzhou, Shenzhen and Beijing systems, along with new completions in Tianjin, Chongqing, Shenyang, Changchun, Wuhan, Xi an, Hangzhou, Fuzhou, Nanchang and Kunming and plans for more systems in other cities. By 2015, it is estimated that there will be over 2,100 km of metro and light rail track laid. 31 However, opportunities to participate for foreign firms are limited. Hong Kong s MTR Corporation (MTRC) is the most active and highest profile foreign player in the market, and with the need for more financing arrangements there are likely to be newer methods of participation as well. To date however, foreign investors have been more successful supplying technical equipment and solutions to the sector. Private sector involvement Under the current government expanding plan, private investors will have more and more opportunities to participate in China s metro and light rail construction than ever before. Hitachi group has also gained access to China s metro and light rail market. Their product contains a new generation of urban traffic system that covers high speed trains, commuter trains, monorail products, signal control support, operation management, Intergrated Chip (IC) card ticketing, user action support and other systems. The group has installed its solution in a Tianjin project, which was funded by the China and Singapore governments. The system is also being promoted in Guangdong province. Excluding equipment manufacturing advantages, foreign enterprises have also participated in China s metro design and construction. MTRC, in particular, is involved in the operations of Beijing metro line 4, Shenzhen Longhua line phase 2, and more recently the new Hangzhou metro line 1 (opened in November 2012) which MTRC operates under a joint venture concession for 25 years with Hangzhou Metro Group. Given that the 12th Five-Year Plan aims to increase metro and light rail construction around many of the first- and second-tier cities in China, this industry presents significant opportunities for foreign and private capital. Although participation methods are still limited, these companies can find other scaled benefits that will allow them to participate in China s metro and light rail industry, and advance the industry at a significant pace in the next five to ten years. On 28 February 2011, Alstom, the French multinational company, announced in Beijing that its two joint ventures in China secured a EUR 140 million contract to provide Beijing metro line 6 with the latest traction system and one of the world s leading signal systems. On the same day, Air Train International Group held a press conference in Beijing to introduce the H-Bahn sky train, and announced the promotion of the H-Bahn sky train in China. According to Air Train International Group, the H-Bahn sky train can save on plant, property and equipment cost, and requires a short construction time. 30 China Bureau of Statistics 31 China Daily, 16 June 2009

20 20 Infrastructure in China Sustaining quality growth Ports

21 Sustaining quality growth Infrastructure in China 21 Shanghai is the world s busiest container port by throughput. Two other Chinese cities are in the top five and nine in the top 20, with further expansion in the pipeline. 32 Breakdown of bulk throughput World s busiest container ports Rank City 1 Shanghai Singapore Hong Kong Shenzhen Busan Container volume in 2011 (in million TEU) Others 39% Coal 22% Petrochemical 22% Ores 19% TEU = Twenty-foot equivalent unit Source: World Shipping Council The major ports are located around China s three key manufacturing hubs: the Pearl River Delta around Guangdong, the Yangtze River Delta around Shanghai and the Bohai Rim around Beijing/Tianjin. With the global economy still facing challenging headwinds, China s ports have also seen a substantial slowdown in growth, with throughput in national ports (above a designated size: 10 million tons for inland, 15 million tons for coastal) up 7.2 percent, representing a 6.1 decline of percentage points from the growth rates seen a year ago. Total national container throughput fell in year-on-year growth terms by 4.3 percent, but perhaps more significantly, domestic throughput growth fell 11.3 percent year-on-year to 30 June Despite the weaker activity in 2012 and the volatile growth rates shown above, the longer-term outlook for this sector appears more robust. Ports and shipping feature prominently in the 12th Five-Year Plan. Though coal and other fossil fuels are significant throughputs, and are likely to be adversely affected by the sustainability focus, there are still plans to construct 440 deep-water berths equipped for vessels 10,000 tons or above Government of Hong Kong SAR Marine Department, access 27 August 2012, 33 China Daily, Freight, Financial Ambitions take Flight, 20/8/ th Five-Year National Development Plan 35 China Bureau of Statistics th Five-Year Plan Building materials 19% Source: China Statistical Yearbook 2011 In the half year to 30 June 2012, despite the lower throughput numbers, fixed asset investment in the waterways sector grew 19.9 percent 35 indicating confidence in the long term value of port infrastructure. For example, Zhanjiang Port in Guangdong is continuing to expand its berthing capacity in anticipation of a number of substantial projects from firms such as Baosteel and Sinopec. The 12th Five-Year Plan has also highlighted China s need for better inland transport systems, providing for a number of inland waterway expansions. Channel extensions in the Yangtze estuary, increasing the capacity of Xijiang River trunk and the Beijing-Hangzhou canal improvement project, are all intended to be completed by Top 10 Mainland China ports City Container volume in 2011 (in million TEU) Shanghai Shenzhen Ningbo-Zhoushan Guangzhou Qingdao Tianjin Xiamen Dalian Lianyungang Suzhou TEU = Twenty-foot equivalent unit Source: World Shipping Council World ranking

22 22 Infrastructure in China Sustaining quality growth Private sector involvement In the wake of the global financial crisis, Chinese foreign trade was seriously affected by weak overseas demand, but port investments have shown no sign of slowing down. According to data from the Ministry of Transport, coastal port investment increased to RMB 80 billion in Other than the active participation of state-owned and domestic privately owned enterprises, there is also a clear trend showing foreign investors interest in port construction in China. In June 2012, Maersk group and Ningbo port signed a USD 4.3 billion agreement to mutually invest and manage the No.3, 4 and 5 berths of Meilong pier at the Meishan bonded harbor area. Through August 2012, Maersk s investment in the Ningbo port reached an annual growth rate of 8.5 percent, despite the weaker global economic climate and shrinking foreign trade in China. Maersk is one example of a successful mutual partnership approach in China, but Chinese ports are not without some serious issues that need to be considered, for example, improving service quality, managing excessive competition, and tackling homogeneity. Furthermore, it is reasonable to expect that China s port investment is likely to shift from high growth to a more moderate growth mode. Cooperation between ports also needs to be further expanded in order to achieve enhanced integration of regional ports. Thus, foreign investment in Chinese port construction not only needs to pay more attention to local government policies and the future trend of foreign trade, but also needs to consider the target port s geographic location, management capability, as well as other issues regarding differentiation and integration. For merger and acquisition activities to continue, strategic alliances with surrounding small ports should be forged together with the development with and cooperation from larger ports. Special consideration should also be given to a port s location and geographic or regional advantages that the port possesses. Such mergers and acquisitions between ports may also be a future trend for the purpose of resource integration, demographically value-added, and/ or complementary functions associated with different sized ports. Presently, domestic private capital is mainly concentrated on small and medium-sized coastal and inland ports in China. This is because domestic private enterprises do not have an abundance of capital or the ability to invest in larger ports. Therefore, for the large ports, private capital is more concentrated on warehousing, freight forwarding, truck transportation, customs clearance, and packing activities. Liaoning Jinzhou Port is the first domestic private capital-held coastal port. In Jinzhou Port Co., Ltd., the original stateowned port capital accounts for only 22 percent, domestic private capital accounts for 33 percent, and private capital shares including employees holding shares of more than 50 percent. As a result of the participation of domestic private capital, there has been a significant change in the Jinzhou port system and mechanism. The port construction and production operations developed rapidly, and achieved positive economic benefits. 37 However, if China cannot attract domestic private capital, the most likely way to privatize the ownership of ports is to actively attract more foreign capital. This will broaden financing channels for port construction and greatly reduce the proportion of state-owned capital. Sino-foreign joint ventures for construction and management are still the main form of Chinese ports privatisation. There are significant overseas investors in coastal ports, primarily through minority strategic stakes such as those by Hong Kong players and other worldwide port operators. According to NDRC s 2012 Catalog of Foreign Investment Industries (effective 30 January 2012), foreign private sector involvement is encouraged with up to 100 percent foreign ownership permitted. 37 International Maritime Information 1 December 2007 The diversification of port investment development in China

23 Sustaining quality growth Infrastructure in China 23

24 24 Infrastructure in China Sustaining quality growth Airports

25 Sustaining quality growth Infrastructure in China 25 Increasing GDP over the past 10 years is helping fuel an increase in air travel. Passenger volume through China s airports increased 12.4 percent in 2011, although that represents a slight slowdown in growth rates of 2010 s 16.1 percent growth. Despite this, airport revenues still rose 16.7 percent to nearly RMB 49 billion. 38 Both domestic and international passenger traffic is growing quickly. In 2004, 242 million Chinese travelled domestically. By the start of 2011 this was up to 570 million. 39 This has benefited larger regional airports, which are starting to achieve more substantial traffic numbers. In 2011, China had more than 180 airports, representing 22.5 percent overall growth since 2007, when 147 airports were in operation. However, to ensure availability of capacity as travellers near 700 million per annum, the government has announced plans to build 50 more by RMB 46 billion in airport construction investment was incurred in 2011 alone, with another RMB 100 billion expected over the next five years. 41 The five largest airports in China Beijing, Guangzhou, Shanghai Pudong, Shanghai Hongqiao and Chengdu make up around 36.6 percent of airport passenger traffic in However, as passenger numbers have increased, industry concentration has decreased. In 2007, there were just 10 airports with more than 10 million passengers. By 2011 there were 21 and the share of total traffic of the largest 10 has consistently declined. 43 Beijing Capital Airport handled 78 million passengers in 2011, growing 6.3 percent, making it (by passenger traffic) the largest passenger airport in China and Asia, second only to Atlanta International in the world. Shanghai Pudong is the largest cargo airport, handling 3.1 million tons in 2011, one-third of China s total. 44 Passenger traffic of China s top 10 airports Total number of passengers using Chinese airports (in millions) % 57.9% % % % % 60% 59% 58% 57% 56% 55% 54% 53% 52% Percentage of passengers using China s top 10 airports % Total number of passengers Passengers using top 10 airports Source: Civil Aviation Administration of China, 38 IBISWorld: Airports in China, May 年 全 国 机 场 吞 吐 量 排 名. Civil Aviation Administration of China I1/K3/201203/ 年 全 国 机 场 吞 吐 量 排 名. Civil Aviation Administration of China K3/201203/P xls 41 Center for Aviation; Asian Airport Capex Report IBISWorld: Airports in China, May 年 全 国 机 场 吞 吐 量 排 名. Civil Aviation Administration of China 年 全 国 机 场 吞 吐 量 排 名. Civil Aviation Administration of China

26 26 Infrastructure in China Sustaining quality growth Major airports in China Harbin Urumqi Shenyang Taiyuan Xi an Beijing Tianjin Jinan Zhengzhou Dalian Qingdao Passenger throughput per annum > 25 million million Chongqing Chengdu Wuhan Guiyang Changsha Kunming Guilin Guangzhou Nanjing Shenzhen Fuzhou Xiamen Shanghai Pudong Shanghai Hongqiao Ningbo Wenzhou 5 15 million < 5 million Sanya Haikou Source: CAAC Statistical Report 2008 Source: Civil Aviation Administration of China,

27 Sustaining quality growth Infrastructure in China 27 The government is continuing its Hub-and-Spoke network, much like the United States model to move rapidly growing tons of cargo and passenger numbers. Between 2011 and 2015, 50 new airports will be opened, taking the total to 230, in line with the long-term goal set in 2008 of having 244 operational airports in 2020 and it is estimated that by 2030, another 5,000 airplanes will be needed to service demand. 45 A central piece to the aviation development plan is a new Beijing Airport to accommodate the rapid growth in both domestic and international passengers. 46 In September 2012, NDRC approved the Gansu province Dunhuang airport expansion proposal. The main constructions are a new 6,000 sq m terminal, expansion of the parking lot by 5,500 sq m, as well as 46,700 sq m of related commercial facilities. NDRC also approved a new Holingol airport feasibility project in the Inner Mongolia autonomous region. The main constructions are a new 2.7 km long runway, a new 3,000 sq m terminal, ramp parking space for three aircrafts and other related commercial facilities. In addition, NDRC approved the Shanxi Linfen airport, western-imposed reconstruction project comprising construction of a new 2.6 km long runway, 4,200 sq m terminal, ramp parking space for four aircrafts and other related commercial facilities. According to NDRC s announcement, all are expected to be completed and operational by 2020 and meet or exceed additional passenger projections ranging from 150,000 (Holingol Airport) to 960,000 (Dunhuang Airport) additional passengers per year. Private investors According to the latest Catalog for Guidance of Foreign Investment Industries, foreign investors are allowed to take up to a 49 percent equity interest in the construction and operation of airport activities including terminals and runways. Private investors may own up to 100 percent of regional airports, but are limited to a 49 percent stake in major airports such as capital cities of provinces and autonomous regions, municipalities, and some selected large cities. One of the key challenges for private investors in China s airports has been the difficulty to create revenue from secondary activities, such as shop leases, car parking and advertising. Many airports have had difficulty generating the critical mass of traffic to drive strong non-aeronautical revenue streams. Concessions such as rent and advertising currently make up 23 percent 47 of Chinese airport revenue; substantially lower than some international counterparts such as Germany where airports have seen as much as 33.2 percent 48 or the USA, where non-aeronautical revenues can account for over 50 percent of total revenue, leaving significant room for growth in their non-aeronautical platform. The relative lack of international travel from within China limits duty-free shopping, and the Hub-and-Spoke network focuses passenger transit times in only a few airports. Thus commercial retail leases, especially in more regional locations, and other non-aeronautical revenues have been weaker than in other airports of similar scale worldwide. Given the tightly regulated nature of airport fees charged, a lack of non-aeronautical revenue is a substantial problem. However as pure passenger numbers grow, so have the value of advertising leases etc, driving more revenue growth for airport operators. Most of the private investments in China s airports have come from operational investors, such as HNA Airport Group, Hong Kong Airport Authority, Fraport AG, Singapore Changi Airport and Aeroport de Paris. With air transit ridership at just 0.15 trips per capita, industry penetration is low, thus providing substantial expansion opportunities for the future. International financial investors have also shown interest in the sector due to the expectation of longer term passenger traffic growth (for example GIC is a significant minority shareholder in Beijing Capital International Airport). However, accepting structural features such as regulatory control over airport fees have proved challenging, and more attention has been given to auxiliary services such as catering and logistics. The other key issue for investors is the timing of investment in relation to the capital expenditure cycle. Capital investment by airports is generally lockstep and large (for example the building of a new terminal, or expansion of runways) and there can be a lag for cash inflow for such an investment. Timing therefore has a significant impact on the risk profile of an investment. 45 American Chamber of Commerce in the People s Republic of China (AmCham China) 46 NDRC 12 th Five-Year Plan 47 IBISWorld Airports in China Zenglein, M & Muller, J; (2005) Non-Aviation Revenue in the Airport Business Evaluating Performance Measurement for a Changing Value proposition; Berlin School of Economics

28 28 Infrastructure in China Sustaining quality growth Water and waste

29 Sustaining quality growth Infrastructure in China 29 China s water market China has more than 100 cities with a population of 1 million or more and this sustained urban growth and the continued economic development have necessitated greater domestic utilities infrastructure. 49 To ensure the water quality and sanitation of its municipalities, as well as to improve its water efficiency, the 12 th Five-Year Plan has targeted substantial investments into the water and the environmental protection sector, whilst encouraging the private sector to follow. Structure of China s water market Raw water WTP payment Water Treatment Plant (WTP) Flow of water Flow of cash Distribution payments Potable water Customer Municipal Utility Company Distribution System to Customer Unified Water Charge - water scarcity charge + tap water charge + wastewater charge + infrastructure charge Discharge WWTP charge Waste water Potable water Government (Bureau of Finance) WWTP payment Waste Water Treatment Plant (WWTP) River Discharge Sludge Due to geographic factors, China has limited and unevenly distributed water resources across the country. Rainfall and water resources are primarily located in southern China, while there have been significant shortfalls in the north of China. Out of the 662 cities in China, more than 400 are suffering from water shortages, with 110 classified as severe. Alongside these challenges there has been no substantive improvement in water resources, with water availability per capita of only 2,220 cubic meters, which is one quarter of the world average. 51 Growth of China s water resources 3,500 Total amount of water resources (in billion cubic meters) 3,000 2,500 2,000 1, Source: China Statistical Yearbook 2011 Surface Ground 49 China Statistical Yearbook Ministry of Water Resources, 51 Ministry of Water Resources,