How to partner with Chinese investors

08 February 2018

As dawn breaks, on 16 February 2018, we will enter the Chinese Year of the Dog. Courage, loyalty, and responsibility are the qualities associated with ‘dog’ years. According to Chinese astrology, good fortune is predicted for householders if a canine visitor arrives unexpectedly at their door during the next 12 months.

For UK contractors, China has more than symbolised good fortune, regardless of the year. Investment from the global superpower in recent years has yielded a wealth of cold, hard cash.

Since 2005, China has invested USD 44 billion into the UK, of which USD 11.15 billion was invested last year alone, according to FT.com.

Chinese companies have bought a slew of UK assets, including the GBP 1.1 billion ‘cheese grater’ skyscraper in London. They’ve invested widely, too, with stakes in a plethora of projects, including:

  • National Grid’s gas distribution arm
  • Global Switch, a global data centre
  • Hinkley Point C nuclear power station.

For UK contractors, partnering with Chinese investors could seem like a match made in heaven. However, differences – both business and cultural - need to be taken into account. The relevant professional advice should always be sought, but the following should be considered when entering a partnership:

1. How deals are constructed

Deal structure varies from market to market, though Chinese investors typically act as partners alongside host nation governments and other private backers.

The level of finance the Chinese partner puts into the project will determine the amount of control they have over the direction of the project and the contractors chosen. Many investors want to retain long-term revenue inflows, having delivered a project through the construction phase.

Financing bodies such as pension funds don’t particularly like construction risks, but Chinese investors are prepared to be involved in that risk, as well as in the on-going operational risk.

In developed markets, Chinese firms tend to favour joint ventures or mergers with local players. The construction of Hinkley Point C is a prime example:

  • State-owned China General Nuclear Power Group (CGN) and Chinese National Nuclear Corporation (CNNC) are taking a 33.5% stake in the project, funding the estimated GBP 18 billion construction cost alongside French energy provider EDF and the UK government
  • In return, CGN and CNNC are expected to have a significant influence on the choice of construction partners, and will enjoy a guaranteed return from the project for the next 35 years.

2. Political risks

Political changes could also mean potential risks. In recent years, the UK has been one of the western governments most open to allowing Chinese investment in sectors such as nuclear power and cyber infrastructure - sectors that could be critical in a national security context.

Debt-laden developed markets, such as the UK, lack the available capital which is needed to overhaul infrastructure and generate more home-grown power.

They are increasingly looking at Chinese funding to get the necessary mega-projects off the ground, even if that means submitting a certain level of control over their critical infrastructure to foreign interests.

However, complacency is not recommended: “The British government is pressing ahead with plans to tighten screening of foreign investments by China and other countries amid concerns that such flows could compromise national security,” reported the FT in summer 2017.

“In the election manifesto, the Conservatives pledged that Prime Minister Theresa May would ensure foreign ownership of companies controlling ‘important infrastructure’ would not undermine British security.”

“A weakened Tory party abandoned a string of other promises after losing seats in a disastrous election performance,” continued the FT. “But the plan for a tighter takeover regime is one manifesto idea that will still be taken forward, government aides have confirmed.”

While Brexit discussions progress, it remains to be seen how potential national security concerns will balance against the need to continue building on solid trading relationships outside the EU.

3. Prepare to cede control

Over time, we are likely to see increasing Chinese involvement creating a new market dynamic for contractors. But with that Chinese investment comes the funding for essential infrastructure. It’s a balancing act.

In return, Chinese contractors also gain valuable insights into regulation, project management, risk management and risk transfer from their global partners.

Chinese contractors wish to learn from their counterparts in the UK and other mature markets. However, it is the Chinese who hold most of the power, along with a lucrative financial stake in the economies in which they invest.

4. Insurance considerations

As Chinese merger and acquisition (M&A) interest continues, a new insurance trend has emerged in the infrastructure sector.

Sellers of businesses in the sector are increasingly offering to pay for buyers to acquire warranty and indemnity (W&I) insurance.

W&I covers the buyer against breach of warranty and also ensures the seller a clean exit – rather than signing an agreement and being liable for a portion of the purchase price if a warranty is breached.

Policies for buyers make up about 96% of JLT’s W&I business, and roughly half of those were introduced to the deal by the sellers.

The insurance market considers infrastructure to be an attractive risk, meaning sellers can currently obtain good cover for their buyers with relatively low excesses and affordable premiums.

5. Overcoming differences in business and working culture

Contractors in the UK and other countries are getting used to working with Chinese contractors, either on a joint venture or sub-contractor basis. Local firms might have to adapt to new supply chains, as well as a different business culture, so communication is key.

Joint ventures are put together with the best of intentions, but disputes can arise. That puts relationships under strain, especially when projects encounter difficulties.

Traditional contract dispute resolution mechanisms might not be common in China. Host-nation contractors must adapt to working with partners who may not seek to resolve disputes in that way.

No matter what form the investment, it will be essential that contractors commit to building and nurturing strong relationships with their Chinese counterparts.

Talk to your broker

Developing any sort of business partnership takes time and effort. Always take professional advice. For further assistance with regard to risk and insurance issues raised by Anglo-Chinese partnerships, contact your construction insurance broker.

For more information contact Richard Alford-Smith, Account Executive on +44 20 7528 4694 or email richard_alford-smith@jltgroup.com

This blog is compiled for the benefit of clients and prospective clients of companies of the JLT group of companies (“JLT”). It is not legal advice and is intended only to highlight general issues relating to its subject matter; it does not necessarily deal with every aspect of the topic. Views and opinions expressed in this document are those of JLT unless specifically stated otherwise. Whilst every effort has been made to ensure the accuracy of the content of this document, no JLT entity accepts any responsibility for any error, or omission or deficiency. If you intend to take any action or make any decision on the basis of the content of this document, you should first seek specific professional advice. The information contained within this document may not be reproduced and nothing herein shall be construed as conferring to you by implication or otherwise any licence or right to use any JLT intellectual property.