China has turned into the world's biggest construction project. Its racing economy cannot continue if infrastructure, already lagging severely, does not catch up. Construction, in turn, fuels more growth – creating more opportunities for foreign firms, and experience for Chinese contractors to sell their services overseas.
Almost no corner of the country is untouched by the humble, leather-faced laborers in yellow hats who dig, drill or hammer, cigarettes burning slowly between their lips. Roads, railways, bridges, tunnels, ports, airports, data networks, power-plants, power transmission, pipelines, dams and water-diversion projects are a significant slice of the estimated US$340bn China spends annually on construction.
"China is growing at a rate that is hard to conceive in Europe," noted Keith Clarke, chief executive of Atkins, a British design, engineering and planning consultancy expanding rapidly in China. "Atkins has done the master planning and urban design for 24 new towns in the last two years, with a population in excess of 5m."
Urban centers are exploding as Chinese shift off their farms to the cities, driving demand for infrastructure. China, now 35% urban, is expected to be 60% urban by 2020. The country is re-engineering itself, building, expanding and replacing infrastructure built to serve an economy that allocated resources according to plan, not according to need.
And then there are the links between cities. Port and airport development has been getting a lot of attention but work is moving apace on rail and road projects, too. The Ministry of Railways owns China's 66,000km of track and that keeps lengthening – although not as fast as the railway, shippers and the traveling public would like. The tenth Five-Year Plan (beginning 2001) called for investing RMB100bn (US$12.1bn) in new and upgraded track, as well as high-speed rail linking all provincial and regional capitals.
At the moment there are around 30 light rail and metro systems in the various stages of planning. During the Five-Year plan, the government says, US$24bn will be invested in metro and LRT development. But foreign participation is limited to 30% of project budget, a sore point with some offshore players.
Road and rail
In road works, government plans call for building a "great channel" comprised of seven capital-area "radiation" highways around Beijing and nine highways running the length of the country, and 18 traversing its width for a combined 85,000km of roadway. Of that total, 29,000km have been so far been completed, 16,000km are currently under construction and 40,000km await start of construction. Over half of the highways awaiting construction are in China's West, where development will focus on the Middle West region. Completing everything in the grand channel is projected to take 30 years.
And so China's to-do list goes.
"China needs to be getting efficient construction of its infrastructure to allow the underlying economy to grow," Clarke argues. "That means more and more thought about the allocation of scarce resources."
That thought process didn't really begin until Deng Xiaoping's Open Door policy was introduced in 1978. But it has been a case of fits and starts since, the latest fit coming with last year's initiative to cool China's overheating construction sector by shortening or cutting credit lines. As bankers have argued, it was not infrastructure spending that was draining supplies and pushing prices up, but runaway building in the private sector – as developers rushed in to building apartment and office blocks.
"A lot of the over-investment over the last one to two years is tied not into infrastructure but into a private sector being too optimistic [and] investing blindly," notes Hui Cheung-Tai, a China economist at Standard Chartered Bank in Hong Kong. Indeed, poor infrastructure has helped push up costs as transport bottlenecks make it a struggle to move raw materials from interior provinces to factories on the coast, he says. "The fact that the connections between the two are pretty poor does reduce the efficiency of the economy," Hui says, recalling one Stanchart customer "complaining that it was cheaper to import coal from Australia than central China." (Australian's wheat board long maintained that it was easier for China to buy its wheat than to source it from China's own bread basket in the interior.)
The economy is also diversifying from metal-bashing to keyboard-tapping in the space of a few years. Fitting out cities with sophisticated communications infrastructure goes down well with foreign investors – like Intel, which set up shop in Chengdu, an unthinkable proposition a few years ago. "Some of our clients describe it as first-world infrastructure and third-world labor costs," said Hui.
China sees the connection between infrastructure and economic growth all right. The problem is there are too many cooks. Provinces and counties blindly compete against each other, forgetting the big picture, says Hui. "The challenge is to coordinate projects between various provincial governments."
Coordination issues aside, infrastructure has been creating its own sub economy, filling the pockets of legions of peasant laborers and trickling money into the poor interior. That process has added to China's consumer population – and cement, steel, glass and electrical factories' revenues for expansion and innovation. China's massive building extravaganza has also created the biggest engineering learning environment in history. Graduates pouring out of Chinese universities get to cut their teeth on an infinite variety of projects, often using the latest technologies and techniques under the world's leading practitioners. Down the line, China should end up with a compelling engineering and building skill set to sell overseas.
But that picture is a touch rosy, say foreign consultants who complain that most doors into the market are marked "Chinese Only." "Foreign companies are pretty much excluded from most of the work," says Mick Adams, general manager of Gammon Construction in Shanghai. "They can only work for foreign-invested projects. The rules allow Chinese to employ foreigners [only] if they have technology the Chinese don't have."
China's WTO membership makes little difference, Adams asserts. "What is needed to really open up the market is for China to sign up to the general agreement on procurement. If they decide to go forward with that, maybe in two or three years, they would have to open up all government contracts to foreign firms."
Not that Gammon is strapped for work. Gammon is busy on a number of big projects, including the 1,385m Jiangyin Bridge across the Yangtze and a three-year railway electrification project – working on the 950km Harbin-Dalian railway. "You can certainly do things in China quickly if the government puts its mind to it," Adams says.
Aside from basic projects like building factories for foreign manufacturers, and there is a lot of that work, foreign consultants are being tapped by government to help in city planning, transit and airport projects. That adds up to around 5% of China's total infrastructure business at the moment, according to one foreign consultant. That might seem like a small slice, but the pie never stops growing. "Our biggest challenge is not opportunities, but how fast we can grow," says Samson Sin, Atkins China managing director.
Until now most of the work has been in the east coast cities. "There's still a lot of opportunities in the next five to 10 years," says Edward Chan, managing director of Maunsell Consultants Asia in Shenzhen. "But for foreign consultants, starting now, there will be a lot more opportunities in second-tier places like Jiangsu, Anhui and Sichuan,"
The nature of those opportunities is changing too, potentially opening the door to foreign consultants investing in and running projects, before transferring them to the government – usually known as build-operate- transfer (BOT), or public-private partnerships (PPP).
"The Chinese government has talked a lot about it, but the Chinese financial institutions are not up to speed yet," Chan says. "But in five to fifteen years there will be a lot of this, both BOT and PPP."
During which time Chinese contractors and consultants will have come of age on the global market, snapping up projects and perhaps even merging with western companies. Until a decade ago, Chinese firms were largely working on government aid projects in places like East Africa.
Things are different now. Chinese contractors are increasingly in evidence in commercial projects in Malaysia, Singapore, Thailand and beyond. China Railway Engineering is financing, designing and building an iron-ore railway in Australia for Fortescue Metals.
"Most contractors are taking their management, their balance sheets, their experience," Atkins' Clarke says. "There's an awful lot of Chinese contractors winning business in the Gulf against major established companies."
Chinese consultants are heading overseas too, in person or virtually, mostly for Western firms. Eva Hua, who hails from Beijing, runs Atkins' 10m-a-year UK mechanical and electrical business.
Today, of course, broadband networks allow engineers to crunch numbers in a design shop thousands of miles from the project site. "We are already using engineers in our Beijing office to design work on mainline rail and underground in the UK," Clarke points out.
Atkins employs 600 architects, engineers and planners in Greater China, of which 85% are Chinese, and that number is rising. Of Maunsell's 300 staff, only about 10 are foreigners.
Not only are Chinese good at what they do, they are filling the growing shortage of engineers in the West, where young people have been swelling the ranks of financial services at the expense of civil engineering firms. And they are cheaper. "A general manager at China State Construction might not even earn a quarter of what his counterpart at Bovis earns, Maunsell's Chan asserts. "Their overheads are much lower than their competitors'."