China's relentless rail expansion represents a potentially lucrative opportunity for law firms and their clients. But there are also pitfalls – as GLENN HALEY explains.
“The close relationship between railroad expansion and the general development and prosperity of the country is nowhere brought more distinctly into relief than in connection with the construction of the Pacific railroads.” John Moody (1868 – 1958) US financial analyst and investor.
The above remarks were made about a different time and a different nation, but they are curiously apt to the role that China has been carving for itself in the developing nations of Central and South-East Asia in recent years. China is building its own great railways, both domestically and internationally, and helping to push back the economic frontiers of Asia. More importantly, China’s continuing involvement in the development of Asia is also helping to secure its access to crucial resources and expanding its already considerable influence in the region.
China, its government and its state-owned corporations have, over the last ten years, explored and invested in many significant rail projects across the Asian region (and extending even into Eastern Europe) which, when completed, will bring significant economic windfalls for China and the region. This trend looks set to continue and if it does, will present significant opportunities for contractors, specialist subcontractors and professional service providers, including law firms, in Asia and elsewhere.
However, as might be expected when dealing with the continued rise of the Chinese tiger, the many opportunities come with occasional potential pitfalls. The familiar difficulties which come with dealing with Chinese government and corporations will apply equally to any enterprise looking to benefit from China’s spending spree.
An overview of China’s recent activities quickly demonstrates the breadth and depth of rail development. Projects which China is actively involved in include the following:
China Metallurgical Group plans to develop a 700 km, USD5 billion railway line connecting Afghanistan, Pakistan and Uzbekistan. The railway will be used primarily for the transport of ferrous and copper ore. The project is due to be completed in five years.
A EUR2 billion railway line in Iran as part of the development of a 570 km line from Tehran, Iran to Khosravi at the Iraqi border.
Signing an agreement with Kazakhstan in February 2011 to build a 1,050 km line from China to Almaty, Kazakhstan.
Discussions with Thailand regarding the possibility of jointly building a number of railway projects, including one from Bangkok to the Thai province of Rayong.
Cooperation with Myanmar to build a 1,215 km railway over the next three years from Kyaukphyu deep sea port in Myanmar to Yunnan, China.
It is clear that the investment and scale of China’s activities represent significant economic opportunities for law firms with the resources and expertise to take advantage. However, cross-border projects of such scope and value can run into difficulties, and any firm tendering for work must be aware of the potential risks. Specifically, questions may be raised as to how solid China’s commitment to its grand projects actually is and whether China will continue to pursue this form of ‘railway diplomacy’ as a key plank of its foreign policy. Reports earlier this month regarding China’s Ministry of Rails gave cause for concern, indicating that the year’s investment in railway infrastructure would be slashed by 200 billion yuan from a total of 700 billion yuan.
This was claimed to be a result of the recent turmoil in the Chinese railway ministry during which the former pro-development Minister of Railways Liu Zhijun was sacked and replaced with the more conservative Sheng Guangzu. Subsequent reports have confirmed that the reduction will not occur, and that investment would remain at 745.5 billion yuan for the year 2011, with 3,000 km of new tracks due to be laid over the next five years.
To take a project-specific example, a 421 km, USD7 billion high-speed railway track linking the Laotian capital of Vientiane with Kunming, the capital of China's Yunnan province, has being delayed. Feasibility and social/environmental impact studies on the proposed project have been deemed to be insufficient. The line is eventually intended to form the part of the planned pan-Asia high speed rail link, which will continue on to Bangkok, and Kuala Lumpur. China is to take on 70% of the cost of the project.
Clearly, while China is currently spending big in this area, there is the possibility for its projects to be derailed by the vagaries of China’s political system or the unavoidable complications brought about by international projects of this nature. Any enterprise looking to profit from China’s continued presence in this space needs to be alert to the possibility that the pipeline of work may unexpectedly flow more slowly.
Lastly, while China is the key player in the industry, it is not the only active party in rail development within Asia. Indonesia is launching a project with Japan’s Itochu which is investing in a USD2.2 billion, 1,829 km railway in Kalimantan for the transport of coal. The project is to be a public-private partnership, with the government side to be managed by Indonesia’s Investment Coordinating Board. Itochu will construct the rail line and operate it for 30 years, with a guarantee that all coal transported from the area will be carried by rail. Similarly, Japan CADEX KK and the Mongolian Railway State Owned Share Holding Company are in alliance with a view to embarking on Mongolian railway projects. Firms should not focus so strongly on the Chinese miracle that they become blind to other opportunities that may present themselves.
Rail development in Asia looks set to undergo a period of frenzied activity over the next five years and firms should take care to consider their strategies to take advantage of this exciting area.
Glenn Haley is a partner at Haley & Co. in association with Clayton Utz.