Chinese Infrastructure Investment: Paradigm change?

Two major developments caught my attention this week: firstly the signing of the Chinese-Australia free trade agreement on June 17, and secondly the publishing of a report by KPMG into Chinese investment in Australia.

KPMG's Demystifying China has highlighted the scale and concentration of Chinese property and infrastructure investment into Australia, with NSW receiving 72% of total Chinese investment and Sydney & Melbourne together getting more Chinese investment than London or New York individually.

What has intrigued me is the purchase of local infrastructure builder John Holland by CCCC (China Communications Construction Company).  Almost all of Sydney's most significant infrastructure under construction is being built by John Holland.  Sydney Metro Northwest?  Yep, John Holland.  WestConnex M4 East?  Yep, John Holland.  South East Light Rail? Ok, no, John Holland missed out or didn't want to take up the risks involved.  But they did construct the inner west light rail extension.  Southwest rail link?  Yep, John Holland.

Did CCCC buy John Holland to just take a "hands off" approach?  The timing and magnitude suggests not.  Firstly magnitude: at a cost of around $1 billion, this is a major investment for a company which has a market capitalisation in China of around $20 billion.  Then timing: the acquisition was announced a month after G20 in which a China-Australia free trade deal was announced.  Did this timing reflect the raising of the FIRB Chinese investment to $1 billion?  No, as CCCC is state owned and therefore would have required FIRB approval regardless - which they did ultimately receive.  I believe the timing of this deal reflects provision in the China-Australia free trade agreement for IFAs (Investment Facilitation Agreements).  I'm going to quote this excerpt from lawyers KWM to explain:

Under ChAFTA, certain infrastructure development projects which are majority or substantially owned by a Chinese enterprise will be able to operate under an Investment Facilitation Agreement (IFA). IFA’s streamline and relax Australia’s immigration law requirements. IFA’s will be permitted where a project has expected capital expenditure of A$150m (lower than the A$2bn and 1500 worker threshold for the Enterprise Migration Agreements allowed in the resources sector (including Roy Hill)).

IFAs will also apply to projects in a broader range of sectors including food and agribusiness, resources and energy, transport, telecommunications, power supply and generation, environment and tourism sectors.

IFAs will operate within the framework of Australia’s existing 457 visas and applicable laws, including work health and safety law and relevant Australian licensing, regulation and certification standards.  However, the IFA will allow a departure from skill requirements (to allow lower skilled workers foreign workers to work in Australia) and labour market testing requirements. IFA’s are designed to make it easier for foreign labour to be utilised on Chinese sponsored infrastructure projects while maintaining compliance with the safety net of minimum employment conditions provided for Australian employees.

Whilst not quite bringing Chinese-level wage & employment conditions into Australia, IFAs will allow John Holland to keep Australia's construction unions at bay and prevent them from using heavy handed industrial relations tactics to hold hostage major infrastructure projects.  This is good news for Sydney's infrastructure deepening, as well as good news if China can transfer it's High Speed Rail cost advantages through to Australia by it's newly acquired Australian subsidiary.

With $28 trillion in savings, China could make HSR commercially viable in Australia by packaging financing with cost effective construction.  Parramatta to CBD express rail is another potential project that could be amenable to a Chinese financing and construction package.  Parramatta express rail and HSR would dramatically reshape the Australian landscape.  Canberra will become a satellite suburb of Sydney.  Airlines (and airports) could lose a chunk of their patronage.  Whilst it's not yet time to be buying property in the Sydney-Canberra corridor, I am keenly awaiting further developments on this front.