Chinese investment in HS2

David Cameron has promised China’s leadership that there will be ‘very open competition’ for investments in Britain’s HS2 high-speed rail link.

The prime minister made the pledge during talks in Beijing with president Xi Jinping and premier Li Keqiang, who expressed an interest in putting Chinese money behind the project, which will link London with cities in the Midlands and north of England. As we all know the government is committed to cutting public sector borrowing whilst also being committed to this ambitious and controversial project.  

The case for HS2, as stated by the government, is that good transport links make our economy stronger and our lives easier. Congested transport networks are unreliable and constrain travel opportunities, restricting growth. HS2 will free up capacity on existing rail lines for more commuter, rural and freight train services, and mean fewer cars and lorries on our roads, cutting congestion and carbon.  

The government argues that HS2 will provide considerable economic benefits to the country as a whole, both during and after its construction, and will help to rebalance the economy between north and south of the country.

This is not universally accepted and there are high-profile campaigns against HS2 which challenge these arguments in favour of it. There is also disagreement about how much it will cost. Figures vary (some say it will be as much as £50bn) but suffice to say that HS2 will require a huge amount of money, which will have to be provided as a mix of both public and private funding.

The prime minister did not offer any further thoughts as to how Chinese investment might be made, which is not surprising as he was talking in general terms. In this case the devil really would be in the detail. Broadly, funding can be provided into a project as either debt or equity, or a combination of the two and, significantly, the contractors who act as sponsors of a project are also involved in the construction and maintenance of the facilities which are built, and the critically important supply chain.

Indeed, while the Chinese may have the money to invest in international infrastructure projects, experience elsewhere (particularly in Africa and Eastern Europe) has shown that their investment is motivated by a desire to ensure that the project utilises Chinese companies, products and technology. The Chinese have already built an extensive domestic high-speed rail network and any such investment in the UK or elsewhere would primarily be an effort to develop their export market.  

From the Chinese government’s perspective, in this particular case they may also feel that they could take some pride in showing developed countries how it should be done and establishing themselves as one of the world’s leaders in these complex infrastructure projects and technologies.

However, there have been some problems with China’s internal network and the Chinese government’s own report into a bullet train crash which killed 40 people near Wenzhou in July 2011 revealed that the disaster was in part caused by design flaws and sloppy management. The accident occurred after one train stalled following a lightning strike, and then a second high-speed train ran into it. Four carriages were thrown off a viaduct. The report found that serious design flaws in control equipment and improper handling of the lightning strike led to the crash.

For HS2, British officials have stressed there would not be any direct Chinese involvement in the railway line’s construction, which is due to be funded by the taxpayer. It would however still be possible for the Chinese to bid for concessions to operate HS2 or parts of it and/or invest in related schemes such as developments around stations. These may not be the biggest prizes on offer but could be of interest to Chinese property investors and developers who are already actively involved in the UK.

The law will no doubt have changed by the time these contracts are eventually put in place. As things stand today, the contracts to run HS2 would most likely be structured as services concessions, where the public pays for the use of the service. A new EU directive governing concessions is expected soon, but as a general proposition concessions are subject to a more relaxed public procurement regime than traditional procurements where the contracting authority pays for the services. These contracts would undoubtedly be of cross-border interest within the EU which means that the General Treaty Principles of transparency, equal treatment and non-discrimination would apply.  

In any event, a legally compliant process would have to be run and thus Chinese success in bidding cannot be guaranteed. The process will be very high profile and subject to great scrutiny. The appointment of the Chinese to deliver a significant part of the project would be highly controversial. Cynics would question the reasons for the appointment and ask what strings are attached to the involvement of the Chinese, seeing it an attempt to exert influence.  

Ultimately, the prime minister’s statement, and the Chinese government’s welcoming of it, is very much about diplomacy and politics, as well as pure economics. Despite the government’s relaxation of visa requirements, some see immigration policies, visa restrictions and import controls as obstacles to UK-Chinese trade and investment, a view which David Cameron is no doubt keen to change, leaving the message that the UK, in a competitive global market place, is very much open for business for the Chinese. Whether this extends to their involvement in HS2 (and if so, how) very much remains to be seen.

Vincent King, partner at national law firm Weightmans LLP