Chinese toll road for sale, published in The Financial Times

Published in The Financial Times

It would make a curious dinner party conversation: "So you're an investor? What kind of business?" "Well I just bought a 60 per cent stake in a Chinese toll road lease. Forty kilometres for $40m. Estimated returns of $586m over 25 years. Not bad, eh?"
Sceptical ears might begin to twitch at these unearthly returns, with good reason. Although private investment in Chinese infrastructure is well-established - more than $35bn in FDI has flowed into the country's highway sector since 1994 - enthusiasm for the practice has cooled among the predominantly Hong Kong-based joint venture companies such as New World Infrastructure and Road King Infrastructure. The latter was caught short when its JV partner in the Guangxi region reneged on a deal to guarantee returns, after central government banned such guarantees.

This newly-constructed toll road runs between Xinxiang and Zhengzhou in the Province of Henan, 800 km south of Beijing. The stake in the 25-year lease is being offered for sale around the world through a London-based website,, which has developed a reputation for outlandish investment opportunities. Among the offerings have been an airport, a Los Angeles cemetery plot next to a dead Hollywood star or a humble fish and chip shop in northern England.

Experts in Chinese infrastructure worry that the new marketing ploy is a sign that the shine has gone off the sector. "This looks like a promotion deal, where a foreign company will offer a stake in a joint venture company without putting up any cash, but will take a percentage of the profits," says Andrew Loewenthal, chief executive of ProFina, a London-based company advising on infrastructure finance. "They may be going to parts of the world where investors would be excited by the promised high returns, or where investors don't know much about toll roads."

The exact terms of the deal are that the $40 million will be used by MingDu as collateral with a Chinese bank which has already (claims MingDu) agreed to a loan of RMB1bn ($119m), which would be used to 'consummate' the lease. The $40m buys a 49 per cent interest in MingDu and 60 per cent of any profits from the toll road. An offer document estimates initial returns of $13m in the first year, with increases year on year for 25 years.

The pitfalls for the unwary include 'leakage' from the toll collection system (some operators insist on a maximum six-week employment term to counter fraud), onerous repair costs and replacement of collection technology, even having to re-lay the entire road because it was built for too light an axle-weight. Tolls on Chinese roads are on average between $3 and $5 for cars and between $1 and $1.5 for buses, trucks and other heavy vehicles, but motorists will drive miles to avoid them and toll evasion is common. A parallel road might be built, or a new rail system could depress traffic numbers.

Local authorities can be reluctant to increase tolls; and some of the predictions made by the promoting company MingDu Trading International are optimistic, to say the least. They posit annual GDP growth of more than 8 per cent until 2010, with the toll road giving an average ROI of more than 58 per cent per year.

Jerry Li of Sunbelt Business Brokers in Fullerton, California, admits that the joint venture partner MingDu will not be investing any of its own money in the lease. MingDu has an executive with a family connection in Hunan, which Li's colleague Ron Hottes at Sunbelt Business Brokers described as key to unlocking the deal. "There is a relative at the Henan department of transport," he said. The Californian-based brother-in-law of the Chinese contact then set up MingDu as an investment vehicle.

Once again, this kind of arrangement is not unique, but in today's more open commercial world, investors expect to see some kind of tendering process, rather than a 'sweetheart' deal through family connections. "A lot of overseas Chinese set up investment vehicles," confirms Andrew Loewenthal at ProFina. "But it would be more usual to have open competition for such a contract."

One UK banker with experience of Chinese infrastructure finance points out: "There is always a risk of difficulties with local authorities. Certain local authorities might not allow increases in toll charges for example." A worst case scenario would be complete re-nationalisation.

Some issues may not even be covered by Chinese law, since foreign direct investment is still relatively new to the country. Andrew Loewenthal recommends hiring experienced Western (or perhaps Hong Kong-based) lawyers or accountants to complete due diligence. "You'd want to be able to sue them if things went wrong," he counsels.

These kind of investments are really for the big boys. Jerry Li mentions General Motors and IBM to illustrate the size of potential investors. But it would be kind of fun (wouldn't it?) to take a punt on a strip of tarmac running through the middle of the most populous nation on earth.