China Needs a New Urban Policy

China will build 6,000 new towns over the next two decades. This will be the most rapid urbanization in history. If China does it wrong, it will be the biggest urbanization disaster in history. If China does it right, it will set a new standard for urban planning and development for future cities around the globe: Urban Planning with Chinese Characteristics!

If urban planning and development just continue the practice of the past two decades, there will be unsustainable urban disaster driven by errors in government planning procedures, design, development practice, infrastructure construction, architecture, materials, urban management, social community design, economic concentration, and environmental degradation

Let’s take a few examples of these errors

· Planning: Master planning comes before clear economic, social and environmental strategy.

· Design: Design is driven by rigid technical standards and does not facilitate sustainable economic, social community and environmental strategy.

· Development : Developers do not follow Master plans.

· Infrastructure Construction: Infrastructure construction starts before strategic marketing and economic planning, constraining the shape of viable new urban and suburban places.

· Architecture: Celebrity driven, rather than integrated into the new community strategy.

· Materials: Poor materials undermine durability and degrade the environment.

· Urban management: Fragmented administration; government technical mandates without community involvement.

· Livability: Homogenous “Life style” planning, instead of diversified neighborhood communities and spaces.

· Market value: No strategic marketing plan for sustainable industry and commercial attraction and investment.

· Civic Life: Insufficient amenities and public centers for neighborhood identity and robust community life.

· Branding: New towns and renovated urban centers need distinctive Place brand identity that will be managed for decades to come.

What Can Go Right?

There are some well-planned new industrial cities like Tianjin Binhai city and a number of successful revitalized urban areas, like Xi[Maxwell M1] Tian Di in Shanghai and elsewhere in Chengdu, Guangzhou and other cities. But more often the Master Plans are congested and boring homogenous cookie-cutter formats. Even where Master Plans are good, actual development often corrupts their integrity because of inadequate development control. Sustainable community development requires single owner control of the land parcel with enforceable code specifications for sub-developers. There has to be more policy flexibility in the planning process and control in the development process to get away from the sterile standardization of most new towns. Good planning has to follow sound principles of Place Planning and Development.

What is Place Planning and Development?

The word “Urban” does not tell us what a City is. Real cities and towns are heterogeneous places where people of all classes live, work, learn, play, visit and socially interact with each other both within and between diverse neighborhoods, as well as interact with adjacent and nearby cities, towns and communities. It is this neighborhood diversity and interaction that gives vitality to urban life.

If there are no diverse neighborhoods with new cities and, towns and communities, then the city is a homogeneous settlement of aggregated persons, families, businesses and public areas that have no “living”vitality for their people, businesses and industries. Everything has a boring“sameness”. There is no threshold for human differences that can build interesting personal and family acquaintance, bonds for affection and trust, economic vitality and social harmony. Such physical settlements, however pretty they may look for the moment, will degrade and perish.

Kotler Marketing has four books on Place Marketing and has practiced its principles of strategy, development, design, marketing and management to attract people, investment, businesses and tourists to place destinations. We apply these same principles to urban planning and development in order to create Urban Places of vibrant community life and economic growth.

The Principles of Place Planning and Development

Place Planning requires a clear understanding of the purpose of a city. Economic and social strategies for urban places must precede Master Planning, design and infrastructure construction. Urban Places must have an intrinsic economic value and add collateral value to the surrounding metropolitan region and its industry clusters.

Place Planning harmoniously integrates the economy and community of urban places. Efficient planning of CBDs as a center of government, cultural institutions, service industries and high-end real estate and amenities must complement the diffusion of commerce, creative industry, affordable housing, learning and social life in the neighborhoods. Citizen participation at the neighborhood level must balance central power at the CBD level.

The CBD must interact with neighborhoods and neighborhoods with each other. Urban Place Planning, development and management has to be as social as it is physical. It has to be as humane as it is efficient. Architecture and landscape design must enable the distinctive and authentic identity to the City. These principles attract talent, investment, business and visitors to the city and its communities.

What is a City?

Historically there were clusters of independent towns. The most powerful town, or municipality, aggrandized, or more politely stated, annexed surrounding towns. The agglomeration became the “City.”

To this day, cities are composed of “Downtown CBDs” (the annexing town) and“neighborhoods” (the annexed towns). Downtown is the seat of political power, big business and finance, and high-end commerce and real estate. Neighborhoods are communities of people with the social residue of their former autonomy. They are a social fabric of families, homes, stores, small businesses, schools, temples and churches, fire stations, libraries, restaurants and theatres and unique historic sites. In some cases they become industrials ones.

People do not live in a city. Rich people live and work downtown. Ordinary people live in neighborhoods and either work in their neighborhoods or work or visit the CBD and industrial zones.

What Happened to the City?

The economic and financial growth of downtown expanded its original boundary by demolishing or gentrifying adjacent neighborhoods to make more room for CBD hotels, office towers, high-end housing and service businesses.

Municipal government moved industrial production to outlying old neighborhoods or to [Maxwell M2] Greenfield suburban districts. Developers built residential suburbs for middle-income housing, high-end condo and villa enclaves and even enclave zones for industrial migrant housing. Auto highways and mass transit connected the City center to neighborhoods and new suburban sprawl developments and towns. All roads led to “Downtown.”

Near-in neighborhoods decayed until they were cheap enough to be gentrified into high income lifestyle districts. The social community of old neighborhoods was replaced by the anomic lifestyle of young professional newcomers, living in uniform designed condo or rental flats.

Some old neighborhoods are historically preserved by the government because of special features, while other neighborhoods fight for their own preservation. Ad hoc neighborhood groups defend these neighborhoods. The cityscape may look like a pretty picture, but it is a power struggle and disaster for community.

Where Did This Happen?

It happened in the U.S. and it is happening in China and rest of the developed and developing world.

What is the Result?

The rich get richer and fill the ever expanding City Center. Middle class families move to homogeneous suburban developments, separated from old neighborhood networks and left with a minimal social fabric of community. Workers are shunted to residential towers adjacent to industrial zones, without nearby amenities. Poor people fall through the cracks! Most of the 78,000 reported protests in China are precisely about neighborhood displacement.

The municipal drive for globalized centers and suburban surroundings has produced a double standard of architectural fashion and lifestyle downtown and boredom in the surrounding settlements where people are new to each other and have few ties to bind them.

Downtown is held together by wealth. Decaying neighborhoods and new makeshift districts have little intrinsic commerce and public life to hold them together. The disconnection of economy and society is burdensome to people and dangerous for the State. As downtown wealth accretes, surrounding society becomes enraged. Official culture alone cannot bind this separation. We need to restore a community fabric and measure of public autonomy to city neighborhoods and new towns so they can be connected harmoniously to the Center City. Harmonious society is the goal of place planning and development.

What Role Do Planners Play?

City planners are the front men for downtown developers, financiers and politicians. They focus on “downtown” enhancement and suburban residential and industrial resettlement. However talented and well-intentioned, they work under the constant pressures of land sales for municipal revenue. They seek new models for their tasks from cities around the world, in order to copy what looks decent, rather than invent what will actually work.

Planners are driven by central political policy, municipal finance and centralized infrastructure and economy; rather than principles and strategies of economic development and community life. They are separated from economic planners, as well as from neighborhood people. They are technically- rather than economically- or socially-oriented.

What Role Should Planners Play?

The true mission of planners should be to plan new cities and redevelop old cities in a manner that harmonizes economic development with the neighborhood community. They have to be social and economic planners, as well as physical planners.

They have to preserve historic urban neighborhoods for current residents and newcomers in order to retain and augment the cultural identity of their city and maintain the balance between its CBD and local neighborhoods. They have to involve residents in the planning process.

Planners have to help the Government and the Party to find a new model of harmonious urban planning that combines economy and society, and execute that model with variety, adaptability and consistency.

What Role Do Designers Play?

Designers are hampered by preemptive infrastructure construction. They design around bureaucratic initiatives and roadblocks, rather than help bureaus design for viable economic and social strategy. As a competition-based professional they are driven by creative aesthetics and ecological innovations, rather the human livability and taste.

Urban designers focus on downtown commerce, finance, residential luxury and public institutions. They do not pay adequate attention to the sociability and aesthetics of neighborhood design. They are more interested in green technology than community livability.

China is a world leader in solar technology, which it can harness for sustainable cities. But, we must beware of “ecomania” and balance new energy technologies with social principles of human community.

What Role Should Designers Play?

Design should serve people through humane design. Aesthetic novelty and new technology are no surrogate for community. Master Planning has to integrate downtown attraction with neighborhood attraction. Neighborhood community design has to be a key element in Master Planning. Neighborhood design has to invite small business, light industry, crafts and services to neighborhood, so some residents can work in their neighborhoods. Neighborhoods have to be designed for safety, friendship, walking, shopping, fitness, learning, entertainment and community social life.

What Role Do Urban Agencies Play?

City management is driven by tax revenue for operations and economic development for jobs. It posits that economic development is the primary driver of social benefit through jobs and wage growth for the people.

Public managers primarily focus on providing services to CBD and industrial development. The provision of health and social services in the neighborhoods is a secondary interest. There are few incentives for robust neighborhood business and community life.

City managers engineer civic engagement, but do not confer legally empowered community involvement. Their heart is in the right place, but they do not share their authority. This is community engineering, not community life.

What Role Should Urban Agencies Play?

Urban managers are qualified professionals and are trying to do a good job; but they work within the economic priorities of municipal finance. Neighborhood residents do not trust the allegiance of these managers to community interest.

Urban service management requires a broader government mandate and training to involve residents in health and social service program decisions. To do their job well, urban managers have to gain the trust of people. They have to share decision making with neighborhood residents and businesses.

The Central Government acknowledges this need for citizen involvement. China’s 2007 Urban and Rural Planning Law calls for more participation at the local level and that comments by local people should be noted in the final plans. It also calls for more consideration of environmental and cultural conservation as part of the planning process and encourages an integrated approach from urban to rural.

There is a good opportunity to put this mandate to work. In 2012 the Central government is phasing out the Neighborhood Committee level of government. This creates a vacuum of connecting people to government. This vacuum can be filled by voluntary Advisory Neighborhood Councils. Voluntary Neighborhood Advisory Councils operate in the U.S., Europe and elsewhere in the world. These councils have legal standing in the municipality for advisory recommendations on service management and zoning. They have small budgets and their members serve on an unpaid, volunteer basis. Neighborhood councils balance community interest and downtown power.

I organized the first legally mandated neighborhood councils in the U.S. almost forty years ago, so I speak from experience about their usefulness for dispute settlement and civic harmony. My book, Neighborhood Government, Lexington Books, 1969, is still in print.

How Should Government Mandate Place Planning?

I wish I knew the answer! I know the questions, but I do not know the answers. It is for municipal leaders, planning professionals and neighborhood leaders to solve this problem of reconciling the power of CBDs for economic and job growth with the community interests of territorial neighborhoods.

I want to sum up three essentials of Place Planning that have to be faced: (1) strategy must come before planning and design; (2) CBD power must be harmonized with neighborhood community; and (3) neighborhoods require a legal framework for popular participation in local matters.

China’s Unique Urban Opportunity

The disconnection of economy and community is a crisis for all cities around the world, in both developed and developing countries. It is caused by the consolidation and globalization of industry, finance and trade.

It is an explosive crisis because the inequalities of downtown wealth and neighborhood decay. Dispirited neighborhood people are living without a social and commercial fabric of community. They express their rage in all forms of social distemper. Cities are time bombs that must be defused before they explode.

The whole urban world needs a new model of Place Planning and Development, and China is the only place where there is sufficient central authority, financial strength and the ideological, social commitment to devise this model. This cannot be done in the fragmented and competing authorities of Western democracies.

If China can plan, design and manage and the balanced city of downtown power and neighborhood community, she will achieve the harmony she seeks and provide a felicitous road to urbanization for the rest of the world.

Marketing Infrastructure Investment

For the past two decades China has been the world leader in domestic infrastructure investment and construction. It has now become the global leader in infrastructure investment and construction. With towering Chinese capital reserves, bank and SOE resources, engineering, equipment, construction capability and strategic policies, global infrastructure investment and construction will be China’s next great economic driver to sustain GDP growth.

 Rough estimates from the 2009 OECD Infrastructure Project suggests that annual investment requirements for telecommunications, road, rail, electricity transmission and distribution, and water taken together are likely to total around an average of 2.5% of world GDP. If electricity generation and other energy-related infrastructure investments in oil, gas and coal are included (as the IEA does in its Investment Outlook), the annual share rises to around 3.5%. Clearly, the figure would rise further if we include other infrastructures, e.g. sea ports, airports and storage facilities, telecommunications, etc. Since the 2011 global annual GDP was $65 trillion, this amounts to $2.275 trillion a year (at 3.5%) or $56.8 trillion over a 25 year period. The real physical need is probably closer to 5% of annual global GDP; and this excludes social infrastructure.    

The highly respected 2009 Cohn & Steers Global Infrastructure Report projects a need for $40 trillion over the next 25 years for water, electricity, roads and rail and airports and seaports. Excluding other vital areas of physical infrastructure, the estimate corroborates the OECD forecast. Both of these projections do not account for cost increases or variable global GDP growth rates and revenue streams. Nor do they consider any reserve costs for unanticipated innovative systems that are bound to emerge over a 25 year time period.

To highlight the magnitude of investment need, KPMG estimates that the U.S. has to spend roughly $40 billion a year just to upgrade its roads. President Obama’s 2013 budget proposes $50 billion for all infrastructure expenditure. The estimates of different sources are all over the place, but they are all staggering.

When you consider that the U.S. purports to spend 2.5% of its GDP on physical infrastructure; Europe 5% and China 9%, you notice several things. The U.S. cannot even update its current infrastructure. It is rated as 26th in infrastructure quality by the Society of Civil Engineer’s 2009 Global Report.   Europe at 5% is committed to infrastructure maintenance and marginal growth, but is hardly likely to accomplished this target in view of its long-term fiscal crisis and sovereign recessions. China is racing ahead  at 9% of its GDP.

However essential physical infrastructure is for competitive economic growth for Developed, BRIC and Developing Economies, traditional capital sources cannot meet this need. Typically, capital customers were government budgets and user fees, government debt; commercial and investment banks, public funds, like the World Bank, private investment funds and commercial privatization. In today’s post- fiscal crisis world of intense global competition for infrastructure, these sources have largely dried up. The new frontiers of investment are sovereign funds, specialized private global infrastructure funds, larger scale public/private partnerships and extensive privatization.

As Berthold Brecht in his opera Mahaggony declaims, “There is no Money in this Town”! The gravity of this issue is illustrated by the paltry sum of available global infrastructure private funds. Goldman Sachs is among the largest of such funds. In its current 2011 report, GS Merchant bank announced it has raised $10 billion since 2006 for investments in infrastructure and infrastructure-related assets and companies.

Pension funds are enormous, but it should be noted that the second largest pension fund in Europe spends only 1% of its holding on infrastructure. Pension funds are reluctant to invest because of political instability, regulatory interference, cost overruns, extended periods of cost recovery (often 15-30 years), and disruptive technology that can upset forecasts. Postal service investment has been wrecked by the Internet. Maritime ports are clobbered by trade fluctuations and competitive ports and trade routes. Rail investment is constantly at war with highways development and truck transit alternatives. Fifteen years is a long time for cost recovery and a fair return on investment.

Over the past decades, privatization has mitigated the deficiency of public finance, notably in telecommunications, gas and electric power and roads. Privatization will continue to grow in the years to come. However, it requires a dependable legal and regulatory structure; standards protocols for operataibility, politically reliable user-fee rate-setting regimes, and numerous subsidies to make it viable for listed companies to finance, build, operate and maintain reliable and durable systems. It is an important contributor to infrastructure maintenance and growth in the U.S. and Europe, notably the UK. BRIC countries are getting there with 20%-30% of their infrastructure already in the private sector.  Developing countries lag behind because they lack planning and management capability, as well as the legal, regulatory, administrative and political conditions that can protect long-term foreign investment. There is also a resistance in developing countries to privatization because it withdraws a powerful instrument of political control and public employment from political leaders.

Public/Private Partnerships (PPPs), such as listed utilities, have developed over the past three decades to meet infrastructure needs. These are complex arrangements that meld public budget and debt resources with private domestic and foreign investment partners to build, operate and maintain infrastructure though a variety of business models. One model is equity investment; another is Build, Operate and Transfer (BOT), which gives private companies concessions to build and operate public installations for a term to recoup capital costs and profit targets; and then revert the concession back to public ownership, or whatever successive arrangements of operation and capitalization public authorities may wish to make. 

These are very long-term projects and their performance has been mixed. The Millau Bridge in France was totally financed to the tune of 320 million Euros by the private company Eiffage on a 78 year concession for toll increases not to exceed the rate of inflation. The Confederation Bridge in Canada, linking Prince Edward Island to New Brunswick has a 35 year concession for private tolls. These projects are by and large successful, with exceptions like the bankruptcy of Sydney Australia’s Cross City Tunnel, which overestimated the volume and value of truck freight to the port. 

The newest sources of global infrastructure investment are the sovereign reserve funds of BRIC and Middle East countries, primarily China. These funds have different investment strategies and business models and have taken an aggressive position in turning from sovereign debt purchase to investments and acquisitions of tangible infrastructure and company assets.  

Sovereign funds, Public/Private Partnerships and intensified privatization are the key to future infrastructure in the competitive environment of the wide and deep search for scarce capital.  The old public finance paradigm of selling infrastructure to ample capital sources must be replaced by a new paradigm of competitive marketing to scarce capital sources. Marketers can help countries to shape infrastructure projects that can compete for capital on the basis of what capital customers specifically want, not the wish list of country infrastructure desires.   

China

China has built more infrastructure in the past two decades than any other country. It has more highway miles than the U.S., the largest telecom network in the world, the three Gorges Dam, 14,000 miles of operating high-speed rail and work in progress for a total of 43,000 by 2015, the largest seaports in the world, airports galore and more planned, and the greatest number of electric power plants in the world, along with 36 planned nuclear plants.

China has the engineering and related equipment, construction know-how, technology and human resources to build and manage many sectors of infrastructure anywhere in the world, not to mention its $4.3 trillion sovereign fund and additional trillions held by state banks and state-owned enterprises. China's export of infrastructure financing, equipment and construction is a new major driver of China’s economy.

Addressing European appeals for debt purchase, Lou Jinwei, Chairman of China Investment Corporation, China’s sovereign wealth fund, declared that “it is difficult for long-term investors, including his company, to buy European debt, and investment opportunities are more likely in infrastructure and industrial projects” (China Daily, February 15, 2012). Primer Wen Jiabao has reiterated this same message in numerous meetings with European leaders.

China has supported the West with national debt purchase for a decade and continues to do so to a lessening degree. Now, China wants to make real money by building tangible, revenue producing physical assets that advance their foreign manufacture, trade penetration and geo-strategic interests. Global infrastructure investment, construction and management are the new drivers of Chinese economy. 

China’s infrastructure in Africa grew from less than $1 billion annually to $6 billion in 2007. Its cumulative investment by 2009 reached $24 billion, which was 10% of their total outbound FDI. This amount has grown since then, and it is concentrated in electric power, roads, rail, dams and water systems, airports, sea ports, mining infrastructure, telecommunications and Special Economic Zone (SEZs).

In 2007, China financed 10 hydroelectric power projects in Africa with an investment of $3.3 billion. It financed $4 billion worth of investments in road and railway network in Nigeria, Gabon and Mauritania. In information and communication infrastructure China supplied $3 billion in equipment to national firms in Ethiopia, Sudan and Ghana.

The $3 billion Great Gabon Belinga iron ore mine, which broke ground in 2009, is China’s largest mining operation in Africa. China is building a rail that links the Atlantic coast of Africa in Bengala, Angola with two ports on the Indian Ocean, in Tanzania and Mozambique. This is the first ever East-West rail link between Africa’s two bordering oceans. The most recent investment is a $1.5 billion refinery investment in Uganda. China has  constructed SEZs in Ethiopia, Nigeria, Egypt, Mauritius and Cape Verde to leverage their infrastructure investments.

The recent Sino-Angolan association is illustrative. When this  petroleum-rich area called for investment and rebuilding, China advanced a $5 billion loan to be repaid in oil. They sent Chinese technicians to reconstruct a large part of the electrical system. In the short term, Angola benefits from Chinese-built roads, hospitals, schools, hotels, football stadiums, shopping centers and telecommunications projects. In turn, Angola mortgaged future oil production. It to be a costly trade for Angola, but their need for infrastructure is immediate and that is precisely what China provided when no one else is willing or able to do so. Angola has become China's leading energy supplier. Chinese corporations, financial institutions, and the government are involved in billions of dollars worth of large dams in Africa.

Turning to Southeast Asia, South and Central Asia, Premier Wen Jibao announced a new $10 billion Asian Infrastructure Investment Fund. China Communications Construction is investing $100 million in constructing Burma’s new capital city airport. China is building railways to Laos, Cambodia and Thailand. It is also building a railway that links Afghanistan, Pakistan and Uzbekistan, which is part of China’s plan to connect to ports in Iran and Pakistan. The railway will be a 700 km long at an estimated cost of $5 billion. China has also agreed to take over operations at Gwadar port in (Baluchistan province) as soon as the terms of agreement with the Singapore Port Authority (SPA) expire.

In Bangladesh, China is negotiating for investment and construction of Sonadia Island deep sea port, new rail lines through Myanmar to Bangladesh and a $200 million loan for 3G telecommunications.

In Sri Lanka a consortium consisting of China Merchants Holdings International Company and local conglomerate Aitken Spence was awarded the tender for the construction and operation of the Colombo South Harbor Expansion Project. This $500 million Chinese investment is the largest foreign direct investment project in the country. Official data shows that China was Sri Lanka’s biggest lender in 2010, with loans amounting to $821.4m. It also offered $7.5m worth of grants. China plans to pump $1.5 billion into Sri Lanka over three years to develop infrastructure including roads,  bridges, water supply schemes, irrigation and power.

The Philippines has presented to Chinese and international contractors a $12 billion transport sector infrastructure development project under the administration’s PPP program. China is likely to take the biggest chunk.

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In Europe, the China Development Bank financed Serbia to acquire a bridge over the Danube. China Overseas Engineering Group won the bid for an A2 highway in Poland at less than half of what the Polish government had budgeted; that project is currently halted because of underestimated costs. China is investing an estimated EUR 10 billion in the Croatian seaport of Rijeka, which will be the largest seaport in the Adriatic.  It is investing and building the new Zagreb airport and financing the rail line connecting Kiev to its airport.

China’s CIC has taken an 8.6% investment stake in UK Thames Water, and announced its interest in pumping money into Britain’s railways, as part of a major plan to invest in the crumbling infrastructures of developed countries. It has expressed interest in financing a proposed highspeed rail line from London to the north of England.

CIC has taken a 40% stake in Portugal’s national grid and a Chinese power company has acquired Portugal’s leading power company for 2.7 billion Euros. Bernhard Hartmann, an expert in the power utility sector at A.T. Kearney sees “a big wave of Western interests trying to find someone in China to bankroll them”. (China Daily, 02-17-12).

China is causing geostrategic sweats in its bid to acquire .03 percent of Iceland for recreational development and a future potential Atlantic seaport. It has purchased Greek debt as a quid pro quo for a 35 year lease on Piraeus harbor and a deal to finance the purchase of Chinese ships.

Turning to Latin America, China is leading the way in foreign infrastructure investment. In July 2010 China signed a $10 billion agreement with Argentina to refurbish the Belgrano Cargas freight rail line and an additional $2 billion agreement to upgrade the Ferrocarril Belgrano Norte y Sur. Two other initial agreements worth $1.5 billion each are related to a potential subway line in Cordoba and train line connecting the Buenos Aires Ezeiza airport.

In 2009, China signed an agreement to take a 40% stake in a Venezuelan rail project worth $7.5 billion. This project will connect oil producing regions to the Capital as part of China’s interest in maintaining a steady energy oil supply from a Venezuela. A consortium of three companies from China, (as well as companies from Japan and South Korea) are bidding on a high speed rail project in Brazil to connect Rio, Sao Paulo and Campinas. Beyond rail, Chinese companies are building three hydroelectric dams in Ecuador. In total, China is financing over half of the energy infrastructure projects in Ecuador right now.

China is today the largest and most willing infrastructure investor in many countries on every continent.  They have a current problem of getting into certain countries, like the U.S., but they want in and it is only a matter of time that they will get in. The U.S. needs Chinese infrastructure support more than China needs U.S. infrastructure demand. CIC has already taken a 15% equity interest in AES, the largest U.S. power company, and is discussing a 35% share in its wind power business.

A great part of the world is seeking infrastructure investment and construction from China. Conversely, China is driving global infrastructure as a new growth industry. There are other global capital customers, but not of China’s scale and scope. China invests more in Africa today than the World Bank. ME Sovereign reserve funds are not investing in foreign infrastructure. They prefer fast returns and have limited long term strategic interests.

The demand for Chinese infrastructure investment exceeds its capital supply or scope of strategic interest. China is steadily adding internal and external capital and industrial partners for more extensive ventures; and is always varying its scope of strategic interest as conditions change. We are not looking at an earlier infrastructure “selling” scenario, where public authorities sold numerous projects to bankers and bond underwriters, who had to place ample capital supply into limited infrastructure demand. We are instead looking at a marketing scenario, where project demand exceeds capital supply and countries have to market their numerous infrastructure project needs to the limited capital suppliers. The paradigm has shifted from “selling” to capital markets to “marketing” to capital customers.

How to Market Infrastructure Investment to China

I suggest ten things to consider:

1.    Customers

With regard to infrastructure, the seller is the public authority seeking investment for its projects. The buyer is the capital customer who wants to invest and construct installations that meet its economic and strategic objectives. The Marketer’s role is to help infrastructure sellers thoroughly understand China’s economic and strategic investment goals and requirements; and help governments develop projects that have a competitive advantage for China’s distinctive needs and wants. Marketers also help Chinese government agencies and companies find investment and construction projects that generate the greatest value for China’s economic and strategic goals. The key thing is customer focus, and that is what Marketing is about.

           

China Investment Corporation is a $400+ billion source of out-bound capital for infrastructure investment, but it is by no means the only source or first port of call for a seller. State-Owned Enterprises in road, rail, seaport, airport, mining are power generation are the initial point of contact. These companies want contracts for engineering, construction and management of developments. Buyers have to identify the prime contractors for projects, build a relationship and make their case. If it fits the goals of the SOE, the SOE will carry the ball through the political process for approval and ultimately to CIC and Peoples Bank of China which hold the currency reserves.

Too many foreign projects waste time by first going through diplomatic and political channels or going directly to CIC to gain interest. The real beneficiary is the prime SOE and its SOE and private sub-contractors. It is their job to maneuver the political and financial process.  

2. Investment objectives and goals

Foreign physical planners, engineers and politicians can draw up all sorts of infrastructure project proposals that do not fit China’s agenda. Government planning departments need marketers to shape plan offerings that fit the China capital market, not their own glorious aspirations. How many politicians, planners and engineers and politicians have the foggiest notion of what China and its SOEs want, let alone who the Marketers are who can help fit projects to these wants? It is the challenge of foreign political leaders to make their planners and agencies aware of the need for Marketers to research, analyze, segment, target and brand their needs to China’s foreign infrastructure investment program.  Infrastructure projects that do not fit what China wants are pie in the sky, in so far as China’s capital is concerned.

3.Market Profile

We are deluged with global engineering and innovation driven estimates of infrastructure need from every level of government... $5 billion here, $20 billion there, even trillions. The figures are so high they paralyze, rather than promote real investment activity. The new rule is to understand what capital customers, like China, want to buy, not what foreign countries want to sell. The Marketer’s job is to understand Chinese objectives for return on investment, security, industrial fit, trade advancement and leverage, indigenous operation and management capability and efficiency, duration of capital recovery, geo-strategic advantage, and regulatory, legal, administrative and political support.

4. Segmentation

Every government has numerous physical infrastructure needs. Different capital buyers have specialized infrastructure interests, based on their industrial strengths and strategic goals. China, for example, looks for road, rail, power stations, airports and sea ports, bridges and mining infrastructure because of  their mix of strengths in steel production, trade logistics, resource needs and other factors. They do not do as well as the French in nuclear power and water management, or the U.S. in terms of aviation. The Marketer helps country projects target capital resources of different centers of infrastructure excellence.  

The next level of segmentation for foreign sellers is to distinguish big infrastructure projects from small ones. Big projects are more likely to attract Chinese interest where China is a welcomed investor on the basis of past and ongoing projects. For these countries, small projects can be layered into the negotiation for costly dams, rail and ports. For countries that have not previously welcomed Chinese investment, small projects may be of interest “as a foot-in-door” tactic. A large project, like California’s approach to China for investment in high speed, is hardly going to interest China. The political risks of a new departure of cooperation, however heartily hailed, are too great to engage.  If California wants Chinese infrastructure capital, it should starts with toll roads and bridges. 

A further level of segmentation for Chinese investment is what is essential to replace or maintain and what is new and innovative for exceptional growth. Global investors, sovereign or private, prefer lower risk, in-place infrastructure to new infrastructure. China would rather buy a share of the UK Thames water authority, than build a new water system; the same with existing power plants. Revenue, cost and management systems are already in place.

Governments have to make a seed capital stake in Public/Private Partnerships projects.  The less robust the domestic investment, the higher the risk for external investors! Governments have to parse their money very carefully and invest enough to meet external investor risk standards. This means reserving enough money for “conventional” projects that meet the risk standards of capital sellers, like China, not for “exciting” priorities beyond the pale of reasonable foreign investment. This is a tough lesson to learn for foreign buyers of infrastructure capital, because it is counter-intuitive to the domestic political hype of grand schemes.

    

5. Targets

Infrastructure investment Marketers are international in a global economy, not nationalistic. They should try to work for countries that have a track record of attracting Chinese infrastructure capital, like SE Asian, South Asian, and Central Asian republics, African countries and Latin American countries, UK, the Euro periphery and Eastern Europe. These regions welcome Chinese infrastructure investment. The trick is to multiply investments in these countries for synergistic economic value both to the Chinese capital customer. 

Frankly, I think it is a waste of time for Marketers to try to sell U.S. National projects to Chinese capital customers. There is too much Congressional resistance to Chinese tangible investment, despite recent sanguine presidential rhetoric. The best U.S. sellers are certain State governments like Georgia, Texas, Iowa and several other States that have reached out to China. National level infrastructure is political dynamite. Progress is being made in the energy field. For example, Sinopec paid $2.5 billion to Devon Energy of Oklahoma of a 1/3 stake in 1.2 million acres of drilling property. Other investments have been made with Chesapeake and other U.S. energy companies. The key is low profile and not controlling share.

6.Positioning

Positioning is more about offering a superior value proposition to customers than competitive offerings. It is the Marketer’ job to document the unique and superior fit of his client country’s project to China’s capabilities, trade, financial and strategic interests, like the transcontinental African rail and the investment in Portugal’s largest power company which they got for very little money. The positioning question is always why the capital seller should invest in W country project X, rather than Y country project Z. Why is X superior to Z in revenue, political reliability, trade or geo-strategic advantage.

7. Strategy

Chinese capital buyers want synergies in their investments. They prefer to work with countries that have a strategic plan for Chinese investment for multiple infrastructure inputs over a long term period. One infrastructure impacts another set of needs. Roads, rail and ports make mineral resource acquisitions feasible. All of these inputs leverage Chinese trade through SEZs, which bring hundreds of Chinese companies together into infrastructure region.

Some countries, like the UK, are developing strategic plans for Chinese infrastructure investment. Cressida Hogg of 3i Infrastructure in the UK sees an emerging UK strategy for Chinese investment in a new model for investors to take on more of the construction risk instead of seeing infrastructure purely as a safe income yielding asset. The UK needs 200 billion pounds of investment in energy, water, transport and other projects by 2015. For the past two decades it has aggressively privatized infrastructure and, according to Hogg, “there is no political resistance in the UK to Chinese or other investors in major infrastructure assets, unlike the United States.”

 8. Branding

The purpose of branding is to build customer trust in the seller. The UK has done a splendid job of marketing its country brand for privatizing infrastructure, a friend of China and a stable government. France is a friend of China, but has a restrictive privatization. African countries like Kenya, Ghana, and South Africa are relatively stable, compared to other African countries.

Country branding has its limits. Democratic regimes change leadership frequently by election; autocratic regimes have longer leadership cycles, but are prone eventually to rebellion. In both cases the cast of characters changes in the long duration of an infrastructure project. Brand trust requires continuous relationship building that can withstand these changes in political leadership.

Provincial and municipal governments have more entrenched elites than national governments, which can better sustain public/private partnerships for the long duration of a project. They are also more aggressive and innovative because of domestic, regional, and local competition.

9.Promotion

 Countries need well funded and organized campaigns to promote their infrastructure projects to China’s CIC and its SOEs. It is not enough to impress China to have a president or governor’s hailing a new day of bi-lateral cooperation. Infrastructure buyers need road show events, business models and plans, documentation, feasibility studies, financial incentives, public relations and events, favorable public opinion, political support, corporate business involvement, community support, media celebrity, social networking, personal relations and tireless staff work to demonstrate seriousness. China wants to see a big, well-financed promotion campaign to get them on board.

   

10.Marketing Organization

Finally, countries and state and local governments need an aggressive infrastructure marketing organization in place to play the competitive game of capturing scarce global infrastructure capital. Public bureaucrats, by and large, know nothing about Marketing, and are notoriously poor at Selling. Public infrastructure marketing organizations should be public/private consortia, so there is embedded business and political leadership, profit-centered incentives and driving energy to battle the way to China’s infrastructure capital market and win the battle against ever smarter competitive countries. Marketers should propose, design and staff these organizations.

In conclusion, infrastructure replacement and new development is the biggest new industry in the world. It has traditionally been left to public authorities and bankers to handle. This is no longer the case. Marketing must step in with its vital discipline and play a robust role in the value exchange between infrastructure project buyers and new capital, equipment and construction sellers, principally China.