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Rocky road

Cover story - China

Foreign construction firms can work in China, but there are hazards China joined the World Trade Organisation (WTO) in 2001, underlining its commitment to opening its market internationally.

For foreign consultants, contractors, manufacturers and investors, this means they can trade in China, subject to restrictions - and to certain operating hazards.

Payment can only be made to companies registered on the mainland and is in Yuan for Chinese-backed projects. The Yuan is relatively stable for now, but is expected to become vulnerable to fluctuations as China integrates more fully with the international financial markets.

Although Chinese firms are hungry for foreign investment and keen to form joint ventures, foreigners are forced to make do with minority stakeholder status.

This can make risk difficult to control - Chinese firms often have little real idea about project or business planning, making them dangerous controlling partners.

It is common for Chinese clients to keep back 10% of the agreed project fee, a form of thinly disguised corruption that is commonplace in the construction industry, UK firms say. Their advice is to arrange payment on a regular monthly basis rather than against results which, however well delivered, are liable to be found wanting.

At the same time, Chinese clients expect foreign firms to make concessions to win work.

'You are forced to do loss leaders to get into China, but the question is how to convince the client that, when you've done the job cheaply once, he should pay more next time, ' says one UK consultant. One of his competitors confirms: 'It is very easy to grow orders but far more difficult to turn orders into profit.'

Clients are also historically used to shopping around and trying out different suppliers. There is no certainty that, having won a job and done it well, there will be repeat orders.

A second phase of integration with the WTO will take place in 2004 which should see some revision of Chinese construction and contract law to allow payment to be made to companies based outside mainland China. These are expected to enable foreign firms to become majority stakeholders in joint ventures.

Working on privately financed schemes offers better prospects for firms seeking greater certainty in their trade with China. China's project list cannot be realised without private capital and the country is eager to embrace the design build finance operate (DBFO) model. French, US, Italian, Australian and German investors have already entered the road, water supply, waste water, airports and ports sectors.

Finding privately funded schemes that will provide an adequate rate of return on investment is difficult, however.

Many, like the light rail and metro projects planned for Chongqing, are too ambitious and must be scaled down before international firms consider them, say many UK firms with private finance expertise. It is claimed the government has a slush fund that can be drawn on to bail out DBFO projects that run into trouble, but it is also against the law to provide guarantees.

To some extent Chinese clients are already aware of the problem.

The government has developed a formulaic approach to providing urban infrastructure, dictating predetermined lengths of road, metro or rail line in proportion to local populations. To win government approval, elaborate schematic designs are developed in the knowledge that they are unworkable, but can be scaled down later, government insiders admit.

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