Market Studies
1394 Market and Technology Study
"A New Project Finance Paradigm"

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Published By: The MacLellan Group, Inc. September 2001

The incredible growth and concentration of economic activities and population in China has created an overwhelming need for new debt and equity capital particularly in the telecommunications industry. Privatization, public infrastructure and concession based telecommunications projects are the driver behind many new potential project finance transactions. China’s investment, financial, taxation and legal reforms have clearly strengthen its ability to attract greater amounts of project finance, although previously issued state level guarantees are much harder to put in place today.

China’s telecommunications regulatory environment is poised to improve significantly, but not until after China is accepted into WTO which is anticipated to take place no earlier than November 2001. The Ministry of Information Industry ("MII") China’s telecommunications regulatory agency has a goal to facilitate orderly competition, but foreign investment in the telecom sector will remain blocked until the new regulations are implemented. Numerous newly emerging telecom business opportunities in areas such as the next generation fiber networks and the broadband wireless marketspace including: Local Multipoint Distribution Systems ("LMDS"), Multichannel Multipoint Distribution Services ("MMDS") and Very Small Aperture Terminal ("VSAT"), are actively seeking foreign equity and debt financing. (For additional industry and market information see: "Implications for Strategic Investment in China’s Broadband Wireless Telecommunications Industry," a June 2001 white paper available for sale at The only current path for foreign investors to participate in the industry is through some form of indirect investment, wherein the investor would receive a percentage of cash flow from any business today and then in the future convert this cash flow agreement to direct equity. This form of investment is fraught with high risks, just ask any of the 30 odd China Unicom foreign investors who had their China-China-Foreign ("CCF") investment agreements unilaterally cancelled in 1999.

Unfortunately, most private equity investors will not risk making indirect investments in the industry until after the new regulations have been proglimated. This leaves project financing as the key tool to be utilized by these various start-up telecom companies to finance their initial operations with debt financing that has the ability to carry them all the way to their respective Initial Public Offerings ("IPO’s") in 2002 and 2003. In most cases these new telecom start-up companies are sponsored and majority owned by some of China’s largest State Owned Enterprises, ("SOE’s"). These SOE’s have for the most part instructed their start-up company’s management to seek private equity in order to fund their initial operations. Yet, the reality of the private equity market for such transaction is extremely limited. Consequently, these SOE’s are likely to embrace project financing as an alternative financing path. The primary element for the SOE’s to put this project finance in place will be their willingness to provide any participating banks with a suitable form of corporate guarantee. The second half of 2001 could see over US$ 1 billion in project finance commitments issued to these new China based telecom start-ups, whose majority shareholders are likely to include the following ten Chinese corporations or one of their primary subsidiaries: China Electronics Corporation ("CEC"), China Unicom, China Mobile, China Telecom, China Railway Telecommunications Center ("CRTC"), China Educational and Research Network ("CERNET"), China State Power Corporation ("SPC"), China Huaneng Telecom and Jitong Communications Corporation ("Jitong") and China Network Telecommunications ("Netcom").


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