China: Patient returns

In late May, Shanghai’s Tongji University, Siemens and German-based hospital operator Asklepios Kliniken signed a Rmb1 billion ($131 million) joint venture agreement to build and operate the Shanghai Sino-German Friendship Hospital (SSGFH) to be established in Shanghai International Medical Zone. Scheduled to be fully operational by 2010, the hospital will eventually offer capacity of more than 500 beds and will offer services to international standards.

Tongji University, a leading medical school in China with six existing affiliated hospitals, holds a 46% interest in the joint venture. Siemens, which will play a major role in structuring the finance for the project as well as providing advanced medical equipment and training, holds 40%. Asklepios Kliniken, which will operate the hospital, holds the remaining 14%.

The project is the latest in a series of successful PPP financing projects undertaken in Asia by Siemens’ subsidiary, Siemens Financial Services, which provides investment financing, treasury services, fund management and insurance brokerage both internally for Siemens and increasingly for external clients.

The firm’s investment subsidiary, Siemens Project Ventures (SPV), makes equity investments in infrastructure projects worldwide, focused on power, airports, health and transport projects in which Siemens also acts as a principal supplier and/or solutions provider.

Charged with the requirement to be independently profitable, SPV has learned much from past experience, says Johannes Schmidt, managing director, Siemens Financial Services.

"We started out 11 years ago in power, mainly in Asia," he says. "After the financial crisis, it was very slow for new projects in Asia and we worked hard to keep our existing projects above water. We learned a lot from that experience. We didn’t always make a lot of money and we had to renegotiate some deals, but our original analysis that all our deals would hold water over time was correct."

SPV has so far closed 15 separate infrastructure PPP transactions, mainly in power, and has exited six (see chart). These include the $1.05 billion coal-fired steam turbine power station at Hangfeng in China, in which SPV held a 24% stake, and the $1.7 billion Jawa Power project in Indonesia in which SPV invested $170.5 million of equity.

Staying local

In 2005, SPV invested along with Zurich Airports, Larsen & Toubro and the Airport Authority of India in a $400 million project to build Bangalore International Airport in India, the first greenfield airport project financing in the country. Locally financed through ICICI Bank, the project is regarded as a template for future build-operate-transfer projects in India.

Wherever in Asia SPV finds its projects, the firm is prepared to be patient, says Schmidt.

"We’re geared towards a longer-term perspective," he says. "We have several more airport projects under consideration in India in addition to Bangalore. Like power projects, airports are difficult: they take three years or more to complete."

Another advantage of SPV, says Schmidt, is that the firm hires extensively among local populations in the region, an advantage that he claims competitors sometimes overlook.

"Being local has prevented us from doing some silly things in the past," says Schmidt. "We have to be a good corporate citizen. If we make life hard for our local partners, they always have a thousand opportunities to make life hard for us. That differentiates us from other international finance partners."

SPV is also sensitive to potential charges that its main motivation in pursuing infrastructure project investments is to generate orders for equipment and services that can be provided by its parent, Siemens, a charge Schmidt repudiates. "We never want to dominate a partnership," he says. "We won’t be seen as an investor there just to push enough equipment through the hospital, say, without making the hospital profitable in the longer term. That’s why we’re organized as a business in its own right."

Perhaps. But the firm is able to take a far more relaxed view on potential returns for its investments than most pure financial partners. Schmidt claims that SPV operates without specific hurdle rates for investments, instead seeking sensible investment cases that are commensurate with the risk taken, which he defines as accounting for the risk-free spread of the country as well as the specific project risks.

"Combine those factors and you rarely get anything below 10%," says Schmidt. "Equally, if you see investments offering 20% to 25% you start worrying. If you need so much return on paper to justify the risks in the contract, it is better to revisit the risks inherent in the project."

For its investment in SSGFH, SPV is expecting its return to come from dividends initially ahead of an eventual sale.

"Our expertise is in getting all the parties together," says Schmidt, "and the project going. Long term, we’re not a holder of investments so we’re willing to sell on once the project works and is profitable."

Interestingly, for its latest investment, SPV has established a holding company in Hong Kong called Asia Care Holding, and is now in the market seeking new healthcare PPP investments. The firm declines to specify countries of focus or to elaborate on the possibilities of eventually seeking a listing for Asia Care Holdings but does not rule it out either.

"We’re focusing on all of Asia," says Schmidt. "It’s a bit early to talk about specific projects and we have no given time frame to exit. There’s a lot of hype in the market about infrastructure funds and we don’t want to join this."