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China's New Rules on Concessions for Infrastructure Projects

On 1 June 2015, China implemented the Administrative Measures on Concession for Infrastructure and Public Utilities (the "Measures"). The Measures are a significant step in enhancing the development of public-private partnerships ("PPP") in China.

PPP are arrangements where the public and private sectors bring their complementary skills to a project, with varying levels of involvement and responsibility.1 The advantages of PPP include the ability to raise additional funds, to reduce costs, and increase quality and efficiency.2 As tremendous economic growth in China has resulted in a significant demand for basic infrastructure and public utilities, the Chinese Government has progressively encouraged private sector investments under PPP.3

The Measures seek to provide a fundamental regulatory framework for private investors participating in infrastructure and public utilities projects.

Welcome changes under the Measures Strengthening Investor Protection

The Measures for the first time emphasize the protection of the concessionaires' legal rights and interests as one of its legislative objectives.4 The Measures require the Government and the concessionaires to specify their respective rights and obligations, and the allocation of risks in the concession agreement.5 In addition, it is expressly stipulated by the Measures that the contractual parties should perform their obligations in good faith.6 More importantly, no entity or individual can interfere with the concessionaires' lawful operational activities.7

Promoting Flexibility for Concession Projects

Eligible concessionaires are not limited to domestic private entities but also foreign investors.8 The scope of concessions has been extended to include five major areas, namely, energy, transport, water resources, environmental protection and urban utilities.9 While originally the longest time period for a concession project was 30 years, the Measures extend this for concession projects which may require a large investment and a long payback period.10

The Measures also permit various forms of concession arrangements, including but not limited to Build-Operate-Transfer, Build-Own-Operate-Transfer, and Build-Transfer-Operate models.1 Parties are also allowed to amend the concession agreement to accommodate unforeseen changes when there is a genuine need.12 The Measures also contemplate remedies in case of a counterparty's breach, or a force majeure event.13

Standardising Concession Procedures

The Measures clarify the fundamental standards for implementing a concession. Concession projects may be proposed by governmental departments at or above county level in charge of relevant industries with a detailed implementation plan based on social and economic development needs.14 Detailed requirements for the implementation plan and project feasibility assessment are set out in the Measures.15 In addition, the Measures streamline the review and approval processes.16 Local governments must set up departmental coordination mechanisms to facilitate the granting of concession rights.17 Authorities are obliged to evaluate the concession regularly and adjust the pricing and subsidy amounts in accordance with the concession agreement.18

Broadening Financing Channels

Various financial measures are introduced to facilitate the financing of concession projects. For example, the Measures allow policy banks to provide tailor-made credit support to specific projects with loan terms up to 30 years.19 The concessionaire will also be allowed to use project receivable as security. Moreover, the Measures encourage utilization of various funding tools, such as private equity, corporate bonds, revenue bonds, and project bonds.20 Many provisions under the Measures take into account the lenders' interests. For example, the lenders' prior consent is required for any early termination of the concession agreement21 or any material change.22

Problems and UncertaintiesRelationship between PPP and concession

Even with the implementation of the Measures, currently there is no Chinese law clearly defining the relationship between PPP and a concession. Some authorities in China consider PPP as a general term for a cooperative relationship between the government and private investors, which could be conducted through a concession,23 or as government procurement, where the authority will procure certain public services from private service providers who will serve as the agent of the authority.24 Uncertainty may arise as to whether a private party participating in government procurement should comply with the Measures or is merely subject to Chinese contract law.

Foreign concessionaires still face uncertainty

As the Measures allow concessionaires to be entities either incorporated in China or outside of China,25 it seems that foreign investors do not need to incorporate a local entity for market entry. However, in practice, foreign companies have difficulties in acquiring land rights certificates, importing project equipment, and taxation issues.

Uncertainty as to dispute resolution

Under the Measures, the available dispute resolution methods include negotiation,26 mediation,27 administrative review and administrative litigation.28 Arbitration is not mentioned, which will be a concern for private investors when they consider PPP opportunities in China. This is indicative of the Chinese government's view that concessions are conducted as an administrative relationship, which is reflected in other legislation29 and judicial interpretations.30 On the other hand, the Operational Guidelines of the Ministry of Finance for the Public-Private Partnership Model expressly provides that PPP disputes can be arbitrated or be resolved by civil litigation.31 Foreign investors are advised to include an arbitration agreement in their concession agreements.

Conclusion

PPP projects in China have created significant opportunities for foreign investment. However, the legal framework governing PPP projects has long been fragmented. The Measures establish a basic legal foundation for PPP projects through concessions in China.32 While there are positive impacts created by the Measures, uncertainties still exist for foreign investors.


  • * Partner, International Arbitration, Hogan Lovells, Hong Kong
  1. Efficiency Unit, Hong Kong SAR (2008), An Introductory Guide to Public Private Partnerships (PPPs), 2nd edition
  2. European Commission (2003), Guidelines for Successful Public-Private Partnerships, Version 1, Brussels, 2003:16
  3. Chinese Government's Official Web Portal (2008), China's 4 Trillion Yuan Stimulus to Boost Economy, Domestic Demand
  4. Article 1 of the Measures
  5. Article 3 of the Measures
  6. Article 26 of the Measures
  7. Article 27 of the Measures
  8. Article 3 of the Measures
  9. Article 2 of the Measures
  10. Article 6 of the Measures
  11. Article 5 of the Measures
  12. Article 37 of the Measures
  13. Article 38 of the Measures
  14. Article 9 of the Measures
  15. Article 10 and Article 12 of the Measures
  16. Article 22 of the Measures
  17. Article 13 of the Measures
  18. Article 31 and Article 20 of the Measures
  19. Article 23 of the Measures
  20. Article 24 of the Measures
  21. Article 37 of the Measures
  22. Article 38 of the Measures
  23. Concession is where a private investor participates in infrastructure and public utilities projects as a partner to the granting governmental departments. See Article 3 of the Measures.
  24. See the Guiding Opinions on Launching Public-Private Partnerships promulgated by the National Development and Reform Commission, which stipulates that the operational methods for PPP include concessions, government procurement of services, equity cooperation, etc.
  25. 25 Article 3 of the Measures
  26. 26 Article 49 of the Measures
  27. 27 Article 50 of the Measures
  28. 28 Article 51 of the Measures
  29. For example, the newly amended Administrative Procedure Law has included performance, amendment and termination of concession agreements within the scope of case acceptable for administrative procedures.
  30. The Judicial Interpretations of the Supreme People's Court came into effect on May 1, 2015. This provides that concession agreements are administrative agreements.
  31. See Article 28 (3) of the Operational Guidelines for Public-Private Partnerships (Trial Implementation) issued by the Ministry of Finance on and effective of November 29, 2014.
  32. Louise Meng, Ricardo S. Martinez, James Zhang, Miles Pan, China's New Rules on Concession of Infrastructure Projects Welcoming Private Investment.