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Promotion of PPP Projects and the Challenges to Investors

In recent years, public-private partnerships (PPP) have become more and more popular in China. This trend has been further encouraged by three documents issued by the Chinese Government in September 2014, which are: the Opinions of the State Council on Strengthening the Administration of Local Government Debts of September 21 2014, Guo-Fa (2014) No. 43 (the Opinions), the Decisions of the State Council on Deepening the Reform of Budget Management System of September 26 2014, Guo-Fa (2014) No. 45 (the Decisions) and the Notice on Relevant Issues Concerning Promoting the Application of PPP issued by the Ministry of Finance on September 23 2014, Cai-Jin (2014) No. 76 (the Notice).

In terms of the legal framework for PPP projects, the National Development and Reform Commission, a functional institution of the State Council, circulated a draft Concession Law for Urban Infrastructure and Public Utilities (Concession Law) in the past few months and solicited comments from various experts. Although it is unclear when the Concession Law will be promulgated, the government entities and the potential investors are all closely following the progress of the draft. Meanwhile, it seems likely that the next draft of the Regulation of the Implementation of the Government Procurement Law (Implementation Regulation) will include an article stipulating how to award a project through a competitive tender process. It is said that such an article will be included in the Implementation Regulation in anticipation of being applied to the procurement of PPP projects.

Moreover, the Ministry of Finance has established a PPP Taskforce, which will shortly be transformed to a PPP Center. The Ministry is also about to issue PPP Contract Guidelines and PPP Operational Guidelines by the end of 2014. The PPP Contract Guidelines will include a brief introduction to the contracts that may be involved in a PPP project, including a PPP contract, shareholders' agreement, supply agreement, financing arrangement and so on, an user-friendly examination of the most commonly used terms and conditions in a PPP contract, an in-depth analysis of the payment mechanisms in PPP projects as well as the key features of PPP in public transportation projects, public utilities projects and social infrastructure projects. The PPP Operational Guidelines will set forth the general principles for the application of PPP and comprehensively cover all major aspects of a PPP project by giving concise provisions on the preparation, procurement procedures, implementation, supervision and transfer of PPP projects. Several local government entities such as the People's Government of Beijing Municipal, the People's Government of Fujian Province, the People's Government of Shaanxi Province, etc, have already promulgated PPP-related local laws and regulations.

In its Opinions and Decisions, the State Council repeatedly encouraged the participation of social capitals in PPP projects for public welfare purposes with steady revenue streams, say PPP projects in the sector of urban infrastructure. The Ministry of Finance, in its Notice, mentioned that the government entities should start with PPP projects that apply user charges so as to set some leading examples and that the PPP projects with a transparent pricing mechanism and stable cash flow are preferred. Accordingly, the type of PPP projects being promoted by the Chinese Government will predominantly focus on urban infrastructure and public utilities, including water, heat and gas supply, waste and water treatment, public housing, underground pipelines, track transportation, medical facilities and nursing centers. In terms of the relationship between the government entities and investors, the Ministry of Finance emphasised that the government entities and social capitals shall be on an equal footing to cooperate with each other when dealing with PPP projects and both shall observe the terms of PPP contracts.

It appears that the legal framework at both the central and local government levels are all singing from the same song sheet of promoting PPP projects in China; however, investors are still faced with challenges. For example, the lack of a clear set of laws governing all PPP projects is a major issue. Moreover, there are conflicts in the existing laws and regulations such as the debates on which law is applicable to a BOT project, the Government Procurement Law, the Bidding Law or others? Would the promulgation of the Concession Law or the Implementation Regulation resolve these conflicts or further complicate the situation? Additionally, the lack of clear regulations on how an investor can obtain and secure his right to use the land imposes a major risk for the investor. There are also calls from the market for provisions on the assistance that investors may receive from the government entities in obtaining the required permits and licenses. There is still room for the parties to better appreciate and observe the concept of a reasonable allocation of risks in a PPP contract. The line between proper supervision over PPP projects by the government entities and inappropriate, or sometimes even illegal, intervention by the government entities should be drawn. In short, the Opinions, Decisions and Notice paved the way for further development of PPP projects in China but the road might be bumpy before the Government makes further efforts to create a consistent and easy-to-follow legal environment and the government entities learn to treat their contracting counter-party equally.