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A LOOK BACK AND THOUGHTS ON PPP LEGAL PRACTICE IN CHINA IN 2015
The current PPP tide in China driven by the Ministry of Finance and the National Development and Reform Commission witnesses the transformation and upgrading of large state-owned enterprises. These enterprises that have traditionally only been familiar with bid invitation, bid submission, and construction, have started to have an impact on numerous new areas such as project proposal and planning, company establishment and acquisition, fund establishment and operation, etc. Certain state-owned enterprises that got their starts fairly early have cultivated teams with extensive experience in investing, and certain enterprises that are just starting up are selecting young talent from various entities in all out effort to catch up. Private enterprises also participate enthusiastically.
Under the guidance of “One Belt, One Road” Initiative, numerous enterprises have extended their PPP project antennas beyond China’s borders. Fortunately, a major change in business philosophies has occurred, where enterprises start to rely on lawyers, accountants and other such professional advisors to innovate investment and financing models. Following on their heels are the large banks and insurance, fund, trust and other such financial institutions that are directly or indirectly participating in PPP projects through equity investment plans, independently or jointly establishing funds, and other such means.
However, the current project risk identification and prevention standards of these enterprises and financial institutions will be subjected to the test of reality within the next 5 to 10 years and, unavoidably, a number of them will be hit by such risks as difficulty in payment of government service fees or underperforming projects, resulting in their being sidelined.
Furthermore, even while PPP projects are advancing everywhere like a prairie fire, every once in a while, in practice, the sound that “PPP projects are having difficulty landing” is heard.
What is the relationship between PPP and concessions?
Although this seemingly is a most basic question, in practice, people’s understanding of it is all over the place. Indeed, to date, there is no regulation that expressly states their relationship, whether it is of one encompassing the other, an overlapping one or a parallel one. This led a lawyer in a PPP project bid invitation to state that “regulations on concessions do not apply to PPP projects. If it is your opinion that they are applicable, please show me the legal basis”.
We tried hard to find the regulatory connections, but did not find any clear basis. A new invitation of bids was called for the relevant project, and the construction profits that should have been coming to the investor based on the fixed quota pricing was thus chopped to the bone.
What is the relationship between government procurement of services and build-transfer (BT)?
The Notice of the Ministry of Finance on Better Regulating Public-Private Partnership Projects specifies that “the term of public-private partnerships shall, in principle, not be less than 10 years”. The Notice additionally specifies that the Ministry of Finance will not accept BT projects that carry out financing in such disguised forms as giving undertakings of minimum returns, providing a buyback arrangement, etc.
Setting aside the reasonableness of the requirement of a term of not less than 10 years, the question is, where does the difference between BT and a PPP project for government procurement of services lie? In a PPP project for government procurement of services, doesn’t the practice whereby the government, after a value for money assessment (including reasonable investment returns for the investor) and an assessment of fiscal bearing capacity, undertakes to incorporate the service fee into its annual and three-year fiscal budgets constitute an undertaking of minimum returns or a buyback arrangement? BT is a financing method, and, for the government, isn’t a PPP project also a financing method?
Imbalance in the rights and obligations of local governments and private investors.
In many PPP contracts for projects, everything that the government has are rights, and everything that the private investor has are obligations and responsibilities. The rights, obligations, and liability for breach of contract are extremely unequal. The imbalance in the rights and obligations of the government and the private investor is serious.
Current PPP contracts usually emphasize the public party’s oversight rights and involvement rights throughout the project and emphasize that the private investor bears full responsibility for the project’s investment, construction, quality, safety, environment, etc. However, they contain few provisions ensuring the independent and complete exercise by the investor, as the project owner, of its rights in terms of financing, investment, construction, operation, etc.; and provisions on how the investor is to recover the funds it has sunk into the project after the government becomes involved in the project are even scarcer. Some local governments go as far as trotting out the view that not one word of the conditions in the bid invitation documents can be amended. Continuing in this manner in the long run will be adverse to the healthy development of PPP projects.
Conflict between PPP and current legal systems.
Since all PPP policies and documents are ministerial level, a national legislation is absent. This has directly resulted in a serious conflict between PPP projects, in the course of their implementation, and the current project proposal system, land system, security system, tax system, pricing system, budget system, government procurement system, bid invitation and submission system, state-owned equity transfer system, finance system, dispute resolution system, etc. PPP regulatory documents typically cannot be applied with priority due to their relatively low level in the hierarchy of laws and regulations, and even if one were to be applied with priority, there is a risk that it could be negated or overturned when a dispute arises in future.
In addition to legislative absence, there is also a lack of coordination and uniformity in the regulatory documents issued by different ministerial level authorities, and, in some instances, even discrepancies in different documents issued by the same authority, leaving local governments and private investors at a loss as to what to do. In some instances, there has been insufficient research and fact finding done before the issuance of a policy, resulting in such problems as a mismatch in legal relationships, low practicability, etc. This also affects the long-term benign development of PPP projects.
Stumbles in the exploration and development of PPP projects in China are unavoidable. What is key, however, is that after such stumbles, things need to be thought out clearly rather than continuing to unceasingly fumble around in the old ways of thinking. In 2016, it is hoped that PPP projects in China will ride on a more rational and mature track.
Wang Jihong is a partner of Zhong Lun Law Firm. She can be contacted on +86 10 5957 2063 or by email at firstname.lastname@example.org