Special Feature : The Feasibility Study Report: Some Frequently Encountered Issues and the Impact of WTO

January 31, 2001 | BY

clpstaff &clp articles

The feasibility study report is usually associated with the inception of a project. As an increasing number of foreign investors acquire, dispose and reorganize…

The feasibility study report is usually associated with the inception of a project. As an increasing number of foreign investors acquire, dispose and reorganize businesses in the PRC, the continuing relevance of the feasibility study report has to be looked at in those circumstances.

Consider the following scenarios: 

  •          You are acquiring an interest in an equity joint venture. As part of the due diligence investigation, you discover from the joint venture¡¯s constitutional and approval documents that it has increased its total amount of investment and registered capital, but these increases are not consistent with the amounts stated in the joint venture¡¯s feasibility study report.
  •           A cooperative joint venture was originally approved to produce industrial waxes and other downstream chemicals. It currently also produces lubricants which it believes is in line with its approved scope of business. However, the results of the due diligence reveal that the joint venture¡¯s feasibility study report does not contemplate the joint venture producing lubricants.
  •          You are disposing of an interest in a joint venture which is authorized to develop software, but which also operates an internet portal. The prospective purchaser requests to inspect the feasibility study report, but you do not have one.

Scenarios such as these are recurring with increasing frequency as growing numbers of foreign investors acquire, dispose and re-organize businesses in the PRC. This article looks at issues concerning the feasibility study report in this context. One question that foreign investors in these situations frequently raise (or ignore) is whether the feasibility study report has a continuing practical relevance to their activities. The comments in this article are addressed particularly to small to medium sized joint ventures engaged in manufacturing and light industry. There is less flexibility in the case of high profile or big-ticket projects.

Role and purpose of the feasibility study report

The primary purpose of the feasibility study report is to secure the relevant planning approval for the project that is a necessary precursor in order to obtain the approval for the establishment of the joint ventures. In many cases now, especially those where the foreign investor is experienced in establishing projects, investors have become brutally efficient in preparing the feasibility study report. Although, of course, a feasibility study report will still contain a detailed description of the project and the usual information, details which may have been volunteered a decade ago are now considered otiose and standard form recitations are commonplace, all this perhaps reflecting a change in attitude towards feasibility study reports. Many foreign investors, in particular those who have been through the approval process before, do not seem to view the feasibility study report as being an actual study of the feasibility of the project, but a document which is designed solely for the approval process. So, for example, an encouraging remark by a PRC government minister made at a luncheon hosted by the foreign investor in, say, Paris might be usefully included in the feasibility study report in order to demonstrate to the local planning commission the support of the project by the central government. The feasibility study report which is actually prepared to assess the feasibility of the project and to obtain internal board or investment committee approval sits safely in the headquarters of the foreign investor.

From the perspective of the relevant planning commission, the feasibility study report is, in the context of the PRC51s centrally planned economy, a macro-economic planning aid. It assists the State, for example, to plan an efficient and reliable allocation of resources amongst competing users, to guide the inflow of foreign investment and to ensure a demand for products manufactured. The feasibility study report allows the PRC authorities to determine whether the project is suitable. In assessing the suitability of the proposed project, the planning commission applies what may be described for the purpose of this analysis as a business purpose test as well as a resources based test.

Business Purpose Test

The term business purpose test means the process by which the relevant authorities classify the business purpose and industry of the project to see in which category of the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) (the Catalogue) the project falls, that is Prohibited, Restricted A or B, Encouraged or the residual Permitted. The Catalogue reflects the PRC government's macro-economic policies including those relating to the allocation of resources and the flow of inward investment. For example, projects which bring into play the advantages of the manpower and resources of the central and western regions and which conform to the industrial policies of the State are encouraged. Projects that involve industries for which central planning is required are categorized as restricted, and projects that use land resources inefficiently are prohibited.

Depending on the category which applies, it can be ascertained whether the project is prohibited, whether it should be approved locally, by the central government or at the State Council level, and whether the project is one which should not be wholly foreign-owned or in which the PRC partner should maintain a controlling or dominant position. The feasibility study report assists the relevant planning commission to make a proper assessment of the relevant facts and to ensure that the project is properly classified and approved.

Resources Based Test

Even if the project satisfies the requirements of the Catalogue, the relevant planning commission will need to determine that it fits into the relevant local or State plan in terms of available resources, utilities, land and other industry-related demands of that project. A feasibility study report would typically set out the project51s requirements for raw materials, utilities and other supplies and the expected demand for its products. Based on this information, the State Development Planning Commission or the relevant local planning commission can fit the project into their planning programmes and allocate resources accordingly.

An often perceived advantage of a well thought out feasibility study report is that if the feasibility study report provides clearly for the project's expected needs for raw materials or utilities then, if during the life of the project there is a threatened shortage in such supply, there would be a basis for making a case that the project should receive preferential or, at least, non-discriminatory treatment with regard to the supply of such raw materials or utilities. On the other hand, there is no legal basis to support the view that an approved feasibility study report is binding on the planning commission that approved it. A planning commission may impose conditions on a project, but it is not necessarily bound to help meet the expectations contained in the feasibility study report that it approved.

Given the underlying purpose of the feasibility study report, the relevance of two questions becomes immediately apparent:

(i) if the feasibility study is concerned with the project at its inception, does it not become an historic document once use of it has been made at the initial stages of the project, it thereby ceasing to have an ongoing importance? and

(ii) what is the relevance of the feasibility study report as a macro-economic reporting device in an increasingly market economy?

This premium content is reserved for
China Law & Practice Subscribers.

  • A database of over 3,000 essential documents including key PRC legislation translated into English
  • A choice of newsletters to alert you to changes affecting your business including sector specific updates
  • Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
For enterprise-wide or corporate enquiries, please contact our experienced Sales Professionals at +44 (0)203 868 7546 or [email protected]