Legality of Investing in Urban Gas Supply Networks

The Investment Catalogue lists the construction and operation of urban gas supply networks in the prohibited category. This means that foreign investment in this sector is not permitted and cannot legally be approved, at least by authorities below the level of the State Council.

Prohibited Status Changing

There have been a few indications that the prohibited status of such projects might change. On May 27 2000 the Ministry of Construction (MOC) promulgated the Provisional Regulations for the Use of Foreign capital by Urban Public Utilities (Provisional Regulations). The stated purpose of these Provisional Regulations is to "expand the scope of using foreign capital" in urban infrastructure projects.

According to its terms, the Provisional Regulations apply to projects for "urban public utilities" which use foreign capital. This includes projects for, among other things, the construction or renovation of facilities for urban heat and gas supply. Thus, the initial impression created by the Provisional Regulations was that foreign investment would now be permitted in these types of urban infrastructure projects.

While the wording of the Provisional Regulations gives the impression that foreign investment in urban gas supply is now permitted, no corresponding change to the Investment Catalogue has been made. As the MOC is lower than the State Council in the hierarchy of PRC government entities, to the extent that the Provisional Regulations contradict the Investment Catalogue, the former are invalid. Moreover, inquiries with the MOC and the State Development Planning Commission (SDPC) have confirmed that the apparent expansion of the scope of foreign investment in PRC urban public utilities is subject to the overall regulation scheme set out in the Investment Catalogue. For the time being, therefore, there is no legal basis for foreign investment in this sector.

Exception to the Rule

As an exception to this general rule the West-to-East Gas Project has apparently been given a special exemption from the prohibition on foreign investment in urban gas supply and distribution. Last summer, as an inducement to interest foreign investors in the proposed project, it was officially announced that it would be possible for successful bidders to obtain special consideration in applying for both upstream and downstream-related projects. Such special consideration extends to participation in local distribution networks.

Of course, this announcement does not remove the general legal prohibition discussed above, and it should be noted that no official document from the State Council, SDPC or other government entity has confirmed the official press reports. At the same time, however, it is unlikely that such an announcement would have been made if PetroChina, as the Chinese sponsor of the project, had not obtained high-level confirmation that either special rules would be issued or that the State Council would approve such projects on an individual basis at the appropriate time. Nevertheless, obtaining in due course proper governmental approval of foreign investment in such urban gas supply networks will be of major importance to foreign bidders and their legal counsel.

Will it Continue?

At this point it seems that this special exemption will apply only to this particular project. As with many other areas of foreign investment regulations, however, it may well be that if the PRC government sees a benefit in utilizing foreign investment to upgrade its urban gas supply networks, that it will, in due course, extend the privilege to all foreign investors.

By Tarrant M. Mahony,
Freshfields Bruckhaus Deringer, Beijing