New Investment Catalogue Expected to Liberalize Infrastructure Investment
December 31, 2001 | BY
clpstaffChina's accession to the World Trade Organization is expected to have significant and far-reaching impact upon China's domestic economy and related legal…
China's accession to the World Trade Organization is expected to have significant and far-reaching impact upon China's domestic economy and related legal framework. This includes the area of basic infrastructure, of which we've covered many issues in the past year on this page.
Foreign investment in basic infrastructure, like other types of direct foreign investment in the PRC, is governed by and subject to the overall legal framework set out in the Directing of Foreign Investment, Tentative Provisions (the Investment Provisions) and the Foreign Investment Industrial Guidance Catalogue (the Investment Catalogue). This will not change with China's entry into WTO. The State Council first issued the Investment Provisions in 1995, and the State Development Planning Commission (SDPC), the State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) are jointly responsible for their implementation.
The Investment Catalogue, first promulgated together with the Investment Provisions in 1995, is revised on a periodic basis by the SDPC in consultation with the State Council. The first revised version of the Investment Catalogue was adopted by the State Council and became effective from January 1 1998. Further to China's accession to the WTO, a new revised version of the Investment Catalogue is expected by the end of December 2001. This version will reflect the specific changes agreed pursuant to the terms of China's accession documents, together with other changes reflecting domestic priorities (such as the development of the western provinces).
Under the Investment Provisions, all foreign investment is divided into four categories: encouraged, permitted, restricted and prohibited. The Investment Catalogue itself only lists those areas that are encouraged, restricted and prohibited. Industrial sectors not expressly mentioned in the Investment Catalogue are deemed to be permitted, and are therefore neither eligible for special benefits nor subject to additional restrictions.
The current Investment Catalogue places various types of infrastructure projects in the prohibited category. These include the construction and operation of urban gas supply networks, urban water supply and disposal networks, and urban electricity transmission networks. Consequently, up to the present foreign investment in these sectors has not been permitted and cannot legally be approved, at least by authorities below the level of the State Council.
Recent reports indicate that the new Investment Catalogue will further liberalize foreign investment in basic infrastructure. While the exact scope of the changes is not yet clear, it is expected that such liberalization will extend to foreign participation in the construction and ownership of urban gas, heating and water supply systems. Such participation, however, is to be predicated on Chinese control of the networks. Wholly foreign-owned enterprises will continue to be prohibited in these sectors.
Such reports appear to confirm certain regulations that have been issued, seemingly prematurely, over the past several years. One example is the Ministry of Construction, Use of Foreign Capital by Urban Public Utilities Provisional Regulations (the Provisional Regulations) issued on May 27 2000. The stated purpose of these Provisional Regulations was 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, including projects for, among other things, the construction or renovation of facilities for urban heat and gas supply. Inquiries at the time of their promulgation indicated that they were intended to permit foreign investment in urban public utilities once the Investment Catalogue was revised. The expanding scope of permitted projects was also witnessed in the special exemption given to the West-to-East Gas Project for foreign investment in urban gas supply and distribution, both for upstream and downstream related projects, and in particular for participation in local distribution networks.
It remains to be seen how and to what degree the exact wording of the new Investment Catalogue will create additional opportunities for foreign investment in infrastructure projects and, at the same time, whether the new wording will impose further restrictions. Current indications, however, are that the scope will be at first expanded gradually: “crossing the river by feeling the stones”, to use a Chinese phrase. In addition, the revised Investment Catalogue is subject to further revision at a future date, which is largely how China's foreign investment regime has proceeded to date.
By Tarrant M. Mahony,
Freshfields Bruckhaus Deringer,
Hong Kong
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