New Opportunities for Foreign Investment in Infrastructure

A new development however is the addition of "urban utilities" to this article of the Provisions incentivizing foreign-invested infrastructure projects. The Provisions also expand the list of parenthetical examples of these encouraged infrastructure projects to include oil, natural gas, airports, city roads, sewage and waste treatment in addition to coal, electricity, railways, highways and ports that were provided in the 1995 Provisions.

New Infrastructure Investment Possibilities

The encouragement of infrastructure projects had been tempered by the earlier 1998 version of the Catalogue, which limited foreign shareholdings in several types of projects and prohibited foreign investment in the construction and operation of urban water supply and sewerage, gas and heating networks.

But with the issuance of the revised Catalogue this year, the authorities have substantially reinforced their encouragement of foreign investment in infrastructure as outlined in the Provisions. The new Catalogue removes several of the limitations and prohibitions on certain foreign invested infrastructure projects found in the previous 1998 version of the Catalogue. In addition, it encourages foreign investment in new areas of infrastructure such as energy, water and certain "urban utilities" mentioned in the Provisions.

The new Catalogue liberalizes several infrastructure projects in which foreign investment had been prohibited. The 1998 version of the Catalogue prohibited any form of foreign investment in the construction and operation of urban water supply and sewerage, coal gas and heating pipe networks. The new Catalogue however categorizes the construction and operation of water supply and sewerage, gas and heating pipe networks in large and medium-sized cities as restricted projects and requires that Chinese parties have a controlling interest of 51% or more in the project.

The new Regulations remove other restrictions as well. The construction and operation of main line railways, previously restricted, are now encouraged, although Chinese parties must have a controlling interest of 51% or more in the project. However, the construction and operation of public dock facilities at ports and the construction and operation of oil (gas) pipelines and depots and special oil jetties no longer require Chinese parties to be controlling shareholders and wholly foreign-owned projects are thus allowed.

In accordance with the broadened scope of encouraged infrastructure projects suggested by the Regulations, the new Catalogue adds several new energy and "urban utilities" projects to the encouraged category. To help fulfil the need for power spurred by China's rapid industrial development, the Catalogue's encouraged industries now include the construction and operation of thermal-electric cogeneration and natural gas power stations. In addition, the construction and operation of enclosed urban road systems and construction and operation of sewage and garbage treatment plants, dangerous waste treatment and disposal plants (incineration plants, landfill) and environmental pollution control facilities appear as encouraged industries. The encouraged category of the Catalogue also includes the construction and operation of urban water supply plants. None of these newly listed projects contain restrictions on foreign shareholdings and thus wholly foreign-owned projects are permitted.

With the issuance of the Provisions and new Catalogue, Chinese authorities have continued and expanded their encouragement of infrastructure projects and foreign participation in such projects. If China continues on its present course of rapid industrial and urban development, as many anticipate it will with China's accession to the WTO, the new Provisions and Catalogue will help to create more opportunities for foreign investors to participate in projects meeting China's increasing demand for basic infrastructure.

By Scott Silverman,
Freshfields Bruckhaus Deringer,
Hong Kong