Accelerating the Marketization of Urban Utilities Opinions

2. Opening of the Urban Utilities Market

(1) Private funds and foreign capital are encouraged to participate in the construction of urban utilities by way of such different vehicles as wholly-owned enterprises, equity and cooperative joint ventures, etc., thereby giving rise to a pluralistic investment structure. Bids should be publicly invited from the private sector to select investment entities for the construction of for-profit urban utilities such as those for the supply of water, gas and heating, the treatment of sewage, the disposal of waste, etc.

(2) Cross-regional and multi-industrial participation in the operation of urban utility enterprises will be permitted. Entities to operate urban utility enterprises involved in water supply, gas supply, heat supply, public transport, sewage treatment, waste disposal, etc. should be selected through the public invitation for bids from the private sector and concessions will be granted by governments.

(3) Regular maintenance entities or contractors for such non-profit facilities as public facilities, parks and greenery, environmental hygiene, etc. should be selected through the invitation for bids or contracting. An integrated contracting system for road and greenery maintenance and environmental hygiene in respect of urban streets should be gradually established and implemented so as to improve maintenance efficiency and quality.

(4) The design, construction and supervision of urban utility projects and production and supply of equipment for urban utilities must be divested from the main line of business, be administered as an integral part of the construction market and be made subject to the public invitation and submission of bids.

3. Establishment of an Urban Utility Concession System

The term "urban utility concession system" means the system wherein the government grants an enterprise the right to deal in or provide a certain urban utility product or service for a certain period of time and within a certain scope, i.e. a concession. The government specifies the rights and obligations of the government and the concessionaire vis-a-vis each other by way of a contractual agreement or otherwise.

Urban utilities subject to the concession system include sectors that have a direct impact on the public interest and involve the allocation of limited public resources, such as urban water supply, gas supply, heat supply, sewage treatment, waste disposal and public transport.

The implementation of the concession system should cover existing enterprises already carrying on business in these sectors, newly established enterprises that are to carry on business in these sectors, and projects in progress and newly constructed projects in these sectors.

(1) Granting of concessions

The implementation of concessions should be effected through the public invitation for bids from the private sector by way of the prescribed procedure in order to select the investors and operators. In accordance with the PRC Invitation and Submission of Bids Law, the particulars and time limit of, and the market entry criteria and the bid invitation procedure and method for a concession project should first be published and applications accepted in a transparent manner within the prescribed time. Experts should be arranged to examine the qualifications of and strictly assess the applicants in accordance with the market entry criteria and the best should be selected to become concessionaires.

The selected concessionaire should be announced in the news media and be subject to supervision by the public. After the expiration of the announcement period, the municipal authority in charge of the urban utility sector, acting on behalf of the municipal government, will conclude a concession contract with the concessionaire.

An entity that wishes to invest in and construct an urban utility project requiring a concession must first obtain the concession and conclude a contract with the authority in charge of the industry before it can commence construction.

Existing urban utility enterprises that are owned by the State or in which the State has a controlling interest should apply for concessions in accordance with the prescribed procedures after undergoing a State-owned asset appraisal and registering their property rights. A government may also grant such an enterprise operating rights by way of a direct engagement, after which the competent authority will conclude an operation contract with the enterprise engaged.

(2) Conditions that an enterprise applying for a concession should satisfy:

- having the status of a legally registered enterprise legal person;

- meeting the conditions appropriate to the operations for which it is applying: the enterprise's persons in charge of business management and technical management having the appropriate professional experience and track record, its personnel in other key positions having the appropriate professional qualifications, and it having the necessary funds, equipment and facilities;

- having a good bank credit rating and financial position and a debt service capacity appropriate to the size of its business; and

- having a feasible business plan and meeting other necessary conditions specified by the government.

(3) The concession contract should include the following basic terms:

- the particulars, scope and term of operation;

- the quality standards of the products and services;

- the method for determining, and the rates of, prices or charges;

- the asset management system;

- the parties' rights and obligations;

- the performance bond;

- the termination and modification of the concession;

- the supervision mechanism; and

- liability for breach of contract.

(4) Modification and termination of the concession

If the particulars of the concession change during the contract term, the parties must conclude an appropriate supplementary agreement on the basis of mutual consultations. If a material change in the particulars of operation occurs due to a reason attributable to the enterprise, the government should decide whether to continue the grant of the concession to the enterprise depending on the circumstances of the change. If the government adjusts its plans and the contract due to development requirements, it should fully take into account the reasonable interests of the original concessionaire.

Prior to the expiration of the concession (in general not less than one year), the concessionaire may apply for a renewal of the concession in accordance with regulations. The concession may be renewed after the competent authority has arranged for a review in accordance with the prescribed procedure and the municipal government has granted its approval.

If a concessionaire is characterized by any of the circumstances set forth below during the term of operation, it will be appropriately dealt with after the authority in charge of urban utilities reports the matter to the municipal government, and the municipal government grants its approval; if the circumstances are serious, the enterprise should have its concession revoked:

- it fails to perform the contract in accordance with the requirements, the quality of its products or services fail to meet the standards and it fails to rectify the matter on time in accordance with the requirements of the authority in charge of urban utilities;

- it assigns or modifies its concession without the approval of the government or the authority in charge of the industry;

- it suspends operations or shuts down without the approval of the municipal government and the authority in charge of the industry, thus affecting the interests and the safety of the public; or

- a major quality-related or production safety related accident occurs or its legal representative commits a major violation of regulations or breach of discipline.

When a concession is changed or terminated, the disposal of assets and personnel arrangements must be duly carried out and the continuance of services must be ensured.

Urban utility enterprises must autonomously operate in accordance with the law. A concessionaire must formulate its annual production plan in a scientific and rational manner, guided by the government's master plan for the allocation of public resources; provide to the public a sufficient quantity of products or quality services that meet the standards; willingly accept government supervision, formulate strict financial and accounting systems, periodically report on its business operations to the government and the competent authority and truthfully provide relevant materials that reflect its performance of the contract. An urban utility enterprise should obtain a reasonable return on its investment and realize an operating profit by operating lawfully and should bear the corresponding operational risks and legal liability, thus truly becoming a market entity that operates autonomously, that assumes sole responsibility for its own profits and losses and that develops itself.

4. Changing of the Government Administration Method

The people's governments of municipalities are responsible for the granting of concessions within their administrative jurisdictions. The municipal authorities in charge of urban utilities shall be authorized by the local governments to take charge of the specific administration of concessions on behalf of the municipal government, and exercise the relevant rights and bear the relevant responsibilities of the grantor.

The municipal authorities in charge of urban utilities must further change their method of administration, from hands-on administration to macro administration, from administration of different industries to administration of the market, and from being accountable to the enterprises to being accountable to the public and society.

The main duties and responsibilities of the authorities in charge of urban utilities are the conscientious implementation of relevant State laws and regulations, the formulation of development policies and plans and construction plans for the sector; the formulation of urban utility market rules so as to create an environment characterized by transparent and fair market competition; the strengthening of market oversight and the regulation of market activity; the supervision of the qualifications, market activities, product and service quality and contract performance of enterprises active in the urban utilities sector; and the punishment of enterprises whose market activities violate regulations, whose products or services do not meet standards or that breach their concession contracts.

The prices of urban utility products and services should be determined and monitored by the government. The tariffs for the pricing of (charges for) urban utility products and services should be determined in line with market economy laws, on the basis of the average costs of the sector and by considering reasonable corporate profits, provided that full consideration is given to the rational allocation of resources and that the public interest is safeguarded.

The reasonable returns obtained from the lawful operation of an urban utility enterprise should be safeguarded. If the prices of an enterprise's products and/or services are set below cost in order to satisfy the public interest or if the enterprise undertakes a task on the order of the government in order to achieve a public welfare related objective of the government, the government should grant it an appropriate subsidy.

5. Strengthening Leadership and Actively and Steadily Driving the Pace of Marketization

Accelerating the marketization of urban utilities and establishing a concession system are requirements necessary for the establishment of the socialist market economy system and are a major reform of the urban utility sector. All local authorities must strengthen their leadership thereof and actively and steadily promote the same.

The Ministry of Construction is responsible for macro guidance in driving the pace of the marketization of urban utilities and establishing the concession system throughout the country. The administrative authorities of the provinces and autonomous regions in charge of construction are responsible for supervising and guiding the implementation of the concession system for urban utilities within their administrative jurisdictions.

Based on a strong sense of responsibility toward the people and the enterprises, municipal people's governments and their authorities in charge of the industry must painstakingly organize, comprehensively plan and appropriately handle the relationship between reform, development and stability; actively and steadily drive the pace of marketizing urban utilities; formulate master implementing plans and implement the related auxiliary policies; proceed from the actual circumstances in their regions, suit measures to local conditions, provide guidance tailored to different sectors and decisively solve actual problems arising in the course of marketization; and satisfactorily solve staff and worker old age, medical and other social insurance problems arising during the reform of the system of property rights ownership in accordance with relevant State and local government policies.

The relevant legislative work must be accelerated, the rights, obligations and responsibilities of investors, operators and administrators, and the legal relationship between the government and its competent authorities on the one hand and the investors and operators on the other hand, must be clarified in the form of laws.

All relevant authorities must cooperate fully to actively create the conditions for promoting the marketization of urban utilities and establishing the concession system and strive to establish as quickly as possible within a relatively short period of time a uniform, deregulated and competitive but orderly urban utility market system and operating mechanism.