Private Investment in Urban Utilities

The Opinion also states that foreign investment in various forms, such as the wholly foreign-owned enterprise, equity joint venture and cooperative joint venture, is to be encouraged for the construction of urban utility facilities. However, as with the Ministry of Construction's earlier Utilization of Foreign Investment in Municipal Public Works Tentative Provisions (the Tentative Provisions) issued in May 2000, it appears that the Opinion cannot be deemed to expand the areas already open to investment under the Foreign Investment Industrial Guidance Catalogue. In any case, the current version of the Catalogue issued in March 2002 has opened certain key areas to foreign investment that had previously been off-limits, including the construction and operation of gas, thermal energy and water supply networks in large and medium-sized cities.¹

Concession System

To a large extent, the Opinion reiterates existing practices, as well as the requirements of current laws and regulations such as the PRC Invitation and Submission of Bids Law (中华人民共和国招标投标法) (the Bidding Law, effective January 1 2000). The Opinion mandates the use of a concession system wherein operational rights are granted to an enterprise for a certain product or service within a specified time and scope. This concession system is to apply to "those enterprises that have engaged in the operational activities of these industries and newly established enterprises, as well as projects under construction and those projects that are just completed". The extent to which the Opinion is intended to shape future use of either the traditional joint venture or the BOT model under which several previous foreign-invested infrastructure projects have been structured is unclear.

Competitive tendering is generally required for all utilities projects, though the stipulations in the Bidding Law on this point are a bit vague. In particular, the Opinion leaves the door open for direct assignment of concessions in some cases for enterprises in which the State has a controlling interest.

Tariff Regulation and the Role of the State

The Opinion formalizes, in the area of municipal utilities, the PRC government's ongoing policy campaign to separate the administrative and commercial functions of government. As in other sectors, notably telecoms, the aim is to boost operating efficiency through private investment and operation, while at the same time recasting the state as a regulator charged with overseeing the public interest. Accordingly, the Opinion charges each municipal utilities department with the task of "moving from industrial management to market management" as a macro-regulator as well as administering the concession process.

The Opinion is ambiguous on the sensitive but vital issue of tariff rates. Tariffs are to be set "in accordance with the industry's average costs and with consideration given to the reasonable profits to be made by the enterprises". However, the Opinion also vaguely states that "the reasonable investment returns to be obtained by an enterprise through its legal operation shall be guaranteed", which on its face would seem to contradict provisions in other PRC legislation that prohibit overt or covert guarantees of a fixed ratio of return to foreign investors. The Opinion additionally provides for government subsidies to an enterprise in cases where tariffs are set below cost in order to meet public welfare objectives.

Conclusion: The Legislative Vacuum

Though drafted in vague language, the Opinion may serve to accelerate the ongoing privatization of the utilities sector. However, given the recent opening of the water, heating and gas supply sectors to foreign investment, the lack of national-level rules governing the structure and operation of these industries, and the lack of a comprehensive law governing the concession process, additional legislation can be expected in the future.

Endnote

1 For additional details, see Scott Silverman, "New Opportunities for Foreign Investment in Infrastructure," China Law & Practice, April 2002, 16(5), p. 117.

By Adam Kearney

Freshfields Bruckhaus Deringer, Hong Kong