Foreign Investment in the Yangshan Deep-sea Port

The Foreign Investment Industrial Guidance Catalogue (the Catalogue) previously expressly provided that "State-owned assets" must constitute the majority shareholding and control over, or maintain the "leading position" in, projects for the construction and operation of "common-user" port terminals. In practice, this provision was interpreted to mean that foreign or private ownership in port construction/operating companies must be less than 50%. An amendment to the Catalogue (which came into force on April 1 2002) deleted this provision. Multinational shipping companies and port terminal operators interested in investing in the Yangshan port project may therefore consider setting up majority controlled joint ventures or even wholly foreign-owned enterprises to engage in port construction or operations.

Shanghai Tongsheng Investment (Group) Co. Ltd., the investment vehicle designated by the Shanghai Municipal Government to develop Yangshan Port, is reportedly drafting an investment guideline to provide for, among others, equity ratios for foreign investment and the rate of return on investment. It is not clear at this stage whether this guideline will be published or whether it will remain as an internal guideline to investment in the port project.

Some Issues

Given the daunting engineering challenges associated with converting the outlying Yangshan Islands into a modern port facility, and the various social and resettlement programmes associated with the creation of a new port city with its various facilities, the Yangshan port project will likely prove extremely expensive and time-consuming. Moverover, given the size of the project, commercial negotiations with the local authorities and their corporate alter egos will likely be complicated.

A Cross-jurisdictional Project

One of the main controversies surrounding the Yangshan port project is that, while the port will be situated on the Yangshan Islands of neighbouring Zhejiang province, it will likely be competing with Zhejiang's own deep-sea port, Beilun Port, in Ningbo City, which is located approximately 80 kilometres south of Yangshan. This cross-jurisdictional setting coupled with the common problem of local protectionism may well set the stage for future turf wars between Shanghai and Zhejiang.

A great deal will depend on how administrative authority in respect of Yangshan Port will be divided between Shanghai and Zhejiang. For example, unless special arrangements are made, multinational port terminal operators within Yangshan Port will need to complete their corporate and labour registrations with and be subject to annual audits (including tax audits) conducted by the local Zhejiang authorities. Therefore, multinational shipping companies and port terminal operators interested in investing in Yangshan should be prepared to commit resources to deal not only with the central government authorities, but with the local authorities of both Shanghai and Zhejiang province as well.

Availability of Professionals

Given the relatively remote location of the Yangshan Islands, before completion of the port city in Nanhui district, port terminal operators may face difficulty in finding qualified professionals and skilled labour willing to relocate to Yangshan. This will likely lead to increased staff compensation and relocation costs for such operators.

Revisiting Regional Strategy

If the Yangshan port project is a success, it will likely compete with and draw business away from other deep-sea ports throughout north-east Asia. Over time, port terminal operators who have already made strategic investments in these ports may need to revisit their regional investment strategies.

China's Ports Law

Articles 27 and 49 of the new PRC Ports Law (中华人民共和国港口法)(the Ports Law) provide that "[p]ort operators shall give priority to handling supplies for rescue missions and disaster relief, and supplies urgently required for the development of national defence", failing which port operators will be penalized and may even lose their operating licences in extreme cases. Since the Ports Law will not come into force until January 1 2004, it is not clear at this stage how the broad provisions of these articles will be interpreted and enforced in practice. Multinational shipping companies and port terminal operators interested in investing in Yangshan would be well advised to negotiate with the relevant Chinese authorities to narrow the scope of application of these provisions.

Political Risk Insurance

Given the long-term nature and the magnitude of their potential investments in Yangshan, it will be prudent for multinational shipping companies and port terminal operators to consider purchasing political risk insurance in respect of their investments in the port.