Beijing's New Rules on Municipal Infrastructure Projects

Investment Returns, Special Incentives and Legal Restrictions

The Procedures stipulate that investors may obtain a return on their investments from the charging of fees for services and products. Other sources of potential income for investors include development rights for projects related to the infrastructure project. The Procedures also provide that the concession holder may be granted government subsidies in certain projects, but do not provide any further guidance as to when and under what conditions such "additional development rights" and government subsidies might be available. The Beijing municipality further undertakes to provide the necessary land use rights and related facilities, and to prevent "unnecessary" excessive competition from redundant construction projects. This last provision, if realistically enforceable, would greatly benefit investors by protecting them from having their market undercut by competing projects.

The Procedures also provide that if government policy changes during the term of the concession adversely affecting the project company's expected benefits, the project company may apply for compensation. The relevant authority in charge shall verify the compensation application within six months, which shall then be subject to approval of the Beijing government. However, the Procedures do not indicate how long such government approval will take. During the term of the concession, moreover, the government cannot take away the concession rights unless the concession operator is in material breach of its obligations under the concession agreement or is otherwise in material violation of law, or if "public interests" are at stake. The municipal people's government is responsible for compensation in the latter case.

The Procedures, however, specifically provide that the government will not provide any guarantees related to business risks, such as guaranteed fixed returns or other matters forbidden by laws and regulations. This follows from numerous State Council notices prohibiting fixed investment returns, but does not provide any clarity with regard to the permissibility of minimum take or pay clauses and similar types of financing techniques commonly used in basic infrastructure projects. It also raises a question as to the validity of government subsidies. If such subsidies are in fact disguised "guarantees" of the project's profitability, then they will be invalid. Project developers and lenders will want to ensure that any such provisions are carefully drafted to avoid their subsequently being unenforceable.

The Concession Agreement

The Procedures provide that the concession agreement to be signed between the relevant project authority and the project operator shall include: project name and contents; form of operation and term; product or service quantity, quality and standards; investment financing terms and method; fees or subsidies and their adjustment mechanisms; government pledges and safeguards; rights and obligations of the concession operator; risk allocation during concession term; transfer method and procedure at the end of operation term; terms for breach of contract; and dispute resolution method.

After signing the concession agreement and related contracts, the operator must establish the project company that will be responsible for implementing the project. In the case of a foreign-invested company, the Foreign Investment Industrial Guidance Catalogue (the Catalogue) will be applicable and the relevant level of MOFCOM approval will be required. Thus, the Catalogue must always be consulted to ensure that a specific project is indeed open to foreign investment and whether any other restrictions (such as maximum equity holding percentages) apply.

By Tarrant M. Mahony,

Freshfields Bruckhaus Deringer

Beijing