Railway Construction in China

China's Specific Commitments on Services for WTO accession outlines the openings available to foreign investors to engage in construction or related engineering services in China. Construction services are defined to include "construction work for civil engineering projects", which incorporates constructing "highways (excepting elevated highways), streets, roads, railways and airfield runways". Under the schedule, China committed to allowing joint venture construction service providers with foreign majority ownership upon accession (i.e., on December 11 2001). Three years after accession (by December 11 2004), wholly foreign-owned enterprises (WFOEs) will be permitted to undertake railway construction projects. It is noteworthy that, even once permitted, wholly foreign-owned construction enterprises may undertake only the following types of construction projects:

· construction projects wholly financed by foreign investment and/ or grants;

· construction projects financed by loans from international financial institutions and awarded through international tendering according to the terms of loans;

· Sino-foreign jointly constructed projects with foreign investment equal to or more than 50%; and Sino-foreign jointly constructed projects with foreign investment less than 50% that are technically difficult to be implemented solely by Chinese construction enterprises; or

· with approval by a provincial government, in the case of Chinese-invested construction projects that are difficult to be implemented solely by Chinese construction enterprises, Chinese and foreign construction enterprises can jointly undertake the work.

In addition, foreign investors in construction services currently face limitations that mean the "national treatment" principle is not yet applicable. China has not committed to the elimination of such discrepancies in treatment until December 11 2004.

...and the Reality

To date, the April 2002 Foreign Investment Industrial Guidance Catalogue (the Catalogue) is the best reference to determine how closely China is implementing its WTO commitments. Foreign investment in railway construction falls under the "encouraged" category in the Catalogue, and foreign investors may engage in construction and operation of main line railways, with the express restriction that the Chinese side must hold a majority stake in such ventures. Further, the Catalogue stipulates that foreign investment must take the form of a joint venture (equity joint venture or cooperative joint venture) for ventures involving the construction and management of branch line railways, local railways and related bridges and tunnels. Given China's pledged liberalization under the WTO (foreign majority joint venture construction enterprises permitted), and the reality of China's foreign investment regulations (foreign majority joint ventures not permitted in mainline railway construction), it appears China has fallen short of its WTO obligations. Furthermore, it remains to be seen whether China will revise the Catalogue by the end of 2004 to permit WFOE construction companies to undertake mainline railway construction projects in line with its WTO commitments.

The Procedures

Under the Procedures, investors in railway construction projects shall select a construction management work unit, which is responsible for the projects' execution. The means by which investors shall select the construction management work unit is not specified in the Procedures, except for projects directly invested in by the central government. In such cases, the State Council department in charge of railways shall select the construction management company. However, according to bidding legislation, construction of railway projects in many cases must be done by bidding.

The construction management work unit arranges for the invitation for bids for surveying and design and actual railway construction, and also carries out project supervision. It is important to note that the bid-winning construction contractor may not assign or subcontract the project (in the case of works that truly need to be subcontracted this fact shall be specified in the bid documents, and the contractor is liable for the quality and safety of subcontracted works).

In line with practice, the Procedures call for the strict regulation of railway project funds. Recently, debates have raged over the estimation and valuation of cost in implementing magnetic levitation versus high-speed rail tracks in a number of China's railway projects. To prevent unexpected cost increases, the approved budgets for the initial design of the railway may not be increased (except for policy or special reasons, which presumably require further approval).