A Look at Concession Rules for the Urban Water Industry
March 31, 2004 | BY
clpstaff &clp articlesBy Yuan Jianan and Qin Yu [email protected] [email protected] city governments in China monopolized the urban water industry…
By Yuan Jianan and Qin Yu
[email protected] [email protected]
Local city governments in China monopolized the urban water industry until the mid-1990s. In 1995, three ministries led by the State Planning Commission issued the Several Issues Concerning the Examination, Approval and Administration of Experimental Foreign-invested Concession Projects Circular, which introduced BOT concessions to urban water plants. A more comprehensive foreign-invested BOT regulation that was promised in the 1995 Circular was not issued. However, since that time, concession-based water supply projects, and later wastewater treatment projects, have been gradually carried out across China, and both foreign and Chinese investors have participated. Apart from the grant of concessions to a new project company, an equity transfer in an existing water company is also a popular approach for attracting outside investment. In this method, the domestic water company has already held some form of concession and modifies the concession for the outside investor upon the equity transfer.
In terms of market access, the concessions were initially limited to plants; but recently distribution networks have also been opened to outside investment. Of past water concession projects in China, the Shanghai Dachang Water Plant project and the Chengdu No. 6B Water Plant BOT project represent two major models in granting the concession.
In the former case, the Shanghai municipal government enacted a particular ordinance for the project to grant concession rights and set out the terms of the concession.
In the latter, the Chengdu city government entered into a concession agreement with the project company to provide for the terms of the concession.
Recent Developments
Recent years have seen a surge in concession-based water projects in China. On the national level, the concessionary approach is highlighted in several ministerial-level industry guidelines issued in 2002 as the way forward. Many local city governments have enacted their own rules to regulate utility concessions, as urban utilities are a matter of local jurisdiction.
Chengdu (in 2001), Shenzhen (in 2003), and Beijing (at the end of 2003) promulgated specific local regulations to address the scope, form, grant procedure, rights and responsibilities, termination and government authority in urban utility concessions. Tianjin and several other cities and provinces set out their policies in less formal government circulars.
Bidding or auction are the preferred methods for granting concessions.
Under these local rules, the concession is either granted under an agreement with the government authority (e.g., Beijing and Chengdu) or via a specific government permit/ordinance without a separate concession agreement (e.g., Shenzhen). In Chongqing, while no concession regulation is in place, the city has granted a water concession by issuing a specific approval that set out the detailed terms of the concession. The difference is significant especially in terms of dispute resolution. While under the concession agreement approach, an arbitration clause has been included for many projects, it would not be possible to choose arbitration under the government permit approach in the event of a dispute with the government.
It is interesting to note that assignment of the concession is generally prohibited under these local rules. The Shenzhen rules even expressly disallow the pledge of the concession right, which would be a concern for project finance.
These local rules also show the different concerns and priorities of the local governments in handling concessions. The Beijing and Tianjin rules spell out the government commitments that are allowed and disallowed. The Shenzhen rules provide for a hearing mechanism in early termination and pricing and adjustment procedures.
It should be noted that these local rules set out the basic local concession parameters. Given their generality and evolving nature, however, investors will need to take a case by case approach in interpreting their practicality.
Impact of the Administrative Licensing Law
The PRC Administrative Licensing Law (the Licensing Law), promulgated on August 27 2003, will be effective from July 1 2004. This law is supposed to streamline the method, and control the government's power, to impose and grant administrative approvals and permits. The Licensing Law allows the regulation of market access, and hence the granting of permits, in special industries directly affecting the public interest. It is understood that the granting of concessions in urban utilities will thus be subject to the Licensing Law. The impact of the Licensing Law may be felt in the following aspects.
Determination of the grantee. The Licensing Law requires that the grantee of a concession shall be determined through fair competition such as bidding or auction unless otherwise provided in laws and the State Council's administrative regulations. This would largely restrict the government's flexibility in direct negotiation to locate a grantee.
Remedies. The Licensing Law provides for administrative petition or litigation in case the government breaches its duties in granting and executing the concession. This casts doubts on the current characterization of concession agreements as commercial transactions.
The concession fee. The Licensing Law does not allow the government to charge for granting a concession unless otherwise supported by laws and the State Council's administrative regulations. Per the Licensing Law, a party may challenge if the government wishes to charge for a concession grant even if this is allowed in its concession rules.
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