National Rules to Regulate Urban Utility Concessions

The Procedures apply to concessions in urban utility industries, including the supply of water, gas and heat, public transportation, wastewater treatment, and garbage disposal. An urban utility concession, for the purpose of the Procedures, is defined as a system under which the government chooses urban utility investors or operators by means of a market competition mechanism, and the selected parties operate such urban utilities and provide utility services within a certain term and scope.

Approval Authority and the MOC's Role

The Procedures provide that the selection of concession projects shall be decided by the government at the provincial level through legally defined procedures, and the granting of concessions will be approved by the directly governed municipality, city or county. This is in line with current local concession rules in which selection and granting of concession projects are under local jurisdiction. Nevertheless, it should be noted that urban utility concession projects are not purely local matters; depending on the scale, national-level approval may be required, especially in the case of large greenfield projects.

Under the Procedures, the MOC takes on guiding and supervisory roles for urban utility concessions at the national level and provincial construction commissions and bureaus assume the same role in their own provinces. However, the Procedures acknowledge that urban utility industry authorities at the municipality or the city level are the departments in charge of implementing the concessions (the Utility Authorities).

Is a Public Tender Mandatory?

The Procedures require the Utility Authorities to grant concessions through a public tender process. Previous local utility concession rules and the MOC's own circular had no such universal public tender requirements. It is not yet clear how this requirement will affect the granting of local concessions. However, it may be argued that the Procedures do not address direct or negotiated concession grants, rather than expressly prohibiting them. On the other hand, according to the PRC Legislation Law, the State Council will adjudicate in conflicts between a ministerial regulation and a local government regulation. Very likely, this apparent conflict will not be addressed until a disappointed third party investor challenges a directly negotiated concession transaction.

Moreover, added to the public tender process is a further requirement in the Procedures for public notice of the grant for at least 20 days to allow for public challenge. A concession agreement can only be executed after such public notice period, and after no objection has been raised.

Terms of Concession

The Procedures address a broad range of concession issues largely in general terms, such as the terms of the concession agreement, the responsibilities of the grantee and the government, and the government's regulatory and intervention powers.

A grantee must be a legal person, and the Procedures do not allow flexibility for a non-legal person consortium grantee that is apparently permitted under certain local concession rules and in some past transactions.

The term of a concession shall not be longer than 30 years. The 30-year limit echoes the maximum term under the much earlier Administration of the Assignment of Highway Operating Rights for Compensation Procedures, issued by the Ministry of Communications and effective from November 1 1996. It is also in line with normal local practices, while current local concession rules are generally silent on this point. It should be noted that under the State Development and Reform Commission's Strengthening State-owned Infrastructure Facilities Assets Interest Transfer Administration Circular issued on October 19 1999, the maximum term for transfer of existing state-owned urban utilities is 25 years, and this shorter term applies to TOT-type concessions. The above measures and circular are all silent on the extension of the concession term. However, current local concession rules or practices usually permit approved extensions.

There are extensive governmental supervision and intervention clauses in the Procedures. The grantee is required to file its annual business plan and board resolution with the Utility Authority and is subject to an interim operation review by the Utility Authority every two years. Quite unusually, even a change in the legal representative of the grantee requires the consent of the Utility Authority. The Utility Authority is empowered to temporarily take over the utility in emergencies that threaten public interest or safety, and are allowed to assign an undefined "governmental public interest task" to the grantee, albeit with compensation for losses so caused..