Secured Financing of Urban Utility Concessions

In the ordinary course of financing for development projects, land use rights and ownership of the construction in progress are usually provided as security. This approach may not always work in urban utility concession projects in that land use rights, in addition to other related rights, are accessories to, and not independent of, government franchising and thus cannot be disposed of separately by way of security. For example, in a highway development project, the government will usually specify in the concession contract that as far as the project company remains in its position as concessionaire, the project company is entitled to the relevant land use relating to the project free of charge. However, the governmental authority will not issue separate certificates to the project company that evidence the grant of the land use right or such other rights that the project company may be granted. As such, it is impractical to register the security interest created thereon as required by PRC laws.

Pledging Concessionary Rights

Alternatively, some financing parties have started to inquire about the possibility of pledging the rights under a government concession to back up the repayments under the related financing. In the traditional theory of Chinese law, the rights to be pledged must be transferable. But in the case of a government franchise, the transferability of the rights has not yet been agreed upon generally among practitioners and legal theorists. The Ministry of Construction recently enacted the Administration of Concessions for Urban Utilities Procedures (the Procedures) with a view to setting up a regulatory framework for urban utility concessions. The general view is that the urban utility concessions under the Procedures will be categorized as a form of administrative licensing under the PRC Administrative Licensing Law, to be effective July 1 2004. Once recognized as an administrative licence, the rights owned by a concessionaire under a government concession can only be transferred in limited circumstances and must follow the required formalities applicable to administrative licences. This raises the question of whether an urban utility concession can be pledged or otherwise disposed of.

Applicable PRC Laws and Regulations

Under current PRC laws and regulations, only a letter of approval issued by the State Council in 1999 on issues relating to security for financings of toll collection highway projects and Clause 97 of the Several Issues Concerning the Application of the Interpretations enacted by the Supreme People's Court have addressed the topics that we are discussing. The 1999 Letter provides that the income collection rights of highway tolls can be pledged to the PRC banks for the purposes of loan financing and Clause 97 confirms the admissibility of taking rights to the earnings from, among other things, highway bridges, highway tunnels or highway ferry crossings as security. It remains to be clarified whether the 1999 Letter and Clause 97 can be applied to cover the case of municipal utility concessions.

Pledging Subsidies

Another interesting question is whether the concessionaire's right to enjoy government subsidies can be effectively pledged to secure the relevant financing. Such subsidies are granted in certain projects where the concessionaire is only allowed to charge the public at a price lower than cost, or is following governmental directives for the purpose of fulfilling public services. This legal avenue has not yet been explored.

Working in an Evolving Legal Framework

The legal framework and practice in urban utility concessions is still underdeveloped. While awaiting a clear direction in the regulatory environment, perhaps it is more practical to make reference to foreign systems that allow financing parties to get involved as parties under concession documents that give the concessionaire the exclusive right to develop and operate urban utility projects. The advantages of this approach are that the financing party can directly enforce undertakings made by the relevant governmental bodies to ensure the safety of their financing.