The Bidding Law and Urban Utility Concession Practices

Is tendering/bidding mandatory for utility concession projects? Local concession rules vary in this respect. And recent national rules are not consistent, either. The Ministry of Construction's Administration of Concessions for Urban Utilities Procedures, effective May 1 2004, require that urban utility concessions be granted by means of a market competition mechanism such as tendering and bidding.

However, the Further Regulating Tendering and Bidding Activities Several Opinions (Guo Ban Fa No. [2004] 56) issued by the General Office of the State Council on July 12 2004, give a different picture than the above Procedures. According to this document, the system of tendering for selection of the project legal person may be gradually promoted in public utilities, public infrastructure or monopoly projects that are commercially feasible, capable of recovering investment, and can produce a reasonable return.

Does the Bidding Law apply to bidding for concessions? The PRC Invitation and Submission of Bids Law (中华人民共和国招标投标法)(the Bidding Law), effective from January 1 2000, applies to any tendering and bidding activity in the PRC. But it seems to be tailored to construction projects only, especially in respect of survey, design, construction and supervision works, without mention of the selection of the project sponsor or operator or the "project legal person". How the Bidding Law is applied to a concession-bidding process has not been clarified by any further laws or rules.

Mandatory or not, under the Bidding Law, once the bidding process is employed, the Bidding Law has to be followed. Many practical issues have arisen in this regard.

Does a concession grantee have to go through a bidding process to select its contractors? Considering that utility concession projects normally require that bidders are qualified and experienced in investment, construction and operation of similar projects, concession bidders often organize consortiums to bid. A classical alignment of the consortium members would include a fundraiser/capitalist, an engineering company and an operation company. After the concession bidding, neither the grantor nor successful bidder wants to go through another tendering/bidding process to select contractors in engineering, procurement and construction. For the grantor, further tendering/bidding delays the project schedule, and for the concession bidder, it conflicts with the very purpose of having formed such a consortium. However, public utility projects are listed as "must bid" projects in the Bidding Law. The ministerial governmental authorities tend to take a strict line on this issue, but local governments, which carry out concession granting, often hold a different position. It is difficult, if not impossible, for a successful consortium concession bidder, which includes a construction or supplier company, to choose other contractors for its concession project.

Is a member of the tendering committee qualified to join a bid evaluation committee? The Bidding Law does not prohibit a member of the tendering committee from participating in the bid evaluation committee. But according to rules issued by the State Development and Reform Commission, people from the authorities in charge of the concession project are not allowed to become members of the bid evaluation committee. This ban may be counterproductive in some utility concession projects, where the local government or its department(s) is the tendering party and would need to have its officials join the bid evaluation committee as representatives from the tendering party.

When does the contract need to be concluded after the bid is awarded? The Bidding Law allows 30 days to conclude the contract between the tendering party and the bid winner. Most tendering parties find that this isn't enough time even for clarification and negotiation on the bidding documents with the bid winner. In a usual utility concession project, at least two months is necessary for the work, and further extensions are quite normal.

Is transfer of shares of a sponsor in the project company allowed? The Bidding Law prohibits the successful bidder from transferring the project in whole or in part. In concession projects, the bid winner usually sets up a special project company to undertake the concession, and the "transfer" of the project from the bid winner to such project company is generally accepted.

However, the Bidding Law is silent on whether the equity shares of such project company can be transferred or not. To some capitalists or short-term investors the floatability of their shares in the project company is very important. But grantors award the bid to the bid winner based on its or its sponsor's qualification and commitment and the change of any sponsor would affect such qualification and commitment. The change may adversely affect the project, especially during the construction period. So it is usual that the tendering documents do not allow any transfer of shares during a certain period (normally in the beginning of the concession term) and for later years, shares can be transferred subject to the consent of the grantor.