Opening Up China's Construction Engineering Services Market

A foreign-invested construction engineering service enterprise (FICESE) can be established in the form of a Sino-foreign equity joint venture (EJV), a Sino-foreign contractual joint venture (CJV) or a wholly foreign-owned enterprise (WFOE). This is consistent with the approach taken in Decree 113 and Decree 114, as well as the requirement that the Chinese investor in an EJV or CJV contribute at least 25% of the total registered capital.

The foreign investor in a FICESE must have an existing engineering services company in its home country which carries out the type of services that it intends to engage in, in China, and have a suitable track record to support its application to establish a FICESE.

The Provisions provide a brief outline of the application procedure to establish a FICESE, similar to the procedures specified under Decree 113 and Decree 114. Applications to set up a FICESE must be examined and approved by the Ministry of Commerce (MOFCOM) or its local counterpart at the provincial, municipal or autonomous region level. If approved by MOFCOM (or its counterpart), the enterprise must be registered at the competent registration authorities to obtain a business licence.

Like other forms of investment in China, the higher the level of investment, the higher the level of authority from which approval must be sought. In the case of FICESEs, an application to establish a Class-A FICESE must be submitted by the local department of commerce to MOFCOM, which in turn must seek opinions from the MOC before deciding whether or not to approve the application. An application to establish a Class-B FICESE or lower only needs to be approved at the provincial, municipal or autonomous region level. According to the Provisions, an application should be processed within 40 days of it being accepted. However, the first few applications may take much longer to process, as has been the case with applications under Decree 114.

One of the application requirements is that the foreign investor must submit three years of financial statements or, if it has operated for less than three years, for the period that it has operated. This is a marked improvement on Decree 113 and Decree 114, which contain no such concession for new companies.

Skill qualification certificates

As with other construction-related activities, a FICESE must obtain a skill qualification certificate (SQC) from the MOC before engaging in construction activities. The SQC determines the size and scope of the work which it is permitted to carry out and is graded Class A (the highest), Class B or, in the case of construction supervision entities, Class C. A FICESE must satisfy the normal conditions and requirements for obtaining a SQC as set out in the relevant MOC regulations.

When applying for a SQC, a company must satisfy four criteria:

(i) minimum registered capital;

(ii) a good track record on relevant projects;

(iii) the chief engineer/managing director meeting minimum professional qualifications and experience requirements, and

(iv) a minimum number of certified engineers and other professional personnel.

The requirements are more onerous when applying for the higher classes of SQC.

The minimum registered capital requirements for FICESEs are lower than the SQC requirements for construction companies and design companies. This should make them a more attractive option for smaller foreign engineering consulting companies in China.

With regard to maintaining a good track record, the Provisions are silent as to whether the investors' overseas experience can be included. If the MOC adopts the same approach as that under Decree 113 and Decree 114, experience in Hong Kong and Macao will be accepted in support of applications by companies from those regions under their respective agreements under the Closer Economic Partnership Arrangement between China and Hong Kong. However, other overseas experience will generally be disregarded. Consequently, foreign investors establishing a WFOE FICESE will need to begin with the lowest class of SQC and build their businesses over several years.

Under Decree 113 and Decree 114, when a foreign investor establishes a construction or design enterprise, the technical staff must include a minimum number of foreign staff who are qualified in China and who will reside in China for a period of at least six months a year. This requirement is difficult for foreign investors to satisfy and, in practice, acts as an obstacle to greater foreign participation in construction and design enterprises. Interestingly, the Provisions make no mention of these additional requirements in relation to FICESEs. It is unclear whether this signifies a change in position by the MOC or simply an oversight in the draft Provisions that may be corrected when the final Provisions are promulgated.

Forming a joint venture with a Chinese engineering services enterprise enables a foreign investor to satisfy the SQC requirements more easily, since the joint venture can draw on the experience and resources of its Chinese partner. However, forming a joint venture comes with all of the attendant issues concerning joint venture relationships in China. Another welcome difference between the Provisions and Decree 113 is that there are no restrictions on the scope of work that a WFOE FICESE can engage in compared to an equivalent class EJV or CJV FICESE.

An application for a Class-A SQC must be submitted to the MOC for approval, but applications for a Class-B SQC and below can be determined by the provincial, municipal or autonomous region construction authority. However, they must report their decisions to the MOC for its records.

Provisions and project management

The Provisions not only open the door to foreign investment in the construction engineering services sector but also address one of the difficulties faced by foreign engineering consulting companies that want to undertake project management in China.

Under Decree 200, the Interim Measures on Construction Project Management, issued by the MOC in November 2004, enterprises engaged in project management were required to possess a SQC in construction, design, surveying, construction supervision, tendering agent or cost consulting. Strictly speaking, this excluded virtually all foreign engineering consulting companies from project management since they did not hold any of the mentioned SQCs.

Decree 113 and Decree 114 provide the procedure for foreign investors to set up foreign-invested construction enterprises or engineering design enterprises and obtain the relevant SQCs. Until recently, SQCs for construction supervision, tendering agent and cost consultancy were unavailable due to the lack of regulations for foreign investment in these sectors. The Provisions, once promulgated, provide foreign investors with a cheaper and easier way to obtain one of the SQCs required before engaging in project management in China. However, the scope of project management activities will still be restricted since a foreign investor will usually start with a Class-C SQC and complete smaller projects for several years in order to build up its qualification in China.

A welcome development

On the whole, the Provisions should be welcomed as providing further access for foreign companies to China's construction sector, particularly in relation to project management.

Perhaps because of their nature as draft regulations seeking public comments, the Provisions are relatively brief and will certainly require supplementary regulations and possibly some revisions. Similar to Decree 113 and Decree 114, there are also some potential difficulties that foreign investors will face when trying to avail themselves of the benefits of the Provisions.

One area which will need to be clarified is whether existing foreign engineering consulting companies can convert into FICESEs. Rather than having to set up a new company in China, it would be ideal if the scope of business of an existing consulting company could be amended and application for the requisite SQC be made available.

A small disappointment is that applications for FICESEs will only be accepted from December 11 2006 and it is likely that a number of the uncertainties will only be resolved once the first applications are processed. However, for those companies wanting to establish an FICESE, now would be a good time to start discussions with the MOC on what exactly is required.