Partners advised for newly-opened sector investment
September 04, 2010 | BY
clpstaff &clp articles &New notice promotes private investment in certain industries
Private investors should take foreign or domestic partners to mitigate risks when investing in sectors that were previously dominated by state-owned enterprises (SOEs), say counsel.
The State Council issued a circular on July 27 that allows private investors to participate in sectors including infrastructure, renewable energies, financial services, education, social utilities and welfare projects. The notice allocated responsibilities among different government agencies to regulate the private investment's market access.
However, regulatory hurdles and enforcement issues remain an open question.
The new policy, a further step following the State Council's guidelines issued in May, is not intended to break up the existing monopoly scenario nor is it to enable privately-owned enterprises (POEs) to compete with the SOEs. Instead, Beijing-based Broad & Bright partner Libin Zhang suggested that investors could take a “cooperative approach” to line up with the SOEs.
Investing in these state monopoly industries requires “strong financial capacity” and Zhang recommends POEs find a partner first. “It would be advisable for a participating POE to bring in a foreign or another Chinese investor for the investment for the purpose of spreading the risk,” he said. He pointed out that sectors such as oil and gas are risky and difficult for private investors to obtain approvals for.
If a private investor files a lawsuit against the regulator for rejecting an application for approval, the dual role of the government as owner of the SOEs and as legislator creates a conflict of interest and enforcement problems.
Although there is legal basis for foreign investors to sue regulators for competition violations in China's Anti-Monopoly Law, which prohibits the government's abuse of administrative powers, “lawsuits against the government should be taken as a last resort to resolve any dispute in China,” said Zhengyu Tang, a partner in Sidley Austin's Shanghai office.
“For tactical reasons, given the importance of maintaining a good government relationship in China, it is better to use such right to challenge as a leverage only to compel regulators to behave,” he said. Tang also notes that potential plaintiffs must seriously consider the government's influence over the judiciary system, evaluate the pros and cons of bringing a lawsuit against the Chinese government, and anticipate possible retaliatory actions.
Zhang agrees that taking action against the government is unlikely to benefit an investor. “Practically speaking, suing a regulator or a monopolising SOE is just a theoretical option,” he said. “Although you may win the case, it does not help to improve your business situation unless your case has brought a systematic change to the monopoly.”
According to the Broad & Bright practitioner, China lacks an effective judicial system to protect the property rights of private entrepreneurs. “Even though a private investor may have a good opportunity, they would still be concerned whether their investment would be protected by Chinese law,” he said. “On this, the government should give more assurance to private investors so that they do not have such concerns.”
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