Why foreign investors should go green
March 29, 2012 | BY
clpstaff &clp articles &Green technology developers will now benefit from the improved financial viability of domestic energy projects, but only if the correct structure and licensing arrangements are put in place when setting up joint ventures
Energy and natural resources projects are now eligible for bank loans on favourable terms provided they are environmental-friendly, according to The Green Credit Guidelines (绿色信贷指引) issued by the China Banking Regulatory Commission (CBRC) on February 24.
Practitioners told China Law & Practice that in an attempt to receive adequate finance, project companies would now be more motivated to seek advanced green technology. Foreign high-tech companies are likely to have greater opportunities, but finding the correct structure for technology licensing arrangements and protecting of intellectual property under such joint venture structures will be crucial.
“The win-win structure allows joint ventures to have R&D capacities, thus improving foreign licensed technology and allowing such improvements to be licensed back, free of royalties,” said Beijing-based partner Zhang Libin of Broad & Bright.
“This way, foreign investors can benefit from the lower costs of employing Chinese engineering talent,” he added. He also noted that investors need to consider whether exclusionary licensing to one joint venture is workable or whether other methods would be better.
Another example of a win-win arrangement is to adopt a royalty-payment scheme based on the net sales revenues of products manufactured with the foreign licensed technology.
“This will tie the interests of both foreign and Chinese investors so that they are more incentivised to cooperate with each other,” Zhang said.
The projects company itself, whether a joint venture or wholly foreign owned entity (WFOE), would be qualified to apply for green credit under the guidelines. However, it remains unclear whether the green lending policies will apply equally to foreign invested companies in China and what technical procedures and requirements will apply to those foreign investors, according to Zhang.
The Guidelines require banks to carry out an evaluation of clients' environmental risks when determining their access to credit, and to reduce financings to excessive energy consumption projects.
If the green lending policy improves the financial viability of start up projects, it may attract foreign private equity investors and Chinese investors who are seeking opportunities in this sector.
The Guidelines also cover the lender's management of financing to overseas projects, which requires compliance with local environmental and healthcare provisions.
“More thorough due diligence is needed, and investors could build in certain protection clauses in the investment documentation for control of such risks,” Zhang suggested, as non-disclosure of environmental and social risks may affect the target company's ability to obtain financing under the restrictive rules in the Guidelines. This may pose a serious threat to overseas projects, which are particularly vulnerable if disputes or litigations arise.
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