China: Ministry of Construction Issues Administrative Measures on Concession Arrangements For Municipal Public Utilities

The Ministry of Construction ("MOC") recently issued the Administrative Measures on Concession Arrangements for Municipal Public Utilities ("the Concession Arrangements"), which guide local governments on how to promote concession arrangements for local public utility services in the water, natural gas, public transportation (including expressways, subway lines, light rail, and bus routes), and sewage and waste treatment industries. The Concession Arrangements do not prohibit foreign-invested enterprise ("FIE") involvement, but according to the Catalogue Guiding Foreign Investment in Industry, FIEs that provide public utility services must have majority Chinese ownership. The Concession Arrangements came into effect on May 1, 2004.

The Concession Arrangements are aimed at allowing full use to be made of private and overseas capital. The MOC believes that the Concession Arrangements will not only reduce operating costs for infrastructure facilities, but will also enhance service quality.

According to the Concession Arrangements, concession rights will be awarded through public tendering, based on fair, open, equitable principles with the best interests of the public as the first priority. Bidder requirements are somewhat vague: Bidders must hold legal person status, have reasonable registered capital, necessary facilities and equipment, relevant experience, good bank credit and sound financial standing, feasible and practical operational service plans, and a reasonable number of technical, financial, and operational personnel.

The winning bidder must sign a concession contract with the relevant local public utility authorities, which must contain terms governing the contract term and scope, the service standards, price calculation and adjustment mechanisms, maintenance of the facilities, safety management, performance guarantees, termination, liability for breach, and dispute resolution. The local public utility administrative departments must calculate and monitor the operational cost of the concession and propose price adjustments, ensure that the concession holder fulfills the obligations stipulated in the concession contract, and handle public complaints on the quality of the public utility's products and services. The concession contract must be filed by the responsible authority with the immediate higher level public utility authority within 30 days of its execution.

Concession contracts can be valid for up to 30 years, but generally the term will be determined with reference to the specific industry and the scale of the operation. The government will provide the concession holder with appropriate compensation for any losses suffered as a result of government decisions made in the public interest. Where either the responsible authority or the concession holder breaches the concession contract, the party in default will be responsible for compensating any losses suffered by the nondefaulting party arising from the breach.

Where the concession holder wishes to terminate the concession contract, it must give notice to the responsible authority, which must then respond within three months. Before the responsible authority agrees to terminate the concession, the concession holder must ensure continuation of normal operation. The responsible authority is entitled to terminate the concession contract and take over the contract, where the concession holder transfers the concession or disposes of the properties it manages, and where there are serious quality problems, interruption, or suspension of business without authorization that seriously affect public interests or public security.

The responsible authority is empowered to revoke the concession contract where the concession holder engages in improper conduct such as bribery or deception. The name of the concession holder and the nature of the improper conduct will be released to the media and the concession holder will be forbidden from bidding for any public utility concessions for three years.

During the operational period, the responsible authority is required to arrange for experts to conduct interim evaluations of the operation of the concession project. Normally such evaluation will be conducted every two years, although in special circumstances an annual evaluation may be undertaken.

The MOC is undertaking research into appropriate regulations relating to product quality and service standards. It is also preparing sample concession contracts for water supply, gas supply, public transportation, sewage disposal, and wastewater treatment. Finally, the MOC intends to issue guidelines in due course for the operation of the Concession Arrangements.

China is committed to moving toward a market-oriented economy, and the Concession Arrangements are an important step in this process. This is illustrated by the more than 700 road, water, gas, and waste disposal projects that have been submitted by local governments for approval. The cost of these projects is estimated to be approximately US$18 billion.

To put it all into context, Morgan Stanley has estimated that 10 million people leave their villages to move to urban areas every year, and this factor has led the government to project that China’s urbanization rate will be at least 50 percent by the year 2020, from 37.7 percent in 2002. China Daily reports that China has 662 cities and 20,358 towns, with a total urban population of 481 million. There is no doubt that construction of urban infrastructure facilities will accelerate as this process of urbanization continues, and the Concession Arrangements are therefore a timely development, which should enhance the procurement of urban infrastructure in China.

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