China: China’s Ministry of Construction Issues Consolidated Qualification Regulations for Consultation Asia

The current PRC qualification system for survey, design, construction, and supervision enterprises was established by the following regulations:

• Regulation on Construction Survey and Design Enterprises Qualification (Decree 93)¹

• Regulation on Construction Engineering Enterprises Qualification (Decree 87)²

• Regulation on Construction Supervision Enterprises Qualification (Decree 102)³

The Ministry of Construction ("MOC") is now attempting to integrate these fragmented regulations into one consolidated qualification regulation for survey, design, construction, and supervision. Accordingly, on August 9, 2005, the MOC issued a consultation draft of its Regulation on Construction Enterprises Qualification (the "draft Qualification Regulation"). A revised qualification and licensing system is being built by the MOC based on the draft Qualification Regulation.

The draft Qualification Regulation (which was available for comment until August 23, 2005) applies to foreign and domestic enterprises operating in China. It covers enterprises that engage in project evaluation/survey, engineering design, project supervision, and construction, including civil engineering, architecture, building work, cable and pipe installation, installation of equipment, and decoration work.

There are at least three reasons why the MOC has issued the draft Qualification Regulations:

• The previous regulations were similar in terms of the approval authorities, process, application materials, supervision, inspection, and other requirements, and there was a degree of overlap.

• Business trends show that currently many large-scale construction enterprises are expanding from single qualifications to multiple qualifications across several categories.

• The Administrative Licensing Law⁴ calls for the standardization of administrative licensing and for the implementation of administrative licensing that follows the principles of convenience for the public, enhanced operational efficiency, and quality service.

The following chart outlines the qualification categories under the current regulations and the draft Qualification Regulation.

Under the existing regulations, there are two levels of approval authority:

• Central (or national), namely the State Council Construction Administrative Management Authority

• Local (province-level), namely the competent construction administrative departments in each province, autonomous region, and directly administrative municipality

The draft Qualification Regulation keeps this two-level approval system. However, the approval power over certain construction specialty Grade 1 contracting categories has been transferred from the central level to the local level, although the draft Qualification Regulation does not specify which construction specialty Grade 1 contracting categories have been transferred. While operational efficiency may be enhanced by the workload being transferred to local authorities, whether the quality of the approval services will be improved is open to question, given that local interest considerations could be taken into account.

The following table shows the approval levels required for each grade of qualification.

The draft Qualification Regulation streamlines the existing qualification approval process, including the initial application and the processing of the application, the application materials, verification process, and the decision. These proposed amendments make the qualification process clearer and more orderly.

In this connection, late last year, the MOC also issued the Proclamation on Regulations and Contents of MOC’s Directly Responsible Administrative Licensing (the "Proclamation")⁵. The Proclamation specifies the resources, conditions, application materials, procedures, time limits, and other aspects of survey, design, construction, and supervision enterprises qualifications, whose administrative licensing is undertaken directly by the MOC.

Enterprises that seek survey, design, or supervision qualifications must initially apply at the Grade B level. Construction enterprises must initially apply at the lowest level (there are exceptions for foreign construction companies under Decree 159). To apply for an upgrade to a higher level, companies must submit financial statements from the last three years of their operations in China. This suggests that foreign construction companies should take advantage of Decree 159 and apply for the highest level of qualification grade possible, because otherwise even highly qualified foreign construction companies will not be permitted to apply for qualification grades that are commensurate with their global experience simply because they have not been in China for three years.

In addition, according to the recently issued Notice on the Matters concerning Qualification Application and Annual Review of Project Survey, Design, Engineering, Supervision Enterprises, and Bidding Agents (the "Notice")⁶, the qualification process can be commenced at any time, and applicants do not need to wait for the annual or biannual application slots.

The draft Qualification Regulation also makes amendments to the approval period, the preliminary period, and verification period, so that they are consistent with the Administrative Licensing Law. The Administrative Licensing Law generally provides for shorter time limits, which also reflects the principles of convenience, efficiency, and quality of service.

The table below sets out some of the changes in time limits that are contained in the draft Qualification Regulations.

One significant change brought about by the issue of the Notice is the cancellation of the annual review of the qualifications of survey, design, construction, supervision, and tendering enterprises. According to the Notice, as a result of the implementation of Administrative Licensing Law, the MOC no longer requires an annual review of the relevant qualifications of such enterprises, and accordingly the MOC will no longer annually review qualifications of survey, design, construction and supervision enterprises, and tendering agents, starting from 2005.

Obviously, the MOC is making efforts to comply with the principles of the Administrative Licensing Law, although there is no explicit ban on the annual review of qualifications in the Administrative Licensing Law. The previous annual reviews were actually more than just reviews; they were in practice a requalification exercise, and qualification certificates were cancelled if offending enterprises did not apply for or pass the annual review. This change is significant because the previous review regime was very onerous for construction enterprises, and the excessive power given to the construction authorities could, on occasions, lead to abuse and inconsistencies.

The draft Qualification Regulation attempts to bring the various existing and overlapping regulations into one consolidated regulation, and the MOC should be congratulated for taking this initiative.

It should be noted, however, that the draft Qualification Regulation does not specify the standards that will be used to assess qualification certificate applications. Instead, it stipulates that the MOC will establish standards for each category and level of qualification certificate will be established following consultations with relevant government agencies, including between the State Council Construction Administrative Management Authority and a special specialty departments of under the Ministry of Commerce State Council. Any significant changes or adjustments to the existing standards will not take effect until at least six months after the promulgation of the changes.

Once the draft Qualification Regulation is finalized and promulgated, Decrees 87, 93, and 102 will be repealed.