Chinese companies active in Asian infrastructure

By Wang Jihong and Liu Ying, Zhong Lun Law Firm
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The One Belt, One Road (OBOR) initiative accelerated during 2016. According to China’s Ministry of Commerce (MOFCOM) statistics, from January to November Chinese companies participated in 53 OBOR direct investment projects with a cumulative investment of US$13.35 billion, primarily investing in Singapore, Indonesia, India, Thailand, Malaysia, Vietnam, Laos, Iran and Russia. In the construction and engineering industries, Chinese companies signed 7,367 construction contracts relating to countries along OBOR with a cumulative value of US$100.36 billion across many industries including roads, railways, oil pipelines, energy, ports, development zones, business logistics centres, and economic and trade co-operation zones.

Wang Jihong, Partner, Zhong Lun Law Firm
Wang Jihong
Partner
Zhong Lun Law Firm

One of the main restrictions on economic development in Asia is inadequate and differing infrastructure, which causes disparate market conditions. China’s OBOR initiative will greatly promote Asian infrastructure construction and energy collaboration to the mutual benefit of countries along OBOR, while at the same time promoting opportunities for Chinese companies to go abroad.

Although the OBOR initiative is an attractive opportunity, in practice Chinese companies participating in outbound infrastructure construction projects should understand the varying political, economic, local market and legal systems within Asia, as well as the target country’s own politics, economy, law, culture, environment and work culture. During this familiarization process, companies should first perform comprehensive due diligence of the economic and legal environment, and explore different methods to communicate with the related government administrations, such as during negotiations.

Looking back on many failed outbound projects, it is apparent that missing just a minor detail during due diligence for these projects may result in billions of dollars in losses. For example, the authors provided legal services relating to an Indonesian oil pipeline project. During the initial stages of this project, the client engaged in several rounds of negotiations with its Indonesian partner and other local parties. After these negotiations the client believed that there were no major problems to its participation in the project, and planned to collaborate with an Indonesian partner to jointly act as the project owner, introduce a Chinese construction company to perform the related EPC construction work for the pipeline, and then, after the pipeline had been completed, rent the pipeline out to an Indonesian oil company.

However, after the client engaged our firm, we promptly performed due diligence on the required approvals and informed the client that, although Indonesia does not restrict foreign operation of oil pipelines, it does have restrictions on foreigners performing construction work for pipelines. Specifically, Indonesia does not allow foreign entities to perform onshore oil pipeline construction work. Since the majority of the contemplated oil pipeline would be on land, the prohibition on foreigners building onshore oil pipelines had a tremendous impact on the client’s original plan to introduce a Chinese construction company, as well as wasted a substantial amount of time, energy and capital.

Liu Ying Associate Zhong Lun Law Firm
Liu Ying
Associate
Zhong Lun Law Firm

Outbound projects abound in opportunities, obstacles, risks and profits, and pose numerous difficulties for traditional Chinese companies in how they operate, invest, and hire managers and other key staff (such as ensuring that related employees are appropriate for outbound investment projects). The need for improvement is particularly clear for state-owned companies investing abroad, such as, for example, increasing the effectiveness of their internal investment approval procedures.

As a legal services institution that assists companies going abroad, we also face similar obstacles with law firms from other countries such as culture, fee structure (including capped fees versus hourly rates, as well as related assumptions) and work methods, particularly the disparity between legal service quality, such as when comparing developed and undeveloped jurisdictions.

These differences test Chinese law firms and their management (which act as overall legal service co-ordinators), such as how to communicate with local firms to provide effective, unified and professional legal services. The authors and their legal team have participated in dozens of outbound investment projects and for each project have selected and engaged local law firms to collaborate with to provide comprehensive legal services including legal due diligence, determining transactional structure design, drafting transactional documents, and accompanying clients during on-site visits to meet with the local government and local partners.

Through these experiences, abundant practical knowledge can be accumulated, including how to supervise and collaborate with local legal counsel and, as Chinese attorneys, how to incorporate the clients’ goals and requirements into tailored legal services, build extensive bridges with local attorneys, etc., with the overall purpose of assisting Chinese companies going abroad.

WANG JIHONG is a partner and LIU YING is an associate at Zhong Lun Law Firm

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Zhong Lun Law Firm

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Contact details:

wangjihong@zhonglun.com

liuying@zhonglun.com