Clarity needed on PPPs and concessions

From fledgling concessions to public-private partnerships (PPPs) that are sweeping the country today, there are two major sets of regulations to be followed: one being regulations for concessions led by the National Development and Reform Commission (NDRC) and the other a series of regulations for PPPs led by the Ministry of Finance (MoF). However, to date, there is still not one law that expressly defines the relationship between concessions and PPPs, resulting in much confusion and many impediments in practice. This is an issue desperately needing clarification.

The NDRC holds, in the Guiding Opinions on Launching Public-Private Partnerships, that the operational methods for the PPP model include concessions, government procurement of services, equity co-operation, etc. In the Guiding Opinions on Promoting the Public-Private Partnership Model in the Public Service Field, the NDRC, MoF and People’s Bank of China specify that use of the PPP model is encouraged in the public service sector. But in specific sectors requiring the implementation of concessions – such as energy, transport, water resources, environmental protection, public utilities, etc. – matters are to be handled in accordance with the Administrative Measures for Infrastructure and Public Utility Concession.

From these two regulatory documents, it can be deduced that the NDRC and MoF have reached a common understanding that a PPP includes concessions and that concessions are one of the means of implementing PPPs. The authors argue that a PPP is the general term for a co-operative relationship between a government and private investors, that a concession is public-private co-operation in which the users pay the fees, and that a BT (build-transfer), which existed in large numbers in the past, involves a necessary government procurement of services.

Furthermore, whether PPP, concession or BT, they are all essentially the establishment of a co-operative relationship between a government and private investors whereby the government turns an infrastructure or public utility project that would traditionally have been invested in and constructed with fiscal funds over, by way of a licence, to private investors to invest in and construct. The scope of a PPP is broader, with a greater variety of forms; and concessions and BTs are specific ways in which a PPP is manifested (see the figure on this page).

The absence of a demarcation of the relationship between PPPs and concessions has resulted in much confusion and many dilemmas in PPP projects in practice.

Dilemma 1: Does the third paragraph of article 9 of the Implementing Regulations for the Law on the Invitation and Submission of Bids apply to PPP projects? This provision specifies that where the investor in a concession project that has been selected by way of an invitation of bids can itself do the construction, production or provision in accordance with the law, no further invitation of bids is required. However, opinions differ as to whether this provision is applicable to PPP projects.

In a PPP project the authors handled, the government side expressly stated in the bid invitation documents that “where the investor in the concession project that has been selected by way of an invitation of bids can itself do the construction, production or provision in accordance with the law”, no further invitation of bids will be conducted. The documents also set out requirements for the investor’s construction qualifications based on the size of the project and set the investor’s construction track record and enterprise qualifications as evaluation factors for the project.

However, after the investor was awarded the project, the government side’s lawyers demanded that the investor must, after establishing the project company, go through a further invitation of bids to select the general contractor on the grounds that a PPP project is not a concession project, therefore regulations on concessions were not applicable to such projects.

This self-denying attitude on the government side placed the private investor in a real bind – the second invitation of bids not only signified that the investor would surrender a large part of the profits from the construction portion, but also exposed it to a huge risk of losing all of the construction profits if it failed to win the bid.

Dilemma 2: spurious concessions everywhere. Certain local governments, for the purpose of procuring the classification of projects as concession projects, avoiding a second invitation of bids for the construction portion and complying with the MoF’s requirement that the co-operation term of PPP projects not be less than 10 years in principle, have switched the concepts by packaging PPP projects that do not have an operational stage and do not involve the payment of fees by users as spurious BOT (build-operate-transfer) projects, treating the repair and maintenance of the projects as “operations” and the repair and maintenance fees paid by the government side as so-called “operating revenues”, thereby fabricating spurious concession (BOT) projects.

Dilemma 3: civil law relationship or administrative law relationship? One of the notable changes in the newly amended Administrative Procedure Law is its inclusion of the performance, amendment and termination of concession agreements within the scope of cases acceptable for administrative procedures. This was further clarified by the judicial interpretations of the Supreme People’s Court that came into effect on 1 May 2015, which also state that concession agreements are administrative agreements.

On the one hand, the perspective in the Operational Guidelines of the Ministry of Finance for the Public-Private Partnership Model that disputes over PPP projects can be arbitrated indicates that what exists between the government and the private investor is a civil law relationship between equals.

On the other hand, when a dispute arises over a concession project, i.e. one of the means of implementing a PPP, the institution of an administrative procedure is required, indicating what exists between the government and the investor is an administrative relationship between unequals.

Despite their both being public-private co-operation, the great difference in the nature of their legal relationships has made the selection of the means of dispute resolution in projects difficult for local governments and private investors. In PPP projects, the grant and termination of the concession right is usually intertwined with such issues as compensation, claims, etc., and there is a significant difference between administrative compensation and the principles for, and outcome of, damages for breach of contract in civil procedures and arbitration.

If such basic concepts as PPP and concession are not cleared up (given the lack at the level of PPP and concession laws and regulations), the smooth genesis and implementation of PPP and concession projects will certainly be affected.

Wang Jihong is a partner and Miao Juan is an associate of Zhong Lun Law Firm