Disputes over laws applicable to procurement for PPPs

By Wang Jihong, Zhong Lun Law Firm
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The competition between private investors for public-private partnership (PPP) projects has reached white-hot intensity. In a few of the projects which the author handled recently, potential investors lodged complaints against each other over the selection of the project investor. The issue of the law applicable to the selection of private investors stands out: which is applicable to procurement for PPP projects – the Law on the Invitation and Submission of Bids (LISB), or the Government Procurement Law?

In the above-mentioned projects, the complainant and the local government (as the party inviting the bids and conducting the procurement) generally overlooked such attributes of a PPP project as its financing, investment, operation and maintenance, deeming such projects, out of force of habit, as simple invitations of bids for construction and thus subject to the LISB and related regulations. This is a fundamental misunderstanding of the nature of PPP projects.

Wang Jihong is Partner at Zhong Lun Law Firm
Wang Jihong is Partner at Zhong Lun Law Firm

Article 17 of the Notice on the Issuance of the Operational Guidelines for Public-Private Partnerships (for Trial Implementation), issued and implemented by the Ministry of Finance in 2014, expressly provides that: “If procurement for a private-public partnership project is to be done by a public invitation of bids, selective invitation of bids, competitive negotiations or single-source procurement, matters shall be handled in accordance with government procurement laws, statutes and related regulations.”

The Law on Private-Public Partnerships (Draft for Comment), for which the seeking of comments ended in January this year, further expressly provides that: “A PPP implementing entity shall select the private partner based on the approved implementation plan and by the procedure specified in relevant laws, rules and regulations relating to government procurement, and publicly announce the same.” From this it can be seen that procurement for PPP projects, as a form of government procurement, is subject to laws relating to government procurement, not relevant provisions of the LISB.

Article 2 of the Government Procurement Law specifies that government procurement includes three types of procurement acts: procurement of goods; procurement of works; and procurement of services. The term “procurement” in the law means the act of securing goods, works or services for consideration by way of a contract, including through purchase, lease, entrustment, and hiring. “Goods” means various forms and types of things, including raw materials, fuel, equipment and products. “Works” means construction projects, including the construction, alteration, expansion, fitting out, demolition, and restoration of buildings and structures. “Services” means things procured by governments other than goods and works.

More specifically for PPP projects, pursuant to the Notice of the Ministry of Finance on Issues Relevant to the Promotion and Application of the Private-Public Partnership Model, PPP projects are divided into “user pays projects” and “essential government pays projects”. Based on government’s statutory duties and obligations to provide services to the public, both of these types are “service” procurement acts where a government entrusts a private investor to provide to the public on its behalf a service that it is required to provide, unmistakably making the same subject to the Government Procurement Law.

Of course, application of the LISB to PPP projects is not completely precluded. PPP projects often include the construction, design and supervision of the works, and if the specific selection of the construction entity, design entity and supervising entity calls for an invitation and submission of bids, then, pursuant to article 4 of the Government Procurement Law, relevant provisions of the LISB are to apply.

The thornier issue is that, in practice, the local government and the private investors often wish to have the selection of the private investor, and of the construction entity, achieved in one procurement. In such a circumstance – given that both the invitation and submission of bids for the works and the selection of the private investor are involved, and that the provisions of the Government Procurement Law and the LISB addressing such matters as the procurement procedure, the lodging and handling of complaints differ – how are the differences to be negotiated?

At present, in the absence of clear legal provisions, the author recommends that as long as such conditions as the relevant qualifications, track record, etc., are expressly required in the bid invitation conditions for the procurement of a PPP project, the Government Procurement Law is applicable, and selection of the investor and construction entity can be accomplished in a single invitation of bids for procurement.

The reasons for this are as follows. PPP projects with a long life, and in which the subject amount is very large, usually involve numerous stages such as investment, financing, securing of land-use rights, construction, operation, maintenance and transfer. They also have numerous parties participating, involve complex legal relationships, present difficulties in simply and clearly defining the financial, commercial and technical issues, and require multiple rounds of discussions and negotiations.

The LISB, however, applies only to construction projects, and prohibits substantive negotiations between the bid-inviting party and the bidders after the opening of the bids. This limits the space for negotiations between the public and the private partners, and denies the opportunity to conduct exchanges and consultations on such major issues as the massive investment and recovery, which may require 20 or more years, the numerous risks and the sharing of risks, the financing model and financial arrangements, etc.

In contrast, the government procurement legal system provides for a number of procurement methods such as selective invitation of bids, competitive negotiations, price discovery and single-source procurement. This allows greater flexibility, not only permitting the public and private partners to conduct sufficient negotiations and discussions on projects that involve co-operation over an extended period of time, but also favouring detailed discussions on the allocation of project benefits and risks, so reducing the possibility of disputes and controversies arising during implemention of the project and avoiding the PPP project grinding to a halt. It satisfies the requirements of PPP projects for legal standards and protects the lawful rights and interests of the public and private partners to the greatest extent possible.

A good law is the booster and lubricant of socioeconomic activity. Given that the numerous provisions of the LISB are already incapable of meeting the requirements of current project practice, it is hoped that it will soon be revised and improved, and also that the soon-to-be-issued Law on Public-Private Partnerships will deal with the issue of the conflict of applicable laws faced by PPP projects.

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