The infrastructure concession sector in China has, in terms of legislation, always been a blank slate, and in terms of policy has swung like a pendulum, from encouragement at the outset, then wavering in the middle, and more recently, expressly permitted. The Third Plenum of the 18th Central Committee of the Communist Party of China expressly indicated that “private capital is permitted to participate in urban infrastructure investment and operation through such means as concessions, etc.”, manifesting a new era will begin.
Key investment sector changes
One of the major changes in infrastructure projects in future will be the change in investment projects from above ground to underground. In the past few years, such incidents as urban surface subsidence, disastrous inland inundations, bridge collapses, natural gas line explosions, etc., have occurred from time to time. Urban underground pipe networks, including those in Beijing, have seriously degraded with age, severely affecting the normal operation of cities. Document Guo Fa  No. 36 issued by the State Council expressly states that the principle of urban infrastructure construction is “first underground, then above ground”, and the key sectors for investment will converge on the construction of infrastructure that is intimately connected with people’s day to day lives, such as that for water, gas and heat supply, power, communications, public transport, logistics and distribution, and disaster prevention, as well as the improvement of old and dilapidated infrastructure.
Investors and governments maturing
From the nearly 50 concession projects in which the first author rendered services between 2003 and 2013, she believes that with the accumulated practical experience in concessions throughout the country, both governments and investors have gradually matured. Initially, certain governments deemed that the BT (build and transfer) method was advancing funds and construction, and simply viewed the investors as the parties that advanced the funds and did the construction, whereas now, the expertise of quite a few city governments in handling BT and BOT (build, operate, transfer) projects is relatively mature, with several tens of provinces and municipalities – including Beijing, Shenzhen, Zhengzhou, Fuzhou and Haikou – having issued regulations specifically for concession projects. Governments are starting to pay close attention to the bid invitation and submission process for concessions, and also close attention to the method of selecting the design, supervising and auditing entities and emphasising overall control of construction quality and pricing of projects.
As for investors, some of them, after learning lessons from initial setbacks, have started to attach great importance to investigating in the early stages of a project the investment environment, commercial conditions and the government’s capacity for securing the buyback. An increasing number have come to realise the indispensability of legal, finance and other such intermediary firms in moving concessions forward, and are willing to engage such firms to intervene at the early stage of a project, launching legal and financial due diligence early so as to provide professional opinions and advice for their investment decisions. It is, however, regrettable that numerous investors still have not come to realise the importance of due diligence and are still “navigating blind”.
Diversified financing channels
Traditionally, the investment entities in large infrastructure projects were usually state-owned enterprises (SOEs) that normally could secure low-cost loans from banks. However, the scale of construction of infrastructure everywhere has become larger and the funding costs of bank loans have also increased, putting pressure on investors to find new financing channels.
Some large SOEs have started experimenting with the individual or combined use of such varied means of financing as trust financing, debt schemes, corporate bond issues, and securitisation of accounts receivable in concession projects. For example, in a BOT project in which the author is currently involved, insurance capital trust financing was used in the early stages and debt financing is being used in the later stages. However, the legal framework for such financing is complex, involving numerous entities – the investor, trust company, insurance company, guarantor, government, etc. – and posing a whole new challenge for traditional construction enterprises. Investors are advised to engage specialised outside lawyers and other professional firms to assist them in completing the negotiations for, and the execution of, the series of contracts and legal documents.
Dispute resolution method
In past contract negotiations, investors paid most of their attention to the commercial terms in the contracts, while ignoring the choice of the dispute resolution method. With the intervention of the legal personnel of both parties, selection of the method of dispute resolution has gradually become a point hotly contested by both sides. The government’s legislative affairs office, or lawyers, will generally insist that disputes between the parties be resolved through the courts. In accordance with the general rules for civil procedures in China, the court of the place where the defendant is domiciled, or of the place where the contract is performed, generally has jurisdiction over infrastructure concession projects. As a result, once a dispute arises, the investor’s investment of often up to several tens of billions, has taken material form as a highway, bridge or levelled land that, objectively, the government cannot be stopped from using.
In legal actions between an enterprise and a government, the trials at first instance and appeal may both be conducted in the province where the project is located. Considering the local protectionism that objectively exists in China, it is unlikely that the outcome of the court action will put the investor’s mind at ease. It is natural for investors to show a preference for excluding the jurisdiction of the courts and selecting arbitration for dispute resolution.
However, the arbitration institutions established in different cities pursuant to China’s Arbitration Law are institutions under the purview of the legislative affairs office of the local government and, professional competency aside, as such their independence is questionable. Accordingly, the means that is relatively fair to both parties is the joint selection of an arbitration institution that is not subordinate to any first-level local government, e.g. the China International Economic and Trade Arbitration Commission (CIETAC). Among CIETAC’s large team of Chinese and foreign arbitrators are numerous experts in concessions. The hearing of cases by independent experts is more conducive to the fair and reasonable resolution of investment disputes between investors and governments.
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