PPP regulations: basic concepts need clarification

By Wang Jihong and Han Jiangyu, Zhong Lun Law Firm
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Following our article in the previous issue, this article will make recommendations on the Regulations for Public-Private Partnerships in the Infrastructure and Public Services Sectors (Draft for Comment) issued on 21 July 2017, addressing PPP project implementation, oversight, dispute resolution, legal liability and other issues.

Wang JihongPartnerZhong Lun Law Firm
Wang Jihong
Partner
Zhong Lun Law Firm

Project implementation. This includes such stages as procurement, contract execution, etc. The methods specified in the regulations for project procurement are incomplete. The authors recommend that it be expressly provided that the private party can be selected by such means as public invitation of bids, private invitation of bids, competitive negotiations, competitive consultations and single source procurement. Also, a deadline for signing the PPP contract should be specified to avoid a situation where the project implementing authority or private party refuses to sign, or drags out the signing of, the PPP contract for whatever reason after the conclusion of procurement.

With respect to the signing of the project contracts, the signing entities and their rights and obligations in the contracts should be fair, reasonable, clear and specific. For example, the entities signing a PPP project contract are usually the project implementing authority and the project company, and the project company is independent from the private party, so its rights and obligations should not be confused with those of the private party. Also, to ensure the validity of the contracts, the project implementing authority should also have full civil capacity and capacity to act, and have secured the authorizations and approvals of the government at the same level. The draft regulations should not only emphasize the liability of the private party for breach of contract, while ignoring the liability of the public party for breach of contract.

Oversight. Chapter 4 of the regulations provides for the oversight of PPP projects. The author would argue that the administration of projects by government authorities should be separate from the civil rights and liabilities of the government’s implementing authority. Furthermore, a PPP project should be subject to public scrutiny, and the scope of the scrutiny should not be limited solely to the private party – more effective scrutiny should cover the government’s implementing authority as well as the relevant authorities with a hand in the PPP project. If, in the course of administration, a government authority causes harm to the lawful rights and interests of the private party, the private party should be awarded reasonable compensation in accordance with relevant administrative laws and regulations. The authors therefore recommend the addition of “ensuring the lawful rights and interests of the private party” and “awarding reasonable compensation to the private party” into the chapter 4.

Han JiangyuAssociateZhong Lun Law Firm
Han Jiangyu
Associate
Zhong Lun Law Firm

Dispute resolution. The author would argue that the relationship between the public and private parties should be that of equal contracting parties, and in the event of a dispute, an application for arbitration should be made or a civil procedure should be conducted as for a civil relationship. Article 41 of the draft regulations provides that, where a dispute arises from an administrative or monitoring act carried out by a government authority in accordance with the law, administrative reconsideration or an administrative action may be instituted. However, the right of administrative reconsideration or administrative action granted to the private party and the project company by Article 41 is more limited than the one granted to administrative counterparties by the Administrative Procedure Law. This is not reasonable. In the revised Administrative Procedure Law and related judicial interpretations, an administrative counterparty may institute an administrative action, the subject thereof being an “administrative act” rather than a “specific administrative act” as before.

Furthermore, that “where a dispute arises in the course of performance, an application for arbitration may be made or a legal action instituted”, as specified in the regulations, could easily be misconstrued as being solely for the performance stage of the project agreement. PPP includes such stages as procurement, contract execution, contract performance, transfer, termination, etc. All of these stages are regulated by such laws and regulations as the Contract Law, and should be incorporated into provisions on dispute resolution. Additionally, where a dispute over specialized issues involved in a project agreement occurs, the authors recommend inviting experts or professional institutions for mediation.

Legal liability. Chapter 6 of the draft regulations provides for the legal liability of the parties to a PPP project, but with omission of the liability of the public party. The regulations fail to address how the government, as a party to the project agreement, is to bear liability for breach of contract, or stipulate the procedure and criteria thereof. Pursuant to China’s revised Budget Law, each government expenditure is to be arranged for through the budget, and among the liabilities borne by the government, only state compensation arising as the result of a violation of regulations can be arranged for through the budget. How the liability of the public party for breach of contract and the liquidated damages under the project agreement are to be included in the budget and arranged for through the budget remain unclear. If the regulations fail to address the government’s liability for breach of contract, this liability of the government under a project agreement is unlikely to be enforceable.

Furthermore, based on the principle of risk allocation, such risks as changes in laws and changes in policies should be borne by the public party, and the public party should indemnify or compensate the private party for losses incurred as the result of risks or changes beyond the control of the private party, such as changes in laws, changes in policies, national security, disaster relief, the public interest, etc.

Other recommendations. Considering the objective issues that have already arisen in PPP practice, the author would argue that the draft regulations should additionally expressly address the following issues to minimize uncertainties.

Firstly, one of the major reasons for the difficulty in implementing PPP projects is the lack of clarity on the competent authority, but the regulations still fail to expressly specify the specific State Council authority that is in charge, and fails to change the current situation of multi-headed regulation. The authors recommend the formulation of a guiding catalogue specifying the competent authorities for the various matters.

Secondly, in the course of the investment, construction and operation of a PPP project, the private party may generate patented technology, intellectual property and trade secrets of substantial value. The regulations should accord importance to the method of paying consideration for such intellectual property when a project is transferred to the relevant government authority.

Author: Wang Jihong is a partner and Han Jiangyu is an associate at Zhong Lun Law Firm

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