Given that the legislation in the infrastructure concession sector is dated, certain local governments, with a view to providing valid legal basis for BT (build-transfer) concession financing projects, have referred to the Government Procurement Law and used the government procurement procedure to select BT investors, concluding that if the government procurement procedure is used, it is unnecessary to require the government party to provide buyback security. However, is the law fully applicable to BT projects? Does the inclusion of BT projects in the scope of government procurement mean that the investments of investors are effectively protected? This column examines these questions.
Managing Partner
V&T Law Firm
Applicability issues
Although there is some similarity between BT projects and government procurement projects in terms of the source of the funds, as BT projects are a new model for investment in and financing of infrastructure, they were not considered when the law was being drawn up.
BT projects do not fall within the scope of government procured “construction projects”
In contrast to the average construction projects contemplated in the law, BT projects go beyond the simple construction sector, combining investment/financing with construction, in being a model for infrastructure investment/financing and construction. The definition of the scope of construction projects that are the procurement targets contemplated in the law is limited solely to the construction of the projects and does not cover the investment in and financing of construction projects.
The procurement prices of government procurement projects and BT projects are different
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V&T Law Firm
In government procured construction projects, the consideration is usually paid to the contractor in line with the construction cost, whereas, in a BT project, being an investment-type project, the investor not only bears the construction risks, but is also required to bear the higher financing risks. Accordingly, the investor should be entitled to greater investment returns that go beyond the construction costs. However, in government procurement projects, the investment profit returns of the investor are generally not taken into consideration. Accordingly, government procurement projects and BT projects are different in terms of procurement price.
Government procurement budget requirements are inconsistent with BT project buyback periods
Government procurements are to be effected in strict accordance with the approved budget. When a department responsible for budget preparation prepares the departmental budget for the following fiscal year, it is required to budget for and list the government procurement projects of the department for the fiscal year in question and the amounts required and submit this to the finance authority at the same level for collation. The budget enters into effect and is implemented only after it is submitted by the government and reviewed and approved by the people’s congress at the same level.
However, the construction and buyback period for a BT project usually straddles three to five years. If a BT project were to be treated in a manner identical to the government procurement model, it would mean that the budget approval authority would be required, during the current year, to approve in advance the budget for the next few years, which would clearly result in a conflict with current provisions of the Budget Law.
Payment risks of buyback moneys
Even if a BT project is included within the scope of government procurement, it is impossible to ensure that there is absolutely no risk attaching to the payment of the buyback moneys.
The law does not provide greater assurance of payment
For a project that is included within the scope of government procurement, it is necessary to formulate a government procurement budget in advance. Additionally, the law does not provide further mandatory requirements or assurance measures in respect of the procurement funds being fully in place. For suppliers, government procurement projects and BT projects are the same – they rely more on the confidence in the government as assurance for the project.
In practice, for a BT project that has not been included in the government procurement system, the government may, as requested by the investor, include the payment of the buyback moneys in the government fiscal budget and submit it to the people’s congress for approval. This too has become common practice. In this respect, government procurement does not offer any special advantages.
The law does not contain mandatory provisions in respect of the obligation of the procurer to pay the procurement moneys
Although the Budget Law specifies that the finance authority of governments at each level must allocate budgeted expenditures in full in a timely manner, it is silent on the legal consequences should the government fail to allocate the budgeted funds in full in accordance with the budget. Accordingly, if the government party commits a breach of contract by failing to pay the buyback moneys on schedule, the only option that remains open to the supplier is to pursue the government party’s liability for breach of the procurement contract.
The law does not prohibit the provision of security to a supplier
Laws and regulations do not prohibit the provision of security in connection with a government procurement project. In the process of entering into a government procurement contract, the parties are equal civil entities and can agree upon the contract terms of their own free will and on an equal basis. Particularly in the case of investors in BT projects, where investments can easily run into the hundreds of millions of RMB, the risks that an investor faces are greatly increased as compared to the average government procurement project. In order to ensure that it receives the buyback moneys on schedule, the investor may require the government to provide security in respect of its payment of the buyback moneys.
To summarize, the buyback period for a BT project is relatively long and express legal assurances for the payment of buyback moneys are lacking at present. Furthermore, local governments are currently trying to issue government bonds and the sources of funds for the repayment of such bonds and buyback moneys for BT projects are identical, thus bringing the buyback capacities of local governments into further doubt. Accordingly, even if the government procurement procedure is used to select investing entities for BT projects, investors, from the perspective of effectively protecting their investment costs and investment returns, should still require governments to provide the necessary security and assurance measures in respect of the payment of the buyback moneys.
Wang Jihong is the managing partner of V&T Law Firm. She practises in the field of infrastructure development. Xie Yi is a partner at V&T Law Firm.
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