Examining common types of PPP project disputes

Following three years of development, the public-private partnership (PPP) model has become the mainstream financing model in China’s infrastructure and public service sector. The PPP is driving the transformation and upgrading of Chinese enterprises and the reform of China’s fiscal budgeting system, and is spurring the improvement of the service and business of all sorts of consulting firms and dispute resolution institutions. If one takes a look at China and the countries strung along the Belt and Road, be it highways, railroads, subways, ports or power stations, or be it heating, telecoms, real property, industrial parks, etc., none of them has been left untouched by the PPP model.

However, with deepening co-operation in PPP projects and with parties moving from the infatuation stage to the nitty-gritty of married life, all manner of disputes are also cropping up. The authors have summarized a few relatively central dispute types, the significance of which can guard against and respond to future possible disputes.

Disputes due to the conversion of existing build-transfer (BT) and other such projects to the PPP model. Every region has certain existing projects that the government would wish to convert to the PPP model and continue in that form. However, the conversion inevitably involves such issues as an adjustment of the project scope, a change in payment method, and cancellation of the provided security. Such issues tend to give rise to disputes due to the changes in the public and private parties’ interests.

Disputes due to project procurement. This type of dispute has become more frequent due to increasingly intense project competition, for example: disputes arising over whether a commercial bank is eligible to be a bidding entity; and disputes over doubts as to the independence and impartiality of the bid evaluation experts. Inconsistencies between the procurement documents and the contract concerning the performance guarantee letter submitting entity or the submission time, or concerning the major financial targets, which make it impossible for the private party to have its bid accepted, may also give rise to a dispute.

Disputes due to the relationship between a PPP and concessions. In practice, there are different opinions on whether a separate invitation of bid is required for the construction work after the social investor is selected. The Ministry of Finance deems that a separate invitation of bid for the construction work is not required using any of the methods of government procurement, whereas the National Development and Reform Commission deems that a separate invitation of bid is unnecessary solely when the PPP project is procured through public invitation of bid.

Disputes due to co-operation with a consortium. The co-operative relationships within a consortium are of significant bearing to the normal progress of a project. If the parties are unable to carefully consider all of the various issues when submitting their bid, such core issues as the determination of the general-subcontractor model, division of construction tasks, distribution of the authority for management of the project, etc., after awarding of the contract can easily give rise to disputes.

Disputes due to a change in the private party. The public party may, due to a rupture in the private capital, terminate the co-operation with the party providing the same and demand that it withdraw from the site. When this occurs, unravelling of the relationships among the private party, the suppliers and the contractors will require a relatively long period of time. To minimize the effect of such withdrawals, the public party will usually select a new private party while simultaneously dealing with the relationship with the original private party. In this situation, relatively serious disputes around such issues as the payment of moneys, compensation, etc., will arise among the public party, the original private party, the new private party and other third parties.

Disputes due to changes in laws. PPP projects usually require many years of co-operation between the public and private parties, during which changes in law might take place. The author was involved in a compensation dispute in which project costs increased due to the adoption of more stringent environmental standards, a compensation dispute in which projects costs increased due to the adoption of more stringent construction standards, and a dispute arising due to a revision in tax policies.

Disputes due to a breach of contract by the public party. These types of disputes are relatively common, with breaches by the public party manifested in many ways, including forcible recovery of the right of operation by the public party; a change in the scope of the project, or the making of the project standards more stringent by the public party; and a change in government, with the new government refusing to continue performance in accordance with the existing contract.

Disputes due to a breach of contract by the private party. These mainly involve such circumstances as rupture of the private capital, the quality of the works failing to satisfy regulations, or the occurrence of a major safety-related accident.

Disputes due to the transfer of the project. The public and private parties might fail to complete the project transfer tasks at the transfer stage due to such issues as the scope of the transfer of the project, the quantity of spare parts and components to be transferred, the outcome of the performance assessment and payment of the final instalment, or consideration for transfer of the equity.

It is not difficult to see that China’s PPP project disputes present the following features: (1) the types of disputes are varied, involving complex legal relationships; (2) the subject amounts involved are large, most in the hundreds of millions of renminbi; (3) the disputes are moving to the early stages of the project, with disputes arising at the procurement stage showing a marked increase; (4) a single reason for a dispute will often trigger a series of cases involving numerous entities; (5) instances where the public party is in breach are numerous.

The authors foresee that the coming five years will be characterized by frequent PPP disputes in China, and hope that private investors and governments can make sufficient advance preparations to detect, identify and guard against risks early, placing emphasis on the means of dispute resolution and the selection of arbitration institutions to effectively protect their lawful rights and interests.

Wang Jihong is a partner and Li Xiaodan is an associate at Zhong Lun Law Firm