Imbalance between rights and obligations of public, private parties

At the two recently adjourned national meetings, PPPs (public private partnerships) were again a hot topic of conversation, with such phenomena as the unequal standing of the public and private parties, and the imbalance in their rights and obligations, in particular becoming major issues the resolution of which was called for by numerous representatives at the two meetings.

What “partnership” embodies is an equal partnership-type co-operative relationship between the government and a private investor, which includes equal rights and obligations, liabilities for breach of contract, sharing of risk, and protection of rights and interests. The series of documents issued by the State Council, the Ministry of Finance, the National Development and Reform Commission, etc., also addressed the problems mentioned above.

In practice, however, as local governments simultaneously control procurement authority, the granting of concessions, and fiscal, legislative and judicial power, a private investor will usually find itself in an inferior position when it faces a local government. Particularly in projects where the competition is fierce, certain local governments habitually arrogantly treat the private party as a target of management, resulting in an imbalance in the rights and obligations of both parties, and other such issues, becoming increasingly more serious.

Contract status

Certain local governments, standing in the advantageous position conferred upon them as purchaser, will rope off certain content in the procurement documents that affect the rights and interests of the investors, such as the term of the concession, final settlement, auditing, price adjustment mechanism, fiscal subsidies, and fee payment assurance measures, as non-negotiable terms, and not permit the private investor to further negotiate these with the government.

Some procurement documents even state that one mark will be deducted for each deviation from the contract raised by the private investor, or require that no change be made to the bid invitation documents. The private investor is forced to keep its dissatisfaction to itself as, if it wishes to secure the project, it has to accept all of the adverse conditions set by the public party.

Rights and obligations

In a PPP project, the government not only takes on the role of “referee”, performing the administrative and oversight functions at various stages and the project bid inviting party’s monitoring responsibilities, but the government’s investment representative, as a shareholder in the project company, also participates in the project as an “athlete”. This dual capacity and the functional arrangements have explained the abuse by local governments of their authority and the limitless expansion of the scope of their rights.

Some projects emphasize the public party’s right of oversight and right of intervention throughout the entire project, with some forcefully demanding an agreement solely on oversight matters and requiring that the use of each amount of project money be approved by the public party. Furthermore, the public party is not intended to have actual control over, or the right to manage, the project company. But in practice, cases in which the capital contribution percentage of the public party is very small, yet it enjoys a veto over material matters of the project company, are not a rarity.

As for the private party, what it has are almost all obligations and responsibilities: to bear all project investment/financing, construction, quality, safety and environmental responsibilities, and to submit to the scrutiny of the public party throughout the life of the project. However, when ensuring that the investor independently and integrally exercises its rights as project owner, the contract will contain few provisions, and will be doubly silent on government intervention in the project, how the investor is to recover the funds it invested in the project after termination of the PPP contract, and how its long-term interests are to be ensured. The rights and obligations of the parties are very unequal.

Liability for breach of contract

The imbalance in liabilities for breach of contract is increasingly pronounced at the PPP project negotiation stage. A project in which the authors were recently involved typically reflected this: the PPP contract specified that where the party responsible for a delay in the construction schedule was the project company, liquidated damages were calculated based on the number of days of delay and the rate of such liquidated damages varied depending on the duration of the delay, at its highest reaching millions of renminbi per day – extremely harsh liability for breach of contract. However, where a delay is attributable to the public party, the contract merely vaguely provides for a corresponding extension of the construction period and incorporation of the extra costs and expenses arising as a result of the delay into the total investment for the project, without reflecting in the least equivalent sanctions for a breach by the government.

Sharing of risk

Based on the risk sharing principle of PPP projects, that “risks are to be borne by the most appropriate party”, the various risks of a project are to be reasonably allocated between the government and the private investor. However, in practice, some local governments shirk their responsibilities and saddle the private investor with unreasonable demands. One that is commonly seen is in highway BOT projects. The forecast of traffic numbers in the project feasibility study provided by the government is usually a major reference on which the investor relies to decide on whether to invest in the project. The government should be liable for the truthfulness, accuracy and completeness of such a document. However, certain PPP contracts not only require the private investor to fully accept the project report provided by the government, but also require it to bear all liability, thus transferring the risks that ought to be borne by the government onto the private party.

Protection of rights and interests

Local governments enjoy large maneuver possibility because of the lack of national legislation on PPPs. The legislative power of local governments further increases the imbalance between the protection of the rights and interests of the government and the private investor. If this imbalance in the rights and obligations of the public and private parties continues to worsen, the long-term development of PPP projects will be compromised and could have a negative impact on China’s transforming economy.

Wang Jihong is a partner and Miao Juan is an associate with Zhong Lun Law Firm