The issue of ownership of concession projects

By Wang Jihong, V&T Law Firm
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As Chinese laws are silent on the question of the ownership of project facilities during the term of a concession, this is an issue that parties carefully avoid when negotiating concession projects. However, this sensitive issue is always present, and investors and government authorities must ultimately face it. Examining various provisions of current laws, we are of the opinion that the ownership of project facilities during a concession term should vest in the concessionaire (the project company).

Foreign-invested projects

Wang Jihong 王霁虹, V&T Law Firm 万商天勤律师事务所, Managing Partner 执行合伙人
Wang Jihong
Managing Partner
V&T Law Firm

As early as 1995, the former State Planning Commission, the Ministry of Power Industry and the Ministry of Communications jointly issued the Issues Relevant to the Examination, Approval and Administration of Trial Foreign-Invested Concession Projects Notice. Article 2 of this Notice specifies that “during the term of a concession, the project company shall own the concession project facilities; shall have the right to engage in investment, financing, engineering design, construction, equipment procurement, operation and management in respect of the concession project, and to charge reasonable fees for the concession project; and shall be responsible for the repair and maintenance of the concession project facilities”.

Although the legal weight of the Notice is relatively low, it nonetheless remains, to date, the first and only regulatory document expressly to address the issue of title to project facilities during a concession term.

The PRC Property Law

In a legally compliant concession project, the concessionaire is generally selected by a government authority by competitive means, such as an open invitation to bid. Following this, the project entity confirmed by the government authority as responsible for construction of the concession project will secure the official permission necessary for things such as the project proposal, planning and environmental impact assessment; will secure the necessary land use rights; will construct the project; and will meet all the costs of the project itself.

In the last 10 or 20 years, the concession financing method that originated in the infrastructure sector has been adopted in many other sectors in China. Although the PRC Property Law fails expressly to address the issue of ownership during the term of a concession, which is to be regretted, it is nevertheless possible to conclude that ownership of project facilities (other than land use rights) during the term of a concession vests in the concessionaire.

Section 30 of the PRC Property Law specifies that “if ownership rights are created or extinguished as the result of such acts as the construction or demolition of premises, such creation or extinguishing shall occur at the time of completion of the act”. Section 7 specifies that “the obtaining and exercise of ownership rights shall comply with the law, respect social ethics and may not harm the public interest or the lawful rights and interests of others.” Accordingly, so long as other laws are not violated, ownership of project facilities lawfully constructed by a concessionaire should vest in it during the concession term, and this should take effect immediately construction is completed. The term of the concession and any restrictions on rights (e.g. the inability to mortgage or lease the facilities without authorization) are merely types of contractual restriction on the concessionaire’s ownership; and the transfer to another party of the project assets upon the expiry of the concession term is a transfer of assets also provided for in the concession agreement, not an act of returning assets.

Summarizing the above, the project facilities of a foreign-invested concession project vest in the concessionaire during the concession term. The same should be true for a domestic concessionaire. If this were not the case, for a domestic concessionaire to secure ownership of concession project facilities during the concession term, it would be required to seek out a foreign enterprise to take an equity interest in the project company, thereby converting it into a foreign-invested concession project. This would be highly discriminatory against domestic enterprises. Accordingly, we recommend that the relevant regulatory documents be amended expressly to provide that, during the concession term, a domestic enterprise owns the project assets in which it has invested.

Clarification required

Based on the above, we can conclude that project facilities are owned by the concessionaire during the concession term. However, as current laws are silent on the issue, government authorities, during negotiations on concession agreements, often deliberately fudge or refuse to discuss the issue. This results in title to project assets often valued in the several hundreds of millions consistently remaining uncertain during the concession term, which can last for several decades. This clearly is not conducive to encouraging investment in infrastructure by private investors, or to the effective use of project assets. Accordingly, relevant legislative or government authorities should regulate to clarify the issue of the ownership of project facilities during the concession term under different concession models.

Practice

Although the ownership of project facilities during the term of a concession is a sensitive issue in the negotiation of a concession agreement, any potential concessionaire should nevertheless attach great importance to it. Government credit risk is a real issue that a concessionaire must take into consideration, particularly in today’s China where laws on concessions are incomplete and government authorities have been known unilaterally to terminate concession agreements. If the ownership of the project facilities is not expressly addressed in a concession contract, levels of compensation for those assets will be extremely unfavourable to the concessionaire should the government terminate the concession agreement early. Accordingly, we recommend that, when negotiating concession contracts with governmental authorities, concessionaires clarify the issue of the ownership of the project, the method of compensation and the compensation principles in the event that the government terminates the concession early.

Wang Jihong is the managing partner of V&T Law Firm. She practises in the field of infrastructure development

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E-mail: wangjihong@vtlaw.cn

www.vtlaw.cn

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