Ministries need to be more specific about rules for private investment

By Wang Jihong and Xie Yi ,V&T Law Firm,
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On 7 May 2010, the State Council published Several Opinions on Encouraging and Guiding the Healthy Development of Private Investment, the so-called “New 36 Initiatives for the Non-public Sectors”. Under the opinions, 36 policies and measures were proposed to encourage private capital to invest in such sectors as infrastructure, environment, resources and energy. Ministries under the State Council have introduced at least 15 sets of implementing rules for the New 36 Initiatives, covering transportation, municipal utilities, railway, land resources and other areas.

Deregulating infrastructure

The Ministry of Railways, dubbed the last conservative unit in the transport sector, has issued the Implementing Opinions on Encouraging and Guiding Private Capital to Invest in Railways, which makes it clear that the sector will be fully opened to private capital by encouraging private capital to invest in: the construction of a variety of railway lines; railway passenger and freight transport services; the innovation of railway technology; and the revamping and reorganisation of railway enterprises for non-transport purposes.

Wang Jihong Managing Partner V&T Law Firm
Wang Jihong
Managing Partner
V&T Law Firm

With respect to the highway and waterway sector, the Ministry of Transport has issued the Implementing Opinions on Encouraging and Guiding Private Capital to Invest in the Highway and Waterway Transportation Sector to encourage private capital to fully participate in the construction, maintenance, operation and management of transport infrastructure, and to gain access to the transport service sector and the transport emerging businesses.

As for the land, resources and mineral sectors, the Ministry of Land and Resources and the All-China Federation of Industry and Commerce have jointly published the Implementing Opinions on Further Encouraging and Guiding Private Capital to Invest in the Land and Resources Sectors to encourage and guide the commitment of private capital to: the exploration and development of mineral resources, petroleum and natural gas; the exploration and exploitation of unconventional oil and gas resources; and land remediation and rehabilitation of the geological environment in mining areas.

The opinions say various measures including giving priority to development or granting subsidies or incentives in order to encourage private capital commitments may be taken.

Involving private capital

As the private capital investment sector is deregulated, various ministries and commissions are also introducing rules to further expand the ways and means in which private capital can participate in the urban infrastructure and energy sectors.

With municipal utilities, the government encourages private capital: to construct and operate the utilities in the form of sole proprietorship or joint venture, or by means of asset acquisition; to participate in the operation and maintenance of water supply, roads, bridges and other projects by acquiring services from the government; and to indirectly participate in the construction and operation of municipal utilities by purchasing local government bonds or investing in stocks. Private capital can also gain access to municipal utilities through participating in corporate reform, or restructuring or subscription of shares.

On the energy side, private capital can invest in geological exploration fund projects. If an investor with private capital is not qualified in geological exploration, it may bid for the rights to prospect for unconventional oil and gas resources by collaborating with entities that meet the qualifications.

Municipal utilities

In the Notice for Distributing the Implementing Opinions on Further Encouraging and Guiding Private Capital to the Municipal Utilities Sector, the Ministry of Housing and Urban-Rural Development has made it clear that it will further improve the pricing and financial subsidy mechanism for municipal utilities, with gradually smoother pricing for products and services. Urban governments should establish an appropriate incentive and subsidy mechanism if private capital invests in marginally profitable or not-for-profit municipal utilities. This will help alleviate the difficult situation where investors in build-operate-transfer projects are often unable to adjust, in a timely manner, their charges in line with market price fluctuations.

Xie Yi Partner V&T Law Firm
Xie Yi
Partner
V&T Law Firm

The Ministry of Housing and Urban-Rural Development will actively look into the enactment of some regulations, such as the Municipal Utilities Franchising Regulations, to regulate access to the market, improve the exit mechanism from the market and strengthen the supervision of projects in strict compliance with the requirements of the franchise regime. However, the current status suggests that the regulations were introduced at the ministerial level, which is too low. The urgent need is to promulgate a law, a piece of national franchising legislation at the regulatory level.

Support stepped up

The State Administration of Taxation has systematically eased the stipulations of current tax policies and regulations in relation to preferential policies towards private investment, and summed these stipulations into a new tax policy – the Tax Policy for Encouraging and Guiding the Healthy Development of Private Investment, under which the tax authorities at all levels are required to ensure that private investment taxpayers are able to receive full tax concessions in a timely manner.

The Ministry of Land and Resources has proposed that if privately run logistics enterprises wish to construct logistics facilities in old plants or idle warehouses, and this construction involves the transfer or lease of formerly allocated land-use rights, these land-use rights may be provided to them by means of agreement upon approval.

The China Banking Regulatory Commission has expressly called for increased financing support for private investment. The State Administration for Industry and Commerce has called for full use of its functions to: help solve financing problems faced by private investors; guide private investment in carrying out financing by means of mortgage or pledge guarantees; support private investors to carry out capitalisation of trademarks as intangible assets; and support private investors to reduce the debt burden using debt-to-equity swaps.

The relevant departments have also further streamlined the regulation of the repatriation of foreign direct investment funds, and the foreign exchange control over offshore lending, and appropriately eased control over the provision by individuals of guarantees to foreign parties.

But generally, the implementing rules published by various ministries and commissions are not specific enough. We are anticipating the introduction of more operational regulations and auxiliary measures, hoping that the expected arrival of private capital investment is not empty talk again.

Wang Jihong is the managing partner at V&T Law Firm, and Xie Yi is a partner at the firm

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