PPP regulations need clarification

By Wang Jihong and Han Jiangyu, Zhong Lun Law Firm
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The Legislative Affairs Office of the State Council on 21 July 2017 issued the Regulations for Public-Private Partnerships in the Infrastructure and Public Services Sectors (Draft for Comment). The authors have mixed emotions regarding the draft: happy because the PPP regulations expressly specify certain provisions that address the fundamental objectives of PPP – oversight, the relationships of the rights and obligations of the participating parties, etc., resolving and improving certain current issues in practice; and concerned that the PPP regulations are too brief on, or avoid, numerous fundamental issues and key contradictions, such as the nature of PPP contracts, conflicts between current systems, etc., greatly limiting their capacity to resolve prominent issues in practice.

王霁虹 WANG JIHONG 中伦律师事务所合伙人 Partner Zhong Lun Law Firm
王霁虹
WANG JIHONG
中伦律师事务所合伙人
Partner
Zhong Lun Law Firm

Relationship between PPPs and concessions. To date, regulatory documents in China fail to define the relationship between PPPs and concessions. As a second invitation of bids can be avoided for construction of a concession project, “if the investor can itself carry out construction, production or provision in accordance with the law”, the impact on the private investor’s returns is major. However, due to inconsistent understandings of the PPP and concession concepts among different local governments, their application likewise varies tremendously. The authors recommend that the relationship between the two concepts be clearly defined when the regulations are issued in future.

Method of selection of the private investor. The regulations specify that, “the phrase ‘public-private partnership in the infrastructure or public services sector’ means that the public party selects the private party by a competitive method …” From this provision it can be seen that the regulations deny the method of selecting the private investor by way of a direct award.

However, the authors would recommend that the method of direct awarding be retained for procurement. The reasons are as follows: first, a PPP project in essence falls within the category of government procurement, and article 31 of the Government Procurement Law expressly provides for use of the single source method for procurement in certain specific circumstances. The PPP regulations should comply with the Government Procurement Law; Second, not all PPP projects are competitive. Under certain specific circumstances (e.g., national defence, military projects, underdeveloped regions, etc.) the use of a competitive method for procurement may be inappropriate for such reasons as the special or monopoly nature of the project, its lack of attractiveness, etc. Accordingly, the method of procurement by way of a direct award should be retained.

韩江瑜 HAN JIANGYU 中伦律师事务所律师 Associate Zhong Lun Law Firm
韩江瑜
HAN JIANGYU
中伦律师事务所律师
Associate
Zhong Lun Law Firm

Relationship between PPP government payment projects and government purchase of services. Since the Notice of the Ministry of Finance on Resolutely Putting a Stop to Local Governments Illegally Raising Financing in the Guise of Purchasing Services (document No. 87) placed strict limits on the purchase of services by governments, the issue of whether government payment-type PPPs can continue has become a huge uncertainty for many local governments and personnel. Pursuant to document No. 87 and relevant PPP regulations, the conditions that the two are required to satisfy are seemingly completely different.

The conditions that a government purchase of services is required to satisfy are as follows: the scope of application must fall within the guiding catalogue for the government purchase of services, there must first be a budget before a purchase of services, and procurement entities include mass organizations, in addition to administrative authorities and institutions. The scope of application of PPP government payment projects is not being restricted by the guiding catalogue for the government purchase of services, the implementing procedure is required to undergo demonstration and evaluation, and the implementing entity is usually a government or a functional authority/institution designated by a government, with mass organizations unmentioned. It can be seen that the two differ markedly in terms of their scope of application, the implementing entities and procedures. Accordingly, the regulations should specify guiding provisions addressing the relationship between the two.

Balancing public interest and interests of the private investor. Chapter 1 of the regulations only mentions that priority is given to the public interest, and is silent on protection of the interests of the private investor. The authors recommend the addition of language reading “safeguarding the lawful rights and interests of private parties”, and also recommend the addition of the “risk-sharing principle”. Co-operation projects should accord with the principle of consistency of risks and benefits, and project risks should be reasonably apportioned between the public party and private party. In principle, the public party should be responsible for preventing and mitigating legal and policy risks, the private party should bear the project construction and operating risks, and natural disaster and other such force majeure risks should be jointly borne by the public and private parties.

PPP project sponsoring method. Chapter 2 of the regulations addresses the issue of the sponsorship of projects, but provides only for sponsorship by the public party. The authors argue that since PPPs are a new thing and still at the exploratory and progression stage, having the public party serve as the only sponsor is not necessarily conducive to the promotion of PPP projects, due to such party’s own limitations. The authors recommend that the private party be added as one of the sponsors of a project.

Furthermore, seeking the opinions of the potential private parties is not necessary for all implementation plans for PPP projects at the time of sponsorship, particularly for projects the technology for which is relatively simple and the competition for which is extremely fierce. As the mandatory seeking of opinions of potential private parties increases the burden on the public party to a certain extent, the authors recommend revision of the provision reading “the opinions of the potential private parties must be sought on the implementation plan”, and removal of the legal liability of the public party if it fails to seek the opinions of the potential private parties.

Additionally, in terms of the evaluation of the implementation plan, the authors recommend that it be expressly stated whether a “value for money assessment” is a necessary procedure. The value for money assessment and the demonstration of fiscal capacity are currently two key tasks that identify PPP project stages. Both theoretical and practical circles have reached a common understanding that PPP projects require the conduct of the “two assessments”. Accordingly, the authors recommend that the regulations expressly state the necessity of a “value for money” assessment, and where the public purse bears the obligation of making a capital contribution and would bear liability for breach of contract, an evaluation of fiscal capacity should also be carried out.

Wang Jihong is a partner and Han Jiangyu is an associate of Zhong Lun Law Firm in Beijing

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