Some things to keep in mind in PPP project compliance review

Since 2014, the public-private partnership (PPP) model has been well regarded and widely applied by every level of government. The State Council, ministries and local authorities have all issued legislation providing legal guidance on PPP project compliance.

Conducting a compliance review of a PPP project prior to execution is essential in order to avoid any legal obstacles. The Ministry of Finance’s (MOF) Notice on the Issuance of the Operational Guidelines for the Public-Private Partnership Model, issued for trial implementation, sets out that a feasibility study, project output specifications and a preliminary implementation plan be provided for greenfield or rehabilitation PPP projects. The notice also provides that historical data about the existing public assets, the project output specifications and the project’s preliminary implementation plan must be submitted for compliance review of existing projects. This indicates that a feasibility study and official replies are the main focus of the review.

In practice, if the project proposal has been approved, the PPP project may proceed to preparing for the execution stage.

Transaction structure

The local government is the entity entrusted with authorizing PPP projects, and is required to provide the implementing authority with the proper authorization documents. Authorization documents must set out the authorizing and authorized parties for the project, or clearly state the “project implementing authority”, lest they not be deemed a proper document. Implementing authorities are required to secure the authorization from the county-level government or above for concession PPP projects, as provided in the Measures for the Administration of Infrastructure and Utilities Concessions.

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According to the notice and the MOF’s trial Guidelines for PPP Project Contracts, the public partner may make a capital contribution to the project company. Where it does, the capital contribution is required to be less than 50%.

In order for a PPP project to undergo review, the minimum capital percentage is required as set out in the State Council’s Notice on Revising the Capital Percentages for Fixed Asset Investment Projects. The minimum capital percentage for an iron and steel project is 40%; for a coal, airport, port or a coastal or inland waterway transport project, 30%; for a railway or highway project, 25%; for a low-income housing or ordinary commercially developed housing project, 20%; for other real estate development projects, 30%.

For a PPP project that will mainly adopt government fee payments, a value for money assessment and a demonstration of fiscal bearing capacity must be carried out. Article 5 of the MOF’s Guidelines for Demonstrations of Fiscal Bearing Capacity of Private-Public Partnership Projects provides that demonstrations of fiscal bearing capacity can be rated as either pass or fail. Projects that fail may not adopt the PPP model. For projects that pass, the relevant finance bureau must incorporate responsibility for the project’s fiscal expenditures into the overall budget arrangement when preparing its annual budget and the medium-term financial plans.

Selecting investors

The current PPP policy and regulation regime sets out that the investor should be selected by way of a public or selective tender, negotiation, consultation or single-source procurement. Each procurement method must satisfy certain conditions. Public or selective tenders should be the primary method for projects with strong business potential or those where competition for a private partner is expected to be intense.

Public tender is the main method for selecting the private partner. A number of matters should be kept in mind when conducting the compliance review of the bidding process.

A preliminary, not subsequent, review of potential private partner’s qualifications shall be conducted when the partner is to be selected via tender (as required by the relevant MOF regulations). The request for tender may set no provisions which restrict competition unreasonably. The request must be published in the government procurement media designated by the MOF or provincial finance authority. The notice of tender and related documents must comply with relevant provisions of the Law on Tenders and Bids. The tender evaluation should primarily be assessed comprehensively. Finally, the substantive terms of the tender should not be amended during contract negotiations.

If any of the following circumstances apply, negotiations may be considered as the procurement method. First, no supplier responds to the tender notice or no qualified bids were submitted and further tender invitation is not possible. Second, determining the detailed specifications or requirements of a project is not possible due to complex or specialized technology. Third, there is not sufficient time to conduct tendering due to urgent user demand. Fourth, the total cost is unable to be calculated in advance. Where negotiations are the chosen method of procurement, compliance with the Law on Government Procurement is mandatory.

If any of the following circumstances apply, consultations may be considered as the procurement method. First, the project involves the government purchasing services. Second, the technology is specialized or complex. Third, the total cost is unable to be calculated in advance due to the project involving procuring works of art, involves a patent or proprietary technology, or due to the time or quantity of service being unable to be calculated in advance.

Fourth, the project is a research and development project lacking sufficient market competition, or it is a technological transformation that requiring support. Fifth, the project is a construction project other than one for which tender procurement is mandatory per the Law on Tenders and Bids and its Implementing Regulations.

Where consultations are the chosen method of procurement, compliance with the Provisional Measures for the Administration of Government Procurement by the Competitive Consultation Procurement Method is mandatory.

It is also necessary to review whether the competitive consultation procedure is compliant. However, it should be noted that many of the provisions for the procedural arrangements for competitive consultations are merely guidelines rather than mandatory.

Liu Xiaojun is a senior partner and Xing Limiao is an associate of AllBright Law Offices