Public procurement and PPP
Legislation
Is the legislation governing procurement and PPP general or specific?
The overarching legislative instruments governing procurement in China are the Government Procurement Law 2003 and its corresponding implementing regulations. Procurement of goods, services and engineering projects by government bodies that are within the centralised procurement catalogue or exceed the prescribed thresholds need to follow the procedures set out in these legislative instruments. These include observing the budget, giving priority to domestic suppliers and providers, and following a competitive tender process.
For construction works involving large infrastructure or government-funded projects, a responsible entity must also follow the procedures set out in the Bid Invitation and Bidding Law 2017, which requires a tender to take place by way of a public tender or invitation to tender.
If the government procurements are not subject to bidding in accordance with the law and regulations on bidding, the Administrative Measures for Non-bidding Methods of Government Procurement will apply. Non-bidding procurement methods include competitive negotiation, single-source procurement and procurement by price inquiry.
In addition, for marine construction projects, the requirements set out in the Administrative Measures for Tender of Water Transport Construction Projects 2012 must be followed, with the Ministry of Transport and its provincial bureaus being the responsible government departments in charge.
In the last few years, the Chinese government has issued the Administrative Measures for Concessions for Infrastructure Facilities and Public Utilities Projects (June 2015) and the Guiding Rules for Implementing Public-Private Partnership Projects in Traditional Infrastructure Fields (October 2016). These measures set out certain concession models (such as build–operate–transfer (BOT), build–own–operate–transfer and build–transfer) that may be adopted by a government for the construction and operation of infrastructure facilities and public utilities, and the approval requirements and procedures for the implementation of these models. The Guidelines on Common PPP Agreement were issued by the government setting out guidelines for basic provisions required for a public–private partnership (PPP) agreement.
Proposal consideration
May the government or relevant port authority consider proposals for port privatisation/PPP other than as part of a formal tender?
In China, port construction and operation projects are led by local port corporations. Reputable, qualified and suitable private investors are invited to participate in a port project in the form of a joint venture. A private port investor must demonstrate to the relevant local port corporation that it is the most suitable joint venture partner for the particular project before being invited to the negotiation table.
Joint venture and concession criteria
What criteria are considered when awarding port concessions and port joint venture agreements?
The criteria often used by a local port corporation in awarding a port joint venture agreement to a private investor include:
- previous international port construction, management and operation experience;
- financial capability, reputation and creditworthiness; and
- the ability to increase throughput and access to the customer base.
Model agreement
Is there a model PPP agreement that is used for port projects? To what extent can the public body deviate from its terms?
There is no model joint venture agreement used for port projects in China. However, most port joint venture transactions follow a similar format. Common transaction documents for a public–private joint venture include:
- a joint venture agreement, which sets out the terms and conditions governing the rights and obligations of each participant;
- the articles of association, which set out the management and corporate governance of the joint venture;
- a lease agreement for the lease of any port facilities to the joint venture; and
- an asset transfer agreement for the transfer of any port assets to the joint venture.
The terms of these transaction documents are negotiated between the relevant local port corporation and the private investors.
Approval
What government approvals are required for the implementation of a port PPP agreement in your jurisdiction? Must any specific law be passed in your jurisdiction for this?
For a joint venture involving foreign participants, the main government approvals and registrations include approval from or record-filing with the National Development and Reform Commission, the Ministry of Commerce, the State-owned Asset Supervision and Administration Commission, the State Administration of Foreign Exchange, and the State Administration for Market Regulation or their respective local branches.
No specific law is required to be passed for the implementation of a port public–private joint venture agreement in China.
Projects
On what basis are port projects in your jurisdiction typically implemented?
Port privatisation in China is typically implemented on a partial BOT basis. Local port corporations usually take responsibility for the construction of both the infrastructure facilities (such as the breakwaters, navigational aids, approach channels, quay walls, wharves and container yards) and the superstructure, and then transfer them to the joint venture company for management and operation for the duration of the joint venture term. Sometimes, the joint venture companies are also given the right to construct the superstructure. At the end of the joint venture term, the land, infrastructure facilities and all fixtures attached to the land are transferred back to the government. The movable assets are distributed to the joint venture partners in proportion to their equity ratios after settling all outstanding liabilities of the company.
Term length
Is there a minimum or maximum term for port PPPs in your jurisdiction? What is the average term?
In general, the minimum term for port PPPs is 10 years and the maximum term is 30 years. The term shall be determined according to factors such as the nature of the industry concerned, public demand for the products or services to be provided, duration of the project and investment payback period.
On what basis can the term be extended?
The term can be extended subject to agreement from the local port corporations and filing with relevant government authorities.
As for concession projects involving infrastructure and public utilities with large-scale investment and a long return cycle, the government or its authorised departments may enter into an agreement with the concession operators to extend the term of concession beyond the specified term.
Fee structures
What fee structures are used in your jurisdiction? Are they subject to indexation?
A private port investor will be required to make a capital contribution (usually in cash) in proportion to the ratio of its equity interest in the joint venture company. The cash capital contributions will then be used to pay the local port corporation for the value of the port facilities built, leased or transferred by the local port corporation and to the government for the right to use the land, sea area and coastline. The value of these facilities and rights must be determined by a qualified valuation institute and approved by the State-owned Asset Supervision and Administration Commission (or its local delegate).
Exclusivity
Does the government provide guarantees in relation to port PPPs or grant the port operator exclusivity?
The local port corporations usually do not grant any exclusivity to private port investors. Sometimes they may agree to give private port investors the first right of refusal to participate in future port projects within the specified geographic region.
Other incentives
Does the government or the port authority provide any other incentives to investors in ports?
Prior to 2011, foreign-invested terminal operating companies were entitled to a five-year income tax exemption, a five-year 50 per cent tax reduction and preferential tax treatments from their first income-generating year. Foreign-invested enterprises were also entitled to a value added tax refund for the procurement of domestic-manufactured equipment within their total investment amount. These incentives were modified with the unified tax treatments for foreign-invested and domestic enterprises.
Since 2011, all companies in China, including domestic and foreign-invested enterprises, have been subject to the same company tax rate of 25 per cent. Currently, the Chinese government provides industry-oriented or geographically focused tax incentives. These tax incentives aim to direct investments into those industries and projects encouraged and supported by the state. While foreign-invested port projects are still encouraged by the state, they are of a lower priority compared to high-tech or energy conservation projects.
