China's Municipal Public Utilities Welcomes Foreign Investments 2

Public utilities used to be a sector where foreign investments were severely restricted or totally forbidden. A new provisional rule (Rule) released by China's Construction Ministry (Ministry) seems to have made attempts toward breaking the ice. The new Rule outlines the general principles, forms, approval procedures and certain restrictions imposed in relation to foreign investments in public utilities sector.

General Principles

Article 4 of the Rule sets out the general principles on attracting foreign investments in public utilities. It says that the use of foreign capitals in public utilities must be in line with the State's industry policy and the middle and long term planning for construction projects and that the attraction of foreign direct investments should agree with the Guidelines for Foreign Investments (Guidelines) and the Directive Catalogue of Industries for Foreign Investments (Catalogue).

Forms of using foreign capitals

Article 3 provides that two forms are available for using foreign capitals: foreign loans and foreign direct investments (FDI). FDI further include Sino-foreign equity joint ventures, Sino-foreign contractual joint ventures, wholly foreign owned enterprises and purchase of Chinese stakes in an existing business by foreign investors. It appears that even 100% foreign ownership may be allowed.

Government Control

The Ministry and its local counterparts are the government authorities in charge of the planning of using foreign capitals in municipal public utilities sector. For FDI projects, usually it is up to MOFTEC or its local counterparts to review the relevant contract and articles and decide whether or not to approve. However, according to the Rule, prior to the MOFTEC review, the construction authorities at provincial level should give their written opinions first and then submit them to MOFTEC for their approval.

Certain Requirements and Restrictions

The foreign partner of the project usually should be identified through the public bidding process or through the comparison of offers from several foreign investors. The Chinese party should commission appropriate valuation agency to evaluate all the assets (whether tangible or intangible) injected by each party to the joint venture. The Chinese party should have control over at least 50% of the total capacity of water supply, heat supply or other public utilities in large and middle-sized cities. This provision may allow the foreign investor to own a controlling stake in particular joint ventures, which is indicated in Article 3 of the Rule, but foreign investors are prevented by this provision from holding a majority market share of the public utilities market of any particular large or middle-sized city.

For further information please contact Bao Chen (Beijing office) at [email protected] or on +8610 6590 0389.