A team of researchers from the Jiangsu Higher People’s Court #1 Civil Division recently published an article on difficult legal issues relating to public-private partnerships (literally government/social capital cooperation) (PPP) in the Journal of Law Application (the Journal) (法律适用), # 17, 2017.  The Journal is one of China’s core legal journals (among the most prestigious academic law journals).  The National Judges College is affiliated with the Supreme People’s Court (SPC).  

The data on which the researchers’ analysis was based was the results of a search of the official Supreme People’s Court (SPC) database (裁判文书网),  using the keywords  “BOT” and  “PPP”.   Their search (end date April 30, 2017) found 493 BOT-related decisions and 20 PPP-related decisions.  The article relates to both BOT and PPP projects and uses the term PPP to include both.

Data on PPP/BOT disputes

1.  BOT/PPP disputes are increasing

   1. BOT cases

	2013	2014	2015	2016
Concluded cases	21	115	107	183

From 2013 to 2016, BOT disputes increased 71%.

2. PPP cases: not large number currently but increasing yearly.

	2015	2016
Cases# that been concluded	4	16

Wide range of industries are involved in PPP disputes

China’s official PPP projects include a large number of industries such as energy, transportation, water conservancy construction, etc (can be found on http://tzs.ndrc.gov.cn/zttp/PPPxmk/xmk/). PPP disputes have largely focused on heating, sewage treatment, road engineering, station project, etc.

Type of PPP cases 

BOT cases:

Type of cases	Civil Cases	Administrative Cases	Criminal Cases
	85.54%	2.7%	11.76%

Civil cases mainly include contract, property, tort and financial disputes, among which contract disputes account for 78.22%.

Type of the contract cases (78.22%)	Construction Project dispute	Heating contract	Loan	Lease	Sales
	21.61%	13.92%	13.19%	7.69%	7.33%

PPP cases:

Type of cases	Civil Case	Administrative Cases	Criminal Cases
#	11	5	4

Most civil cases are construction project disputes.

 parties to PPP cases

PPP disputes involve multiple legal relationships and parties, including the government, private investors, the project company (SPV), financiers, guarantee companies, insurance companies, contractors, operators, raw material purchaser, etc. Also, with the implementation of the One Belt And One Road” strategy, disputes arising from overseas PPP projects have gradually emerged.

New issues are emerging

Because PPP is a newly-developing area, many problems are gradually emerging. New problems will continue to increase, including interpretation of the PPP contract terms, the application of the “changed circumstances” doctrine [under the Contract Law], the government’s repurchasing issue,  and the evaluation of project quality. In December 2016, National Development and Reform Commission (NDRC) and China Securities Regulatory Commission (CSRC) released Notice of the Ministry of Finance, the People’s Bank of China, and the China Securities Regulatory Commission on Issues concerning Regulating the Asset Securitization of Public-Private-Partnership Projects, which however, still cannot solve some key legal issues such as asset independence and bankruptcy isolation in terms of the insufficient SPV legislation.

Difficulties in hearing PPP cases

For a long time, the government has been used to the role of “administrator”, usually solving disputes through administrative mechanisms. It has not cared much about contracts in which it is on an equal footing with private entities. Facing PPP disputes, private entities may take irrational and non-legal means to protect their rights, resulting in further aggravated conflicts and sometimes mass incidents.

There are difficulties hearing PPP cases, considering the insufficient (PPP 立法供给不足), non-specific (没有专门的PPP法律和行政法规) and incoherent legislation (没有明确的法律规则参考). Also, courts need to consider many aspects such as the legal, economic and social impacts.

Legal risks in implementing PPP projects

Although the central and local governments are promoting PPP projects, there is virtually no related legislation. Although there are relatively few PPP disputes now, that will change as government continues to promote PPP.   Because legislation governing PPP projects is insufficient the compliance risk is inevitable.  Major legislation lacks special provisions regulating PPP:

• Nothing in the Budget Law (中华人民共和国预算法);
• Nothing in the Regulation on the Implementation of the Government Procurement Law (中华人民共和国政府采购法实施条例)
• Nothing in the Bidding Law of the People’s Republic of China (中华人民共和国招标投标法)

Although the State Council has enacted guidelines on promoting PPP projects (Circular of the General Office of the State Council on Guiding Opinions on Promoting the Public-Private Partnership Mode in the Public Service Fields (关于在公共服务领域推广政府和社会资本合作模式指导意见)  they are only administrative regulations and are insufficient to protect the private sector. Meanwhile, there are conflicting policies from different national ministries and departments, which in the end not only affects the standing of PPPs and fairness, also causes high administrative costs and low work efficiency.  It is unclear what PPP is and the relationship between PPP projects and others, such concessions. Therefore there are many disagreements concerning whether a project should be considered a PPP project and what the rights of the various parties should be.

The competent authority & management mechanism for PPPs are  unclear

At present, China lacks a unified institution to govern PPP projects.  Although the state has designated the NDRC to take the lead on traditional basic infrastructure PPP projects and the Ministry of Finance (MOF) to take the lead on public services PPP projects, in reality there is crossover between the two types of projects and no clear line between them.  These projects involve  NDRC, MOF, and the authorities in charge of the relevant industry and in this situation with projects involving multiple approvals, there are no clear rules on the division of authority among authorities, and between the central and local authorities, the procedure for obtaining approvals, and whether approvals can be consolidated.

Legal infrastructure for PPP projects

PPP projects involve multiple legal fields such as tax, land, finance, insurance, and construction.  Because a coherent and detailed procedure is lacking for PPP projects, it will lead to legal risks afterwards such as whether PPP projects have tax breaks, whether the land used in a PPP project needs to be put out for bidding separately.

III. How the courts deal with PPP cases

General principles in hearing PPP cases:

1. Balance strict application of law and promoting transactions; and
2. Uphold the equal protection of property rights–balance the interests of the government and social capital (private sector), different parties’ interests, and the interests of the public.

Nature of PPP agreements

There are two schools of thought on the nature of PPP agreements, administrative v. civil agreements.

• Administrative law dispute: In view of Article 11 (“Agreements having content on Administrative Law rights and obligations negotiated and concluded by Administrative organs and citizens, legal persons or other organizations for the purpose of realizing public interest or administrative management goals, are “administrative agreements” as provided for in item (11) of the first paragraph of article 12 of the Administrative Litigation Law”) of the Interpretation of the Supreme People’s Court on Several Issues concerning the Application of the Administrative Litigation LawInterpretation of the Supreme People’s Court on Several Issues concerning the Application of the Administrative Litigation Law (最高人民法院关于适用〈中华人民共和国行政诉讼法〉若干问题的解释) (ALL Judicial Interpretation), a PPP contract is an administrative agreement and should be accepted as an administrative case.
• Civil law dispute: because a PPP agreement is a contract between two parties, and although one party is the government, the substance of the contract is the cooperation in project development, whose negotiation shall follow the principle of equality, voluntariness and equivalency. Therefore there is no administrative force in such contract. (Case support: 北京北方电联电力工程有限责任公司诉乌鲁木齐交通局BOT纠纷案 – where the SPC holds that the contract is a civil dispute。
• Authors’ view: with reference to Taiwan legislation, we need to distinguish the PPP agreements to decide its nature
  • Disputes concerning administrative functions such as administrative planning, licensing, punishment, management or supervision, etc, should be considered to be administrative law cases. It is supported by Article 12 of the Administrative Litigation Law and the ALL Judicial Interpretation.
  • Disputes concerning pure civil rights and obligations under a contract shall be pure contract disputes. In terms of the performance of contract obligation, avoidance of the contract and termination of the contract, these are based on parties’ agreement, not on the administrative force, therefore the dispute parties can bring arbitration or a civil lawsuit. (Case support: 河南新陵公路建设投资有限公司诉辉县市人民政府PPP 纠纷案 – where the SPC adopted this view – available at: http://caseshare.cn/full/127272850.html).

Validity of the PPP contract?

What if the parties argue that the PPP agreement is invalid since it may violate existing laws and administrative regulations?

• Qualification for private sector (companies) to enter into a PPP contract
  • One view is that private sector must be qualified for construction, otherwise the PPP agreement will be invalid.
  • Another view is that private sector does not need construction qualifications, and the PPP is not invalid.
  • Authors’ view: we need to distinguish. If the PPP contract contains project construction, then the private sector shall have the corresponding construction qualification. If the contract does not contain such project construction, then the private sector does not necessarily need to have the construction qualification.
• Problems in the bidding process
  • NDRC has released guidelines for PPP project operations – Notice of the National Development and Reform Commission on Issuing the Guiding Rules for Implementing Public-Private Partnership Projects in Traditional Infrastructure Fields (国家发展改革委关于印发《传统基础设施领域实施政府和社会资本合作项目工作导则》的通知), which provides that the private sector should be selected via relevant bidding process. Then what if the PPP contract which includes the construction project did not go through the bidding process, will that lead the invalidity of such contract?
  • Authors’ view: if the contract contains construction work, and such the contract is legally required to go through the tender process, then without such process, the PPP contract will be invalid.
• land issues

Many PPP projects are connected with land use. What if the land was not subject to a tendering process? Will that invalidate the PPP agreement?

Authors’ view: this is controversial in practice. According to the regulation enacted by Ministry of Land and Resources 国土资源部办公厅关于印发《产业用地政策实施工作指引》的通知国土资源部办公厅关于印发《产业用地政策实施工作指引》的通知, if the PPP project concerns land use, then the process of bidding and the process of authorizing land use can be combined, therefore the courts can confirm the validity of the PPP agreement.

Enforcing government undertakings

Some local governments will make undertakings to provide certain benefits or rewards to the private sector participants. What is the legal effect of that commitment?

• One view holds that the promise is an administrative promise and should be recognized as effective.
• Another view is that the govern commitment is ineffective since it goes beyond the government’s powers.

Authors’ view: we need to distinguish different situations. If the government’s benefits or rewards are in violation of law, administrative regulations and mandatory regulations, such as in violation of tax laws or result in the loss of state-owned assets, then the undertaking is invalid. If the commitment does not violate mandatory laws or against the public interest, such commitment should be valid based on the principle of estoppel.

Issues related to PPP contracts

1. Relationship between the PPP agreement and the construction contract
   • In PPP projects, the government signs the PPP project agreement with the private sector entity, and the SPV and the third party (which is designated or appointed by the private sector) signs the project construction contract. What is the relationship between these two contracts? When the PPP agreement is terminated, how do we deal with financial settlement under the construction contract?
     • One view is that in the construction contract is one part of the performance under the PPP agreement, therefore, the project construction contract is linked to the PPP agreement.
     • Another view is that the construction contract and the PPP contract have an actual connection but involve different legal relationships.
     • Authors’ view: it is necessary to see whether the PPP agreement has specifically agreed upon certain terms governing the construction contract. If not, then these two contracts shall be deemed to be independent of each other.
2.  Bid bond issues

• Generally, the government requires the private sector entity to provide a bond for its bid. The issue is whether the bid bond is governed by the arbitration agreement (in the main agreement).
• One view holds that the bid bond is linked to the main contract and the arbitration clause applies to the bid bond.
• Another view is that the indemnity obligation of the guarantor is primary and therefore not related to the main agreement, therefore the arbitration agreement is inapplicable.
• Authors’ view: the issue of tender guarantee payment, it is related to the main contract, therefore it should be subject to the arbitration clause in the contract if there is any.

Project employer issues

• Since it is the government and the private sector signed the PPP contract, and it is the project company and the contractor have signed the construction contract, then who is the project employer under the construction contract?
  • One view holds that the government and private sector entity are the project employers.
  • Another view is that the project company is the project employer.
  • Authors’ view: the PPP contract and construction contract are independent contracts, therefore under the construction contract, the project company should be recognized as the project employer.

 pledge of the interest in the PPP

Can a concessionaire’s rights be pledged? Considering the SPC’s guiding case No.53, the usufruct (benefits from the use rights) in a concession may be pledged and can be used as accounts receivable in the pledge registration

• Authors’ view: the pledge should be recognized as effective under SPC’s guiding case No. 53.

Dispute settlement mechanism in PPP disputes

• What if the parties agree to dispute resolution by arbitration or civil action in the PPP agreement?
  • Authors’ view: as discussed above, if the issue is governed under administrative law, then even if the parties agreed to arbitration or civil litigation in the PPP agreement, the agreement will not be binding and the parties must rely on administrative remedies. If the dispute is a pure contract issue, then the dispute resolution agreement between the parties shall be valid.
• What if the parties agreed on jurisdiction?
  • Author’s view: if the PPP agreement is relating to the project construction, according to Article 28 of the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law  (最高人民法院关于适用〈中华人民共和国民事诉讼法〉若干问题的解释, the case should be heard in the place of the location of the project. If the PPP agreement does not involve a construction project, then the agreement between the parties concerning the jurisdiction can be valid.

Other Suggestions

• Promote PPP legislation and create an the overall framework of PPP system: China should speed up the process of PPP legislation, which can learn from Legislative Guide on Privately Financed Infrastructure Projects enacted by United Nations Commission on International Trade Law, PPP Reference Guide enacted by the World Bank, PPP Handbook enacted by Asian Development Bank (ADB).
• Clarify the PPP management mechanism and clarify the responsibilities of all parties.
• Improve the supporting mechanisms for PPP projects.

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Many thanks to my Peking University School of Transnational Law research assistant Zhu Dianmeng (Grace) for her work on this.