Until July 2008, there was no national legislation that governed public utilities projects and more specifically, wastewater treatment projects, financed under the BOT model. In July 2008, the Shenzhen Municipal Government promulgated and implemented China's first set of local rules for build-operate-transfer ("BOT") wastewater treatment projects, the Shenzhen Municipal Administrative Rules for BOT Wastewater Treatment Projects «????????BOT??????»("Administrative Rules"). In light of the developments since the enactment of the Administrative Rules, the following seeks to provide an outline of the local framework governing BOT wastewater treatment projects in Shenzhen and the impact on the future development of BOT public utilities projects.
Before the mid-1990s, local city governments monopolised the urban water and wastewater facilities in China. Until the turn of the century, the government was still heavily subsidising the wastewater treatment sector in China. In an effort to improve the quality of the urban environment and achieve sustainable socio-economic development, the Ministry of Environmental Protection, the then Ministry of Construction and the then State Planning Commission and State Development Planning Commission jointly issued an opinion to expedite the development of the waste management and wastewater treatment industry1. It seeks to develop the industry by introducing reforms to the tariff mechanism and management system. In particular, it encourages the concession-based approach such as the BOT model of engaging private investors in developing the industry.
Under the Administrative Rules, the Shenzhen Municipal Water Affairs Bureau ("Water Affairs Bureau") is authorised to grant concessions to project companies that are selected to become operators of BOT wastewater treatment projects in Shenzhen.
The Administrative Rules detail:
- The management structure for BOT projects
- The minimum criteria for project bidders
- The project tendering procedures
- The rights and obligations of the parties involved
Since the enactment of the Administrative Rules, three projects consisting of ten wastewater treatment facilities in the districts of Baoan and Longgang are being developed under the BOT model. The operator selected for one of the projects located in Longgang is an equity joint venture company involving foreign investment. Construction work for the projects is scheduled to finish by end of next year. The term of concession for these project is 22 years and the total investment is over RMB1.8 billion.
The Management Structure
The Water Affairs Bureau is responsible for managing all the BOT wastewater treatment projects in Shenzhen. It cooperates with other municipal government departments, such as the Development and Reform Commission for project establishment and approval, the Urban Planning Commission on mid-to long-term planning of wastewater treatment facilities, the Bureau of Land and Resources on land use planning for the wastewater treatment facilities and the Environmental Protection Bureau in certifying the standard of treated wastewater.
The Requirements for Project Bidders
Project bidders must possess solid investment and financing capability, have a good corporate reputation and experience in the financing, construction and management of wastewater treatment facilities. Bidders are also required to obtain a certificate of qualification for the operation of environmental pollution control facilities issued by the Ministry of Environmental Protection.
Tender Procedures and the Concession
Upon the approval by the Municipal Development and Reform Commission for the establishment of a BOT wastewater treatment project, the operator for the project would then be selected through public bidding. The selected bidder would enter into a concession agreement with the Water Affairs Bureau ("Concession Agreement") within the period of time specified in the tender documents. The term of the concession is determined by the project's return on investment and the revenue generated by the operator. The term shall not exceed thirty years, but it could be extended upon the approval of the Municipal Government six months prior to the expiry of the concession.
Rights and Obligations of the Parties
Under the Concession Agreement, the project operator would be responsible for financing and constructing the wastewater treatment facilities. Throughout the term of the concession, the Municipal Government owns the land and the fixtures on the land, including the wastewater treatment facilities constructed by the project operator. The project operator holds operational and management rights of the wastewater facilities and is allowed to use the land without any payment obligations. The project operator could profit from the project's return on investment. The mechanism for determining the tariff would be stipulated under the Concession Agreement. Upon the approval by the Water Affairs Bureau, the project operator may pledge the cash flow from the project as security to obtain project finance. The project operator is not allowed to transfer its shares within the first three years of the project's commercial operation, and is only allowed to transfer its shares with the approval of the Municipal Government after three years. Upon expiry of the concession, the project operator would transfer the project and facilities to the Municipal Government or other entities designated by the Municipal Government without any payment obligations.
The Administrative Rules are the first of its kind in China. Although it is only applicable for BOT wastewater treatment projects in Shenzhen, the Administrative Rules provide an insight on how public utilities projects in China could be operated under the BOT model. With the gradual acceptance of financing public utilities projects under the BOT model in China, we would expect further legislation to be enacted to provide further guidance on the management of BOT public utilities projects.
For inquiries related to this Client Alert, please contact:
Jack Su ([email protected])