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The main causes of disputes over Public-private partnership projects on the example of China

Обновлено 24.07.2024 06:01

 

The subject of this article is to consider the model of public-private partnership (PPP) in mainland China, to analyze the nature of the PPP agreement and the disputes arising in connection with it.

The study is based on the study of Chinese judicial and arbitration practice on PPP issues.

 

Keywords: public-private partnership, China, infrastructure, dispute, arbitration clause.

 

Public-private partnerships are a type of financing used worldwide that brings numerous benefits to both the State and society. The participation of a private operator eases the budget burden of the state and improves the quality of public services through the introduction of advanced technologies and management experience of individuals <1>.

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<1> Carrillo P., Robinson H., Foule P., Anumba S., Bushlagem D. Participation, barriers and opportunities in PFI: the experience of the United Kingdom // J. Manag. English 2008. Volume 24. Iss. 3. Pp. 138 - 145; Ismail S. The most important success factors for the implementation of public-private partnership (PPP) in Malaysia. Asia Pac // J. Manag. 2013. Vol. 5. Iss. 1. pp. 6-19; Danso A., Frimpong S., Ampratvum G., Oppong G.D., Osei-Kei R. Investigation of the role of traditional authorities in public management as stakeholders in PPP projects: a case study // Int. J. Proj. Manag. 2020. Volume 20. p. 628 - 641.

 

After the global financial crisis of 2008, many states relied on the development of PPP <2>. For example, PPP or private finance initiatives (PFI) are currently being considered as a new form of risk sharing in public infrastructure projects in the UK <3> and Australia <4>.

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<2> Osei-Kiy R., Chan A.P. Review of studies on the most important success factors of public-private partnership (PPP) projects from 1990 to 2013 // Int. J. Proj. Guide. 2015. Volume 33. Issue 6. pp. 1335 - 1346.

<3> Bing L., Akintoye A., Edwards P.J., Hardcastle S. Risk allocation in PPP construction projects/PFI in the UK // Int. J. Proj. Guide. 2005. Volume 23. Iss. 1. Pp. 25-35.

<4> KPMG. PPP procurement: An overview of barriers to competition and procurement efficiency in PPP projects.

 

China has unique political, economic, cultural and legal characteristics <5>. Until the 1980s, China adopted a highly centralized socialist economic system <6>. Infrastructure investments and construction were the exclusive responsibility of the state <7>. Since the implementation of the reform and opening-up policy in China after the 1980s, there has been a great demand for capital for the development of Chinese infrastructure, since public funds alone could not meet the large investment needs in construction. Thus, PPP was introduced in China to fill the funding gap. Unlike Western countries, China is more conservative. Due to the lack of advanced technologies and management in the Chinese construction industry <8>, as well as the lack of a mature PPP project management system, as evidenced by the absence of a national PPP law <9>, the development of this area in China has received great attention from practitioners and scientists from different countries.

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<5> Mu R., Jong M., Koppenjan J. The rise and decline of public-private partnership in China: an approach depending on the path of development // J. Transp. Geogr. 2011. Volume 19. Issue 4. pp. 794 - 806.

<6> Zhang S., Gao Yu., Feng Z., Sun W. The use of PPP in infrastructure development in China: institutional analysis and consequences // Int. J. Proj. Guide. 2015. Volume 33. Iss. 3. Pp. 497 - 509.

<7> KPMG. PPP procurement: an overview of barriers to competition and procurement efficiency in PPP projects.

<8> Wang H., Chen Yu., Liu B., Shen Yu., Song H. The indicator of total factor productivity in the construction industry and the analysis of its spatial differences: on the example of China // Constr. Guide. Econ. 2013. Vol. 31. Iss. 10. P. 1059 - 1071.

<9> Chen S., Doloi H. The use of BOTS in China: driving and hindering factors // Int. J. Proj. Manag. 2008. Volume 26. Issue 4. pp. 388-398.

 

In mainland China, PPP is defined as a partnership between government and private capital.

The district or higher-level government is responsible for the implementation of PPP projects on its territory. Private capital is the capital of domestic and foreign legal entities, which can be state-owned enterprises, private enterprises, enterprises of mixed ownership and other types of enterprises.

China has gone through three stages on the way to adopting a PPP model <10>.

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<10> Zhong Lun. A general introduction to public-private partnerships in China.

 

The first stage occurred in the 1990s and began with the construction of power plants according to the "construction - operation - transmission" model, followed by investments in the construction of toll roads.

The second stage began with the significant publication in 2004 by the Ministry of Construction of Administrative Rules concerning the management of concessions, including the models "construction - operation - transfer", "transfer - operation - transfer", "construction - ownership - operation". These models have received official recognition in the field of public services, such as roads, water supply facilities, sewage or waste treatment facilities and gas stations.

At the beginning of the third stage, 2010-2014, there was a surge in PPP growth in China. At the end of 2013, the Chinese government began to promote PPPs in other areas related to public products and services. It was recommended that various types of PPPs be used to provide public services in a larger number of sectors, including energy, transport, water management, environmental protection, agriculture, forestry, science and technology, affordable housing, treatment, healthcare, elderly care, education, culture, etc.

The requirements for PPP investments have been constantly growing. Thus, according to the National Management Database of the Integrated Information Platform for PPP Projects of the Ministry of Finance, as of the first half of 2020, there were 9,062 PPP projects with an investment volume of 14.8 trillion yuan in the database <11>.

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<11> Cai Fuya, Mo Jiaxin, Xie Lizi and Ye Hao. A study on the efficiency management of PPP projects in China.

 

In 2019, PPP received moderate development in China. Since its popularization in China in 2014, the PPP model has been widely used in various areas of infrastructure and public services after more than three years of active growth and rapid development. At the same time, however, problems such as the abuse of PPPs, the issuance of illegal pseudo-PPP guarantees and non-standard problems such as exceeding the red line of financial expenses have revealed a greater hidden risk in PPP projects.

Many ministries and departments expected that 2017 and 2018 would be years of PPP reform and standards development to address these problems, prevent and eliminate major risks, and promote sustainable PPP development in China. The Ministry of Finance, the National Development and Reform Commission, the State Assets Supervision and Management Commission and other agencies have consistently issued a number of regulatory documents and management requirements for PPPs, as well as carried out the correction and management of PPP projects.

In 2019, the Ministry of Finance and the National Development and Reform Commission continued to further correct and standardize PPP projects. It is noteworthy that against the background of the reform, on November 27, 2019, the Supreme People's Court issued a ruling on some issues of consideration of cases on administrative agreements, in which it defined the PPP agreement as an administrative agreement subject to administrative procedure. This definition contradicts the one given by the Ministry of Finance, which defines the state as a party to the PPP agreement, which is a civil law entity equal to a private partner <12>.

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<12> Zhong Lung. A general introduction to public-private partnerships in China.

 

On March 7, 2019, the Ministry of Finance issued an Executive Opinion of the Ministry of Finance on promoting the regulated development of public-private partnerships to further regulate and promote the implementation of PPP projects <13>. It stipulates that PPP projects should establish a payment mechanism that is fully interrelated with the results and effectiveness of the project and should not fix or fix the government's spending obligations by lowering the valuation standard. Projects paid by the state, in an area where financial expenditure obligations exceed 5%, projects paid by the state that do not meet the above-mentioned restrictive conditions, being linked and designed as a project paid by users, paid by a small number of users, or projects in which the share of payment by users is less than 10%, are not implemented.

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<13> Ministry of Finance of the People's Republic of China (PRC) (2018). Recommendations for the implementation of the practice of promoting the regulated development of public-private partnerships. Cai Jin (2019) No. 10.

 

On June 21, 2019, the National Development and Reform Commission issued a Circular from the National Development and Reform Commission on tightening the management of investments and construction of public-private partnership projects in accordance with laws and regulations <14>. It stipulates that all projects that intend to adopt the PPP model must undergo a feasibility study, and it intends to administer all PPP projects through the National Online Platform for the Examination, Approval and Regulation of Investment Projects, which means that each PPP project will be monitored and managed by the Ministry of Finance and the National Development and Reform Commission.

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<14> Zhong Lun. A general introduction to public-private partnerships in China.

 

The PPP policy in 2019-2023 has largely become a continuation and development of the policy of 2017 and 2018. Standardized management leads to better development. However, standardized management at the same time leads to strict and rigid regulation and administration, and this in some way hinders the development and innovation of PPP in China.

According to the Law on Administrative Disputes and the Explanation of the Supreme People's Court to it, the PPP agreement is an administrative agreement, and lawsuits against the State's failure to comply with the PPP agreement, or illegal modification, or early termination of the PPP agreement must be considered by the court in accordance with the Law on Administrative Disputes.

In the relevant PPP regulations of the Ministry of Finance and the National Development and Reform Commission, if the project implementation agency, the winning bidder and private capital have disagreements about the execution of the PPP project contract and cannot reach consensus through consultations, they can apply to arbitration or file a civil lawsuit.

The Regulation on PPP for Infrastructure and Utilities provides:

"Disputes arising in connection with the implementation of the cooperative project agreement may be submitted to arbitration or the people's court in accordance with the law... With regard to specific administrative actions related to the implementation, supervision and management of joint projects undertaken by the relevant government agencies, if the private capital side believes that they violated its legitimate rights and interests, it has the right to make representations... and may initiate an administrative retrial or administrative judicial proceedings in accordance with the law" <15>.

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<15> Public-private partnerships in urbanization in the People's Republic of China. Mandaluyong City, Philippines: Asian Development Bank, 2014.

 

Of particular interest is the ruling on the arbitrability of the PPP agreement, adopted by the Beijing Intermediate People's Court No. 4 in 2020. <16> The People's Government of the district (Party A) and an industrial limited liability company (Party B) signed an agreement on the international tourist resort project, agreeing to adopt the PPP model. It was agreed that Party A would be primarily responsible for overseeing the project and ensuring external conditions such as land use rights, and Party B would register and establish a project company responsible for financing, construction and operation of the project.

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<16> Zhou Elvis. Judgment assesses nature of PPP agreements // China business law journal. 25 January 2023.

 

In 2019, in accordance with Article 20.2 of the PPP agreement, Party A appealed to arbitration on the grounds that Party B failed to restore its original condition and compensate for losses after termination of the agreement.

Party B applied to the court for invalidation of the arbitration clause under the agreement. Party B argued that, in accordance with Article 1 of the judicial interpretation, an agreement concluded by an administrative body with any citizen, legal entity or other organization through negotiations, containing rights and obligations in accordance with administrative law, would be an administrative agreement in accordance with Administrative Procedure Law. Thus, the PPP agreement was an administrative agreement for the following reasons.

First, it stated that the obligations of Party A include: completion of government approval procedures for the creation, planning and development of the project; requisition of land, resettlement and compensation within the framework of the project; organization of the construction index of the project to ensure its smooth development; allocation of land in a timely and legal manner depending on the progress and location of the project, all of which fall under the functions and powers of the administrative body provided by law.

Secondly, the PPP agreement concerned the development of a large-scale ecotourism and leisure project, which made it a "state concession project" with the nature of a public service. Thus, the PPP agreement was an administrative agreement, and according to Article 26 of the judicial interpretation, if an arbitration clause is provided for in the administrative agreement, it must be declared invalid.

Party A, on the other hand, argued that the PPP agreement was a civil contract. An agreement in which one party is an administrative body is not necessarily an administrative agreement, and in the case of market transactions, the state will have the same status as any natural or legal person; the agreement was intended to implement not administrative, but economic significance, and its essence was to establish equal legal relations focused on property rights; In terms of content, the agreement did not concern the rights and obligations of the parties in accordance with administrative law, and their relationship was not an administrative management relationship. Their contract is an act within the framework of a market transaction, and the principle of compensation of equal value is appropriate here, it should be considered as a civil contract; and the content of the PPP agreement was the return of the money paid, which gave the dispute obvious civil characteristics.

The Court, considering the case, raised the following main questions:

- was the PPP agreement an administrative agreement;

- whether his arbitration clause is valid.

As a result, the court determined that the agreement is a civil contract and the arbitration clause is valid. The court based its conclusions on the following.

First, the question of whether the PPP agreement is administrative and whether the dispute is administrative should be considered in accordance with the specific content of the agreement, the disputed issues between the parties and the requirements of arbitration.

Secondly, from the point of view of the content of the PPP agreement, Party B enjoyed full autonomy of will when concluding the agreement and discussing its provisions. The agreement is based on the principles of equality, voluntariness and equal compensation. The clauses on the rights and obligations of the parties and compensation for breach of contract demonstrated the consensus reached by the parties through negotiations. Their rights and obligations were civil, not administrative in nature. Thus, the PPP agreement was considered a civil and commercial agreement between the parties having equal status in nature, and not an administrative agreement.

Thirdly, with regard to the arbitration claims submitted by Party A to the arbitration institution and disputed issues between the parties, the statement did not relate to any administrative act of the administrative body. As for the dispute, both parties have equal legal status and can apply to arbitration.

Thus, the dispute was an arbitration one and was not a dispute that should be considered by an administrative body in accordance with the law.

This case is indicative of the fact that PPP agreements in China are not necessarily administrative and only those that comply with the provisions of Article 1 of the judicial interpretation are considered such.

In the above case, the motives of the court were also revealed in determining whether the PPP agreement is administrative. Courts usually make a decision taking into account two aspects: the specific content of the PPP agreement, as well as the subject matter of the dispute and the arbitration claims of the parties. With regard to the first, the courts mainly consider whether the administrative body and its counterparty have equal status, as well as whether the rights and obligations established by the agreement fall under administrative law. With regard to the latter, it is extremely important to determine whether the disputed case and arbitration claims are directed at any specific administrative act of an administrative body.

Zhong Lun noted in 2018 that "looking back... with the tightening of the PPP regulatory policy, this area in China has slowed down to a more stable level." <17> She predicted that in the future PPP projects will be implemented more slowly, the number of disputes over PPP projects will increase, and not only because of violations of the terms of contracts, but also because of the conflict of departments in regulating the PPP sphere. She placed high hopes on the Provision on PPP in the field of infrastructure and public services.

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<17> Zhong Lun. A general introduction to public-private partnerships in China.

 

Disputes are inevitable in PPP projects and in practice lead to large losses of both time and money. If you gain a deep understanding of the sources of the dispute in advance, the process of implementing PPP projects can become more stable and smooth.

The results of the study of court and arbitration cases on PPP issues show that the main (decisive) causes of disputes on them are:

- violation of contracts and/or refusal to fulfill them;

- lack of knowledge and experience in the PPP market;

- unreasonable (unreasonable) risk allocation.

The information published by the Chinese Center for Public-Private Partnership (CPPPC) indicates that in October 2021, 10 103 PPP projects were implemented in the country with a total investment of 15.8 trillion yuan <18>.

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<18> China Public Private Partnerships Center (CCPPC). National PPP Information Platform.

 

According to China Judgments Online, over the period from 2013 to 2022, more than 1,500 cases related to PPP projects were resolved through the courts in China <19>. Nevertheless, the number of lawsuits continues to grow annually <20>. In our opinion, this increase in disputes is associated, in particular, with the complexity of financing PPP projects, especially construction projects <21>, a multitude of stakeholders, each of whom pursues its own interests and goals <22>, long-term validity of PPP contracts <23>, during the execution of which unexpected changes occur for investors in Chinese legislation, tariff changes, changes in market demand, acts of nationalization and expropriation.

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<19> China Judgements Online.

<20> Zheng X., Liu Y., Jiang J., Thomas L.M., Su N. Predicting the litigation outcome of PPP project disputes between public authority and private partner using an ensemble model // J. Bus. Econ. Manag. 2021. Vol. 22. Iss. 2. P. 320 - 345.

<21> Osei-Kyei R., Chan A.P.C. Developing transport infrastructure in Sub-Saharan Africa through public-private partnerships: Policy practice and implications // Transp. Rev. 2016. Vol. 36. P. 170 - 186.

<22> Grimsey D., Lewis M.K. Evaluating the risks of public private partnerships for infrastructure projects // Int. J. Proj. Manag. 2002. Vol. 20. Iss. 2. P. 107 - 118; Zheng J., Roehrich J.K., Lewis M.A. The dynamics of contractual and relational governance: Evidence from long-term public-private procurement arrangements // J. Purch. Supply Manag. 2008. Vol. 14. Iss. 1. P. 43 - 54.

<23> Echternach M., Pellerin R., Joblot L. Litigation management rocess in construction industry // Procedia Comput. Sci. 2021. Vol. 181. P. 678 - 684.

 

Another reason for the dispute is, in the fair opinion of analyst Cooper (Cooper D.F.), "unreasonable risk allocation" <24>. Ideally, risks should be distributed between the parties that are best able to manage them and at the lowest cost. Analyst Zheng (Ms. Xiaoxiao Zheng) and her colleagues give an example of the implementation of a PPP project for the Yichang waste-fired power plant. The contract stipulated that the private partner was responsible for all project approval and approval procedures <25>. According to Chinese colleagues, "this is unfair, since it is assumed that the responsibility for the risk of approval lies with the state." Undoubtedly, if both sides of the contract are inexperienced, it is easy to make a wrong assessment of their ability to handle risk.

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<24> Cooper D.F., Grey S., Raymond G., Walker P. Project Risk Management Guidelines: Managing Risk in Large Projects and Complex Procurements; Wiley: Chichester, UK, 2005.

<25> Xiaoxiao Zheng, Yisheng Liu, Ruijiao Sun, Jinzhao Tian and Qi Yu. Understanding the Decisive Causes of PPP Project Disputes in China.

 

In our opinion, in order to minimize the number of disputes, both public and private partners must strictly comply with the contract and fulfill their obligations. It is necessary to maintain a balance between the interests of the public and private sectors.