Foreign contractors and designers may set up Sino-foreign equity or co-operative joint ventures, and those already set up may continue to operate subject to certain conditions.WFOCEs and Sino-foreign construction joint ventures (collectively, “foreign investment construction enterprises” or “FICEs”) in their applications for skill qualification certificates (“SQC”) must comply with the same requirements as domestic counterparts. Foreign investment construction and engineering design enterprises (“FIDEs”) are subject to more onerous requirements than their domestic counterparts under the Design Regulations, as will be discussed below.
1. The Registered Foreign Contractor System
In 1994, MOC issued Tentative Measures on Administration of Foreign Enterprise Skill Qualification for Contracting Construction Works With in the Territory of China (“Decree No. 32”). Under it, a foreign contractor that intended to undertake construction work on a project in China had to obtain approval to carry out the work, which involved an assessment of its skill and experience. The types of work that a foreign contractor was allowed to undertake in China were limited to:
Projects entirely funded by foreign investment or grants.
Projects funded by loans provided by international financial institutions, such as the World Bank, and awarded through international open tenders.
Sino-foreign joint venture projects requiring technical expertise that Chinese contractors were unable to provide.
Projects funded by domestic sources but difficult for Chinese contractors to undertake independently. Foreign contractors were allowed to undertake these projects jointly with Chinese contractors with approval of construction authorities.
The approval process required the foreign contractor to apply for a skill qualification certificate, a project-specific business license and a project permit to undertake the project.
The Registered Foreign Contractor System has some advantages. The main one is flexibility. A foreign contractor is not required to maintain a significant presence in China unless it has a project there. The system is favored by foreign contractors that came to China because clients in their home countries set up businesses in China and engaged the contractors to carry out one-off projects, such as construction of a manufacturing plant or facility. Over the years, many foreign contractors have become familiar with the workings of this system, and the application process has become part and parcel of the paperwork needed to carry out a project in China.
But promulgation of the Construction Regulations means that as of 1 April 2004, foreign contractors no longer will be able to obtain approval to carry out business in China on a project-to-project basis. (There is one limited exception provided in the PRC Bidding Law for projects funded by foreign financial institutions such as the World Bank. If the terms of the loan require work to be carried out by foreign parties, these foreign parties may do so without setting up a FICE.) Any project awarded to a foreign contractor before 1 April 2004 and for which approval has been given may be completed, even if after April 1. (We understand from MOC that during the WTO negotiations, the governments of some countries, particularly Japan, lobbied strongly for the Registered Foreign Contractor System to be retained. This was not accepted by the Chinese government.)
2. Wholly Foreign Owned Construction Enterprises
Under the Construction Regulations, WFOCEs are restricted to contracting for the following types of work:
Projects entirely funded by foreign investment or grants.
Projects financed or funded entirely by foreign investment or grants.
Projects funded by international financial organizations and awarded through international tendering in accordance with provisions of the funding documents.
Sino-foreign joint venture projects in which the foreign investment is 50 percent or more or in which the foreign investment is less than 50 percent but, because of technical difficulties, Chinese contractors are unable to undertake the projects independently.
Domestically financed projects that, because of technical difficulties, Chinese contractors are unable to undertake independently and so long as such projects are jointly undertaken with WFOCEs.
There is one difference in the restrictions on the WFOCEs and Registered Foreign Contractors: WFOCEs can undertake Sino-foreign joint venture projects when the foreign investment is 50 percent or more, but Registered Foreign Contractors can undertake Sino-foreign joint venture projects only if Chinese contractors are unable to undertake the projects independently because of technical difficulties.
The Construction Regulations require WFOCEs to satisfy all the requirements that Chinese contractors of the same class must satisfy, including minimum amounts of registered capital, management and technical personnel requirements, number of projects to be carried out each year and the like, but their market is limited to the four categories of projects described above. These restrictions are likely to make WFOCEs unattractive to foreign contractors as vehicles for long-term investment although most foreign contractors now are interested only in tendering for the four permitted types of projects.
3. Skill Qualification of FICEs Other Relevant Laws and Regulations
The Construction Regulations do not spell out the detailed requirements that a FICE must satisfy to apply for a skill qualification. The Construction Regulations are intended to be read together with other laws and regulations relating to foreign investment and setting up construction enterprises in China. When deciding on the type of enterprise to set up and the class of skill qualification to seek, a foreign contractor should consider pertinent implementation measures and the following other regulations:
Regulations on Administration of Construction Enterprise Skill Qualifications (“Decree No. 87”) issued by MOC on 18 April 2001, which set out the requirements and procedures for application of skill qualifications to construction enterprises.
Implementation Opinion on the Regulations on Administration of Construction Enterprise Skill Qualifications issued by MOC on 28 May 2001, which explains how Decree No. 87 is to be implemented.
Construction Enterprise Skill Qualification Classification (“Skill Qualification Classifications”) issued by MOC on 20 April 2001, which sets out the qualifying standards for different classes of skill qualification.
Article 22 – The Appropriate Class of Skill Qualification
Under Decree No. 87, a construction enterprise applying for an SQC for the first time could obtain one in only the lowest class in the industry or discipline for which it was applying, and the applicant had to carry on business in that class for at least a year before it could apply for a higher skill qualification.
But, under the first paragraph of Article 22 of the Construction Regulations, a foreign contractor need not necessarily start with the lowest class of SQC. Rather, it can apply for an SQC based on its track record of projects in China as a properly registered foreign contractor under Decree No. 32. However, such a track record may be used only once to support an application to set up a FICE. The track record may not be used for subsequent applications.
For Sino-foreign joint ventures, the Implementation Measures expressly provide that the track records of both the foreign and Chinese parties be considered. However, it is unclear whether a Sino-foreign joint venture can qualify solely on the track record of the Chinese party if the foreign party has not performed projects in China. We are of the view that the answer should be yes, but the authorities probably will consider the extent of the interest of the foreign party in the joint venture.
The skill qualifications of existing Sino-foreign joint ventures will be subject to reassessment to ensure that they comply with the requirements of the Skill Qualification Classifications. This process started in 2001 before the Construction Regulations were issued.
In applying for an SQC, all contractors must employ a minimum number of qualified management, financial and technical personnel. The Implementation Measures provide that a FICE may employ “foreign service providers” (for example, by “importing” staff from other offices) to satisfy these requirements. However, they must satisfy conditions in the Skill Qualification Classifications and Implementation Measures, including educational qualifications, experience and residency requirements.
The Application Process
The Construction Regulations set out three steps for applying to establish a FICE:
Application for a certificate of approval from the local MOFTEC office or MOFCOM in Beijing.
Application for a business license from the State Industry Administration Commission (“SIAC”).
Application for a SQC from the relevant construction authority.
The third step is the most critical. If an applicant is unable to obtain an SQC, it is not allowed to undertake any work, even if it has obtained a business license. The Construction Regulations, therefore, provide for a preliminary examination of the application by the relevant construction authority before approval is given by the local MOFTEC office (or MOFCOM). If the applicant is unable to satisfy the construction authority at the preliminary examination, the local MOFTEC office or MOFCOM will not issue a certificate of approval.
We understand that even if the applicant is able to satisfy the construction authority at the preliminary examination stage, there is no guarantee that the SQC will be issued. Further conditions may be imposed before the SQC is issued. We understand that one of these conditions may be that the applicants pay in full its registered capital before issuance of the SQC. Foreign investment laws and regulations generally allow foreign investment enterprises to pay their registered capital in installments.