With the widespread use of the PPP model in China, financing channels for PPP projects have also increasingly diversified. Bank, trust, fund and insurance channels of capital have all rushed onto the stage of project financing. Subject to Article 43 of the Commercial Bank Law, banks, as the traditional big brother of financing, have always played the role of lender. In practice, the opinions as to whether they can participate in the bidding on, and contributing capital to, PPP projects as private investors have been mixed.
A PPP project we recently advised on was called into question on a number of occasions because a commercial bank participated in the bidding as an investor and due to a difference of opinion among the parties on the understanding of Article 43 of the Commercial Bank Law. With respect to the project, the public party expressly stated in the bid invitation documents that “a bidder may be a consortium. One of the other members of the consortium may be a financial institution”. However, when a consortium composed of an investor and a certain commercial bank participated in the bid for the project and was awarded the contract, one entity raised questions with the public party, arguing that the participation by a commercial bank in the invitation of bids for a PPP project and the making of a capital contribution by it to the project company violates Article 43, and should therefore be deemed invalid.
The authors contend that although Article 43 contains the limiting provision that “a commercial bank may not engage in trust investment nor may it invest in non-bank financial institutions or enterprises in the People’s Republic of China”, it also specifies “unless otherwise provided by the state”. Clearly, from the entirety of the provision, it can be seen that a commercial bank not being able to engage in trust investment nor to invest in non-bank financial institutions or enterprises is a general principle only, and should the state provide otherwise, there can be exceptions.
“Otherwise provided by the state” includes both provisions of laws and administrative regulations as well as regulations of the ministerial level authorities of the State Council. In fact, since the promulgation of the Commercial Bank Law in 2003, China’s economic and financial sectors have undergone frequent reforms, resulting in major changes, and relevant ministerial level authorities of the State Council have issued a series of “other provisions of the state”:
In 2014, the Ministry of Finance issued the Notice on the Issuance of the Guidelines on the Public-Private Partnership Model (for Trial Implementation). Article 13 thereof specifies that, “the project implementing authority shall prepare the preliminary qualification review documents as required for the project, publish a preliminary qualification review announcement and invite private parties and the financial institutions cooperating with them to participate in the preliminary review of qualifications so as to ascertain whether the project can attract the interest of private parties and give rise to sufficient competition, and submit the assessment report on the preliminary review of qualifications to the finance authority for the record.” Based on this, the Ministry of Finance has expressly stated that a private party can assemble a consortium with a financial institution to participate in the bidding activities for a project. This is a valid supplementation to the Commercial Bank Law that has now been issued and implemented for more than 10 years and undoubtedly falls within the circumstance of “otherwise provided by the state”.
Furthermore, Article 6 of the Guidelines for Business Cooperation Between Banks and Trust Companies issued and implemented in 2008 and Article 6 of the Notice on Making the Interbank Business of Financial Institutions Compliant, issued and implemented in 2014 by the CBRC, also expressly provide that banks may make investments within their industry and purchase trust investment plans; and they can pay the proceeds from wealth management products into trusts for management, application and disposal of by trust companies in accordance with the trust documents. This signifies that banks can, through the purchase of trust investment plans, invest funds in projects through trust investment companies. Such an investment method is a lawful investment method recognized by the CBRC.
Accordingly, investment in a PPP project by a commercial bank in accordance with “other provisions” of the Ministry of Finance and the CBRC not only does not violate Article 43 of the Commercial Bank Law but complies with relevant requirements of the Ministry of Finance and the CBRC. In addition to the trust channel, pursuant to the provision of Article 4 of the Administrative Measures for the Pilot Project for the Establishment of Fund Management Companies by Commercial Banks, issued and implemented by the People’s Bank of China, the CBRC and the CSRC in 2005, specifying that “a commercial bank may establish a fund management company to offer and manage funds”, a commercial bank may additionally lawfully invest in a PPP project by way of a fund.
Flexibility and Inclusiveness
Accordingly, the authors contend that Article 43 of the Commercial Bank Law is not a provision of absolute prohibition. Under current “other provisions” of the state, commercial banks can participate in PPP projects and invest in project companies through trusts or funds. In fact, in the operational practice of the PPP model in certain regions, there are already cases of commercial banks participating in the bidding for PPP projects and being awarded the contract, e.g. the PPP project for the Weifang section of the Jinan to Qingdao high speed railway, the PPP project for the improvement of the Qinyang squatter area in the Meizhou metropolitan area, etc., which further corroborate the fact that commercial banks can participate in the bidding on, and contributing capital to, PPP projects.