Impact and forecast
On January 16 2017 the Guidelines of the State Council on the Reform Plan regarding a System for the Use of Natural Resources Owned by the Whole People with Compensation were issued. According to the guidelines, a system for the use of natural resources with compensation will be established and functioning by 2020. The guidelines also identify further studies and additional legislation needed to establish and improve the so-called 'use-with-compensation system'.
The guidelines are the first major document issued by the government to establish a full-scale regulatory system for the use of different kinds of natural resource with compensation. They provide a fundamental policy basis for establishing the system and will have a significant impact on the legislation governing China's use of its natural resources (including mineral resources in the coal, oil and gas sectors and land and water resources).
Pursuant to Article 9 of the Constitution, the following types of natural resource are owned by the state (and therefore the people), with the exception of certain resources which are owned by collectives (as stipulated by law):
- mineral resources;
- water resources;
- uncultivated land;
- wetlands; and
- other natural resources.(1)
Before China's economic reform, national law had no concept of private property rights, including the right to use natural resources. Under the use-with-compensation system, any individual, enterprise or other organisation that intends to develop or use state-owned natural resources must pay the government the fee stipulated in the relevant regulations.
Following the economic reform, the government has gradually introduced the concept of private property rights in regard to the use of state-owned land and mineral resources. For example, the coal sector has been liberalised and private companies and individuals can now obtain mining exploration and exploitation rights from the government. However, many problems exist due to insufficient legislation and regulations.
China has gradually developed the use-with-compensation system, which has enhanced protection and led to the reasonable use of the country's natural resources and improved the protection of resource owners' rights and interests. However, due to the system's incompleteness and inadequate government supervision, the following issues remain:(2)
- The conservation of natural resources is not prioritised. As it was driven by economic interests, the natural resources protection mechanism was not fully implemented and the phenomenon of 'more development, less protection' is prevalent. This has led to the substantial destruction of the ecological environment.
- Owners' rights and interests cannot be fully protected. Chinese law does not explicitly regulate who can act as the representative of an owner of natural resources. In principle, the State Council acts as the state representative and exercises ownership of the natural resources on its behalf. However, the way in which this right should be exercised is unclear, which has led to a failure in the fulfilment of owners' rights and interests.
- The role of the market is not fully exercised, as the number of natural resources allocated through markets in China is low. In some areas, natural resource allocation is still done via administrative licensing.
- The development of the use-with-compensation system is unbalanced. Although the system for state-owned land, minerals, water and ocean and sea islands is relatively well-established, the system for state-owned farmland, unused land, forests and grassland has yet to be established.
In light of the above, on September 21 2015 the State Council promulgated the General Proposal for the Reform of the Ecological Civilisation Regime,(3) which explicitly states that China's property rights system and the use-with-compensation system will be improved. On January 11 2017 the General Office of the Communist Party of China Central Committee and the General Office of the State Council promulgated the Guidelines on Innovating Ways of Resources Allocation by the Government,(4) which further specify that all Chinese resources owned by the public and all natural resources owned by the state and collectives will be clearly distinguished to clarify the state's ownership interest in the state-owned natural resources. These guidelines also state that the government will establish and improve the use-with-compensation system and introduce more competitive mechanisms for allocating natural resources. In addition, on January 16 2017 guidelines were issued specifically to improve the use-with-compensation system.
The guidelines are intended to establish a regulatory regime for the use of natural resources with compensation by 2020. To achieve this, the government aims to:
- establish well-defined property rights and substantiate their scope and capacity; and
- introduce detailed and effective rules and regulations with regard to the realisation of these rights.
In addition, the government will:
- improve the system for using natural resources;
- make full use of the market mechanism and its power to regulate the allocation of natural resources;
- protect the rights and interests of resource owners, as well as parties' right to use resources; and
- promote China's ability to protect its natural resources and use them in moderation.
In turn, this will enable the government to reap the ecological, economic and social benefits derived from protecting and moderating the use of natural resources.
To achieve these goals, the basic principles of the guidelines are:
- prioritising the protection of natural resources and ensuring natural resources are used reasonably;
- promoting the division of the ownership of and right to use natural resources and the improvement of the available rights;
- improving the rules relating to the market allocation of natural resources, developing a uniform transaction platform for public resources and improving the price assessment mechanism for natural resource assets; and
- innovating ways to manage natural resource assets and enhance the supervision of natural resources.
The guidelines also set out how the use-with-compensation system will be established or improved with regard to the following natural resources.
Improvement of system for state-owned land resources
The functional division of the land will be undertaken and the protection of state-owned land that has significant ecological function will be prioritised. Stricter approval criteria and procedures will be established for state-owned land which is allowed to be developed and operated under laws and regulations, and the use-with-compensation mechanism will be implemented fully to avoid free or excessive occupation of state-owned land resources.
Improvement of system for water resources
The rules regulating the collection of the water resources fee will be strengthened. The fee will be collected strictly in accordance with the scope, targets, standards and procedures of the relevant legislation. Units and individuals cannot neglect to pay all or part of the water resources fee without the competent authorities' consent. In addition, the government will advance the pilot project regarding the water resource tax reform and further encourage conducting water right transactions via the trading platforms established under the relevant legislation.
Improvement of system for mineral resources
A national royalty mechanism will be established for mineral resources. Further, the scope of the competitive assignment of mineral rights will be widened. Except in special instances where mineral rights are transferred through agreements, all mineral rights will be transferred through bid invitation, auction and quotation. The mineral exploration and mining right usage fee will be adjusted to a mineral rights occupation fee, which will be reasonably determined.
Establishment of system for state-owned forest resources
State-owned natural and public welfare forests, national parks, nature reserves and other state-owned woodland and forest resource assets cannot be transferred. Where forest resources must be used, the scope, term and condition of this will be determined and a procedure for the reasonable use will be established. The government will also undertake the verification and registration work with regard to the right to use state-owned woodland.
Establishment of system for state-owned grassland resources
To improve the protection mechanism for basic grassland, no unit or individual can make a requisition, occupy or alter the use of basic grassland without the competent authorities' consent. The government will also take effective measures to stabilise and improve the state-owned grassland contracting and management mechanism and regulate the transfer of grassland contracting and management right.
Improvement of system for ocean and sea islands
The government will enforce the principle of prioritising ecology and strictly implement the 'ecological red line'. Further, it will monitor the conservation rate of the continental natural coastline – which should be no less than 35% – and strictly restrict the total amount of the sea reclamation. The transfer mechanism for the right to use no-resident islands via bid invitations, auctions and quotations will need to be improved through research and the implementation of relevant laws and regulations.
The guidelines specify that the Ministry of Land and Resources will take the lead role in implementing the guidelines and will promptly report progress in this regard to the State Council.
The use-with-compensation system is a core mechanism through which China is protecting its natural resources. However, due to the system's incompleteness, a large amount of natural resources – in particular, water resources – have long since been deemed to be free. This has led to the excessive use of many resources and contributed to environmental pollution and destruction. In addition, due to the insufficient allocation of natural resources on the market, some state-owned enterprises have gained an advantage in their use. For example, the China National Petroleum Corporation, the China National Offshore Oil Corporation and Sinopec have occupied most of the high-quality oil and gas blocks, which has led to unfair competition and hindered market efficiency. China therefore needs to improve the use-with-compensation system to establish rights to natural resources and a competitive pricing mechanism.
However, the guidelines are only an opinion and their implementation relies on the promulgation and amendment of relevant laws and regulations. Once this happens, the regulations that have been promulgated – for instance, the Guidelines regarding Enlarging the Use-With-Compensation Scope of State-Owned Land, the Reform Scheme of Mineral Rights Transfer Mechanism and the Guidelines regarding the Use-With-Compensation of Ocean and No-resident Islands – will have to be revised to ensure that they are consistent with the guidelines. In addition, other implementing schemes for the use-with-compensation system for state-owned water, forest and grassland resources must be developed soon, in order to ensure that the guidelines are fully implemented.
For further information on this topic please contact Yanbin Zhao, Xiaonan Zhao or Libin Zhang at Broad & Bright by telephone (+86 10 8513 1818) or email ([email protected], [email protected] or [email protected]). The Broad & Bright website can be accessed at www.broadbright.com.
(1) Article 9 of the Constitution.
(2) "Accelerate the Establishment of a Well-functioning Paid-use System for Natural Resources Assets Owned by the Whole People – the Head of the Regulation and Monitoring Department of the Ministry of Land and Resources Construes the Guidelines of the State Council on the Reform Plan of a Paid Use System for Natural Resources Assets Owned by the Whole People".
(3) General Proposal for the Reform of the Ecological Civilisation Regime, September 1 2015.
(4) Guidelines on Innovating Ways of Resource Allocation by Governments, January 2017.