The Ministry of Commerce of the People's Republic of China ("MOFCOM") has released the Draft Measures on the Administration of Overseas Construction Project Contract Bidding (Competitive Negotiation) ("Draft Measures") on 26 October 2010, inviting public comments, which should be submitted by 5 November 2010 to MOFCOM or the Legal Office of the State Council. The full text of the Draft Measures in Chinese can be found at http://tfs.mofcom.gov.cn/aarticle/as/201010/20101007209159.html.

Summary of Existing Rules

Under the existing rules, a Chinese contractor must obtain the Overseas Construction Project Contracting Certificate from MOFCOM to be qualified to undertake overseas construction projects. With respect to overseas construction projects with a value of over USD 5 million (approximately equivalent to RMB 33 million), the Chinese contractor must apply to MOFCOM for issuance of a Permit for Overseas Construction Project Contract Bidding (Competitive Negotiation) ("Project Permit") before bank guarantees (such as bid bonds, advance payment bonds and performance bonds) and credit insurance can be obtained from PRC financial institutions. The existing rules are silent on whether a Chinese contractor, with no intent to apply for bond guarantees or credit insurance from a PRC financial institution, is required to obtain the Project Permit. In practice, some Chinese contractors have not obtained Project Permits prior to participation in overseas construction project contracting bidding where they have not needed bond guarantees or credit insurance from PRC financial institutions.

Summary of Proposed Changes under the Draft Measures

The Draft Measures propose to make the following salient amendments to the existing rules:

  • A qualified Chinese contractor is obliged to apply for a Project Permit from MOFCOM in relation to an overseas construction project which has a value of over USD 5 million (approximately equivalent to RMB 33 million), or which falls within the scope of "special construction projects" as defined in the Draft Measures. Under the Draft Measures, special construction projects are defined to embrace construction projects located in countries having no diplomatic relationship with China or having a territorial dispute with China - this could include Japan, Vietnam, India and some other neighbouring countries. They also refer to those located in "high risk" countries or cross board projects involving multinational interests. The list of "high risk" countries will be published by the Ministry of Foreign Affairs of the People's Republic of China from time to time after consultation with MOFCOM.
  • In the absence of the Project Permit, PRC financial institutions will not be permitted to provide guarantee bonds, loan financing or credit insurance to the Chinese contractor.
  • The Project Permit rule is also utilised to enforce other regulations on overseas construction project contracting. Notably, the Project Permit will not be granted if the Chinese contractor is in non-compliance with industrial measures issued by trading associations. This may allow the trade associations to exert further monitoring power, though, caution should be applied to prevent undue interference by the trade associations over the business activities of Chinese contractors.  

Conclusion

It is evident that MOFCOM is in the process of further enhancing the regulation of overseas construction project contracting by more closely monitoring individual projects under the Project Permit system, as well as integrating the Project Permit rule into the enforcement of other regulations on overseas construction project contracting.