Construction, Engineering & Design

[Emily]

2004 White Paper - Construction, Engineering & Design



In 2003, fixed asset investment in China grew by US$664 billion, an increase of 26.7 percent over the previous year¹ , with roughly half that investment funneled into China's eastern provinces. In basic construction over the past year, China added 36,000 kilometers of new roads (including 4,600 kilometers of expressways), 1,164 kilometers of new trunk railway track, and installed mobile phone switchboards for 62 million users² .

The construction, engineering, and design sectors will likely continue their strong growth in the years ahead. In the short term, the industry will be driven by China's rising urbanization as well as by specific infrastructure projects (the 2008 Olympics in Beijing, the 2010 World Expo in Shanghai, and the 2010 Asian Olympic Games in Guangzhou), the western development program, and the revitalization of China's industrial northeast. During the coming decade, the sector will be fueled by investment in transportation, urban infrastructure, energy production, and environmental projects.

International builders of industrial, commercial, residential, and public infrastructure facilities, and the foreign engineering and construction companies who serve them globally, have come to China. Unfortunately, the issues outlined below, while designed to protect China's domestic industry from foreign competitors, have in fact served to hinder China's otherwise promising domestic industry from reaching international standards.

Discriminatory Practices

The majority of construction work in China is, and will continue to be, implemented by Chinese firms. However, many foreign (and some government-related) entities seek the technology, innovation, and project management expertise provided by foreign-based design and construction firms. These relationships are limited, however, because current regulations do not allow foreign entities to select the design and construction firms of their own choosing.

Regulatory Limitations

The primary regulatory mechanisms restricting foreign participation in the construction and engineering industry are Decrees 113 and 114, jointly issued by the Ministry of Construction and the Ministry of Commerce (MOFCOM, formerly MOFTEC). The two decrees run contrary to the spirit of national treatment -- a basic tenet of World Trade Organization (WTO) membership that provides foreign and domestic firms with equal access to the market -- and arguably violate the anti-rollback provisions of China's WTO commitments.

Decree 113, Regulations on the Administration of Foreign Investment Construction Enterprises, explains the requirements for international firms to obtain a construction license in China. Decree 114, Regulations on the Administration of Foreign Investment Construction and Engineering Design Enterprises, presents the requirements for international firms to obtain an engineering design license in China. Both decrees were to go into effect on December 1, 2002, but were delayed until April 1, 2004.

AmCham's 2003 White Paper highlighted our concerns regarding onerous restrictions designed to limit the participation of international engineering firms in China. During 2003 and 2004, AmCham member companies worked with the relevant Chinese government ministries to communicate member company concerns. Unfortunately, all of the restrictions highlighted in last year's paper remain problematic in 2004, perpetuating an environment of uncertainty, disappointment, and frustration. In summary:
Capital requirements: Because maximum contract value has been set at five times registered capital, foreign firms are either forced to bypass large projects or to place an exorbitant amount of capital in China ($1 billion for a $5 billion project). In addition, regulators look only at the financial strength of the direct investor, not at that of the parent company or its affiliates. This unfairly restrains qualified foreign companies from using commonly-used special-purpose investment entities (such as those based offshore) as a direct investment vehicle in China.
Personnel restrictions: By requiring that large numbers of foreign staff stay in China and that foreign experts reside here for at least three to six months, the regulations hamper international construction and engineering firms from balancing personnel needs for their other global clients. For example, Decree 114 requires a 25 percent foreign professional presence. This means that for a Class A wholly foreign-owned design enterprise in which 80 key technical positions are required, at least 20 foreign technical experts must be employed, driving up costs and limiting advancement opportunities for local staff.
Excluding international experience: Requiring that new foreign-invested construction enterprises possess a minimum amount of China project experience to be certified ignores decades of expertise that foreign-based firms have acquired working internationally.
Broad market exclusions: Wholly foreign-owned enterprises (WFOEs) are restricted to taking on only foreign-funded projects or projects "which Chinese construction enterprises cannot undertake independently due to technical difficulties." This vague clause could be interpreted as allowing foreign firms to participate only in an extremely narrow segment of the market.

While Decree 113 and its implementing rules officially came into effect on April 1, 2004, the Chinese government has informally communicated that these provisions will not be enforced for an unspecified period of time. The lack of formal clarification on this issue has created a great deal of uncertainty in the market.

No implementing rules for Decree 114 have yet been promulgated. However, the Tentative Provisions on Administration of Construction Design Activities within the PRC by Foreign Enterprises (Decree 78) have been promulgated and came into force in mid-June 2004. Decree 78 permits non-Chinese design firms to do design work in China, provided that they team up with one or more Chinese design institutes.

Forcing foreign firms to partner with Chinese design firms and insisting that the Chinese design partner be included in the contract with the client unnecessarily complicates contractual relationships. Our member companies fear that adding this additional "signatory" leads to numerous problems, such as lack of single-source accountability to the client, disclosure of proprietary pricing and contractual terms, and technology transfer to the local design institute.