Local governments can and do select foreign concessionaries; there are conditions under which a single source award can be used. Succeeding with single source procurement requires navigating a bureaucratic and legal maze of requirements, and following a blueprint left by arcane legal cases. This article will provide a roadmap to help navigate PPPs. We’ll start by explaining China’s unique system for concessions and the bidding formats under which they can be used. Finally, we’ll do a walkthrough of the leading legal case on single source awards for PPP concessions in China which will reveal how to actually succeed in practice.

Contents

• How Concessions in China Work
• PPP Bidding Formats
• Single-Source Concession Process
• How Courts Rule on Concessionary Selection

How Concessions in China Work

In Chinese law, a public infrastructure concession is a type of franchise, which is what applies to a McDonald’s restaurant franchise.

An infrastructure or public services concession allows the government to select foreign legal entities, as concessionaries, not just Chinese businesses as is often assumed. The law requires an open competitive process followed by executing an agreement that provides for rights, obligations, and risk sharing. The concessionaries are permitted to invest, construct, and profitably run infrastructure or public services within the project scope and during a certain term.

There are special government procurement rules applicable to concessions beyond typical franchise relationship requirements. A concession agreement is covered by administrative agreements law; it’s not a civil code contract.[1]

Public procurement rules in China must conform to a list of regulatory requirements. The grantor in a concession must be the executive agency, which can vary based on the type of project where the grantee is selected through open disclosed to the public pursuant to law, which replaces freedom of contract. A concession is used for the public benefit where limited public resources are allocated, such as in energy, transportation, water management, environmental, and civil engineering.

PPP Bidding Formats

Whether you can use single source procurement depends on what kind of procurement method the sponsor uses. The main types are:

Public bidding is the preferred government procurement approach under the statute, and involves using a public solicitation to invite legal entities or other organizations, without designating any in advance.

Bidding by invitation involves designating legal entities or other organizations for a bid invitation letter. This can be done if only a few suppliers are qualified due to the project or service’s uniqueness, or if a public solicitation would be disproportionate to the total project value.

Competitive negotiation involves drafting a requirements document providing for the goods, engineering, and services, around which a team deliberates with qualified suppliers, who submit responses and quotations. The purchaser chooses a supplier from the candidates list prepared by the negotiators. This may only be done if during bidding there are no suppliers, qualified bids, or rebidding failed; or if the technology is complex or of special nature, where specifications and requirements cannot be ascertained; or if the need is urgent and time inadequate; or the total price cannot be ascertained in advance.[2]

The best value tradeoff approach to procurement involves using a team to negotiate for the best value with qualified suppliers for goods, engineering, and services. Suppliers submit responses and quotations to the requirements, and the team prepares a list of candidates from which the purchaser chooses.

Under Chinese law, government procurement of services may include projects requiring technology that is complex of a special nature, and for which specifications or requirements cannot be ascertained. Timing or quantity cannot be ascertained in advance, or art purchase, patents, or proprietary technology mean price cannot be calculated in advance. R&D without a competitive market, and research commercialization requiring support; or construction projects not subject to bidding laws.

Single source procurement involves purchasing services or goods from a designated supplier.

It can be used only where unavoidable, due to an unforeseen emergency, or to avoid deviation from the original procurement or for added value service requirements; or the costs would not rise by more than 10% over the original contract. (See China Government Procurement Act)[2]

To recap, the first four methods involve selecting a concessionary through open competition, but not single source procurement. Whether it can be used following a second finding of insufficient competition is very ambiguous in Chinese law and doing so requires following a special pattern appearing in caselaw we’ll look at below.

In disputes, proponents say using the sole private sector partner reduces government spending without harming any interest. Opponents say that it’s inappropriate because it fails to meet single source procurement requirements.

Single-Source Concession Process

A concessionary given a single source award in China usually does so after going through two solicitations where there is insufficient competition to make a selection. The law itself says something different; concessionaries must be selected in open competition, such as bids or negotiation. The law never requires single-source procurement for any use case, and is silent on what process to use after the second finding of insufficient competition. (See NDCR Order No. 17 at § 16)[3]

The law on insufficient competition is found in the PRC Government Procurement Administrative Regulations. In § 37 thereof, if there is a finding of insufficient competition, the bidding process must be redone, or alternatively a changed procurement process can be used with prior approval from the appropriate agency. (except when due to procurement process cancellation)[4]

These rules are usually interpreted locally by applying an inverse interpretation to the statute, which implies that a concession project frustrated by a second finding of insufficient competition cannot resort to using single-source procurement, the NDRC has not provided guidance on this issue.

This ambiguity is a major issue because public benefit and public services projects in China commonly only attract a single bidder. There is a frequently used strategy for achieving single source awards.

How Courts Rule on Concessionary Selection

Concessions are different from ordinary government procurement in that the government licenses a company, which collects tolls charged for public infrastructure and services. Financing comes from end users and not government spending, whereas ordinary procurement involves directly paying a supplier.

Under case law, concessions are not covered by the Government Procurement Act. The Chinese law rationale for openly soliciting concession is that constructing infrastructure necessitates prioritizing creditworthy companies or other organizations with the appropriate management, technical, and financing capability to succeed.

Currently, there is only one China Supreme Court case on the legality of single source procurement from 2021, which despite predating the 2024 NDRC Order No. 17, is still good law, and is included among the court’s official leading cases.

The Supreme Court case shows that courts in China will hold that a selecting a concessionary through single source procurement is allowed despite contrary implications in government procurement law. However, unreasonable conditions imposed during the bidding process can result in judicial invalidation of the government sponsor’s decisions.

The Government Procurement Act provides exceptions only in a list of limited cases. Single-source procurement is unavailable if the bidding is found to lack sufficient competition or is abandoned. Prior approval must be obtained from the procurement oversight agency, or for major cities and autonomous prefectures, the appropriate local government agency.[2]

Case Facts

Guoyang County and Beijing Zhenge Co. entered into a Concession Agreement for a city trash incinerator. Oversight officials audited the agreement on grounds it lacked public solicitation, finding that Guoyang County violated administrative rules on public services concessions. Thus, they ordered its cancellation, revocation, and solicitation redo. Guoyang County complied.

Later, Mengcheng and Lixin Countries contracted Guoyang County to do PPP solicitation for an incinerator. In that project, Guoxin Co. was hired to manage public solicitations for a “BOT” add-on. The documents required the successful bidder pay costs for terminating Zhenghe Co.’s original agreement, which caused other bidders to withdraw, reducing the total bidders below the required three. The bid format was changed to a single source award; ultimately a partnership between Lingshi Co. and Zhenghe Co. was selected.

After the award, the counties disagreed about its implementation saying the concession would not encompass Lixin and Mengcheng counties, but Guoxin Co. claimed it encompasses all three counties. The concession partners demand to sign the contract was ignored. Guoyang County sent a letter terminating the project on grounds the partners’ long failure to execute a contract violated national bidding laws. In court, the judge identified the two central issues: as being the bidding process validity, and the resulting liability.

Holding

The upper appeals court’s holding found the single source award was made unlawfully because (adopted by the Supreme Court): under the PRC Government Procurement Act, a single source award is only available if one of the above three conditions is met.[2]

The court found:

• At least three companies bid on the BOT project, that is, the Shanxi Lingshi Co. and Beijing Zhenghe Co. partnership was not the only one.
• No unforeseen emergency made a single source award necessary, because the process from notice, public solicitation, and procurement was long-term, spanning several years.
• As a new investment, it could be different from the original procurement as to conditions, services, or subsequent purchases from the original supplier.
• The incinerator was ineligible for a single source award because it is a concession project and not covered by the goods or services exception provided in the Government Procurement Act.[2]

Therefore, the BOT incinerator did not satisfy the substantive requirements to qualify for a single source award.

Also, under the PRC Government Procurement Act § 37, “Except where procurement was canceled, bidding shall be restarted after bidding fails.[2] Prior approval from the appropriate procurement oversight agency of a major city or autonomous region, or appropriate agency, to use a different procurement method. Here, the BOT incinerator project was restarted as a single source award without appropriate agency approval, thus was procedurally unlawful.

On appeal, the Supreme Court considered a claim made by Beijing Zhenghe Co. that the government unlawfully terminated the bidding by examining the process’s validity. It held that the process did violate the bidding law, because it did not comply with the single source award method. The government used unreasonable conditions that excluded potential bidders.

Implications

Open competition is required for concessions, but single source procurement is allowed if strict conditions apply. General procurement principles can be applied because concessions are covered under the Government Procurement Act on grounds it involves government openly selecting providers for public purposes.[2]

Otherwise, Chinese law prescribes when and how single source procurement is available for concessions. For example, we’ve seen government projects where the agency attempted bidding twice, but with only one bidder each time, it was changed to single source procurement. The approach is broadly available because concessions often encounter insufficient competition issues, resulting in single source procurement.

FURTHER READING

Get more insights about Chinese law at CBL’s China Law Library

FOOTNOTES

[1] Supreme Court Administrative Agreement Adjudicative Guidelines § 2 (Judicial Interpretation No. 17, 2019), (最高人民法院关于审理行政协议案件若干问题的规定), (Supreme Court, Nov. 27, 2019), (in Mandarin)

[2] China Government Procurement Act, (中华人民共和国政府采购法), (National Development and Reform Commission, Jun. 9, 2024), (in Mandarin)

[3] NDCR Order No. 17, (基础设施和公用事业特许经营管理办法 2024年第17号令), National Development and Reform Commission, Apr. 29, 2002), (in Mandarin)

[4] PRC Government Procurement Administrative Regulations, (中华人民共和国政府采购法实施条例), (Ministry of Justice, Feb. 27, 2015), (in Mandarin)