January, 2007

 

By BILL H. ZHANG

 

BACKGROUND

 

China’s economy has been maintaining a rapid and healthy development rate over the last decades since its adoption of the policy of reform and opening up to the outside world. In recent years, many infrastructures and other construction works have been developed and designed in China and the development and construction designs will be particularly promoted and driven by the 2008 Olympic Game in Beijing and the 2010 World Expo in Shanghai, which means a huge potential construction and design market in China. China is advocating to establish a harmonious society, more and more high quality design construction works are needed in the future.

 

With China’s sound economic development, more and more foreign construction designers and architects are wishing to participate in the development of China’s construction design industry and take a rapid step to occupy the market shares. This article will analyze the development and opportunities of China’s construction design industry for foreign investment and discuss the relevant issues on how to maintain a presence in China’s construction design market as well as the relevant regulatory requirements for foreign designers to comply with when establishing a construction design entity in China.

 

LIMITATION ON FOREIGN DESIGNERS TO PROVIDE CONSTRUCTION DESIGN SERVICE BEFORE CHINA’S ACCESSION INTO WTO

 

Before its accession into WTO, China adopted a control policy on foreign designers to undertake construction design work, for instance, establishment of wholly foreign owned design enterprise was not allowed. When performing construction design work for China’s construction units, a foreign designer may maintain a presence by establishing a joint venture enterprise with a qualified Chinese partner; otherwise, it can only provide limited design consulting services from offshore.

 

OPENNESS AND DEVELOPMENT OF CHINA’S CONSTRUCTION DESIGN INDUSTRY FOR FOREIGN DESIGNERS AFTER CHINA ENTERED INTO WTO

 

1.      Legislation Development of the Governing Regulations on Foreign Invested Design Enterprise (“FIDE”)

 

After China entered into WTO, in order to further regulate FIDEs, the Ministry of Construction (“MOC”) and the Ministry of Foreign Trade and Economic Cooperation jointly promulgated the Provisions on the Administration of Foreign-invested Construction Engineering Design Enterprises on September 27, 2002 under documentation No. 114 (“Decree 114”), which came into effect on December 1, 2002. After several years’ practice, Decree 114 was criticized to set up strict conditions for establishment of FIDEs. Therefore, followed by the promulgation of Decree 114, the Ministry of Commerce (“MOFCOM”) and MOC further jointly issued the Implementation Rules of the Provisions on the Administration of Foreign-invested Construction Engineering Design Enterprises (“Decree 114 Implementation Rules”) on January 5, 2007, which came into effect on the same day. Recently, Decree 114 and its implementation rules are the most important regulations governing the regulation on establishment, administration and qualifications of FIDEs in China. Also Decree 114 Implementation Rules is a great improvement, compared with the former Decree 114 and are welcomed by foreign construction designers.

 

2.      How to Maintain Presence in China’s Construction Design Market and Meet the Regulatory Requirements

 

            Procedures of Establishment of FIDE

            Possible Vehicles for FIDE

 

Under Decree 114, foreign investors are now allowed to establish an FIDE in China by means of wholly foreign owned enterprise (“WFOE”), Sino-foreign equity joint venture enterprise with a Chinese partner (“EJV”) or Sino-foreign contractual joint venture enterprise with a Chinese partner (“CJV”). Apart from those three vehicles, in case a foreign construction designer does not want to maintain a local presence in China due to the consideration of costs and limit of clients and design works, the foreign construction designer may also provide some basic conceptual design service from offshore.

 

Decree 114 maintains a strict control on the qualifications of foreign investors requiring that the foreign investors or the foreign service providers of an FIDE shall be an enterprise engaging in construction and engineering design or a registered architect or a registered engineer in his or her home country.

 

            Examination and Approval of FIDE

 

Generally, to establish an FIDE and engage in construction engineering design activities in China, the foreign investor shall obtain a certificate of approval with foreign investment from the competent commercial authority, then register the FIDE with the competent registry authority, and finally obtain the certificate of design qualifications from the competent construction authority.

 

In case an FIDE to be established intends to apply for Grade A qualification for construction and engineering design or other Grade A or Grade B qualifications for construction and engineering design, its establishment shall be examined and approved by MOFCOM and its qualifications shall be examined and approved by MOC. Where an FIDE to be established intends to apply for Grade B qualification for construction and engineering design or other Grade C or lower qualifications for construction and engineering design, its establishment shall be examined and approved by the provincial-level commercial authority and its qualifications shall be examined and approved by the provincial-level construction authority.

 

            Specific Procedures for Establishment of an FIDE

 

The specific procedures for establishment of an FIDE and the application for Grade A construction and engineering design qualification or other Grade A or B engineering design qualifications are summarized as follows:

 

(1)   Application to the provincial-level commercial authority where the proposed FIDE is to be established.

(2)   Preliminary examination by the provincial-level commercial authority, and then for further approval by MOFCOM.

(3)   Consulting with the opinions of MOC by MOFCOM. After receiving the opinions of MOC, MOFCOM shall make a decision on whether to approve such FIDE or not. If approved, a certificate of approval with foreign investment shall be issued. A written reason shall be given if rejected.

(4)   Register the FIDE with the competent registry authority within 30 days after receiving the certificate of approval with foreign investment.

(5)   Application for construction and engineering design qualifications after obtaining business license of the FIDE in accordance with the Regulations on Administration of Construction and Engineering Design Enterprise Qualifications.

 

The establishment of an FIDE and the application for Grade B construction and engineering design qualification or other Grade C or below Grade C engineering design qualifications shall be examined and approved by the competent provincial-level commercial and construction authorities respectively.

 

            Requirements for FIDE

 

            Registered Capital Requirement

 

The Decree 114 does not directly stipulate the minimum registered capital requirements for FIDE, however, after establishment of the FIDE and then applying for respective design grade qualifications, the minimum registered capital requirement do exist. The minimum registered capital of the FIDE varies greatly from RMB 50,000 to RMB 60 millions depending on what kinds of design qualifications of the FIDE will apply for. However, the grades of design qualifications of the FIDE will determine the design and business scopes of the FIDE. Therefore, the registered capital is an important fact which the foreign investor shall take into account when establishing an FIDE. As to the specific amounts of the registered capital of FIDE for each grade design qualification, please contact us for detailed information.

 

In case an FIDE is to be established by means of EJV or CJV, the total capital contribution by the Chinese partner shall not be less than 25% of the registered capital of the FIDE, which means that foreign investor may not hold more than 75% of the equity interests in the registered capital of the FIDE in the form of EJV or CJV.

 

            Personal Requirement

 

In order to obtain respective design qualification certificates, an FIDE have to employ certain numbers of foreign service providers who have already been registered as architects or engineers in China and also have to live in China for a certain period of time.

 

Under Decree 114, for an FIDE in the form of wholly foreign owned enterprise (“WFOE”), its foreign technical personal who have already been qualified as registered architects and engineers in China shall not be less than 1/4 of the total registered professionals of the FIDE. Further, the foreign architects and engineers who have relevant design experience shall not be less than 1/4 of the total key technical personnel of the FIDE. It has relatively lower requirement for the above mentioned foreign technical personnel in the FIDE in the form of EJV or CJV, the above mentioned respective percentage is both 1/8. Further, the aforesaid foreign technical personnel qualified as registered architects and engineers in China and the key technical personnel of the FIDE shall reside within China for no less than a cumulative period of six months each year.

 

The above requirements on the amounts of foreign technical staffs and the lengthy of their residence in China are heavy burdens for FIDE. The Decree 114 made foreign designers in an unfavorable position when competing with domestic designers and was largely criticized by foreign investors. After years’ practice, MOC and MOFCOM further issued the implementation rules to Decree 114. The Decree 114 Implementation Rules has decreased the above restrictions by:

 

(1)   allowing FIDE to employ Chinese architects and engineers to satisfy the percentage requirement of foreign technical personal who have already been qualified as registered architects and engineers in China;

(2)   allowing FIDE to employ technicians with Chinese nationality to satisfy the percentage requirement of key foreign technical personnel; and

(3)   not requiring the foreign architects and engineers registered in China and the key foreign technical personnel of the FIDE to live in China for no less than six months per year.

 

            Track-Record Requirement

 

Under Decree 114 Implementation Rules, when initially applying for design qualifications, the foreign service providers (foreign investors) are allowed to provide two or more than two engineering design tract records completed outside China as part of their application, of which one engineering design tract record shall be completed in the foreign investors’ country or district. The designed engineering project used as tract record shall be implemented based on the contract concluded by the foreign investor in its own name and the employer and shall have already be completed with an excellent quality. Obviously, the use of the tract record of the parent company or affiliated companies of the FIDE are not allowed.

 

            Foreign Qualification Requirement

 

In case an FIDE employs foreign registered architects or registered engineers and takes them as the key technical personnel of the FIDE when applying for design qualifications, their technical titles are not examined, however their education, practice years engaging in engineering design, their registered qualifications, design tract records and reputations will be examined and their foreign registered qualifications will be verified by the Practice Qualification Registration Center of MOC. Further, those foreign registered architects and engineers can only be employed by one FIDE and shall also hold PRC Foreigner Employment Permits issued by the relevant Chinese authority. Those requirements are obviously driven by MOC to strictly administrate and regulate foreign architects and engineers in FIDE.

 

            Upgrading of Qualifications

 

After obtaining its initial design qualification after establishment, the FIDE may apply for upgrading its qualifications. In the event of application for upgrading design qualification, the engineering design tract records completed within China or outside China after obtaining the initial design qualification shall be provided and at lease two engineering design tract records shall be completed within China. MOC has taken a relative loose requirement, recognizing oversea tract records when the FIDE applies for the initial qualifications and for upgrading its design qualifications after obtaining the initial qualifications. This is in compliance with international practice and favorable for foreign designers.

 

ENCOURAGE DOMESTIC DESIGN TENDERING AND AVOID INTERNATIONAL DESIGN TENDERING IN LARGE SCALE PUBLIC BUILDINGS

 

In order to strengthen the administration on some large scale public constructions, especially on the administration on engineering constructions invested by government, MOC, the National Development and Reform Commission, the Ministry of Finance, the Ministry of Supervision, and the National Audit Office of China jointly promulgated the Opinion on Strengthening the Administration on the Construction of Large Scale Public Buildings (“Opinion”) on January 5, 2007. This Opinion encourages domestic tendering for construction design plans, especially for the large scale public buildings invested by government and the blend international tendering for such design plans shall be avoided. In the event that an international design tendering is organized, the relevant stipulations on market entry and design fees shall be abided by and the same treatment shall be given to domestic and foreign design units. According to the news press of MOC, such encouragement of domestic design tendering was to water down international tendering for design plans for some large scale public buildings, especially some symbolic buildings. MOC accused foreign construction designers of deviating from China’s national conditions and unilaterally pursuing for innovative, peculiar and special design works, thus causing high costs for construction and operation, even technical risks.

 

Obviously, in the Opinion issued jointly by several highest Chinese authorities, to publicly encourage domestic design tendering and avoid international design tendering is a discriminatory treatment to domestic and foreign designers and an implied restriction on foreign construction designers.

 

CONCLUSION

 

After China’s accession into WTO, compared with its former strict control policy, China has taken a more positive attitude to permit more and more foreign construction designers to undertake construction design. Foreign construction designers are welcome to establish construction design entities in China and undertake design activities within the scopes allowed by its design grade qualifications.

 

With China’s rapid economic development and driven by the 2008 Olympics in Beijing and 2010 World Expo in Shanghai, large numbers of construction and design works for infrastructures and other construction buildings will be performed in the recent years to come. Huge potential market shares and opportunities do exist for foreign construction designers in China. However, certain restrictions on foreign construction designers and even some discriminatory treatment for domestic and foreign construction designers in some aspects also do exist. Even so, foreign construction designers are advised to establish a design entity so as to participate in China’s construction design development and take some market shares.

 

About the Author

 

BILL H. ZHANG is the managing partner of China Sunbow & Associates with rich experience in cross-board transactions involving China with more focus on corporate and commercial matters, such as mergers and acquisitions, direct investment in China, joint venture, intellectual property, technology license and transfer, international trade, corporate governance and compliance, restructuring and reorganization, labor and employment, and dispute resolutions. He has represented many multi-national companies to merge and acquire Chinese enterprises, make investment, register and enforce various trademarks, patents and copyrights, resolve commercial disputes in China. He has also counseled many foreign invested enterprises on their daily operations in China.

 

For more information about this article and the author, please contact:

 

BILL H. ZHANG

 

F: +8621 5081 5239 (Shanghai) or

+852 2710 8266 (Hong Kong)

E: bill.zhang@chinasunbow.com

 

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