【Haichuan Chemical EPC】Risk prevention for engineering construction companies under the EPC+PPP model

02 Construction companies should clarify their role as investors in PPP projects. Although, under the EPC+PPP model, financial institutions and construction companies form a consortium to submit bids, and the tendering authority will appoint the construction company as the general contractor for the project while identifying the social investor, according to the relevant regulations of the PPP model, it is the investor who should be the entity responsible for carrying out the construction work. In fact, strictly based on the Implementing Regulations of the Bidding Law, the entity that is permitted to carry out construction on its own should be at least the major shareholder. To date, there have been many cases in which construction companies obtained contracting rights while serving as minority shareholders of the project company, and no cases of penalties have been seen yet. It can be said that, as minority shareholders as investors, and as contractors for PPP project construction, such practices are generally accepted in practice. However, some construction companies believe that since their participation in a consortium to bid on PPP projects is aimed at obtaining the general contracting rights for those projects, investing in them does not serve their commercial interests. Therefore, although it lists itself as one of the minority investors in the PPP project bid documents, it stipulates in the company’s articles of association or other legal documents signed with the actual investors provisions that are inconsistent with the rights and obligations that shareholders should have. For example, the major shareholder purchases the equity of the project construction company at the price of the actual investment amount plus interest after the project is completed ； It stipulates that construction enterprises shall not be involved in the management of the project company, nor shall they bear any losses incurred by the project company ； Delay the timing of capital contribution by construction companies and transfer it to the major shareholder at zero cost before the deadline, in order to avoid making actual capital contributions, etc.

From a legal perspective, this move will pose various risks to construction companies: ➤ They may face complaints on grounds of violation of the law, or be deemed in breach of contract under the pretext of \"using legitimate forms to conceal illegal purposes\", thereby losing their right to undertake the project. ➤If a “secret contract” is signed to conceal the true legal relationship, such a contract may not be enforceable as it cannot receive court support. Moreover, given the public nature of PPP projects, such secret contracts are likely to have a significant negative impact on the entire project by arousing public objection and speculation. ➤ Under the arrangement of delaying the deadline for the construction company to make its capital contribution and transferring the shares to the major shareholder without any consideration, prior to the actual transfer of the shares, the construction company shall bear joint and several liability for the debts of the project company up to the amount of investment it has committed to provide. When investors, rather than the project constructors, participate in joint bids for EPC+PPP projects, it is recommended that the project construction companies weigh the advantages and disadvantages of the following two options in order to make the choice that is most beneficial for them in terms of the project: 1) To truly become investors in the project, thereby exercising the corresponding rights and assuming the corresponding obligations as shareholders ； 2) Specify the aforementioned terms similar to equity disguised as debt, whereby the investor acts only in a nominal capacity and assumes the corresponding risks.

03 Issues related to project pricing in the EPC+PPP model: For construction companies, there is a very important issue to consider: during the bidding process, should the various calculations made by these companies be based on the perspective of the project contractor or that of the investor? This issue must be clarified at the time of bidding; otherwise, disputes are very likely to arise when signing the construction contract with the project company, and losses may even be incurred. In EPC+PPP projects, to avoid the risks associated with secondary bidding, an ideal arrangement is for the party acting as the tenderer for the PPP project to determine the EPC contractor for the construction work at the same time as identifying the investor for the PPP project. Tendering may require bidding consortia to submit separate quotes for the works and services. The purpose of the engineering quotation is to assess the Rationality of the service pricing; therefore, for the entire project, whether it is the PPP component or the EPC component, **the defined boundary conditions remain consistent. During the project implementation phase, it is the project company that actually bears the costs of construction. If the project company and the construction firm stipulate different boundary conditions under the EPC agreement as compared to those specified during the bidding process, then the investor (the project company) has reason to adjust the price.

It should be noted that under the EPC+PPP model, it is not uncommon to require separate quotations for service costs and project costs. For reasons such as pricing practices*, construction companies tend to ignore the difference between the investor’s quotes and those of the contractors when submitting bids. At the stage of signing the contract, they attempt to shift various risks such as anticipated changes and claims onto the project company, a practice that is likely to pose significant risks to them. Therefore, it is recommended that construction companies, before preparing their quotes, negotiate with their partners in the consortium to determine that the project quote should be prepared from the perspective of the investment consortium ； The project quotation is prepared from the perspective of the contractor who signs a contract with the project company. If it is the former, then when signing the project contract, one must either fully adhere to the boundary conditions promised during bidding, or adjust the contract price accordingly to reflect any changes in those boundary conditions ； If the quotation is made from the perspective of a contractor that enters into a contract with the project company, it is necessary to clearly inform the other party in the consortium (usually the lead party) of the boundary conditions on which the quotation is based, and remind them to adjust their bid price when submitting it to the tendering party, taking into account the differences between the boundary conditions provided by the contractor and those set by the tendering party. With the continuous boom in the infrastructure market, it has gradually become a new trend in the industry for construction companies to enter this sector and participate in PPP project development. How to master new business models in the new circumstances, how to seize opportunities while avoiding risks, and how to properly safeguard one’s legitimate interests in collaborations with various parties – these are all issues that construction companies need to consider carefully and address appropriately. Authors: Sun Hui, Yu Yuanyuan.

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Having copied so much content, can’t you simply explain what the PPP model is? The articles written by people these days fail to get to the point; they’re like nonsense

Public-Private Partnership (PPP) model ■ Advantages: The participation of both the public sector and private enterprises from the initial stage facilitates the early assessment of the feasibility of project financing, reduces the time required for preliminary work, and saves on **investment costs； Risk allocation can be implemented at the early stage of a project. Moreover, by **sharing part of the risks, the risk allocation becomes more reasonable, which reduces the risks for both the contractor and the investor, thereby lowering the difficulties associated with financing ； Private enterprises involved in project financing participate from the early stages of the project, which helps them to introduce advanced technologies and management expertise from the very beginning ； The public sector and private enterprises participate together in construction and operation, allowing both parties to establish mutually beneficial long-term goals in order to provide better services to society and the public ； It plays a key role in bringing together all project stakeholders to form a strategic alliance, thereby coordinating their various interest objectives ； **Have a certain degree of control. ■ Disadvantage: For **, it is more difficult to determine which companies to partner with, and having to assume certain responsibilities in these partnerships increases **’s risk burden ； The organizational structure is relatively complex, increasing the difficulty of coordination in management ； How to set the return rate for a project can be a rather controversial issue.