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Opinion Concerning the Implementation of Regulation on the Administration of Construction Enterprise Qualification in PRC

Introduction

1. The PRC Ministry of Construction ("MOC") issued Opinion Concerning the Implementation of Regulation on the Administration of Construction Enterprise Qualification ("Implementing Opinion") on 18 October 2007. The Implementing Opinion supplements the Regulation on the Administration of Construction Enterprise Qualification (" Decree 159"), the Construction Enterprise Qualification Grading Standard ("General Grading Standard") and the Special Grade Construction Contracting Enterprise Qualification Grading Standard ("Special Grade Grading Standard") which took effect respectively on 1 September 2007, 1 July 2001 and 13 March 2007.
2. The Implementing Opinion elaborates on the procedure for applying for a Construction Enterprise Qualification (Le. qualification to perform construction works), the application materials to be submitted to the authorities, and matters relating to the qualification certificate. More importantly, the Implementing Opinion clarifies various substantive requirements (e.g. track records, personnel etc) and terms and phrases used in Decree 159, the General Grading Standard and the Special Grade Grading Standard. The Implementing Opinion also encloses a sample Construction Enterprise Qualification Application Form and a Use of Information Technology Assessment Form for Special Grade Grading Standard.
3. The Implementing Opinion affects domestic investors as well as foreign investors wishing to apply for Construction Enterprise Qualification (through the application of Administrative Regulation on Foreigninvested Construction Enterprise - MOC Decree 113). In this article, we shall highlight some of the important issues covered by the Implementing Opinion.

Applying for Construction Enterprise Qualification

1. The Implementing Opinion reiterates that a construction enterprise may apply for more than one Construction Enterprise Qualification (to carry out construction works for more than one type of construction project), in which case the applicant should designate a qualification as the Main Qualification, and the remaining qualifications are deemed as Supplemental Qualifications. The highest grade of a Supplemental Qualification is restricted to the grade of the Main Qualification. According to Article 6 of the Implementing Opinion, the holder of Construction Enterprise Qualifications may file an application to replace the Main Qualification with a Supplemental Qualification, thereby causing the original Main Qualification to become a Supplemental Qualification.
2. Article 7 of the Implementing Opinion further clarifies that the holder of a Construction Contracting Qualification may engage in works covered by the related Specialist Qualifications without having to obtain such Specialist Qualifications, but it may not apply for Labour Services Subcontracting Qualification (Construction Enterprise Qualification are divided into 3 main types: Construction Contracting Qualification, Specialist Qualification, and Labour Services Subcontracting Qualification). The Implementing Opinion does not set out what amounts to a "related Specialist Qualification", but it indicates that the MOC will issue a supplementing table in the future setting out the relevant scope of coverage.
3. According to Article 21 of the Implementing Opinion, the MOC will conduct on-spot verification regarding application for Special Grade Construction Contracting Qualification. This implies that MOC officials will inspect the premises of the applicant enterprise, and presumably the Use of Information Technology Assessment Form for Special Grade Grading Standard enclosed in the Implementing Opinion will be used for evaluation purposes.
4. Pursuant to Decree 159, the application approval process varies depending on several factors. One of the factors affecting the level of administrative approval involved is whether the relevant type of Construction Enterprise Qualification relates to the administrative ambit of another industry regulator (e.g. railway related qualification would involve the Ministry of Railway, information industry related qualification would involve the Ministry of Information Industry etc). For such qualifications, Decree 159 provides for a joint consultation process between the MOC and the relevant authorities. However, Decree 159 fails to set out the exact scope of such related qualifications (i.e. it is not clear what amounts to say railway related qualifications). The Implementing Opinion supplements Decree 159 and provides a definitive list of the types of Construction Enterprise Qualification which falls into say the category of railway related qualifications, information industry related qualifications etc.

Qualification Certificate

1. Article 28 of the Implementing Opinion confirms that Construction Enterprise Qualification Certificates are valid nationwide. In other words, local construction authorities should recognise Construction Enterprise Qualification Certificate issued by other local construction authorities, thus eliminating potential local protectionism.
2. The Implementing Opinion also confirms that Construction Enterprise Qualification Certificate will be valid for a period of 5 years. The validity period runs from the date on which the construction enterprise first obtained its highest grade Main Qualification, or the date on which the MOC subsequently approved an application for qualification upgrade or qualification reassessment following a split or merger.
3. In order to extend the validity period, Decree 159 stipulates that the construction enterprise should file an application to the MOC 60 days prior to the expiry of the 5-year period. The Implementing Opinion further provides that the MOC will process application filed within 60 days prior to the expiry of qualification certificate, but the relevant qualification certificate will become invalid on the date of its expiry until the MOC approves the extension thereof.
4. The Special Grade Grading Standard provides that the holder of a Special Grade Construction Contracting Enterprise Qualification may perform engineering design services for similar type of projects. In line with the Special Grade Grading Standard, the Implementing Opinion provides that when a Special Grade Qualification Certificate is issued, a corresponding type of Grade A Engineering Design Qualification Certificate will be issued to the relevant construction enterprise.

Track Records and Personnel Requirements

1. According to Article 38 of the Implementing Opinion, one project may only count towards meeting one of the relevant track record requirements even if the project is capable of satisfying more than one requirements (e.g. in terms of height, storey number, span, costs etc). For architecture and construction projects, the construction of the main structure must be completed and passed the completion inspection test before the project may count as track records. Where a construction project involves staged contracting with the same construction enterprise, the said construction enterprise may count the accumulated construction works (i.e. with accumulated project scale) as track records.
2. With respect to personnel requirements, Article 39 of the Implementing Rules provides that technical staff with age over 60 may not constitute more than 15 percent of the total required number, and the chief technical officer may not be over 60 years old. The Implementing Opinion also makes it clear that the MOC will not recognise as technical staff those who are registered with (in the case of professionals such as engineer or architect etc) or employed by more than one enterprise.
3. The Implementing Opinion also clarifies that the MOC will assess the various requirements (including track records and personnel requirements) based on the capabilities of the legal person applicant alone. In other words, the resources within a group of companies cannot be accumulated and counted towards meeting the relevant requirements.

Special Grade Construction Contracting Qualification

1. One of the application requirements for Special Grade Construction Contracting Qualification relate to the applicant enterprise's construction-related business tax contribution. According to the Special Grade Grading Standard, the applicant enterprise must demonstrate that it has paid such business tax of no less than RMB 50million for each of the three preceding years. Article 41 of the Implementing Opinion elaborates that the relevant business tax includes those relating to construction contracting services, shop drawing design services, general contracting (Le. EPC contracting) services and project management services. The Implementing Opinion further states that the requirement must be satisfied in relation to each and every Special Grade Construction Contracting Qualifications for which the applicant applied. For example, in order to apply for two Special Grade Construction Contracting Qualifications (there are 10 different Special Grade Construction Contracting Qualifications covering 10 different types of construction projects such as railway projects, highway projects etc), the applicant enterprise must have paid construction-related business tax of no less than RMB 1 OOmillion (Le. twice the required amount for one such Qualification) in the preceding three years. In other words, the requirement makes it difficult for construction enterprises to obtain the highest qualification covering different types of project. The Implementing Opinion also clarifies that the revenue obtained from construction projects located abroad may count towards meeting the requirement based on the relevant exchange rate as well as PRC construction-related business tax rate.
2. The Implementing Opinion clarifies that the requirement on bank credit facility will be assessed on the basis of the highest annual credit limit obtained by the applicant from one single bank, not the accumulated credit limit provided by different banks.

Transitional Period

1. The Implementing Opinion provides a transitional period regarding Construction Enterprise Qualification issued under the previous licensing regime. Under the transitional arrangements, the qualification certificates issued pursuant to the old regime will not be reissued under Decree 159 for the time being. For Special Grade Construction Contracting Qualification, the qualification certificates will remain valid until 13 March 2010. For other Construction Enterprise Qualifications, the qualification certificates will remain effective until the MOC issues further amendments to the General Grading Standard.

Conclusion

The Implementing Opinion introduces a higher degree of transparency to the administration of Construction Enterprise Qualification. The Implementing Opinion deals with the more technical aspects and provides guidance on the various application requirements and procedures. In this connection, the Implementing Opinion should be welcomed by the market participants. The Implementing Opinion also implies that the MOC is still in the process of updating and consolidating the regulatory framework for Construction Enterprise Qualification. In particular, the Implementing Opinion states that the MOC will issue a supplementing table clarifying the work scope of Construction Contracting Qualification, and the MOC will make amendments to the General Grading Standard. In this respect, construction enterprises considering or which are in the process of applying for Construction Enterprise Qualification should take into account the inherent uncertainty of changes that may be introduced by the MOC in the near future.