Political Risks: Analysis of Key Contract Clauses in China's BOT Project

Abstract

The reforms introduced by the International Monetary Fund in Asia will bring about greater transparency in the economies and innovative approaches in procurement of contracts. China has taken new initiatives in build, operate, and transfer (BOT) infrastructure projects. It is, however, important to analyze and manage the unique or critical risks associated with China's BOT projects. This is especially so after new policies were introduced in late 1996 when the first state-approved BOT project, the U.S. $650,000,000 2 × 350 MW coal-fired Laibin B Power Plant (Laibin B), was awarded. These include the competitive tendering process and 100% foreign ownership of the operating company. An international survey on risk management of BOT projects in China was conducted to seek the views of practitioners. The overall objectives of the survey are (1) to identify the unique or critical risks associated with China's BOT projects; (2) to evaluate the effectiveness of measures for mitigating these risks; (3) to examine the key contract clauses used in Laibin B's concession agreement; and (4) to provide a risk management framework for investing in future BOT projects in China. This paper discusses the adequacy of key contract clauses in Laibin B's concession agreement related to the political and force majeure risks in China, from the perspective of foreign developers, lawyers, and lenders. The contract clauses discussed include changes in law, corruption, delay in approval, expropriation, and force majeure. Areas for further improvement in the clauses are suggested.