China: New Vehicles Proposed for Foreign Engineering Services Companies in China

Originally published September 2005

Following the issue of Decrees of 113 and 114 regulating the foreign invested construction and engineering design sectors, the Ministry of Construction of PRC (MOC) has recently proposed new vehicles open to foreign engineering services companies.

On 19 September 2005, the MOC published a draft of the Administrative Regulations on Foreign Invested Construction Engineering Services Enterprises (the "Regulations") for public comment. The Regulations proposed to allow foreign engineering services companies to set up three types of foreign invested engineering services enterprises ("FIESEs"), namely construction supervision,tender agent services and cost consultancy enterprises. This is a further step to open up the market for engineering services in accordance with China's commitments to the WTO. It is proposed under the Regulations that foreign companies may apply for the setting up of joint venture FIESEs when the Regulations come into effect and of the wholly foreign owned FIESEs from 11 December 2006 (when China celebrates the fifth anniversary of its entry to the WTO).

The Regulations will for the first time provide a clear channel for foreign engineering services companies to set up FIESEs in China, which has received a favorable response, in particular from those companies that have already established project management consultancy entities in China. Prior to the end of 2004, it was a common understanding that these consultancy entities were allowed to provide project management services without holding any specific skill qualification. However, since the issue by the MOC of Directive 200 (the Provisional Measures on Construction Management) in November 2004 requiring entities providing construction project management services to possess certain skill qualifications (namely survey, design, construction, construction supervision, tender agent services or cost consultancy), these consultancy entities have received constant queries from their clients or prospective clients on whether they are in a position to legally enter into contracts to provide project management services. The Regulations will allow foreign engineering services companies to set up FIESEs or restructure their existing entities into FIESEs. We understand that some of these consultancy entities are keen to restructure themselves into FIESEs and the purpose of the restructure is not only to satisfy the requirements of Directive 200 but also to bring their practice in line with the existing skill qualification regime as a further step to ‘go localized’ in the China construction industry.

Similar to Decrees 113 and 114, the Regulations have not specified all the requirements for applying for the relevant skill qualifications and they refer the foreign applicants to the requirements (including the registered capital, technical personnel and track record) as set out in the regulations and rules currently applicable to domestic companies. These requirements are generally not as difficult to satisfy as the requirements for construction and design skill qualifications.