The Research On Legal Risk Precaution In Build-Transfer (BT) Project Financing

With tremendous economic development, there is an increasing demand oninfrastructure and utility constructions in today’s China. To complywith the trend, a variety of innovations and reformations of investmentand financing never stops in such areas in this country. Until now, adynamic and market-oriented financial system is basically established,with diversified financing channels and investment models. Compared withcurrent system, the investment and financing market before, which wasdominated by government, has been demonstrated to be inefficient inserving infrastructure and utility constructions. The rigid bureaucracyand lack of competition did harm the efficiency of fund management andcapital productivity. Even more vitally, it was obvious that thegovernment could not afford the sharply increasing demand for funds forconstructions of public facility any more. Under heavy financial pressure,the authorities had to open up relevant markets and tried to attract moreprivate investments. Nowadays, a new financial system serving publicfacility construction, with reasonable government regulation andconsiderable private capital, tends to be mature in China. Build-Transfer (BT) is a typical public facility construction model thathas been introduced into China during past years. As an investment-drivenmodel, BT has been widely applied across the country. The main advantageof BT is that it reduces government’s pre-investment in infrastructureand utility project, which yields little cash flow during constructionperiod. Besides, BT brings an opportunity for private entities toparticipate in “government’s project”, which usually means smallbusiness risk and stable investment return in China. And hence it is alsopopular among investors. However, BT always involves long-term,large-scale and multiple-subject investments. And due to diversity offinancing channels (including debt financing and equity financing), BTnormally produces complex legal relationship within a project. Therelatively high level of financial and legal risk brought by BT can notbe ignored. So far, China has not yet legislated on BT operation modelas well as BT financing model, causing part of the project currentlyimplemented facing management irregularities. As a main provider ofcredit products in BT area, bank industry has engaged in active researchesfrom the very beginning to reduce the potential risks brought by BT. Andthere are already a number of books and articles published from domesticscholars.Nevertheless, few of those works particularly focuses on legalregulations of borrower qualification identification, project riskrecognition, financing guarantee arrangement and repayment risk control.In this dissertation, background knowledge of BT is briefly introducedin the beginning, containing its concept, origin, present situation inChina and legislative characteristics. The legal features of BT aresummarized in this part. And then, project financing modes used in BT areoutlined, including their concepts, natures and major risks. The differences of project financing between BT and general constructionmodes are analyzed too. Afterwards, the intent of this dissertation isproposed. Considering reality of investment and financing in BT, the legalissues about borrower qualification, financing guarantee and repurchasefund are discussed in depth. After that, some suggestions are given, inthe view of legal and compliance management, on how bank industry couldanswer the challenges of qualification identification, risk appraisal aswell as guarantee and repayment control. In order to ensure the safetyof credit assets, it is necessary for bank industry to take precautionsagainst BT legal risk. There is a conclusion part in the end.