Chinese energy companies are braving regulatory and legal uncertainty and investing in countries that fall under China’s Belt and Road Initiative. Their aim is to take advantage of the myriad opportunities that are emerging but, in doing so, they should be aware of the legal hurdles and risks that they face.

Energy is a key component of the Belt and Road Initiative, which is in line with the significant emphasis China is putting on renewable energy and sustainable development as part of the current 13th Five Year Plan. Many Chinese energy companies are taking advantage of incentives provided by the central government and a wide variety of energy projects, from gas pipelines to wind farms, are either underway or being planned along the Belt and Road.

“We’ve seen a large increase in energy investment carried out by Chinese companies into those countries along the Belt and Road routes,” says Wang Jihong, senior partner and co-chair of the Real Estate and Infrastructure Department at Zhong Lun Law Firm. Wang also serves as vice-chair of the China Chamber of International Commerce’s Environment and Energy Committee.

“We are now helping our clients in a power plant project in Mongolia, which could boost the country’s electricity generation twice as much as its current amount, and in Nepal, another client is currently doing research for several hydropower plants,” she adds.

Along the Belt and Road there are developing nations working to deal with the severe challenges of energy shortages. China’s Initiative is expected to help them upgrade their infrastructure and improve energy efficiency. Many of those countries have set up strategies and policies to boost green development. This includes countries like Nepal, India, Mongolia and their neighbours in Central Asia.

The Belt and Road Initiative refers to the Silk Road Economic Belt and 21st Century Maritime Silk Road, a development strategy launched by the Chinese government to enhance the efficient allocation of resources by connecting Asia, Europe and Africa along five separate maritime and overland routes. The project has been a a catalyst for private investment into energy-efficient infrastructure, investment that requires plenty of input from legal professionals to structure the deals.

GOING GREEN

At the same time, China’s 13th Five Year Plan also specifies the promotion of green production and the establishment of low-carbon industry systems. It also mentions strengthening China’s competitiveness in petroleum and natural gas markets.

The Silk Road Fund, established in 2014 to support the implementation of the Belt and Road Initiative, has first-phase capital of $10 billion to benefit energy firms by giving priority to green projects.

In January this year, as one of the major projects of the Initiative, China Nuclear Engineering Group Corp signed a Memorandum of Understanding with Saudi Arabia for atomic and renewable energy. The company has also been in discussions with Indonesia, the United Arab Emirates, South Africa, and the ASEAN Center for Energy on potential cooperation for high-temperature reactors, a Chinese invention that reduces the risk of radiation leaks.

“Even though in some countries we have not seen any investors stepping in, we have seen some strategic cooperation plans signed,” says Wang.

In June, China signed a Memorandum of Cooperation (MOC) with Serbia on new energy projects including hydro, wind, solar, and biomass. Another MOC was signed the same month for an equity investment in a German company specializing in power and heat generation from waste.

In October 2015, China promised a South–South cooperation fund of 20 billion yuan ($3 billion) to help other developing countries cope with the effects of climate change. A number of countries involved in the cooperation are under the Belt and Road Initiative.

All these cooperation plans and the Belt and Road Initiative provide a good

opportunity for energy investors to brave into new markets, if they can overcome a number of hurdles that remain, particularly in terms of legal structures for these initiatives but also in regards to access to finance and, occasionally, politics.

“Energy companies, which are usually state-owned enterprises, are very cautious and have a very strict investment approval procedures. Legal consultancy is needed in the whole procedure from drafting the investment framework with all legal risks and control measures listed out to liaising with law firms in the destination country,” says Wang.

Some legal issues that Chinese energy companies often come across, particularly in their infrastructure construction practices, revolve around differences in labor laws and local water and land usage regulations.

“For example, in the Mongolian project, our client would like to use its Chinese workers, who are more skilful and well trained by the company; however, there is a clear rule in Mongolia about imported labor quota in different projects. The company has to take that into consideration when calculating their construction period, which might be longer than previous projects they carried out in China,” Wang explains. “In China, water usage rights are usually approved for a longer periods of time for industrial usage; however, in some countries, that is signed year by year, which gives the company a higher risk.”

STAY ALERT

The lack of unified green standards is another pressing concern facing the Belt and Road Initiative. Since environmental policies vary among countries, coming to a consensus on a unified environmental standard might be difficult.

“In Mongolia, for example, the government does not provide a venue for storing ashes, a main residue of a coal-fire power plant, whereas Chinese authorities usually provide aid in finding those sites for energy enterprises. And in other countries, the requirements might not be the same as in China or Mongolia. Environmental issues play a critical role in developing the energy sector sustainably in many developing countries. Our energy enterprises should pay special attention to local environment policies and should never take things for granted based on past experience,” says Wang.

Zhu Hongwen, a partner of Sunshine Law Firm and director of the International Department, warns energy investors that although many developing countries are now rolling out incentive policies to sustainable energy developers, it is possible for such incentives to be changed or cut back.

“It is common for sustainable energy firms to make their judgement in choosing where to put their money based on the incentives that governments offer to push for green energy,” said Zhu. “However, some governments might give quite an aggressive plan during some special period and when they find that they cannot afford it anymore, it is not unusual for some to cut back on some incentives to green energy developers.”

Cross-border Chinese investment under the Initiative might also be exposed to various political and legal risks with no protection, as 27 of the countries along the routes are not part of bilateral investment treaties (BITs) or multilateral treaties that China is part of.

“It works better if there is a BIT between China and the destination country; but if there is no such treaty, that does not mean there isn’t any protection. It means that the investor should be more prudent and should look into the foreign investment policy in the destination country in order to make a better evaluation of the investment. And a proper investment structure may also be applied to get BIT protection, like setting up an SPV (special purpose vehicle) in a third country which has signed a BIT with China and the destination country,” says Zhu.

One possible solution is for China to join the Energy Charter Treaty, which promotes freedom in energy trade, transit, investment, and efficiency by protecting investors in foreign countries. Joining the treaty would benefit Chinese enterprises operating abroad under the Initiative, as they would enjoy national treatment and legally binding protection from unfair treatment in host states. Such a move would also ensure the stability and abundance of China’s energy supply.

On the other hand, joining the treaty would mean that foreign investors would be able to sue the Chinese government for any violations under the treaty. As China is undergoing domestic reforms for the energy sector, the legislative and policy changes will likely affect foreign investment projects in the country.