Fuzhou government sued for US$110 million
(Chinadaily.com.cn)
Updated: 2004-07-15 15:01

A joint venture is suing the Fuzhou city government for 900 million yuan (about US$110 million) for allegedly failing to carry out a promise made seven years ago and causing huge losses to the company. And the China International Economic and Trade Arbitration Commision has accepted to hear the case.

The plaintiff, Fuzhou Xinyuan City Bridge Co. Ltd., is a joint-venture between Fuzhou Urban and Rural Construction Development Corporation and a Hong Kong investment company, a subsidiary company of China Travel Service Group.

Before 1997, there were three bridges spanning across the Minjiang River in Fuzhou City, capital of east China's Fujian Province. Due to city development, a fourth bridge was needed. Troubled by a lack of capital, the local government decided to use preferential policies to attract investors for the bridge construction.

Under a joint venture plan, the side representating the Fuzhou city government used the two existing bridges and Baihuting toll station, evaluated 360 million yuan (about US$44 million), as investment to the venture, accounting for 30% of the shares; and the Hong Kong company invested 840 million yuan (about US$101 million) into the joint veuture taking 70% of its shares. Of its investment, the Hong Kong firm borrowed 540 million yuan (about US$65 million) from the bank, with China Travel Service Group as the guarantor.

At the beginning, China Travel Service Group expressed its worries that no vehicle would use the toll road after the completion of Fuzhou Second Ring Road; besides, it also voiced concern over the removal of the toll station in the future.

In response, the Fuzhou government drafted a license agreement October 1997, promising that within the first nine years of the project, all traffic going in and out southern Fuzhou would pass through Baihuting toll station.

It also stated that in case of any special circumstance causing a sharp decrease in the pike income, the company has the right to request the government to cancel the license and get compensation. The Fuzhou government also promised the investing company would get an 18% return, in addition to a recovery of its investment.

As a result, a 28-year deal was signed and from October 1997 to April 2004, everything ran smoothly and the company had stable income. By the end of May 2004, the pike income totalled 650 million yuan (about US$78 million).

However, problem arose after Fuzhou Second Ring Road was completed and was open to traffic May 16, 2004. Many cars by-passed Baihuting toll station and pike income dropped drastically. At the end of June 2004, the monthly income decreased from some 8 million yuan to some 2 million yuan, recording a drop of more than 70%, and was expected to drop further. More than 150 employees were on the verge of losing their jobs and the company was unable to pay off the loan.

Having just repaid some 200 million yuan out of the some 500 million yuan loan, China Travel Service Group received an attorney's letter requesting loan repayment from the bank July 5.

Spokesman of China Travel Service Group (Hong Kong) said that they fully understand Fuzhou's will to improve the infrastructure of the city, but insisted that it should not be done at the expense of the interest of the investing companies.

After several negotiations, it was reported that consensus were reached between the local government and the joint-venture company June 12, 2004. These included: cancellation of the license by the government and return of the investment to the company, takeover of the role of guarantor by the Chinese side, and a "reasonable" return for the financing cost.

However, the Fuzhou government denied any consensus reached afterwards.

Moreover, as voices requesting the removal of the toll station were reported, it became a question why the government would use the long-term license of such a controversal item to attract foreign investment.

An offical from the Fuzhou city government admitted that licensing Baihuting toll station for 28 years was due to a misjudgment, yet he claimed that both the government and the company had made mistakes in the decision process, so they should bear the responsibility and share the loss together.

He also said that while the company should face their investment failure, it is unrealistic to stick to the terms in the original agreement. He also added that a cancellation of the license would be the "biggest concession" of the local government.

However, the company did not agree with him. "Cancellation of the license and compensation is not a concession but something stated in a legal agreement," said Wang Xiaoguang, director of the Hong Kong company. "The local government should bear the sole resopnsibility for its mistake and repay the company for the loss."

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