The Ministry of Construction (MOC), National Development and Reform Commission (NDRC), Ministry of Finance and People's Bank of China recently issued a joint circular banning the contractors of government-funded projects from making any capital contribution to the project.

As explained by an official in charge at MOC, contractor making capital contribution to a project refers to the situation where the project owner fails to pay the construction cost in advance or fails to meet the monthly payment schedule for construction cost (not including quality guarantee payment as stipulated in contract), and the contractor has to fund the construction out of its own pockets.

The official further explained that in recent years some local government authorities and departments demanded construction enterprises to make capital contribution to new projects to be launched. At the same time, some construction enterprises made promises about capital contribution as a means to win government-funded projects. This practice seriously undermines the state's macro-control measures targeting fixed asset investment and disrupts the order of the construction market. Besides, when a project has overspent, the additional fund is often difficult to come by, resulting in delays in paying construction fees and workers' wages.

In view of this, the four government departments prohibit construction enterprises from making capital contribution pledges when bidding for government-funded projects. They also ban such requirement from the terms and conditions of the construction contract or any supplementary provisions. Furthermore, government-funded projects are required to adopt an open system for contract filing.

The local government departments of NDRC, finance and construction should strengthen management of government-funded projects within their jurisdictions.

Local NDRC offices must not approve any government-funded projects where the sources of funds are unconfirmed. Commercial banks must provide truthful proof of funds before project launch. Financial authorities at all levels must monitor the use of funds during the construction process. Construction supervisory authorities must not issue construction licence to projects with dubious sources of funds.

For government-funded projects found to be using contractors?funds, construction authorities should immediately stop processing their applications and refuse to carry out inspection or record filing upon project completion. NDRC and other relevant authorities will restrict new projects proposed by the project owners concerned. For projects where funds are withdrawn surreptitiously during the construction process, financial authorities must immediately stop injecting funds.