The government of Shenzhen has enacted a new set of regulations on the franchising of public utilities, which went into force with immediate effect. Under these regulations, the city government will franchise its water supply, public transport, garbage treatment and other public utilities by tender, auction or invitation, allowing franchised operators to run these public utilities within the a specified scope and period.

According to the regulations, franchised operators will operate the following public utilities that involve the allocation of public resources and have a direct bearing on public interests: (1) water, gas and heat supply; (2) sewage and garbage treatment; (3) public transport; and (4) other sectors stipulated by law and regulation.

The regulations support the introduction of a mechanism of competition by requiring that each public utility be awarded to at least two franchised operators unless this cannot be done because of the special characteristics of the sector or due to geographical restrictions. The franchise period is set on the basis of the investment recovery period but may not exceed 30 years.

Franchised operators mainly derive their revenue in two forms, namely charges for the public products or services provided, and other business revenue and financial subsidies promised by the government. They may not abuse their advantageous position to compel, limit or obstruct users in the purchase of certain products.

The operation of public utilities built by the Shenzhen government may be franchised out, but franchised operators may not make unauthorised changes to the functions and usage of these facilities. The construction, transformation and maintenance of public utilities and the construction and transformation of stations and pipelines must conform to the overall arrangements of urban planning departments and abide by relevant laws and regulations for road and greenery management.

The price department will formulate price proposals for public utilities in council with the supervisory department and put these into effect after reporting them to the city government for approval. Public utility prices should be set on the basis of average social cost, reasonable revenue for operators, social tolerance and other relating factors. Reasonable revenue for operators should be assessed on the basis of the rate of return on net assets or net value of fixed assets, the rate of return on investment and the rate of return on cost after taking the characteristics of different sectors into consideration. At the same time, the price department should establish a system of regular price inspection, a cost information database and an efficient cost control mechanism. When formulating price proposals, it should appoint a qualified auditing firm to conduct auditing on the operating cost to ensure its truthfulness and accuracy.

The regulations put particular emphasis on the right to public participation because public utilities have much to do with people's everyday life. They specify that members of the public have the right to know the franchised operations and raise questions, and to file reports and complaints if their legitimate rights are harmed. The city government and franchised operators should establish a mechanism of public participation so that the public can effectively monitor the operation of franchised public utilities.

On the strengthening of supervision over franchised operators, the regulations require the city government to set up public utilities supervision committees in different sectors to monitor the operation of different franchised activities for the public. Non-government experts and representatives of the general public should make up at least two-thirds of the membership of these committees, and franchised operators should submit annual operational reports to relevant public supervision committees.

If a franchised operator commits any of the following acts, it will be ordered by the government to make rectification within a prescribed period or will face revocation of franchise if it fails to make rectification after the due date: 1) sub-franchises its business by such means as transfer, lease or collateral; 2) fails to meet the qualifications and requirements stated in the franchise agreement after equity transfer; 3) fails to meet the standards and requirements for the public utility products or services and seriously affects public interests; 4) causes major safety hazards due to poor management; 5) causes financial loss and jeopardises public interests due to poor management; 6) fails to build, transform and maintain public utilities in line with urban planning; 7) stops or suspends operation without authorisation; 8) fails to honour its obligations specified in law, regulations, letter of attorney and franchise agreement; 9) other situations specified in laws and regulations.

The franchised operator concerned may ask for a hearing before the government decides to revoke its franchise.