Project Finance.

This article was written by lawyers from Freshfields Bruckhaus Deringer

UK

Finance Bill 2002 - Proposed Changes to North Sea Oil Taxation Regime

Three significant changes to the North Sea oil taxation regime were proposed in the UK's 2002 Budget. These changes are: (i) the introduction of a 10 per cent supplementary charge on ring fence oil and gas production profits (ii) 100 per cent first year capital allowances for ring fence expenditure and (iii) subject to consultation on timing, the abolition of North Sea royalties. Draft legislation relating to the supplementary charge and the enhanced capital allowances is contained in the Finance Bill currently making its way through parliament.

Of the three, the imposition of the supplementary charge has attracted the most controversy, particularly from US companies. Their concern is that the inability to deduct financing costs from the supplementary charge computation may prevent the charge from being a creditable tax for which a foreign tax credit will be available in the US. The enhanced capital allowances have been largely welcomed, although the allowances may be of little value to new entrants to the North Sea (often small companies financed by private equity) as these companies may have no current year profits against which to offset the allowances.

The changes are expected to create planning opportunities for companies seeking to take full advantage of the increased allowances and the differential tax rates between ring fence and non-ring fence companies.

Both the supplementary charge and enhanced capital allowances regime came into effect on 17 April. The industry is currently lobbying the Inland Revenue in the hope that appropriate changes can be made to the supplementary charge provisions before the Finance Bill is passed into law this summer.

For further information please contact Michael Thompson T + 44 20 7832 7361 or Sally Hoare in London T + 44 20 7832 7276

CHINA

Reform of the Power Sector

On 11 April 2002 the State Council approved a resolution that drastically alters the Chinese power sector, eliminating the virtual monopoly long-held by the State Power Corporation.

The resolution calls for the separation of power generation assets and grid networks and for the establishment of several independent national power generation enterprises. According to the State Development and Planning Commission, Huaneng Power (Group) Corporation, currently owned by the state, is one of the power producers that will soon become independent. Huaneng Power (Group) Corporation will retain its current generating assets. The reforms are expected to allow existing companies the opportunity to expand and acquire former state-owned assets.

The resolution also requires the division of grid networks into two separate entities, the National Grid Company and Southern Power Grid Company. The National Grid Company will administer regional grid networks for north, north-west, north-east, east, and central China along with the grid network for Tibet. The Southern Power Grid Company will take over the administration of the grids in Yunnan, Guizhou, Guangxi, Guangdong, and Hainan. Another integral part of the reforms calls for the institution of a new pricing system that incorporates competitive bidding and is expected to lower power prices on implementation. Reforms also establish a regulatory body to oversee the industry, call for the establishment of new emissions standards and provide incentives for the development of cleaner power.

For further information please contact Lucille Barale in Hong Kong T + 852 2846 3483

MEXICO

Energy Reform in Doubt

Mexico's highest court has dealt a blow to President Vicente Fox's efforts to stimulate private investment in the energy sector by ruling that a decree leading to greater private investment violates Mexico's constitution.

Under Mexico's constitution, the state holds a monopoly over electricity generation, transmission and distribution. However, private entities are permitted to generate electricity in limited circumstances and may sell up to 20MW of excess capacity directly to CFE, the state-owned electrical utility. CFE may purchase power in excess of 20MW from private entities, but must do so through a public bidding process.

In May 2001, President Fox issued a decree that would increase the amount of power CFE could buy directly from private producers without going through the public bidding process. Under the decree, CFE could directly purchase 100 per cent of a private co-generator's capacity and up to 50 per cent of a private self-supplier's capacity. However, in a ruling announced on 25 April 2002, the Mexican Supreme Court of Justice held that the presidential decree was unconstitutional. The ruling resulted from a complaint filed by the Mexican Congress.

The now defunct presidential decree was seen as a first step towards reform in Mexico's energy sector. Other initiatives include proposals for constitutional amendments and new legislation to allow private companies to participate in energy generation through concessions. Such reforms face stiff opposition in the legislative branch and political opposition to reform, and the Supreme Court's recent ruling creates uncertainty for the future of energy reform in Mexico.

For further information please contact Thomas Hechl or Ximena Talero in Washington T + 1 202 777 4500

CHINA

New Measures on the Registration of Security Interests for Notaries Public

The Ministry of Justice has recently issued new measures on the registration of mortgages handled by public notary offices. The measures instruct public notary offices across China on the registration of security interests, primarily mortgages, according to the Security Law of the People's Republic of China.

Lenders and borrowers have long looked to public notary offices to register mortgages over a variety of security interests not handled by other agencies. The measures provide another much needed piece to the legal framework of creating, perfecting and enforcing security interests in China.

The measures also provide generally applicable registration requirements for mortgages and list the types of property that may be registered, expanding the Security Law to cover a wide variety of assets from machinery and equipment to real property located in villages and certain personal chattels owned by individuals.

In addition, the measures provide useful guidance on the registration of security interests over contract rights and other types of security that previous regulations have lacked, including contract operation rights, accounts receivables and future rights and interests.

For further information please contact Lucille Barale in Hong Kong T+ 852 2846 3483

The information and opinions contained in this bulletin are not intended to be a comprehensive study, nor to provide legal advice, and should not be relied on or treated as a substitute for specific advice concerning individual situations.

[copyright] Freshfields Bruckhaus Deringer 2002

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