Overview on Public
– Private Partnership (“PPP”) Laws in Vietnam
Vietnam’s infrastructure development has struggled to
keep up with continued economic and population growth. According to the
statistics, Vietnam needs about US$170 billion for infrastructure investment in
the period from 2011 to 2020 while the State budget is constrained, capital
sources from state budget and official development assistance (“ODA”) are
estimated to meet only a half of the identified requirements.
In this situation, PPP is the most appropriate mechanism
for Vietnam. In practice, other countries have successfully implemented
partnership between the public and private sector. Put it simply, the idea is
that the public sector has the ‘users’ (or customers) and land and can provide
other incentives, such as tax breaks while the private sector can bring in
technology, capital, and efficiency through experience.
Up to date, Vietnam has had several PPP regulatory
frameworks, mostly for the Build-Operate-Transfer (“BOT”) projects since 1997
with Decree No. 1998/ND-CP dated 15 August 1998 (“Decree No. 62”) for domestic
investors and Decree No. 77-CP dated 18 June 1997 (“Decree No. 77”) for foreign
investors. In 2009, the Government of Vietnam issued Decree No. 108/2009/ND-CP
(“Decree No. 108”) to regulate BOT, Build
– Transfer (“BT”) and Build – Transfer- Operate (“BTO”) projects as amended in
2011 by Decree No. 24/2011/ND-CP (“Decree No. 24”). More notably, a pilot
program for PPP projects was promulgated in 2010 under Decision No. 71/2010/QD-TTg
dated 09 November 2010 by the Prime Minister (“Decision No. 71”).
Vietnam to amend
PPP regulatory frameworks
However, since the issuance of PPP pilot program in 2011, no PPP project has been
signed under this framework. Compared with some other jurisdictions in
Southeast Asia, foreign investment in infrastructure in Vietnam continues to be
low. Vietnam’s current PPP regulations were not successful in
attracting foreign investment on a PPP basis. Generally speaking, the current
PPP regulations, mainly Decision No. 71, only provide a basic framework for PPP
projects and it is broadly and generally interpreted as the PPP mechanism for
BOT projects.
In the Vietnam context, the investor and lenders find PPP
projects difficult to be bankable due to the Government’s weak commitment in
dealing with the underlying issues of low tariffs and willingness to pay; risks
of investing in infrastructure projects; and lengthy government procedures.
Vietnam also lacks a government viability gap funding to support PPP projects
that have strong economic returns but may not be commercially viable, and as
well as enable access to ODA grants to identify bankable projects. As Vietnam lacks a clear legal framework, the understanding of state authorities on PPP mechanism is limited, PPP
projects are not supported in Vietnam.
To deal with this situation, Vietnam is finalizing a much
improved legal framework for PPP projects with the goal to revitalize
investment in infrastructure projects (“New
PPP Law”). In early January 2015, the Ministry of Planning and Investment (“MPI”)
sent a final draft PPP Decree to the Prime Minister for consideration and
approval and this PPP Decree when promulgated will replace both Decree No. 71
and Decree No. 108 (“Latest PPP Decree
Draft”).
In this paper, we would like to focus on analyzing some
critical issues under Decision No. 71 that does not clarify and make PPP
projects not bankable, and screening with the Latest PPP Decree Draft to understand whether the
New PPP Law in Vietnam is moving closer towards bankable projects or not.
Why the current PPP
regulations are not bankable?
Bankability is a matter of public partner, private
partner and lender(s) in PPP projects. Simply speaking, a project is considered
bankable if the lenders are willing to finance it. The term of bankable project
is often used in the PPP environment and refers primarily to meeting the
lenders’ conditions and requirements because without their financial
participation, a PPP project cannot proceed.
Naturally speaking, the lenders are
primarily concerned about the security of their capital, step-in rights,
ability to protect the project by taking the control to replace the non-performing
project company, ability to transfer equity following and during construction.
Hence, the lenders certainly require standard mechanisms to secure their rights
when financing for the PPP projects, such as a mortgage on the assets or an
alternative required guarantee through the form of the PPP contract that, from
the lenders’ perspective, must be water-tight and regardless of any
contract event, the lenders’ capital must still be repaid.
As above-said, the current PPP regulations of Vietnam
make PPP project if implemented not bankable and cannot attract both the
investor and credit institutions due to some key bankability issues, i.e., limited step-in rights of the
lenders, guarantees of foreign currency convertibility, the use of foreign
governing law, the availability of Government support and
guarantees, and other bankability concerns.
Step-in-Rights
The previous drafts of PPP Decree required that all the
conditions, procedures and contents of the Step-in-Rights exercised by lenders
must be approved by the Authorized State Agency. However, there is no
definition on the Authorized State Agency and its approval mechanism. It is
also questioned whether the contract signed not between the investor and the
State is under the application scope of this approval requirement. Such
requirement limits the right of lenders and makes the PPP project not bankable.
Foreign currency
guarantee
In most infrastructure projects in Vietnam, the projects have to sell
their output in Vietnamese dong while in term of long-term financing, it is
only available in the foreign currency. This creates the most bankability
hindrance to such projects. Moreover, the current PPP regulations do not
provide the mechanism for government guarantee of convertibility (at the same
exchange rate) of dong into dollars,
and of the availability and remittability of dollars, which makes the dong-revenue project not bankable.
Governing law
The governing law is also another bankability issue with respect to the
PPP projects. Currently, in state-financed projects, the governing law is
mostly the law of Vietnam. Even though Vietnamese law is widely used in
Vietnam, Vietnam’s regulatory framework in general and the PPP regulations in
particular are still limited and definitely not as developed as that in English
law or other law advanced countries. The limit of the laws of Vietnam is not to
give lenders the certainty they need when lending on the basis of the assets
and cash-flow of a project.
Mortgage of Land
Under the Land Law of Vietnam, the investors will be exempted from land use fees/rental. However the
Land Law does not permit the mortgage of land if the rent has not been fully
paid. Hence, this limitation may be interpreted to mean that when a land is
exempted from land rent, it cannot be mortgaged. This interpretation makes the
PPP projects having land exempted from land rent less attractive to call for
bank loan. Meanwhile, the mortgage of land must
also have the approval of the competent state authority.
New PPP Law in
Vietnam: Closer Towards Bankable Projects?
According to ADB’s experience, to ensure successful PPPs, the government needs to
engage in broad based reforms and ensure a level playing field for private
sector participation and also make strong political commitment to promote and
advance PPPs as well as provide strong institutional support for planning and
carrying out effective PPP project preparation, including a thorough analysis
of monetary value. It also needs to pool donor resources to achieve critical
mass and consistency in approach and provide sufficient financing support to
include, but not be limited to, mechanisms for government to provide multi-year
commitments, creditworthy support, and prudent management of the fiscal
obligations created by PPPs.
From the content of the Latest PPP Decree Draft, we have
seen that the opinions from international advisors, multilaterals, donors and
business associations appear to have had a positive impact on the drafts and
the Government has been actively in amendment and improvement to make the New
PPP Law well drafted and help PP projects more bankable.
Notably is the removal of previous limits for the State
contribution in PPP project. Instead of providing the ceiling for State
contribution, the New PPP Law permits State contribution to vary depending on
the financial feasibility of each project and the contribution level will be
determined when the authority approves the financial feasibility report. This
development is remarkable and reflects the commitment of Vietnamese Government to
participate with the private sector to improve Vietnam’s infrastructure.
The latest PPP Decree Draft also eases the Step-in-Rights
of the lenders by removing all the approval mechanism by the Authorized State
Agency. It provides the lenders with more abilities to
protect the project by taking the control to replace the non-performing project
company. However, the draft still requires the lenders to reach the
agreement with the competent state authority at the time signing step-in
agreement, which should be negotiated together with and/or included in the
project agreement. Hence, such requirement may hinder the lenders in the event that
the parties cannot reach an agreement, unless there is a clearer guidance on
procedures for such agreement signing.
Under the Latest PPP Decree Draft, Vietnamese law shall
still remain the basic governing law, but foreign law application can be
negotiated. The Draft sets out clearly where project contracts can be governed
by foreign law, namely contracts involving a foreign party and government
agency guarantee contracts. Foreign arbitration can be selected for disputes
involving a foreign investor and even for government-backed guarantee
contracts. The Draft also provides that dispute resolved by arbitration
tribunal in accordance with the project contract and its’ relevant agreement is
a commercial dispute and the foreign arbitration award will be recognized and
enforced in Vietnam. This development under the Draft addresses a previous
argument that Vietnamese courts have taken certain discretion in preventing the
recognition and enforcement of foreign arbitral awards due to the absence of a
“commercial dispute” under the regulations on recognition and enforcement.
At the same time, the Latest PPP Decree Draft grants
lenders the right to mortgage properties, land use right and trading right on
project facilities. It also guarantees to keep the purpose of land use right
unchangeable during the whole term of project, even after the lenders perform
the Step-in Rights. The requirement for approval from the competent state
authority with respect to any mortgage is also removed. This new development in
the Latest PPP Decree Draft is pretty positive for the investor and lenders in
terms of bankability. However, the Latest PPP Decree Draft just guarantees the
rights to mortgage on the basis of compliance with the land law and civil law
in Vietnam and still fails to regulate the right to mortgage land exempted from land use fees/rental. The Draft should detail this
issue because bankability of the PPP projects is enhanced when the mortgage
rights to which the lenders are entitled to the land are clarified.
Another important bankable issue is foreign currency
guarantee. On the one hand, the Government guarantees the balance between
foreign currencies and domestic currencies and considers to satisfy the money
demand depending on the economic and social situation. On the other hand, there
is no guarantee on foreign exchange rates. In reality, the Government tries to
limit the amount of foreign currencies remitted overseas. This limitation together
with fluctuating and potentially adverse exchange rate has already hindered the
conversion of project revenue. An example from Kazakhstan could be taken to
illustrate the risk of not guaranteeing foreign exchange rate. The Kazakh
government agrees to compensate the concessionaire if the tenge (Kazakh currency) loses more than 5 per cent of its value
during the concession period. It is an important hedge since in Kazakhstan, the
exchange rate is dramatically fluctuating and Kazakhstan’s central bank is commonly
expected to sooner or later be forced
to repeat last February 2014’s 19
per cent devaluation. Thus, if the Government wants to limit guarantees under
the New PPP Law, it will create more concerns for the investor and difficulties
to convert project revenue. Then, it is
hard for the investor to determine the rewards are worth the risks.
To sum up, the Latest
PPP Decree Draft is well drafted and makes the New PPP Law in Vietnam move closer towards
bankable projects, especially the Draft contains no requirement on the maximum
level of the State contribution, which is a breakthrough. If all improvements
under Latest PPP Decree Draft become law, the New PPP Law could rejuvenate
interest in PPP investment form. Meanwhile, the Government is setting up a number
of tools to support PPP projects, including the Project Development
Facility, which is envisioned to help undertake a rigorous assessment of
potential projects, and the Viability Gap Fund, which will provide needed
Government support to make them financially viable. The Government has also
recently released a List of National Projects Calling for Foreign Investment
which is a promising start to develop a pipeline of viable projects. However, in practice,
it will all depend on the quality of implementation.Author: Oliver Massmann – Ho Gia Le Hoang
Source: Duane Morris Vietnam Blog: New PPP laws in Vietnam:moving closer towards bankable projects? Author: Oliver Massmann – Ho Gia Le Hoang