The government of Vietnam recently submitted to the National Assembly a new draft of the proposed Law on Public - Private Partnership (PPP) investment ("Draft PPP Law"), together with its report of reviews of comments.1
Compared to the previous draft version, the new Draft PPP Law provides for some improvements, but leaves a number of critical risk allocation and bankability issues unresolved.
These issues include the following:
- The removal of government guarantees and undertakings for obligations of state-owned enterprises (e.g., in the power and energy sector, EVN's energy payment guarantees under PPAs notwithstanding electricity market reforms)
- Minimum revenue guarantee concerns over financial feasibility for certain projects, and flexibilities in terms of implementation for different sectors and projects in different scales when fixing thresholds under the proposed risk-sharing mechanisms
- Foreign currency convertibility limitations and uncertainty on foreign exchange indexation to tariffs
- Change-in-law risk allocations and legal value of PPP project contracts against existing or future discretionary permits and administrative documents issued by state-authorized agencies
- Governing law for the interpretation of the terms of PPP contracts and associated enforcement issues (for the new wordings added) and dispute resolution
- Lack of guarantees and assurances for termination payments and compensations in events of early termination of PPP project contracts
- Lender's step-in right, restrictions on share transfers, and other project development and project financing issues
In addition, while promoting PPP investments and creating a stable and long-term legal framework has been set as an overall objective, the issues on flexibilities and certainties from a private sector's perspective remain to be a significant concern. A number of areas of the Draft PPP Law have introduced restrictive regulations and tighter requirements. These include: limited sectors eligible for PPP investments and limited roles of the private sector for unsolicited projects; rigid principles of state capital portion uses and associated concerns over efficiency of proposed mechanisms; and restricted timeline to achieve financing arrangement of PPP projects.
The Draft PPP Law is proposed to be applicable to numerous ongoing or newly proposed power, energy and infrastructure projects in Vietnam, with its effect proposed from 1 January 2021.
At the moment, the new Draft PPP Law still leaves certain key risk allocation and bankability issues unresolved. Hopefully, the Draft PPP Law will be properly revised to resolve those as well as ancillary drafting issues before it can be finalized for adoption in the coming National Assembly's meeting in May 2020.
In the meantime, investors and financial institutions should review these draft rules in order to be prepared to take the necessary steps to best position themselves for growing investment opportunities in infrastructure projects and in the provision of public services in Vietnam. Moreover, regulatory issues for project developments and project financings based on best practices can be better addressed with the proper understanding of these draft rules and their developments.
Please do not hesitate to contact us if you would like to know more about any of the following:
- Further details and other areas of the Draft PPP Law, as well as differences between the Draft PPP Law and the Current Regulations on PPP and how they impact ongoing large-scale energy and infrastructure projects
- Specific implications for particular sectors of LNG-to-power and other energy projects, water supply and treatment, expressway, airport, seaport infrastructures, etc., as well as their specialized legal developments
- Potential upcoming additional guidelines related to infrastructure projects
- Specific opportunities, challenges as well as legal and practical solutions for development and investment in energy and infrastructure projects in Vietnam
Overview of Vietnam's PPP investment market
According to the government's Report No. 25/BC-CP in 20192:
- Vietnam had 336 PPP projects for which PPP contracts have been signed (including: 140 projects under BOT contracts, 188 projects under BT contracts and 8 projects under other types of PPP contracts)
- For those projects, a total amount of about VND 1,609,295 billion (approximately USD 70 billion) has been mobilized and utilized for investment and development of infrastructure projects in Vietnam.
According to the government's Proposal No. 354/TTr-CP dated 27 August 2019 to the National Assembly on the Draft PPP Law, PPP projects have been implemented in the sectors of: (i) transport (with a total of 220 projects, accounting for 65.47%); (ii) power and energy (with a total of 18 projects, accounting for 5.35%); (iii) water supply, sewerage and environment (with a total of 18 projects, accounting for 5.35%); and (iv) all other sectors (with a total of other 80 projects, accounting for 23.83%).
Vietnam has been looking for the best approach to promote more private sector capital and participation in the infrastructure sectors since as far back as 1991, when the first "Build - Operate - Transfer" (BOT) rules were adopted. More recently, multiple regulations relating to PPP have been developed in order to promote private investments for infrastructure enhancement.
On 4 May 2018, the government promulgated Decree No. 63/2018/ND-CP ("Decree No. 63") and subsequently, the MPI and other ministries issued more detailed guidelines to govern the implementation of Decree No. 63 (collectively, the "Current Regulations on PPP").
In mid-2018, the MPI prepared the Draft PPP Law, meant for adoption around mid-2020 and for tentatively taking effect from 1 January 2021. In March 2020, the MPI and the government submitted the new draft version to the National Assembly for further review and comments.
The need to adopt the proposed Draft PPP Law
According to the government, it is necessary to adopt a separate law to regulate PPP investment activities and avoid the current situation of "borrowing" regulations from other laws during the application process, in order to set up a stable and sustainable legal framework on PPP investments.
In this respect, the Draft PPP Law provides that in case of any discrepancies between the proposed PPP Law and other laws, the proposed PPP Law shall prevail. However, the application of this provision is limited only to certain matters, including investment process and procedures of PPP projects; PPP project company's operations; governing laws of PPP project contracts; investment assurances; and mechanism for management of state capital in PPP projects. This leaves uncertainties on how to interpret discrepancies in a number of other areas proposed in the Draft PPP Law (e.g., whether more or less restrictive or favorable regulations from a private sector's perspective would prevail, subject to other rules of interpretations under current law).
Under the Draft PPP Law, as a principle of management of PPP investment, PPP projects must conform to the relevant master plans under the Law on Master Planning. Moreover, Investment Policy Decisions (as investment approvals) issued by state-authorized agencies must be consistent with the master plans. However, the Draft PPP Law has yet to provide for specific mechanisms to simplify the master plan approval process for PPP projects, given that it is still a complex and time-consuming process under the current regulations.
The role of PPP project contracts
The Draft PPP Law has yet to clarify the prevailing legal value and interpretations of the negotiated PPP project contract (as the contractual agreement of the public sector's contracting party and private sector investors) against discretionary permits and administrative documents issued by state-authorized agencies.
In this respect, the Draft PPP Law lists out: (i) state-authorized agencies (including those agencies issuing Investment Policy Decisions and other permits and licenses to PPP projects); and (ii) agencies signing PPP project contracts (i.e., the public sector's contracting parties). It also provides that agencies signing PPP project contracts will be state-authorized agencies or other units under such state-authorized agencies' management and authorized by such state-authorized agencies. However, the Draft PPP Law has yet to clarify how to deal with cases where existing or future discretionary permits and administrative documents issued by the state-authorized agencies contradict contractual agreements with investors under PPP project contracts, as well as whether the investors would be protected from risks and liabilities due to changes in laws, policies and permits.
Under the Draft PPP Law, the proposed PPP investment sectors have been narrowed down compared to the current regulations.
For this limited scope, the government has explained that the Draft PPP Law has been drafted and designed to eliminate those sectors that have not been implemented under the PPP arrangement or those that have been implemented but have been ineffective or unattractive to the private sector or have been sufficiently implemented under other modes of investment (e.g., socialization or private investment).3
In order to accommodate certain flexibilities for the public sector, the government has proposed under the Draft PPP Law that if a proposed project does not fall within any of the above-specified sectors, the competent state agency may report to the Prime Minister regarding their proposed projects in other sectors and seek permission of the proposed sectors to be implemented under the PPP form.
For any such proposal of competent state agencies, the Draft PPP Law requires all of the following conditions to be fully satisfied:
- The proposed project falls within the sectors that are governed by the Public Investment Law.
- The proposed project is able to balance state capital when implemented under the PPP form.
- The proposed project is more feasible when it is implemented under a PPP form than public investment.
However, the Draft PPP Law does not give private developers any similar right to propose PPP investment for projects not falling within the above-specified sectors. For example, in the power and energy sector, as the Draft PPP Law limits PPP investment only to "electrical power plants and electrical power grids," it remains unclear whether for other associated components of energy (oil and gas) projects other than power generation plants (IPPs) and transmission facilities (e.g., LNG terminal projects, regasification projects, pipeline/gas transportation projects), the private investors of those projects would or would not have the option to propose PPP investment form if they wish to obtain more governmental support under a PPP framework instead of a normal private investment framework.
Based on the Draft PPP Law's current wordings, the addition of new sectors eligible for PPP investments would require relevant state-authorized agencies' proposal and the Prime Minister's approval on a case-by-case basis, if all set conditions are met. Otherwise, an amendment to the law would be required. As such, this might not be well aligned with the goal of creating a stable and long-term legal framework. The focused strategy on some key sectors does not necessarily mean that other sectors will have to be excluded from PPP investments under the proposed Law. The needs of private sector participations can emerge for new sectors; and private sector investors may also need governmental support in a wide range of sectors.
Classification of project scheme
The Draft PPP Law inherits the current regulations of Decree No. 63/2018/ND-CP, under which there are seven types of basic project contracts that are divided into three groups:
- Projects with collection of fees from users (BOT, BTO, BOO, O&M)
- Projects with state's payments based on the quality of public products and services provided (BLT and BTL)
- Projects with exchange between resources and infrastructure works (BT)
Project contract types other than those mentioned will be subject to competent agencies' proposal to the Prime Minister, to be considered and approved based on appraisal opinions of the state management agency on PPP before the competent agencies issue an Investment Policy Decision.
Under the Draft PPP Law, PPP projects that involve renovating, upgrading, expanding, modernizing, operating, and conducting business activities of existing infrastructure facilities and systems will not be allowed to use project contracts that collect fees directly from end-users (i.e., BOT, BTO, BOO or O&M contract).
Capitalization for PPP projects
The investors and PPP project companies are responsible for contributing equity capital and mobilizing loan capital and other lawful sources of capital to implement the project.
Under the PPP Draft Law, within 12 months from the signing date of the PPP Project Contract, the investors and PPP project companies are required to complete financing arrangements. For projects whose Investment Policy Decisions are under the approval authority of the National Assembly or the Prime Minister, the completion period must not exceed 18 months.
The PPP Project contract will take effect only when the investor and/or the PPP project company has completed financing arrangements.
However, the Draft PPP Law is not entirely clear as to whether "financing agreement" refers to the financial close date (e.g., the date on which all the debt financing documents have been signed and all conditions precedent to initial drawdown of initial loans have been satisfied or have been waived by the financing parties).
For equity capital required to be injected by project sponsors/investors, the investors must contribute equity capital of at least 15% of the total project investment capital (excluding any state capital portion).
Government assurance and guarantees
According to the government's proposal and explanations, a PPP project is a project implemented to provide public products and services (for public purposes) through private investment (private capital) and/or private management. Under the PPP framework, the government of Vietnam aims to call for private sector participation in contributing financial resources, and use intellectual and management capability from all economic private sectors to make up for the state budget shortage. Therefore, the government should take certain responsibilities and obligations in ensuring the feasibility of the projects by providing certain support, assurances and guarantees (rather than pushing the entire responsibility and risks for implementing projects to the private sector as for normal private investment trade and commerce projects).4
However, the Draft PPP Law fails to settle some of the key issues that affected bankability under the Current Regulations on PPP. Specifically, the proposed mechanism for sharing revenue increase and decrease may not be equivalent to government guarantees on minimum revenue (for Stand-Alone Projects) as the proposed mechanism for sharing revenue increase and decrease is subject to strict limitations and conditions and remains favorable to the public sector (rather than the private sector of investors and lenders). Also, fixing thresholds for minimum revenue guarantees may create concerns over financial feasibility for certain projects and flexibilities in terms of implementations, given that the level of guarantees may vary in different sectors and projects in different scales.
Also, amid concerns over sources of foreign currency at the national reserve, the ''guarantee'' for the balance of foreign currency can only be granted to certain limited important projects, with limited guarantee for foreign currency balance to no more than 30% of the project revenue in Vietnamese dong after subtracting expenditures to all PPP projects. The Vietnamese government's approach to these points will have to be closely monitored as they are of the most important concern for foreign investors and lenders. Overall, as the Draft PPP Law sets such a threshold on all PPP projects in Vietnam, which creates concerns over both uncertainties and the lack of flexibilities. This may also not be aligned with the proposed law's set objectives of attracting foreign investors with strong financial capacity in PPP investments to large-scale projects or of increasing the attractiveness of PPP projects. This directly impacts the bankability of projects.
In addition, the Current Regulations on PPP under Decree No. 63 provides for government guarantees for obligations of state-owned enterprises. Specifically, under Decree No. 63, depending on the nature and requirements for the implementation of the projects, the guaranteed obligations can include: (i) the supply of raw materials, the sale/consumption of products and services, and other contractual obligations to the investor, the project company and other enterprises participating in the project's implementation; and (ii) the obligations of state-owned enterprises, which sell fuel and raw materials to, or purchase products and services from, the investor and the project company. For example, in case of power generation businesses with the national electricity company (EVN) being the off-taker, the government guarantee can cover EVN's energy payment obligations under the power purchase agreement, or the fuel supplier's obligations to provide the fuel under the fuel supply agreement. However, the Draft PPP Law has removed this mechanism of government guarantees for obligations of state-owned enterprises.
Under the Draft PPP Law, the land use purpose of the project remains unchanged in the entire implementation term of the PPP project contract, including where the lenders exercise their step-in rights. However, this level of assurance of rights of access to land may not be sufficient to address practical issues on land clearance delays for certain projects and locations without stronger support, assurances and implementation mechanisms from the local governmental authorities.
In terms of assurance of the right of mortgage of assets and the rights to commercially operate infrastructure facilities and systems, while mortgage of right to business in favor of lenders is expected to enhance lender's control over the projects and function of the lender's step-in right, we note that in Vietnam, mortgage over land-use rights in favor of foreign banks is still restricted under the Land Law. Therefore, certain arrangements such as those involving a domestic security agent and bank account mortgage over sale proceed are necessary in order to include land-use rights into the security package for foreign banks -- although validity and permissibility of such arrangements have not fully been guaranteed. As the legal basis is uncertain and the State Bank of Vietnam can challenge such arrangements, the Draft PPP Law remains unresolved as to whether an offshore lender can take a security interest over land and buildings if an onshore security agent is appointed.
Project step-in rights of lenders
Under the Draft PPP Law, lenders have rights to step in and take over the whole or a part of assets of the investors and/or the PPP project company ("project step-in rights") that have been set up under their contracts if the investors or the PPP project company fail to perform their obligations under the project contract or the loan agreement.
The Draft PPP Law provides that lenders may propose to the competent state agency the appointment of another investor to sign the project contract and continue its performance to ensure the continued supply of public products and services. For such projects requiring investor appointment to be implemented right away to ensure continued supply of public services, the lender must carry out procedures for transferring partly or wholly assets it has received from such other investors as designated by the competent state agency. This implies that proposals by lenders on appointment of another investor will be subject to the competent state agency's approval as the word "designate" gives certain discretions to the competent state agencies on whether or not to agree with lenders' proposals. This may create uncertainties as to the enforcement of project step-in rights from a lender's perspective.
In addition, while the Draft PPP Law imposes an obligation for lenders to transfer project assets to the new investor, it has yet to clarify on the appropriate allocation of risks and liabilities between involved parties to preserve commercial rights of lenders under the loan agreements for financing of the projects. The Draft PPP Law provides that the agreement on the above-described arrangements must be made in a written contract between the lender(s) and the contracting parties. This agreement will be an integral part of the PPP project contract. However, the Draft PPP Law does not clearly impose an obligation on the state agency contracting party to enter into a direct agreement with lenders, and the current provisions of the Draft PPP Law may not be sufficient to obligate state agencies to negotiate and sign such direct agreement to create certainties for lenders to exercise their rights.
Governing Law of PPP project contracts
Under the Draft PPP Law, the PPP project contract, its appendices and other relevant documents signed between the Vietnam state agencies and the investors/PPP project company are governed by Vietnamese laws. The new version of the Draft PPP Law has recently added that "for matters for which Vietnamese laws do not regulate, the parties may agree in detail in the PPP Project Contract on the basis of being not contrary to the fundamental principles of Vietnamese laws."
However, the added wording of the Draft PPP Law does not make any reference to "foreign law," and so the applicability of foreign law as the governing law of PPP project contracts remain uncertain.
In addition, as the Draft PPP Law imposes a qualification regarding matters that Vietnamese laws do not regulate, the agreement on governing law for those issues must not be contrary to the fundamental principles of Vietnamese laws. This raises another enforcement issue that those rules practically allow a Vietnamese court to refuse the application of foreign law in cases where it is inconsistent with the fundamental principles of Vietnamese law.
Unlike the "applicable laws" concept, the concept of "governing law" of a contract refers to parties' choice of a specific law to interpret concepts and terms of the contract. It is impractical and unenforceable for parties to specify, in the PPP project contract/concession agreement, "matters for which Vietnamese laws do not regulate" and which are "not contrary to the fundamental principles of Vietnamese laws."
As this clause applies to all PPP projects setting a compulsory and non-negotiable rule, it continues raising concerns for foreign investors and financiers over flexibilities of parties to negotiate the governing law of PPP contracts on a project-by-project basis, as well as the lack of predictability in terms of the interpretation of concepts and enforcement of obligations of parties involved. This clause may also not be aligned with the proposed law's set objectives of attracting foreign investors with strong financial capacity in PPP investment to large-scale projects, or of increasing the attractiveness of PPP projects.
Resolution of disputes
Under the Draft PPP Law, disputes between the competent agency, the contract signing agency and a foreign investor or a PPP project company established by a foreign investor are resolved by: (i) Vietnamese arbitration; or (ii) a Vietnamese court, unless agreed otherwise in the PPP project contract or provided otherwise under an international treaty to which Vietnam is a member. In this case, the Draft PPP Law does not specifically refer to "foreign arbitration" or "international arbitration." However, based on the underlined wordings, foreign investors will have to negotiate for "foreign arbitration" or "international arbitration" on a project-by-project basis, and this will put foreign investors in a weak negotiating position.