- Lawyer in Vietnam Oliver Massmann - New PPP Laws in Vietnam: Moving Closer towards Bankable Projects? Oliver Massmann and Ho Gia Le Hoang
- March 18, 2015 | Author: Oliver Massmann
- Law Firm: Duane Morris Vietnam LLC - Hanoi Office
- 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.
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.
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.