The Government of Vietnam recently issued new regulations on PPP under decree No. 15 (the New PPP Regulations). The New PPP Regulations will take effect from 10 April 2015 (the Effective Date) and replace the previously issued pilot PPP regulations (the Pilot PPP Regulations) and the existing regulations on build-operate-transfer (BOT) projects, build-transfer-operate (BTO) projects and build-transfer (BT) projects issued under decree No. 108 on 27 November 2009 (the BOT Decree).
The New PPP Regulations establish a legal framework for both the PPP and the BOT/BTO/BT projects regimes and are intended to attract more non-Government investment towards the development of national infrastructure. This note looks at some of the key changes brought by the New PPP Regulations.
PPP projects
The New PPP Regulations remove the requirement under the Pilot PPP Regulations that a PPP project must be an important and large-scale project (as previously set out in decision No. 412 issued by the Prime Minister on 11 April 2007). The New PPP Regulations therefore allow the relevant governmental authorities to provide detailed guidance on a broader range of PPP projects falling within the following sectors:
- transportation infrastructure facilities and related services;
- lighting systems, clean water supply systems, water drainage systems, waste water and waste collection and treatment systems, social housing, resettlement housing and cemeteries;
- power plants and power transmission lines;
- infrastructure facilities for healthcare, education, training, vocational training, culture, sport and related services, and offices of state agencies;
- infrastructure facilities for trade, science and technology, hydrometeorology, economic zones, industrial zones, high-tech zones and concentrated information technology zones, and information technology applications;
- agricultural and rural infrastructure facilities and development services for connecting production with processing and sale of agricultural products; and
- other sectors as decided by the Prime Minister.
The New PPP Regulations do not expressly cover certain other projects of interest to potential investors in Vietnam, such as those relating to upstream oil and gas, mining, petrol refineries and plants, steel mills and aluminium refineries.
PPP projects are classified by way of importance, being (i) projects of national importance or (ii) into Groups A, B or C. Feasibility studies for those projects classified under (i) will need to be approved by the Prime Minister and the National Assembly and it appears that (i) will be eligible to receive the highest level of incentives. For Group A, projects require the Prime Minister’s approval and, for Groups B and C, projects require approval by a relevant ministry or a provincial people’s committee. The New PPP Regulations do not contain any express guidance as to which group a project will be categorised. However, the Law on Public Investment (effective from 1 January 2015) provides certain criteria for classifying projects under (i) or (ii) above. In brief, the categorisation of projects will depend on factors such as size of capital investment, potential environmental impact, location, likely impact on the surrounding community and the specific industry sector into which the project falls.
Project contracts
For a PPP project, the relevant governmental authority is expected to enter into project contracts with investor(s) for the purposes of developing, managing and operating the project. Since the New PPP Regulations regulate both BOT/BTO/BT projects and the PPP regimes within a single legal framework, the New PPP Regulations cover not only traditional projects (i.e. BOT projects, BTO projects or BT projects under the BOT Decree) but also expressly provide for additional project structures typically seen in PPP regimes.
Sequence for implementing PPP projects
Except for those projects classified under Group C, the New PPP Regulations provide for the following sequence to be adopted in the implementation of a project and guidance is provided in relation to each of these steps:
1. formulation, evaluation, approval and then announcement of the project;
2. formulation, evaluation and approval of the feasibility study report;
3. co-ordinating selection of investor(s), negotiation and signing of an investment agreement and negotiation of the project contracts with Vietnam government parties;
4. application for and issuance of an investment registration certificate and establishing the project enterprise;
5. commencement of implementation of the project (including both construction and operation); and
6. accounting finalisation and transfer of the project facility.
The investment agreement, referred to in (3) above, is intended to be made between the relevant authorised Vietnam state agency and the investor(s) in order to, among other things, provide confirmations on the draft project contracts, the rights and obligations of each party in the implementing process for obtaining the investment registration certificate and to establish the project company, and other matters to be agreed between the parties.
For projects classified within Group C, the New PPP Regulations provide that the sequence for implementation will be the same, except that there is no requirement to follow procedures (2) or (4) above and there is no requirement for an investment agreement to be signed as referred to in item (3) above.
Private sector investment capital
Investment capital contributed or arranged by investors into a PPP project typically consists of equity capital and loans and other debt from the investors themselves or third party financiers. Under the New PPP Regulations, the equity capital contribution of the non-governmental investors in a PPP project must be at least 15% of investment capital up to VND1,500 billion (currently approximately US$70 million) plus at least 10% of the portion of any investment capital exceeding VND1,500 billion. Any capital contribution from the Government is not counted towards investment capital for the purpose of determining the equity capital contributed by investors. These requirements are generally similar to those under the BOT Decree but are more relaxed than those under the Pilot PPP Regulations (which required at least 30% of the investment capital).
The New PPP Regulations focus more on contribution from the Government rather than providing extensive guidance on private sector investment capital. For example, use of sponsor subordinated loans or equity bridge loans and raising finance through the issuance of preference shares or other types of share are not mentioned. However, the New PPP Regulations do provide more generally that an investor is responsible for contributing equity and raising other capital sources to implement a particular project in accordance with what has been agreed under the relevant project contracts which could broadly cover such other forms of investor contributions.
Government contribution
The Government may make a state capital contribution to a PPP project. The BOT Decree and the Pilot PPP Regulations limit the state capital contribution to no more than 49% and 30% respectively of the total investment capital. The New PPP Regulations remove such limits and, instead of providing fixed limits to state capital contribution, the New PPP Regulations allow the relevant governmental authorities to flexibly determine how much capital will be contributed by the Government based on the financial plan for the project, the ability to raise funds by the Government and the laws on public investments. This development is significant and signals the Government’s willingness to participate alongside the private sector in the improvement of national infrastructure. Whether we will see significant co-funding of infrastructure and other PPP projects in Vietnam by the Vietnamese government remains to be seen. The New PPP Regulations do, however, incorporate a restriction on the types of project in respect of which state capital contributions can be made. This restriction only permits state capital contributions in the implementation of projects that have been proposed by a Government ministry, branch or provincial people’s committee or a project falling within the category eligible to use official development aid and concessional loan capital from a foreign donor.
The New PPP Regulations are silent on whether a Government capital contribution in a PPP project, in which such Government capital contribution is permitted, can be used as collateral for raising finance.
Investment incentives and guarantees
Generally, the investment incentives and government guarantees are not substantially different to those provided for under the existing regulations and are high level in their nature. Broadly speaking, the areas of investment incentive/government guarantee mentioned in the New PPP Regulations include tax incentives, rights to mortgage project assets, rights to use land, rights relating to the purchase of foreign currency and foreign currency balancing, rights to utilise public services and rights relating to ownership of assets. The New PPP Regulations suggest that the Government will give incentive/guarantees in these areas and that such guarantees will be granted in accordance with applicable law.
Notably, the government guarantee relating to the availability of foreign currency will be for (i) projects falling within investment policy approved by the National Assembly in accordance with the Law on Public Investment and certain other related regulations, (ii) infrastructure projects as approved by the Government and (iii) such other important projects as decided by the Prime Minister. The New PPP Regulations do not provide guidance as to what is an “important project” nor as to what Government ministry, agency or authority is being referred to in (ii), but it does seem clear that only projects of a certain importance (to be clarified in future implementing regulations or with the Government at the time) are intended to benefit from government guarantees of foreign currency availability (and presumably also convertibility and remittance).
Selection of investors
Under the Pilot PPP Regulations competitive tendering was always required for the selection of investors whereas under the BOT Decree direct appointment of investors is permitted in some circumstances. The New PPP Regulations have relaxed this position by expressly providing that selection shall be conducted either by open tender or direct appointment for all the PPP project regimes. The New PPP Regulations do not change current restrictions on ownership by foreign investors in certain industries or types of projects, which continue to be governed by existing laws.
Security and step-in rights
Step-in rights are critical to lending banks in allowing them to preserve essential contracts entered into by the project company in the event of a default by such project company. However, under the Pilot PPP Regulations and the BOT Decree, step-in rights must be subject to approval from the relevant competent governmental authority. This approval mechanism is obviously not acceptable to lending banks and may affect the ability of the investors to raise funds for a PPP project. The New PPP Regulations remove this approval mechanism and instead require that lending banks and the relevant governmental authority will determine the timing for execution of the agreement providing for step-in rights. Whilst the New PPP Regulations do not legislate as to the timing of this, typically project lenders require that appropriate direct agreements with Government and other project counter-parties are in place by financial close for a project.
The New PPP Regulations do not deal with the ability of PPP projects to give security over all their statutory land interests, which continues to be uncertain in Vietnam in the case where land is conferred on a rent-free basis for a project.
Transfer of the investor’s rights and/or obligations under a project agreement
The BOT Decree and Pilot PPP Regulations allow an investor to transfer its rights and/or obligations under a project agreement subject to approval from the relevant governmental authority. This approval mechanism has been removed under the New PPP Regulations. However, the New PPP Regulations do require a transfer to be documented under an agreement between the parties (including the relevant governmental authority) to the relevant project document and the transferee. It is not clear whether in practice the relevant governmental authority will impose any conditions or requirements on the transfer of an investor’s rights and obligations under a project agreement at the time of the transfer, although it can be expected that the Government authorities will require consent rights or transfers to third parties.
Selection of foreign governing law for project documents
Under the BOT Decree, selection of foreign governing law in project contracts and certain project documents entered into with foreign investors is expressly permitted. By contrast, the Pilot PPP Regulations require application of foreign law to be determined on a case by case basis which, of course, creates uncertainty. The Government has addressed this issue under the New PPP Regulations by bringing the PPP regime in line with the BOT Decree and permitting the parties to select foreign governing law by contractual agreement in all cases.
Transitional provisions
Generally, projects announced prior to the Effective Date must be reviewed and reapproved in accordance with the relevant provisions of the New PPP Regulations unless that project has already been approved by the Prime Minister. The New PPP Regulations do, however, incorporate the following provisions to cover projects at varying stages of implementation:
- Project contracts initialled prior to the Effective Date are not required to be renegotiated.
- Projects for which an investment certificate has been issued or project contracts which are officially signed prior to the Effective Date shall continue to be implemented in accordance with the provisions of the investment certificate or project contract.
- Projects for which a written undertaking or agreement was made by the Prime Minister or by a ministry, branch or provincial people’s committee on the use of state investment capital for project implementation, on investment incentives and guarantees, and on other matters relevant to project implementation prior to the Effective Date shall continue to be implemented in accordance with such written document (i.e. even if the final project contracts have not been signed).
- Other cases shall be implemented in accordance with a decision of the Prime Minister on the basis of a proposal from the Ministry of Planning and Investment.
In view of the above, and from a practical perspective, for those investors or developers currently seeking to finalise project agreements on existing large-scale projects in Vietnam (for example, some of the BOT power projects currently being negotiated), it is suggested that those investors and developers keep negotiating and/or try to obtain the appropriate written undertakings/agreements (as specified in the third point above) prior to the Effective Date, to avoid the risk of such projects having to be reviewed and reapproved under the New PPP Regulations.
Conclusion
The New PPP Regulations codify both the BOT Decree and the Pilot PPP Regulations within a single legal framework so as to ensure a level playing field for investors in PPP projects. In addition, the New PPP Regulations bring the legal framework on PPP more in line with international practice and address certain key weaknesses in, and inconsistencies between, the BOT Decree and the Pilot PPP Regulations. It is therefore anticipated that the New PPP Regulations will attract more non-Government investment capital into national infrastructure projects which should, in turn, contribute to economic growth of Vietnam. However, it remains to be seen how the New PPP Regulations will be implemented in practice, and so consideration of any further implementing laws, regulations or directives will be key.
