Vietnam: new Decree on public-private partnership investments
June 2015 | EXPERT BRIEFING | FINANCE & INVESTMENT
On 14 February 2015, the government of Vietnam issued the long-awaited Decree 15 on public-private partnership (PPP) investments. Decree 15 took effect on 10 April 2015 and provides a single legal framework for private investments in the public infrastructure sectors. It also repealed previous regulations on build-operate-transfer (BOT), build-transfer-operate (BTO) and build-transfer (BT) investments, and the pilot PPP scheme. Specifically, Decree 15 replaced Decree 108 dated 27 November 2009 (as amended) and Decision 71 dated 9 November 2010 on the pilot PPP investment scheme.
Decree 108, which together with its predecessors actually dated back to 1998, served as the legal framework for three BOT projects that received international financing – Phu My 2-2, Phu My 3 and Mong Duong 2. Decision 71, by contrast, was the first attempt to lay down PPP regulations on a trial basis. Since its adoption four years ago, no project has been completed under Decision 71. As expected, Decree 15 was modelled on Decree 108. Although Decree 15 does not offer the groundbreaking legal framework that was hoped for during the last years of its drafting process, it does introduce several new features, useful clarifications and incremental improvements from the existing regulations.
Decree 15’s noteworthy provisions
Previously, Decree 108 only contemplated the BOT, BTO and BT investment forms, which are suitable only for projects that allow investors to charge off-takers or end-users for the goods or services. Decree 15 introduces three additional forms of PPP investments, namely the build-transfer-lease (BTL), the build-lease-transfer (BLT) and the operate and manage contract (OMC). At the same time, Decree 15 allows investors to charge a usage fee, a rental fee or an availability payment to recover their investments. This offers more flexibility to investors and should allow more industries (such as commercial or healthcare infrastructure) to use the PPP structure to develop their projects than was the case previously.
Criteria for selecting PPP projects
Decree 15 sets out the detailed procedures for pursuing a PPP project, including the process of preparing a project proposal, its appraisal and approval by the government and announcement of the approved PPP projects. It also expressly provides for criteria of a qualified PPP project, as follows: (i) it is one of the listed infrastructure sectors allowed to use the PPP form, as set out in Decree 15; (ii) it conforms to the development plan and master plan of the sectors and regions, and the plan for socioeconomic development of the local region, and projects which are not yet included in such plans must first receive approval by the relevant Ministry or provincial People’s Committee; (iii) it is capable of attracting commercial funding, technology and experienced investors; (iv) it can deliver products and services with satisfactory quality to end-users in accordance with the PPP contract; (v) it has a total investment capital of approximately US$930,000 or more, except for OMC projects and projects in the agricultural sectors.
In addition, Decree 15 expressly provides that among all PPP projects which meet the above criteria, projects which have the most capital recovery potentials from their activities will be prioritised.
The above detailed provisions add more clarity and transparency to the PPP approval and selection process, and are an improvement on Decree 108.
Viability gap funding
Viability gap funding (VGF) has long been instrumental to many PPP projects, especially to those with limited or irregular sources of income. Although Decree 108 is silent on VGF, it does provide for certain quasi-VGF forms, such as support for the construction of ancillary facilities or land clearance and resettlements, which are usually not counted towards the project’s investment capital. On the other hand, in practice, certain quasi-VGF under Decree 108, such as the ‘in kind’ payment in the form of land use rights in certain BT projects, are considered part of the BT project’s package.
Decree 15 has introduced a much-improved VGF regime (compared with Decree 15’s previous drafts) allowing the use of state capital to bridge the gap between the project’s investment and its return, in order to make the project financially viable for investors. Decree 15 also removes the 30 percent cap for VGF by state capital set out in Decision 71, and now allows government agencies to determine the use of state capital based on the project’s needs, which in turn allows the government to be flexible in funding the projects. We should expect that the state’s capital will come with caveats, such as the state’s desire to exert a certain level of control over the project, and this may inevitably slow the project development process. However, if used creatively, this will allow both investors and the government greater flexibility in structuring projects and enabling otherwise unviable projects to become feasible.
Selection of PPP investors
Decree 15 requires that the selection of PPP investors need to comply with the Tendering Law dated 26 November 2013. However, the Tendering Law currently has no specific provisions on the process of selecting PPP investors. This requirement, coupled with the fact that there is no positive precedent for the tendering process for selection of PPP investors, may mean that a completely new legal framework for selecting PPP investors under the Tendering Law regime is needed if projects are not to hit a dead-end.
Land swap for BT projects
By their very nature, BT projects require investors to invest into projects and transfer them to the government without having the chance to operate the project and recover their investments. The government compensates investors in those projects by giving them land use rights to develop a different additional project so that they could recuperate their initial investments. There have been several BT projects developed by investors, mainly in the road sector, in exchange for land use rights for other real estate projects. Under Decree 108, BT investors were assured that the government would facilitate the conditions for them to develop an additional project, so that such investors can recover their investment in the initial BT project. Decree 15 now clarifies that the investors of a BT project will receive land use rights to develop an additional project. The use of the land fund for land to be swapped for the BT investors must be approved by the relevant land management authority. Decree 15 seems to allow investors to develop the BT project and the additional project in parallel, or immediately after the infrastructure of the BT project has been completed. While this is a welcome development for the BT investors, Decree 15 is silent on how the parties deal with the risk that the BT project is not completed and transferred.
Enhanced lenders’ rights
Decree 15 introduces some welcome enhancements of lenders’ rights, which should help to make Vietnamese PPP projects more bankable. Decree 15 now expressly allows investors of a PPP project to mortgage concession rights under the project contracts, in addition to mortgaging land use rights and other assets of the project. This was not available under Decree 108, and had to be specifically negotiated for each project. Under Decree 108, only lenders themselves could exercise step-in rights, and the use of a third party to exercise such rights on behalf of the lenders had to be negotiated on a case-by-case basis. Decree 15 now clarifies the issue by expressly allowing lenders to a PPP project to designate a qualified third party to exercise the step-in rights of the lenders against both the investors and the project company. Decree 15 also removes the requirement that such step-in rights be approved by the competent State authority.
Although the above are only minor incremental changes from Decree 108, they strengthen the lenders’ rights and save the parties from having to spend the time and resources during the development phase to negotiate these specific rights.
Land rental and land mortgage issues
Land rental and the investors’ right to mortgage land are complex issues that have yet to be addressed in a uniform and consistent manner in Vietnam’s short history of project development and financing. One problem was that under Decree 108, investors were expressly exempt from land rentals, and under the Land Law 2003, lessees who were exempt from land rentals did not have the right to mortgage such land.
Unfortunately, Decree 15 does not resolve this issue. In fact, Decree 15’s treatment of land use rights and rentals remains inconsistent. On the one hand, Decree 15 guarantees that the project’s land use rights will remain unchanged for the duration of the project, even in the event that the lenders exercise their step-in rights. This is a positive step to give investors and lenders certainty of their rights to use the land for predetermined and specified purposes. On the other hand, Decree 15 does not give PPP projects an automatic exemption from land rentals and land use fees, as was the case under Decree 108. Decree 15 provides that PPP projects are entitled to land rental exemptions only in accordance with applicable land regulations. In addition, Decree 15 allows investors and PPP projects to mortgage assets, project development rights and land use rights in accordance with land regulations and the Civil Code.
Accordingly, Decree 15’s current language fails to clarify whether investors have an unequivocal right to mortgage the land. Investors and lenders will need to wait for the implementing regulations for either Decree 15, or the land law, or seek ‘special treatment’ on a case-by-case basis for their project.
Foreign currency guarantee
Due to the fact that the Vietnamese Dong is not a convertible currency, the guarantee of foreign currency on availability, convertibility and remittance has been a key bankability issue in many projects in Vietnam. Decree 15 specifically provides that only certain PPP projects may be considered for a guarantee that their foreign exchange needs are met. Such projects include those that require in-principal approval by the National Assembly, infrastructure projects which are included in the government’s investment program, and other important projects as may be determined by the prime minister on an ad hoc basis. Decree 15 further provides that the prime minister will determine and appoint the agency which will provide the foreign currency guarantee on the basis of several factors in any given time period, namely the country’s socio-economic development criteria, foreign currency policies, the government’s foreign currency capability in a given period, and the project’s characteristics.
The above changes to the scope of guarantee seem consistent with the limited scope of foreign exchange guarantees offered for projects in the last few years. Together with the fluctuating and potentially adverse exchange rates, this may pose one of the largest obstacles to project financing in Vietnam.
Investors and lenders are often wary of using Vietnamese laws as the governing law for their project documents, partly because the laws are largely untested, and partly because of their preference to have a more developed body of law to govern the highly complex project documents. The project documents in past projects are often governed by foreign laws, or use a bifurcated approach to have Vietnamese law and foreign law as the governing laws.
Decree 15 expressly allows the parties to a contract to apply a foreign governing law if (i) one of the parties to the contract is a foreign party, or (ii) the obligations under the contract are guaranteed by the government.
The catch to the application of foreign law remains the same as it was under Decree 108, namely that such application of foreign law cannot be contrary to the laws of Vietnam on selection and application of foreign law. Under the Civil Code, the application of foreign law cannot be contrary to the fundamental principles of Vietnamese law which is a rather opaque requirement. The Civil Code is also in the process of being amended; however, this principle is likely to remain unchanged.
Before Decree 15 became effective, more than a dozen projects have been in negotiation for a considerable time, at varying stages of their life cycle. At one end of the spectrum, some were reported to be ‘initialled’, i.e., the project documents are finalised except for very few key outstanding terms. At the other end, some investors may have just signed a memorandum of understanding with the government to signify their willingness to devote resources to develop a project.
Decree 15 contains detailed provisions on how it will apply to projects currently under negotiation. The list of projects which had been announced before 10 April 2015 must be reapproved in accordance with Decree 15, except for cases already approved by the prime minister. Feasibility study reports which had been approved prior to 10 April 2015 do not have to be reapproved. It is unclear what will happen with feasibility studies that have been submitted but not yet been approved before 10 April 2015. Since Decree 15 introduces a new and rather rigorous project screening and formation process, it is possible that the authority may require that these feasibility study reports be resubmitted. Projects that have received approval decisions on investor selection prior to 10 April 15 are exempt from repeating the investor approval process under Decree 15. Project documents that have been initialled prior to the effective date of Decree 15 are not subject to renegotiation. This implies that project documents that are close to being finalised but have not yet been initialled must be renegotiated to be consistent with Decree 15, or otherwise obtain suitable assurances that the lack of renegotiation does not jeopardise their legality and enforceability. This is possible because Decree 15 expressly allows the prime minister to decide on other transition issues upon the proposal of the Ministry of Planning and Investment. Those projects that were granted an investment certificate prior to 10 April 2015 will continue to be governed by their project documents and investment certificates. Decree 15 stops short of specifying that it applies to all existing projects, now that Decree 108 has been repealed. Thus, projects licensed under the old regime may find themselves in something of a legal vacuum in respect of any matters not covered by their investment certificates and project documents.
Decree 15 is a step in the right direction to help move Vietnamese infrastructure projects closer to international bankability norms. Although Decree 15 contains many helpful clarifications and specific provisions, due to its extended scope of application and the introduction of new features, many implementing circulars and regulations will be needed to properly implement it. In order to attract foreign investment, the government and the prime minister will need to exercise their discretion on key bankability areas, such as foreign exchange guarantees on favourable terms, in order to help projects achieve financing and completion under this new PPP regime. As such, there remains a substantial amount of work to be done by governmental agencies for Decree 15 to result in new PPP projects across sectors in the country.
Quynh-Anh Lam is a counsel at Mayer Brown JSM. She can be contacted on +84 8 3513 0315 or by email: firstname.lastname@example.org.
© Financier Worldwide
Mayer Brown JSM