Vietnam’s infrastructure development has struggled to keep up with continued economic and population growth. Modern, efficient infrastructure is vital to continued economic growth and lowers the costs of doing business for all investors in Vietnam. Rapid economic growth and urbanization is driving high demand for roads, power, airports, ports, waste and water treatment, hospitals, and other public infrastructure for goods and services. Meanwhile, State budgets are constrained and not able to meet Vietnam’s infrastructure needs. The balance would need to come from other sources, including from private investment in the form of Public-Private Partnerships (“PPPs”). Other countries have successfully implemented partnerships between the public and private sector. To make 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. The private sector can bring in technology, capital, and efficiency through experience.
Legal issues update
A number of tools have been set up to assist the Government in their support for PPPs, aiming to create a much improved legal framework for PPP to revitalize investment in infrastructure projects. These include the Project Development Facility, which is envisioned to help undertake a rigorous assessment of potential projects, and the Viability Gap Fund, which provides needed Government support to make them financially viable (if they are not otherwise).
The Government continues its efforts by having enacted several laws in order to promote infrastructure development especially through private investment. Decree 15/2015/ND-CP on public-private partnership investment (the “PPP Decree”), is very promising regarding the forms of contract concerned, the various sectors targeted, the State support or participation, projects bankability and tender requirements.
However, in implementation process, there have been conflicting legal issues that deter investors from choosing PPP as an investment method, leading to a humble number of PPP projects thus far. For example, Decree 15 made a progress in other previous PPP regulations in clearly allowing project contracts to be governed by foreign law, namely contracts involving a foreign party and government agency guarantee contracts. The issue only arises when it comes to real-estate related matters, which are not yet finally decided under the Land Law which law will be the governing law.
Moreover, as PPP laws are only at Decree level, regulatory framework for PPP projects mainly includes the Law on Enterprises, Law on Public Investment, Law on Bidding, etc. most of which regulate public investment instead of private one or investment cooperation between the Government and private investors. The investors are also concerned about the stability of PPP regulations, as they are mainly Decrees. While a PPP project could take years to complete, regulations at Decree level may change and cause investors confusion in implementation of the laws. The state agencies also face certain difficulties in managing these PPP projects. According to a real story shared by an officer at VCCI, after the Government signed a PPP contract with an investor, due to changes in policies, the Government amended its determination of the contract value. As a result, the land price increased by 14 times as much as previously agreed, leading to substantial loss for the investor.
According to the Ministry of Planning and Investment, during 2016-2020, it is expected that there will be 598 registered PPP projects with total investment amount of VND 250,000 billion. Given the shortcomings of Decree 15, it would be hard to achieve these numbers without its replacement by another Decree. In that context, Decree No. 63/2018/ND-CP (“Decree 63”) was issued on 04 May 2018 and takes effect from 19 June 2018 to eliminate bottlenecks in PPP implementation.
Decree 63 – What is new?
Capital contribution responsibility
The investor is responsible for contributing and mobilizing capital for the project implementation, in particular, the ratio of the investor’s capital in the owner’s equity is determined as follows:
- For projects with total investment amount of up to VND1,500 billion, the equity capital that the investor must maintain must be at least 20% of the total investment capital;
- For projects with total investment capital of more than VND1,500 billion:
- For investment portion of up to VND1,500 billion: the equity capital that the investor must maintain must be at least 20% of the total investment capital;
- For investment portion that exceeds VND1,500 billion: the equity capital that the investor must maintain must be at least 10% of the total investment capital.
There is no capital contribution requirement from the Government side, thus reducing financial burdens on the Government.
Payment methods in BT projects
Practice shows that investors are very interested in well-located land when implementing BT projects. However, when such land fund gradually becomes exhausted, BT projects seem not to attract investors. Decree 63 has added another method in addition to the exchange of land for infrastructure, so that the investors will have more options in receiving payments. Specifically, the investor may also receive payment in the form of the transfer of right to conduct business, exploit works/ services, etc.
Impact of the CPTPP and the EU-Vietnam FTA (EVFTA) on PPP projects in Vietnam
Covered government entities and agencies
According to Decree 63, tenders for the selection of PPP investors will follow the Law on Public Procurement. While the Vietnam’s Law on Public Procurement still shows some shortcomings, Vietnam will be bound by its commitments in the Government Procurement chapter in the CPTPP and the EVFTA, including the procedures to conduct a tender and in specific circumstances that the Government must conduct a public tender. The investors now have the opportunity to participate in procurement by Vietnam’s government entities and challenge the Government if it does not grant the investors the opportunity to do so in qualified circumstances.
The CPTPP and the EVFTA both make a list of government entities and agencies whose procurement of particular̉ goods and services at a particular amount must be subject to public tender. While the CPTPP only allows expansion of the list within 5 years upon the entry into force of the agreement, the EVFTA allows a longer period (i.e., 15 years).
How to appeal Government tender decision?
The CPTPP and the EVFTA make it possible that foreign investors could sue Vietnam Government for its tender decisions according to the dispute settlement by arbitration rules. The violating party must take all necessary measures to promptly comply with the arbitral decision. In case of non-compliance, as in the WTO, the CPTPP and the EVFTA allow temporary remedies (compensation) at the request of the complaining party.
Enforcement of arbitral awards
The final arbitral award is binding and enforceable without any question from the local courts regarding its validity. This is an advantage for investors considering the fact that the percentage of annulled foreign arbitral awards in Vietnam remains relatively high for different reasons.
Vietnam’s strong economic growth and its demand for infrastructure development are great opportunities for investors planning to invest in Vietnam. The CPTPP and the EVFTA are effective tools to support foreign investment in Vietnam’s infrastructure sector in the form of PPP. Under these agreements, foreign investors could take recourse to arbitration proceedings and have the arbitral awards fully enforced in Vietnam.
If you have any question on the above, please do not hesitate to contact Dr. Oliver Massmann under email@example.com . Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
Thank you very much!