The Law on Private-Public Partnership Investment was passed by the National Assembly of Vietnam on June 18, 2020 and will be effective from January 1, 2021 (“PPP Law”).
This will be the first PPP Law in Vietnam. The existing legal framework on PPP investment is a combination of government decrees and other laws which are not specifically designed for PPP projects (e.g., Law on Construction and Law on Public Investment). This combination exposes parties to legal inconsistencies and impractical requirements in PPP projects.
By passing the PPP Law, the National Assembly aims to (i) establish a stable and consistent regulatory framework for PPP investment; (ii) facilitate foreign private investment into the infrastructure sector; and (iii) promote the efficiency of PPP investment.
We summarize below some key points of the PPP Law.
1. Eligible Sectors for PPP investment
Under the PPP Law, PPP investments are permitted in the following sectors:
power grid and power plant (except for hydropower plant or projects/sectors subject to the monopoly by the State under the Law on Electricity);
irrigation, water distribution, drainage and waste water treatment, and waste treatment;
health, education and training; and
information technology infrastructure.
The PPP Law has narrowed down sectors in which PPP investments are permitted (i.e., removing investments in building head offices of government authorities, resettlement and social housing, agriculture and rural development, and services to enhance the correlation of agricultural production with farm product processing and sales). This change aims at focusing the State’s resources on key important sectors to avoid inefficient investments.
There will be a minimum investment capital threshold for each sector that PPP projects must meet. The PPP Law requires a minimum investment capital of VND 100 billion (approximately USD 5 million) for projects in the health, education and training sectors and projects located in areas with (extremely) difficult socioeconomic conditions. A minimum investment capital of VND 200 billion (approximately USD 10 million) is required for projects in other sectors. Projects will be exempt from the minimum investment capital requirement if they are implemented by way of the operation and management contract. The Government will provide further guidance on the sectors and other applicable thresholds.
Foreign investors may participate in all PPP projects, save for PPP projects in sectors which are not open to foreign investors and PPP projects with the requirements of national defense, security and state secret protection.
2. BT Project No Longer Considered as PPP Project
Under the PPP Law, a build-transfer ("BT") project is no longer considered a PPP project. Accordingly, implementation of a new project by way of a BT contract will no longer be permitted from the effective date of the PPP Law.
BT projects for which an in-principle investment approval has not yet been issued will no longer be permitted from August 15, 2020.
As of January 1, 2021, the transition for implementation of a BT project will be as follows:
A project for which the tender invitation or request for proposal has not been issued will no longer be permitted; if the tender invitation or request for proposal has been issued, the project shall continue to be implemented on the basis of the tender invitation or request for proposal and the law at the time of issuance of such tender invitation or request for proposal;
If the investor for the project has been selected, the project will be continued based on the tender awards, tender documents, tender invitation, request for proposal and the provisions of law at the time of issuance of such tender invitation or request for proposal; and
A project for which the contract has been signed will continue to be implemented and payment be made in accordance with the signed BT contract and the provisions of law at the time of signing of the contract.
3. PPP Project Procedures
The general implementation procedures of the PPP project are outlined below:
preparation and appraisal of a preliminary feasibility study, in-principle investment approval and project announcement;
preparation and appraisal of a feasibility study and project approval;
selection of an investor by way of open bidding, competitive negotiation, investor appointment or other methods as decided by the Prime Minister under special circumstances;
establishment of a PPP enterprise and signing of a PPP contract; and
implementation of the PPP contract.
4. Investment Incentives and Warranties
4.1 Revenue Reduction Sharing Scheme
For the first time, the revenue risk allocation regime between the State and the investor is provided in the PPP Law with some qualifications as outlined below. In the event where the revenue falls below 75% of the projected revenue in the financial model under the PPP contract, the State will take up some revenue reduction equal to 50% of the difference between the actual revenue and 75% of the amount agreed in the PPP contract, subject to the following conditions.
this revenue reduction sharing regime applies only to BOT, BTO and BOO projects of which revenue reduction is caused by changes in relevant planning, regulations or laws;
the revenue falls below 75% of the projected revenue even after the adoption of all remedial measures which include: (i) price and fee adjustment (regarding public goods and service), and (ii) amendment to the duration of the PPP project; and
the revenue reduction must be audited by the State auditors.
Although the revenue reduction sharing scheme is available under the law, in light of the above conditions of which guidance is not clearly provided (including the timeline) and also the fact that the State approvals would be required at every step of the scheme, its application in practice is expected to be considerably challenging.
4.2 Revenue Increase Sharing Scheme
The State is entitled to share the revenue increase of a PPP project where the actual revenue is higher than 125% of the amount agreed in the PPP contract. In such case, the State will receive some revenue increase equal to 50% of the difference between actual revenue and 125% of the amount agreed in the PPP contract.
4.3 Foreign Currency Conversion
PPP enterprises of certain important PPP projects (i.e., projects subject to an in-principle investment approval by the National Assembly or the Prime Minister) may further enjoy the guarantee by the State over the convertibility of Vietnam Dong if the market fails to meet the currency conversion demand of the PPP enterprise. Such guarantee on foreign currency convertibility is capped at 30% of the net revenue in Vietnam Dong. This foreign currency convertibility guarantee has already existed in the current legal framework and the PPP Law simply incorporates this rule.
4.4 Other Incentives
Investors and PPP enterprises are also entitled to incentives under other laws (e.g. tax incentives, and land use incentives), investment guarantees under investment laws, guarantees on access to land and public property, provision of public service, the right to provide mortgage over assets and the rights to commercially operate infrastructure facilities and systems.
5. State Capital in PPP Project
The State capital can be used to (i) assist construction of the works/infrastructure system belonging to PPP projects and (ii) pay for compensation, site clearance, resettlement and construction of auxiliary works, but the total amount of the State capital cannot exceed 50% of the total investment capital of the project.
6. PPP Enterprise
Under the PPP Law, a PPP enterprise is a special purpose vehicle with the sole purpose of implementing the PPP project. Investors may establish their PPP enterprise as a limited-liability company or a non-public joint-stock company.
To finance a PPP project, a PPP enterprise may issue and repurchase its bonds on the condition that the capital raised from bond issuance will not exceed the loan capital in the PPP contract and will be put in a blocked account to be used only for implementing the PPP project or restructuring the debts of the PPP enterprise.
It is not permitted for a PPP enterprise to issue convertible bonds or bonds with warrants.
7. Governing Law over PPP Contract
Project documents (including PPP contracts, the annexes and other relevant documents) between the investor, the PPP enterprise and the Vietnamese governmental authorities shall be subject to Vietnamese laws. In respect of matters for which Vietnamese laws do not provide a guidance, parties may agree specific terms in the contract to address such matters as long as they are not contrary to the fundamental principles of Vietnamese laws.