Elevation of Vietnam's Public Private Partnership Regime: 14 key changes for foreign investors

In brief 12 min read

On 18 June 2020, the National Assembly of Vietnam revamped and elevated Vietnam's 'public private partnership' (PPP) regime to law status in the Law on Public-Private Partnership (the PPP Law) to take effect from 1 January 2021.

We set out in this article 14 key changes to the PPP regime under the PPP Law likely to be of interest to foreign investors.

Key takeaways

• The PPP Law has, for the first time, codified provisions on PPP projects at the law level, thereby reducing uncertainty as to whether similar provisions from another law or decree may apply in any specific situation.
• However, as described below, there are a number of key changes to the previously existing regime that investors will need to study closely, and it remains to be seen whether the enactment of this new law will result in any significant increase in investment in PPP projects in Vietnam in the coming time.
• It will be important for investors and other stakeholders to continue the dialogue with the Government and relevant ministries through the drafting process of the implementing regulations and standard contract forms to ensure that the remaining ambiguities are addressed in a way that encourages investment.

Background – from humble beginnings

The PPP regime came from humble beginnings where, in June 1992, the National Assembly, in a few lines of amendment to the Law on Foreign Investment, passed enabling legislation for ‘build operate transfer’ (BOT) and related projects. Pursuant to that law, a detailed regime for foreign investment in BOT projects was enacted by Government Decree in 1993.¹ A separate decree was enacted for domestic investment in BOT projects.² The BOT regime was adjusted by amending and replacement decrees in 1998,³ 2007 (which also merged the domestic and foreign investment regimes),⁴ 2009⁵ and 2011.⁶ Meanwhile, by Prime Minister Decision in late 2010, an overlapping regime branded 'public private partnership' was born on a pilot basis.⁷ In 2015, the PPP regime was upgraded to decree status (Decree 15)⁸ and replaced the BOT regime. In 2018, Decree 15 was replaced by Decree 63.⁹

1 - Sectors open to PPP

The PPP Law reduces the list of available PPP investment sectors to include only:

• transportation;
• power grids and power plants, except for the hydroelectric plants and the cases of monopoly by the State as prescribed by the Law on Electricity;
• irrigation; clean water supply; water drainage and wastewater; waste treatment;
• healthcare and education – training; and
• information technology (IT) infrastructure works.

The following sectors expressly permitted in Decree 63 for PPP investment will no longer be available (except to the extent that they fall within one the above permitted sectors):

• public lighting systems; parks; housing and yards for parking cars, vehicles, machinery and equipment; cemeteries;
• vocational training; culture; sport; tourism; science and technology, hydrometeorology;
• commercial infrastructure; and infrastructure of urban zones, economic zones, industrial zones, industrial clusters, and of centralized IT zones; hi-tech technical infrastructure; and incubation establishments, technical establishments and common working areas supporting small and medium-sized enterprises;
• agriculture and rural development; development services for connecting production with processing and sale of agricultural products; and
• other sectors as decided by the Prime Minister of the Government.

2 - Standard form PPP contracts

Potentially the most significant change to the PPP regime is that the Government will stipulate standard form contracts for use in PPPs.¹⁰

Article 45 lists all the possible forms of the PPP project contract, which is the most important agreement between the investor and the State for implementation of a PPP project. These comprise 'BOT', 'BTO', 'BOO', 'O&M', 'BTL', and 'BLT,' but no longer include 'BT'.

It is not yet clear how detailed these standard contract forms will be and the extent to which content will be negotiable. The only precedent is the regime for standard form power purchase agreements already applicable in renewables and some other power plant cases. Those documents have fewer than 20 pages of general terms (compared with 100 or more in BOT power plant cases), and are only permitted to be supplemented in order to clarify the rights and responsibilities of the parties without changing the basic content of such contract.

3 - More regulation

Our English translation of the PPP Law11 comprises 24,230 words compared with the 16,279 words of the Decree 63 which the PPP Law repeals. In addition to the 50% increase in text, the PPP Law provides that the Government will issue implementing regulations (usually meaning decrees) on 16 subjects.¹²

4 - Investors to provide more security

Whereas Decree 63 provided for the investor to provide security for performance of the PPP contract (and that is carried forward into the PPP Law at a rate of 1-3% of project value), a new security called 'tender security' - deliverable with a tender for a project with a value between 1% and 1.5% of project value - has been added to the PPP regime. The tender security is forfeited if the investor withdraws its tender or, if the winner, fails to sign the PPP contract within 30 days (force majeure excepted).

5 - Government performance guarantees and other guarantees and rights

Performance guarantees

To date, it has been the practice in BOT projects for the Government to guarantee performance of state-owned enterprises that, for example, supply fuel or buy electricity from BOT power plants. This practice, which so far lenders have considered essential for project financing of such projects, is in conformity with article 61 of Decree 63:

Article 61 - Guarantee of obligations of investor, project enterprise and other enterprises
The Prime Minister of the Government shall, based on the nature [characteristics] and requirements of project implementation, appoint an agency to act on behalf of the Government to provide a guarantee on provision of raw materials, on consumption [sale] of products and services, and on other contractual obligations to the investor, project enterprise or other enterprises participating in project implementation, and a guarantee for performance by State owned enterprises of the obligation to sell fuel and raw materials to, and to purchase products and services from the investor [and] project enterprise.

The PPP Law has no equivalent to this article 61 (and article 12 under the current law on investment on performance guarantees of state agencies or state enterprises has not been carried forward to the new law on investment due to come into effect from 1 January 2021 (New Law on Investment)). Query, though, whether the Government will nevertheless provide such guarantees where it considers appropriate (under the potentially broader but vague Article 11.2 of the New Law on Investment), or whether lenders and investors will simply have to accept that, since the guarantee practice first developed, Vietnam has established itself as a reliable investment destination, and proceed without such guarantees.

Other guarantees

Decree 63 text¹³ on Government guarantees in relation to tax, land, mortgage, public utilities and infrastructure has, in substance, been carried forward into the PPP Law,¹⁴ meaning that rights in relation to these items apply as they do to all projects under land, tax and other laws. Note that the PPP Law also provides that the investor and the PPP project enterprise are entitled to investment guarantees in accordance with the law on investment¹⁵ (which, under the New Law on Investment, includes guarantee of ownership of assets, guarantees relating to business investment activities, guarantee of right to remit assets of foreign investors overseas, and business investment guarantees in event of changes in law).

6 - Foreign currency

To date, in cases where BOT projects have earned local currency revenue, the Government has provided the foreign investors with a guarantee of availability for foreign currency for project needs, including loan repayment and profit remittance. In the past, the guarantee was for 100% of these needs as enabled by Decree 63 and other prior legislation, but more recently Government policy has been to limit such guarantees to 30%. This is now enshrined in the PPP Law.¹⁶

7 - Foreign investor-proposed PPP projects

The first two BOT power plants built comprised one (Phu My 2.2) that resulted from a World Bank-assisted tender, and one by investor proposal (Phu My 3). The next built was Mong Duong 2, also investor proposed. Currently under construction is Nghi Son 2, which resulted from an IFC-assisted tender. Decree 63 required all projects to be tendered in accordance with the Law on Tendering,¹⁷ which in turn had a provision enabling direct appointment in some special cases determined by the Prime Minister.¹⁸ Now the regime for investor-proposed projects is contained entirely within the PPP Law. An investor may propose a project by preparing a pre-feasibility report and, if this is approved, proceed to prepare a full feasibility report which, if also approved, will then usually result in the project being put to tender on the basis that the originating investor has 'priority during assessment of tenders'.¹⁹

Direct appointment of investors may apply in two cases:

1. the project requires ensuring national defence and security or protection of State secrets;²⁰ and
2. if special and one‑off conditions arise in a PPP project where it is impossible to apply the forms of selection of investor prescribed in articles 37, 38 and 39 of the PPP Law, the authorized agency shall make a submission to the Prime Minister for his decision on a plan on selection of investor.²¹

8 - Financing

The PPP Law contains the following provisions on financing that may be of interest to foreign investors:

• PPP project enterprises can issue bonds as a means of financing without needing to first satisfy the minimum operating duration usually required for the issuance of bonds.²²
• The time limit for the investors/PPP project company to complete their financing arrangements is 12 months from the date of contract signing. For projects for which the investment policy is decided by the National Assembly or the PM, this time limit can be extended but is not to exceed 18 months.²³ Presumably this results from the fact that some duly signed and licensed BOT projects were, for some years, unable to secure debt financing.
• The requirement to mortgage in accordance with other laws remains, so the issue of ordinary land mortgage in favour of foreign lenders remains unchanged (as does the regime which for practical purposes solves this issue, which has been accepted in some projects).
• Decree 63 provides that, in the case of loan default, lenders can step in or appoint a third party to take over the rights and obligations of the project company. Now the PPP Law provides that in such case the lenders shall coordinate with the contract signing agency to select a replacement investor. The lenders, the investors, the project company and the contract signing agency must agree to this in writing.²⁴

9 - PPP contract to be governed by Vietnamese law of contract

To date most, if not all, BOT/PPP contracts with foreign investors have been governed by a foreign law of contract in common usage internationally, such as English and Singaporean. For all practical purposes, governance by Vietnamese contract law is mandatory under the PPP Law. This is significant because important concepts of the commonly used English and Singaporean contract law (such as liquidated damages and exclusions of liability for, for example, consequential loss), are, some say, not recognised under Vietnamese law.

10 - State capital account and current account contributions to PPP projects

State contributions in cash and in kind have always been legally possible.²⁵ Now the procedure and permitted ambit of such contributions is set out in some detail.

Of particular note for current account contributions by the State is PPP Law article 52.6 which provides that the investors/PPP project company shall share with the State 50% of the revenue amount (if any) in excess of the 125% of revenue in the financial plan in the PPP contract. On the other hand, for BOT, BOO and BTO the State shall, subject to certain conditions, share with the investors/PPP project company 50% of the difference (if any) between the actual revenue and 75% of the committed revenue in the financial plan in the contract. The conditions are that the turnover reduction was caused by change of planning, policy or law, and other measures, including extension of project term or adjustment of tariff, have not solved the shortfall.

11 - Equity transfers

If the PPP project company was established by more than one investor, then the members have the right to transfer shares or their capital contribution portions between themselves, but must ensure that the 'lead investor' retains a minimum of 30% total equity, and each other investor maintains a minimum of 15%.²⁶

An investor may transfer its shares or contributed capital to an outside investor after completion of construction (for projects with construction component) or upon commencement of operation phase (for projects without a construction component).²⁷

12 - Local content

Whereas Decree 63 is silent on use of domestic contractors, the PPP Law, after some debate on the issue as to whether local contractor use should be compulsory, includes the following mild provision: '[The project enterprise] is encouraged to use domestic contractors for work which domestic contractors are capable of implementing.'

Consistent with this position, the New Law on Investment also provides that the State shall not force investors to give priority to the purchase or use of domestic goods or services, or to purchase or use goods from a domestic producer or services from a domestic service provider.²⁸

13 - Contract amendment

The PPP Law contains new provisions on amending the PPP contract. Certain triggers for amendment must be stated in the PPP contract. These include force majeure, planning change, legal policy change which have 'serious impact' on technical or financial plans of the project and circumstances which 'will bring more effective financial and/or socio‑economic benefits to the project.' What is not at all clear is whether a trigger event creates an enforceable right to contract amendment, or whether any such amendment is in any event subject to agreement between the parties. Presumably this uncertainty will be resolved in the prescribed contract forms.

14 - Early termination

The PPP Law provides that a PPP project contract can only be terminated early in certain circumstances (including extended force majeure, national defence or national security reasons, insolvency, material breach by a party, or where there is a substantial change in circumstances as provided under the civil law).²⁹ The PPP Law does not seem to provide for any flexibility for the parties to agree any other termination events in the PPP project contract, although this may be managed to the extent that the parties are able to negotiate what is defined as a material breach.

Early termination payments are allowed only in very limited circumstances, with no detail provided in the PPP Law in terms of how such payment might be calculated.³⁰