NEW LAW ON PUBLIC PRIVATE PARTNERSHIP: VIETNAM REFORMS ITS PPP LEGAL FRAMEWORK TO BRING IT UP TO INTERNATIONAL STANDARDS
Dear Clients,
Vietnam’s first Public-Private Partnership Law 2020 (the “PPP Law”) was passed by the National Assembly of Vietnam on 18 June 2020 and will come into effect from 1 January 2021. The changes introduced are in response to growing demands for investment, especially in the infrastructure sector.
PPPs are not a new phenomenon in Vietnam, however, in the past investors, contractors and financiers have had to navigate a complex framework of legislative instruments to understand the legal provisions applicable to their particular infrastructure project. The incoming PPP Law serves to unify the current patchwork of laws into a stand-alone legislative instrument, thereby attempting to govern the full life cycle of inbound PPP activity, providing greater legal clarity and comfort to prospective foreign investors.
The following article provides a brief overview of some of the key changes from the old legal framework.
1. Sectors open to PPP and minimum capital requirements:
The scope of investment sectors has been reduced to five and a minimum investment thresholds has been introduced:
| Investment sectors | Minimum investment capital required | Notes |
| Transportation | No less than 200 billion VND, or;
No less than 100 billion VND in case of investment projects implemented in areas with difficult socio-economic conditions; and areas with specially difficult socio-economic conditions; |
Threshold for capital shall not be applied as to projects implemented under an Operate-Manage contract. |
| Power plants, power grids | ||
| Irrigation; clean water supply, water drainage and water waste; waste treatment | ||
| Information technology infrastructure works | ||
| Health; education and training | No less than 100 billion VND |
2. Valid status of an investor
Not all investors are eligible to participate in a PPP project, yet the one who satisfies the following conditions:
- Being duly registered under the law of their original country;
- Having an independent financial accounting to ensure competition during selection of investor*;
- Being neither in the process of dissolution nor the incapability to pay its debts;
- Not being prohibited from participating in PPP investment;
- A 100% Stated owned enterprise must participate in a joint venture with a private investor to tender;
- Satisfying the conditions on market access in case of conditional projects pursuant to the law on investment.
Furthermore, the so-called “eligible” investors must sustain their independence in legal and finance from related parties:
- Consultants for formulation of the pre-feasibility study report, the feasibility study report, design or estimated budget (if any), except for a project proposed by the investor
- Consultants for evaluation of the pre-feasibility study report, the feasibility study report, design or estimated budget (if any)
- Consultants for formulation and/or evaluation of the pre-qualification invitation on documents, tender invitation documents or set of requirements; or for assessment or evaluation of the pre-qualification results or results of selection of investor
- The authorized agency, agency entering into the contract, and party inviting tenders.
3. Form of selection of investors:
The inclusion of competitive bidding processes enhances transparency and is welcomed. However, implementation in practice must be transparent and efficient to be valuable. The selection of investors in PPP investment shall be conducted under the following forms:
| Forms of selection | Scope of selection | Applicable entities | Restrictions |
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Domestic and international | Investors established pursuant to the law of Vietnam and investors established pursuant to foreign law | International selection of investors applies to all PPP projects except for the following:
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* Projects related to security, defence, high technology, and “other special cases as decided by the Prime Minister will not be subjected to the rules of bidding process.
4. Announcement of information on PPP projects
The novel legislation also facilitates the access of investors from private sectors to the information on PPP projects by imposing the obligation of competent authorities to announce the following information within 10 business days after the date of the investment policy and the decision approving the feasibility report:
- Investment policy decision or amendment to such decision (if any);
- Decision approving the feasibility study report and amendment to such decision (if any);
- Information on contact addresses of the authorized agency, the agency entering into the contract, the party inviting tenders.
5. 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. 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’
6. Statutory Definition of “Project Enterprise”
The new law narrowly defines “project enterprise” to that of an entity executing and implementing a single PPP project contract. This would seemingly prevent the enterprise from executing ancillary sub-projects connected to the primary project (e.g. construction of regasification assets connected to proposed gas turbine power plant development).
In comparison with the former Decree on PPP investment, the new law specifies the 02 legal forms which the investor can opt to incorporate an enterprise to implement the PPP project subsequent to the approval on the result of selection of investor. Precisely, a PPP project enterprise may be registered under form of either limited liability company or non-public joint stock company.
In addition, the PPP project enterprise is permitted to issue bonds in accordance with the conditions set forth by the law.
7. Investors to provide more security: (Bid Security / Contract Performance Security)
Whereas Decree 63 obliged investors to provide security for performance of the PPP contract (that is carried forward into the PPP Law at a rate of 1-3% of project value), a new security called “ tender security” has been added to the PPP regime: PPP project companies must provide contract performance security of between 1%-3% of the total investment value of the project. 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). We understand that such requirements may be problematic as financing may not yet be complete at this early stage of the PPP investment cycle
8. Regime on sharing profit on PPP Project
Principle:
When the actual turnover is higher than 125% of the level of revenue set out in the financial plan in the PPP contract, the investor/PPP project enterprise shall share with the State 50% of the revenue increase amount ( if any) in excess of the 125% of the revenue specified in the financial plan, under the circumstances:
- Adjustment to charges, fees of products and public services;
- Adjustment to the term of PPP project contract;
- The increase in the turnover is audited by the State audit.
9. Minimum Revenue Guarantee for BOT, BOO and BTO projects:
For BOT, BOO and BTO projects, when revenue is shorter than 75% of the level of the revenue set out in the financial plan, the State shall share with the investor and PPP project enterprise 50% of the difference between 75% of the revenue in the financial plan and the actual revenue realized, subject to the following circumstances:
- The projects apply the BOT, BTO or BOO contracts;
- taken in relation to adjustment to charges, fees of products and public services, term of PPP project contract but still not be able to ensure 75% of minimum turnover;
- The shortfall in turnover has been audited by the State audit.e relevant master planning, policies and/or law changed resulting in the actual turnover being less than the level of turnover undertaken in the contract;
- All the measures having been prope
We think that this mechanism will provide additional encouragement to international financiers to join PPP infrastructure developments.
10. State capital participation:
The new law sets a limit of 50 percent of total investment capital for state investment in PPP projects. This includes the funding for land clearance, compensation, and resettlement. This provides a tangible incentive for private investors to participate in projects which may otherwise not be economically viable or financially attractive.
11. Flexibility for choosing goods and services:
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.
12. Financial Closing Timeline
Equity and debt financing into the project vehicle must be completed within 12 months (or 18 months for projects whose decisions on investment policy fall within the approval of the National Assembly or the Prime Minister) from the execution of the project contract.
13. 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%.
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).
14. Foreign Lender Security
The requirement to mortgage in accordance with other laws remains, meaning that security over land use rights and real property is only available to domestic lenders. Foreign lenders’ inability to directly take security over land and assets attached to land is a serious impediment to attracting international project finance funding.
15. Loan default:
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.
16. 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).
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.
17. PPP contract to be governed by Vietnamese law of contract
The PPP project agreement must be governed by Vietnamese 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.
18. Dispute Resolution
Where contractually agreed, parties to a project agreement may opt for international arbitration in a third country as a dispute resolution mechanism. The new law also references international treaties as a means to resolve disputes where applicable, leading to a possible application of formal Investor State Dispute Resolution.
ACTIONS YOU CAN TAKE NOW:
Whether you’re an existing company, growing internationally or simply starting a new venture, we can help you understand, identify and manage potential risks to protect your business.
TO FIND OUT HOW WE CAN HELP YOUR BUSINESS, CONTACT US:
Alejandro DOMÍNGUEZ HERRERA
Partner at FIDAL ASIATTORNEYS VIETNAM.
Honorary Consul of Spain in HCMC
Saigon Trade Center Tower, 21 Floor, Suites 2101-02, 37 Ton Duc Thang, District 1 Ho Chi Minh City – VIETNAM.
Tel: +84 (0) 8 39 10 22 84
Email: dominguez@asiattorneys.com
#This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice.
