In April 2020, the Standing Committee of the National Assembly issued a draft law on Public-Private Partnerships (“PPPs” and the “Draft”). This new legislation provides a comprehensive regulatory framework to enhance PPP activities in Vietnam, consolidating all legal requirements applicable to PPPs under a single law.
The current legislative framework for PPPs consists of a number of separate decrees, circulars, and decisions dealing with PPPs.1 The main regulation in this respect is Government Decree No. 63/2018/ND-CP on Investment in the Form of PPPs (Decree 63).
Furthermore, PPPs are also governed by various existing laws which deal with public and private investment in general.2 As a result, the requirements and conditions applicable to PPPs are scattered across a large number of legislative instruments, making it difficult for investors to navigate through.
The Draft remedies this situation by enacting a law on PPP projects which aims to bring Vietnamese legislation in line with international best practices. It consists of 117 articles divided over 12 chapters, covering all aspects of PPP projects.3
Such a specialized law is the most suitable instrument to adequately address the unique nature of PPP projects and the legal issues they entail. Furthermore, the new law is expected to help raise private capital to address Vietnam’s urgent need for infrastructure investment and development.
In this update, we review some of the key elements covered in the Draft, including: (i) the permitted sectors for PPPs, (ii) the minimum investment capital and equity contributions, (iii) single-purpose project companies, (iv) project financing, (v) incentives and
guarantees, (vi) the allocation of revenue risks, (vii) the governing law of PPP contracts, and (viii) dispute resolution.
- I. Permitted Sectors
The Draft identifies the following key areas for the PPP projects: transport, energy, water supply systems, wastewater and waste treatment systems, health, education, and IT infrastructure.4
This list is more restrictive than the one previously found under Decree 63, which also included a broad number of sectors that are no longer included under the Draft.5 Projects involving sectors other than the key areas mentioned above would have to be approved by the Prime Minister.6
The permitted sectors listed in the Draft reflect Vietnam’s past experience in implementing the PPP projects, which also focused on the same key areas.
- II. Minimum investment capital and equity contribution
The requirements for the minimum investment capital is another salient issue affecting the implementation of PPPs in Vietnam.7The Draft aims to settle this matter by providing that PPP projects should have minimum investment capital of VND 200 billion.8
Furthermore, a selected investor must contribute at least 15% of the total investment capital, excluding state capital contributions.9
This minimum standard is in line with the large size of PPP projects, which usually involve significant amounts. In fact, PPPs in the fields of transport and energy implemented in
recent years mainly involved projects with a capital exceeding VND 200 billion.10 Therefore, the requirements set out in the Draft should be achievable for investors of this caliber.
- III. Single-purpose project companies
The Draft provides that an investor selected to execute a PPP must establish a company with the sole purpose of signing and executing PPP project contracts (PPP Companies).11 This enterprise may either the form of a limited liability company or a joint-stock company.
This means that an enterprise established for the implementation of a PPP project will not be allowed to under other commercial activities unrelated to that project.
- IV. Project Financing
Under the Draft, PPP Companies are allowed to issue corporate bonds to finance the implementation of their project.12 The issuance of such instruments would be subject to a number of conditions, including that:
- The bonds may only be issued to professional securities investors, as defined under the Law on Enterprises and the Law on Securities;
- The bonds may not be convertible bond or bonds with warrants;
- The amount of capital raised through bonds may not exceed the total amount of loans determined in the PPP contract;
- The bonds must be issued through an “issuing organization” recognized under the Law on Securities to offer the bonds and receive funds;
- The capital raised in this manner may only be used for the implementation of the project.
Bonds issued by PPP Companies will otherwise be exempt from some of the requirements usually applicable to the issuance of bonds, including with regards to minimum operating times and the repayment of principal and interest amounts.
- V. Incentives and Guarantees
In order to attract investors, the Draft set out a number of incentives (regarding taxes, land levies, land rents, and other related matters)13 and guarantees available to investors which aim to strike a balance between the need to offer stability and legal certainty to the private sector while ensuring that public interest is protected.
For example, the Draft guarantees the right of PPP Company to access land and other public properties for the purpose of performing their PPP contracts. The land use is guaranteed to remain unchanged throughout the duration of the contract.14
Furthermore, PPP Companies will also enjoy guarantees regarding the use of public infrastructure and their right to mortgage properties, and the right to operate works and infrastructure. Such incentives and guarantees must, of course, be implemented in accordance with the relevant applicable laws (e.g. Tax Law, Investment Law, Land Law, etc.).
- VI. Allocation of revenue risks
In addition to the above incentives and guarantees, the Draft also a revenue-sharing mechanism pursuant to the investor and the state share the risks in fluctuations of income for PPP projects.
On the one hand, if the actual revenues exceed 125% of the planned revenue in the project’s financial plan, the State will receive 50% of the increase between the actual revenues and the amounts achieved at 125% of the financial plan.15
On the other hand, the State will share 50% of the revenue decrease between the actual revenue and the revenue committed in the contract, if a number of other conditions are met.16
- VII. Governing Law
One of the most controversial issues in the preparation of the Draft concerns whether the law governing the PPP contract. The Draft now provides that the contracts, appendices, and other documents signed between PPP investors and Vietnamese state agencies must be governed by Vietnamese law.
For matters not covered by Vietnamese law, the parties may agree on a specific provision in the PPP contract, so long as such terms are not contrary to the basic principles of Vietnamese law.
Proponents of the above position generally opine that the PPP projects should be subject to the laws of the country where they are executed, i.e. Vietnam.
However, critics have also raised the issue that international lenders may often require that PPP contracts be governed by the laws of more developed jurisdictions (e.g. England & Wales) to provide funding for the projects. It remains to be seen how this matter will be implemented in practice and whether it will be a practical hurdle.
- VIII. Dispute Resolution
The Draft provides for a multi-tiered dispute resolution system to resolve conflicts that may arise between state agencies and PPP investors regarding the implementation of a project.
As a first step, the parties must attempt to resolve their disputes through amicable means such as negotiation and conciliation. Failing which, the dispute may be resolved through arbitration or litigation, depending on the origins of the parties involved:17
- Disputes opposing (i) state agencies and domestic investors, (ii) multiple domestic investors, or (iii) domestic investors and Vietnamese economic organizations shall be settled at Vietnamese arbitration institutions or local courts.18
- Disputes opposing state agencies and foreign investors shall be settled at Vietnamese arbitration institutions or Vietnamese Courts unless otherwise agreed under the PPP contract or a treaty to which Vietnam is a signatory.19
- Disputes opposing PPP investors where at least one party is a foreigner, and disputes between PPP investors and foreign individuals or enterprises may be settled either by Vietnamese courts, Vietnamese arbitration, foreign arbitration, international arbitration, or ad hoc
Therefore, foreign PPP investors will be able to negotiate a dispute resolution clause in their PPP contracts with state agencies which provide for a mechanism that is suitable to their needs, which is most likely to be international arbitration.
Furthermore, depending on their nationality, foreign investors may be able to pursue investment arbitration claims based on the investment protection treaties and free trade agreements entered into by Vietnam. These include, for example, the EU-Vietnam Free Trade Agreement, the CPTPP, as well as multiple bilateral investment treaties, concluded with other countries.
Likewise, PPP projects usually involve a multitude of local and foreign parties, including lenders, contractors, project sponsors, purchasers, suppliers, etc. Disputes arising between such parties may therefore be settled by international arbitration.
The dispute resolution mechanisms outlined above should therefore provide assurances to foreign investors with regards to the forum for the resolution of the dispute, and alleviate potential concerns which may be faced with local arbitration institutions or litigation.
1 A number of circulars providing guidance for the implementation of Decree 63, including Circulars nos. 19/2019/TT-BGTVT, 09/2018/TT-BKHĐT, 88/2018/TT-BTC, 21/2016/TT-BTTTT, 16/2016/TT-BKHDT, 15/2016/TT-BKHĐT and 19/2015/TT- BKHDT.
2 Including the Law on Government Organization, the Law on Investment, the Law on Public Investment, the Law on Bidding, the Law on Construction, the Law on Public Property Management, etc
3 In particular, the Draft covers the preparation of investments; the selection of investors; the establishment of project companies and contract signature; the implementation of projects; the mechanisms to mobilize and use a capital; investment incentives and guarantees; inspections; responsibilities of involved parties; state responsibility; and disputes.
4 Art. 5(1) of the Draft
5 Excluded sectors include parks, parking, vehicles, machine and equipment, cemeteries, vocational training, culture, sports, travel, meteorology, IT applications, economic zones, industrial parks, agriculture, rural development, etc. Such sectors were previously included under Art. 4 of Decree 63.
6 Art. 5(2) of the Draft
7 Decree 63 contained no minimum capital requirements. Under Decree No. 15/2015/ND-CP (the predecessor of Decree 63), the minimum capital investment was VND 20 billion. Before that, under Decree 108/2009/ND-CP, there was also no minimum capital requirement.
8 Article 5(2)(d) of the Draft
9 Article 78(1) of the Draft
10 See https://baodautu.vn/se-ap-han-muc-toi-thieu-doi-voi-du-an-ppp-d100813.html, Vu Quynh Le, Deputy Director of Bidding Management Department (Ministry of Planning and Investment), a member of PPP Drafting Board
11 Art. 44(1) and 4(7) of the Draft
12 Art. 44(2) of the Draft
13 Art. 80 of the Draft
14 Art. 81(1)
15 Art. 83(1) of the Draft
16 Art. 83(2) of the Draft.
17 Art.103(2) of the Draft
18 Art. 103(3) of the Draft
19 Art. 103(4) of the Draft