How modern is the infrastructure of Vietnam
The government has passed several laws to encourage infrastructure development primarily through private investment. The most recent Regulation No. 15/2015 / ND-CP on Public Private Partnership (PPP) investments showed promise in terms of the types of contracts involved, the different sectors, the government support or participation and tendering requirements. Indeed, enforcement of the regulation revealed that greater efforts were required to implement a successful PPP program.
In order to implement the PPP regulation, documents were adopted in various areas: 1. The project development procedure with circular 02/2016 / TT-BKHDT and resolution No. 06/2016 / TT-BKHDT of the Ministry of Planning and Investment; 2. the financial management of PPP projects by means of circular 55/2016 / TT-BTC from the Ministry of Finance; 3. the energy from the Ministry of Industry and Trade in circular 23/2015 / TT-BCT and circular 38/2015 / TT-BCT; and 4. in the transport sector with circular 86/2015 / TT-BGTVT issued by the Ministry of Transport.
Transparency and approval of the PPP program
After the implementation of the PPP decision, problems remain regarding the profitability gap financing (VGF, engl. viability gap funding) and project development fund (PDF, engl. project development fund), which means that PPP projects differ from the operator model (BOT). Build-Operate-Transfer) differ. Indeed, due to the availability of payments for PPP projects, private operators are guaranteed a profitable VGF regardless of user fees and time. Regulations on VGF and PDF should be enacted to fully control the PPP system.
In addition, infrastructure projects do not necessarily have to meet the requirements of the PPP as other contracts may be less demanding in terms of obligations and incentives in the Investment Act 2015. The idea in the context of the PPP program is to encourage private investors such as banks or credit institutions to finance highly efficient projects and thus relieve the state of project financing. This implies providing further incentives to motivate foreign and local non-state banks.
Under the previous BOT contract regime, a dual licensing system was required for investors to qualify in the selection and then approval of the project and their own capacity. The new PPP decree does not clarify this process, so a simplified procedure should be adopted.
Some difficulties identified in developing the draft PPP decree are affecting project lenders. The first concerns the impossibility for foreign contractors to use land use rights as security means in BOT contracts and the question of the interpretation of land law. A provision of this law provides that land use rights can only be used as a means of security if the lease has been paid in full, while land is freely granted under BOT contracts. The government then decided that it would be impossible to provide security funds under this circumstance, as no rent was paid. The PPP decree appears to allow the payment of a nominal rent, but this does not solve the problem with BOT foreign contractors' security funds. Practical regulations should give private investors at least a certain amount of security for their properties.
Uncertainty about government guarantees
Another difficulty concerns the guarantee of convertibility and repayment of income into Vietnamese dong. Without such a guarantee, some BOT projects would not be discountable and sponsors could - even with a guarantee of a constant exchange rate - remain a residual risk of not being able to convert the income. A clarifying guarantee of exchange rates for projects with revenues in Vietnamese dong would remove this uncertainty.
Applicable law for projects with a foreign contracting party or two Vietnamese companies, if the competent authority allows this, can then be foreign law, as long as this does not conflict with the Vietnamese conflict of laws. It is unclear whether the government guarantees profits or income for PPP projects, as well as contracts under foreign or international law.
In addition, projects in sectors such as transport, renewable energy and traditional thermal energy should be given preference, and if the proposals of the PPP projects were not satisfactory, this means that foreign investors should be attracted to do more work for the development of sustainable projects. The Vietnamese government should therefore financially support projects through guarantees or profitable VGF. In addition, the establishment of new guidelines for the preparation of the PPP program will improve the planning and financing of the projects.
Opportunities under the PPP program
Many PPP projects have already been signed or are in the process of being signed and all information related to PPP programs is compiled on a special website published by the Department of Planning and Investment and the Authorized State Agencies (ASAs), most recently with a own list of projects. Achieving success with a PPP and promoting infrastructure development in Vietnam requires further efforts, which could begin with investors having the right to choose between the PPP regulation and the investment law. In fact, the adoption of the PPP regulation as the only way to develop infrastructure would be counterproductive in terms of economic competitiveness.
Since the energy demand in Vietnam is increasing, there are currently plans to use more coal-fired power plants by the time renewable energies will be sufficient. Due to the Paris Agreement, private investors investing in coal-fired power plants are becoming rarer as the focus is on the green energy movement.
After all, the road construction sector is indispensable for the economy and the climate, and yet there are still high expectations of the Vietnamese legislation in terms of risk distribution, the concession principles and clarifications of the bidding process. These issues should be resolved in order to enable foreign investors to participate in the development of transport infrastructure.
Outlook on the EVFTA
The EVFTA, which was signed on December 2, 2015 and is expected to come into force by January 2018, has resulted in many changes. In terms of market access, Vietnam will be in a privileged position, as it is the only country in Southeast Asia (apart from Singapore, which has a hardly comparable starting point) to have signed such an agreement. Both Vietnam and the EU will access a market of hundreds of millions of people.
In addition, the commitments of Vietnam and the EU go further than those of the World Trade Organization - particularly in the energy sector, in shipping - which shows the honest effort to create a more sustainable and profitable environment for business and investment. With this in mind, Vietnamese legislation has been changed to be more investor-friendly, such as corporate law, investment law and the PPP regulation. Some regulations still need to be developed or implemented, but we can expect new provisions and legislation with the entry into force of the EVFTA.
The most important questions
- The impossibility of a mortgage on land use rights for BOT foreign contractors needs urgent improvement by allowing a certain form of security through land or property for BOT projects.
- The approval process for BOT investors and contractual partners should be simplified and regulations on VGF and PDF created.
- A review of government guarantees and their requirements should be undertaken to avoid discouraging investors during the preparatory phase.
- Investments in coal could become rarer due to the Paris Agreement, which encourages investments in green energy.
- For investments in road transport, it remains uncertain when the participation of foreign investors in the development of the transport infrastructure will be supported.
Disclaimer:This alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
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