New rules ease Public-Private Partnerships (PPP) implementation

The government recently released Decree 15 to provide a comprehensive legal framework for public-private partnership projects, replacing the old regulations. Net Le and Loi Huynh of LNT & Partners took a closer look.

In November 2010, a pilot scheme of public-private partnerships (PPP) was introduced (Decision 71), which was expected to boost PPP projects in Vietnam. As of 2014, there were 38 PPP infrastructure development projects proposed to the government. However, none of them were implemented. From a legal perspective, Decision 71 seems to have failed in providing a realistic framework for the operation of PPP projects. It also confused investors with a dizzying array of government decrees on build-operate-transfer (BOT), build-transfer-operate (BTO), and build-transfer (BT) models, outlined in Decree 108 (November 2009) which provided several amendments. Indeed, most of the infrastructure projects in Vietnam have been carried out in accordance with Decree 108 rather than Decision 71. As such, the government issued Decree 15 on 14 February to finally provide a comprehensive legal framework for PPP projects, replacing Decision 71 and Decree 108. Apart from regulations that remain unchanged, Decree 15 introduces new regulations which may encourage the development of PPPs.

Eligible projects for PPP

The list of the eligible projects for PPP under Decree 15 emphasises the need for the government to develop an integrated infrastructure which has the potential to foster national economic development. Decree 15 describes PPP as an investment arrangement between an authority, investor, and project company to perform, manage, and operate infrastructure and public service projects including:

– Transport infrastructure works and related services;

– Lighting systems; clean water supply systems; drainage systems; waste and waste water collection and treatment systems; social housing; resettlement housing and cemeteries;

– Power plants, transmission lines;

– Health, education, vocational training, culture, sports infrastructure works and related services; offices of state agencies;

– Science and technology, weather forcasting, economic zones, industrial parks, hi-tech zones, information technology parks; the application of information technology;

– Agriculture and rural development infrastructure and services associated with processing and consumption of agricultural products; and

– Other areas as decided by the prime minister.

The government has released Decree 15, intended to clean up sometimes perplexing and contradictory regulations

Financial structure

Excluding operate-manage (OM) projects and projects mentioned above, a PPP project shall have a minimum total investment capital of VND20 billion. Decree 15 allows the investors and the state to allocate financial resources and share the financial risks without a cap, whilst each stakeholder shall be subject to statutory conditions.

Private participation

Private participation shall comprise of the investor’s equity capital and other funding sources which the investor is responsible for raising.

The investor’s equity capital shall be not lower than 15 per cent of the total investment capital. In case the total investment capital is higher than VND1,500 billion ($71 million), the equity capital shall not be lower than 15 per cent for the portion under 1,500 billion Vietnam dong, and for the portion above 1,500 billion Vietnam dong, it shall not be lower than 10 per cent.

Regarding the loan capital, Decree 15 is unclear as to whether the investor may  receive a state guarantee. Previous legislation specifically set out that any loaned capital shall be raised without increasing the burden of public debt. Article 57 of Decree 15 reads that the government may mandate an agency on behalf of the government to guarantee the material supply, product, and service consumption as well as other obligations of the investor, the project company, or other companies participating in the PPP project.

State funding

Before Decree 15, state participation in a PPP projects was capped at 30 per cent under Decision 71, and 49 per cent under Decree 108. These caps had the effect of rendering PPP projects less attractive to investors, as they will have to shoulder a higher risk burden than the state. Decree 15 removes these caps. However, state funding is limited to the following purposes:

– Capital contributions for construction works of projects with business and fee collection from end-users, yet the collection is not sufficient for return on investment and profit;

– Payment for investors providing services in accordance with build-transfer-lease (BTL), build-lease-transfer (BLT), and similar contracts; and

– Support for construction of auxiliary works, site clearance, compensation, and resettlement.

State funding shall include funds from the state budget, central government bonds, local government bonds, official development assistance, and incentive loans from foreign sponsors.

Legal Perspective

Forms of PPP contract

Decree 15 expands on the number of PPP forms available, laying the legal foundation for contracts of build-operate-transfer (BOT); build-transfer-operate (BTO); build-transfer (BT); build-operate-own (BOO); build-transfer-lease (BTL); build-lease-transfer (BLT); and operate-manage (O&M) models. Subject to these forms of contract, the authority that has the power to sign and implement a PPP contract may propose other similar contracts for the review and approval of the prime minister. Previously, Decree 108 only governed BOT, BTO, and BT models, while Decision 71 was silent on the forms of PPP contract.

Governing law

Decree 15 allows parties to choose applicable foreign laws to govern project contracts and contracts guaranteed by the government. Under either scenario, the choice of foreign governing law will not have jurisdiction over Vietnamese regulations on the application of foreign law.

From this perspective, it is possibly the first time that domestic legislation refers to a specific regulation rather than the general term “fundamental principle of Vietnamese laws” which has no definition under the law.

Dispute Resolution

Disputes in a PPP project may be resolved by court or via arbitration subject to agreement by the parties. Decree 15 makes it clear that disputes which are resolved by arbitration in accordance with the project contract and related contracts are commercial disputes. Vietnamese laws only have regulations on commercial arbitration, thus, if the dispute is not commercial, the choice of arbitration would be null and void. Under Decree 15, the resolution schemes are different depending on if the state agency is disputing with a local or a foreign investor.

Protection of lender

Decree 15 provides the lender with the authority to designate a capable organisation to take over all or part of rights and obligations of the investor or the project company in case the investor or the project company fails to perform on its obligations under the PPP project contract or loan agreement. An agreement on such a takeover shall be made between lender and the competent authority or parties of the PPP contract. Decree 15 also allows the investor to assign all or part of its rights and obligations under the PPP project contract to the lender or another investor. In this case, an assignment agreement shall also be made between the assignee and the parties to the PPP project contract.

PPP flow chart

Below is a general flow chart showing the process from initiative to execution of the PPP project contract. It is still a lengthy process for an investor to pursue. Decree 15 allows a conversion from a public project into a PPP project provided that it satisfies the requirements under Decree 15. However, further guidance is expected since it is not yet clear whether such a conversion would require stakeholders to perform all the processes shown below.

This Legal Alert is not a Legal Advice. For more information about this article, please contact the author: Dr. Net Le, Tel: +84909759 699 Email: Net.le@LNTpartners.com

LNT & Partners is a leading full-service independent local law firm based in Vietnam with offices in Ho Chi Minh City, Hanoi, San Francisco and an affiliated presence in Hong Kong. The firm is among Vietnam’s most prominent, representing a wide range of multinational and domestic clients, including Fortune Global 500 companies as well as well-known Vietnamese listed companies on a variety of business and investment matters

By Vietnam Law Insight, LNT & Partners

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com

Comments on Decree 139 & Decree 108

Together with a draft decree amending Decree 108/2006/ND-CP guiding the Investment law’s implementation, the Ministry of Planning and Investment (the MPI) is finalising a draft decree (the Draft Decree) amending Decree 139/2007/ND-CP on implementation of the Enterprise Law (Decree 139) which was hinted to take effect from this November.

This article streamlines some issues that foreign investors may need to be aware of in making their investment decisions in the future, particularly in relation to procedures for the foreign investment by way of capital contribution, purchase share, and establishment of enterprises with less than 49% foreign owned capital (herein after referred to as the “Enterprise(s)”).

Presently, there are different provisions applicable to establishment of the Enterprises according to Decree 139 and the Investment Law. Pursuant to Article 9.3.b) of Decree 139, in case of establishing the Enterprises, the investors shall carry out procedures for establishment of an enterprise in accordance with the Enterprise Law. The enterprise shall then register its investment project as same as domestic enterprises.

However, this provision is claimed to be inconsistent with Article 50.1 of the Investment Law stipulating that foreign investors who first invest in Vietnam regardless of percentage of their ownership in the newly established enterprise must have investment projects and carry procedure for registration of investment. In the event of conflict, the legal instrument with higher validity shall apply, and thus Article 9.3.b) should be void. Consequently, in practice the licensing authorities applying Circular 10725/BKH-PC of the MPI request that the Investors establish and register their investment projects which ironically, in turn, contrary to the provision of Decree 139.

Hence, one of the key objectives of the Draft Decree is to resolve the discrepancies with the provisions of the Investment Law. Indeed, the drafters have amended the Draft Decree in compliance with the provision of Investment Law.
According to Article 12 of the Draft Decree, foreign investor who first invest by establishing an enterprise shall need to conduct the investment registration procedures. The enterprise shall then be issued an investment registration certificate which is at the same time its business registration certificate. That means in establishing the Enterprises, foreign investors shall have to prepare documentation, including, among others, a statement of financial capacity of the investor, required for investment project with foreign capital stipulated in the Investment Law. Therefore, on the one hand this revision has fixed the inconsistency between the laws; on the other hand it creates burdens on foreign investors in proving their financial ability which would have not been the case if the provision of Decree 139 was to apply.

Further, under the current draft decree amending Decree 108, the foreign investors contributing capital or purchasing shares to established enterprise must conduct procedures for evaluation of investment conditions as stipulated in article 60 of Draft Decree 108. According to this Article, foreign investors shall be required to submit evidences of their financial capacity instead of submission of the statement of financial capacity as required by Decree 108. In so doing, the investor shall need to prepare a range of financial-related documents, such as a letter of comfort issued by a bank or credit institution attesting the current status of the investor’s bank account, a financial undertaking for the project or financial statements applicable for corporate investors operating for three years or more, to convince the licensing authorities that they will be able to implement the intended project.

One may take a view that making these amendments is actually taking a step backward in attraction of foreign investment in Vietnam. That is because the evaluation requirement will not only impose more cost on the foreign investors but also take longer time for the licensing authorities to assess applications. This concern is real given current workload of the licensing authorities in Hanoi and Hochiminh city. In future, if the draft decrees are approved, the workload of these authorities shall sharply increase meanwhile the human resources cannot be quickly trained to meet the increasing demands. Indeed, the draft decree amending Decree 108 has extended the statutory time-limit for evaluation from 15 days currently to 30 days. However, it should be noted that under the current evaluation process, very rare projects have been issued an investment certificate within the statutory time limit.

Another issue that raises the investors’ concerns in this regard is that these amendments would create room for bureaucratism. Even though the content of evaluation is restricted, there is no restriction that the licensing authority must not expand the scope of their evaluation to the extent required by law.

Further, two related issues that remains conflict between the provisions of Decree 139 and those of Decree 108 are: First, whether the foreign investors have to carry out project registration in the case where the ratio of foreign own capital exceeded 49% because the capital contribution of the foreign investors or the decrease of capital of the Enterprise. Second, whether an enterprise with less than 49% foreign investment will be restricted by WTO’s commitments, such as distribution enterprises are not allowed to establish more than one distribution point or foreign investment enterprises establishing a restaurant must invest in hotel business, etc. Unfortunately, these issues have not yet been addressed by the Draft Decree. Though, in light of above analysis, it appears that the mindset is in case of conflict whichever is more stringent shall be applied.

In conclusion, despite the expectation that the Draft Decree would further facilitate foreign investment in Vietnam, the provisions of Decree 139 were amended to stringent requirements and procedures for foreign investment. The reason behind these amendments was that there are many foreign investors have delayed the implementation of their projects and thus forcing the local authorities to withdraw their investment certificates. Given the time constraint, it is unlikely that the final Draft Decree would be significantly different from the current draft.

Therefore, to save time and cost, it is advisable that foreign investors should carefully select their investment project as well as prepare all required document, particularly those proving their financial capacity, before submitting to the licensing authority.

By Vietnam Law Insight, LNT & Partners.

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com