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
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 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.
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.
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.
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.
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.