Crafting a workable PPP law in 2020
As Vietnam prepares to enter a new development period in 2021 amid global economic changes and the widespread influence of Industry 4.0 and free trade agreements, the country is seeking to increase its appeal to private investors so that it can access more resources to cover its development needs. Le Net and Vu Thi Thinh from LNT & Partners discuss how important public-private partnerships are to the country’s infrastructure development.
Vietnam is a developing country with an abundance of infrastructure potential. While the country has been notably successful in foreign direct investment attraction in recent times, such investment in infrastructure is still limited. Public-private partnership (PPP) projects operating in Vietnam have primarily been in the form of build-transfer or build-operate-transfer and mostly focus on transportation, electrical energy, and several other fields.
The potential of Vietnam’s infrastructure market is highly valued by international investors, and it will surely offer them more opportunities when barriers are demolished and PPP projects in the country align with international norms.
In less than 10 years, Vietnam has three times made efforts to introduce, revise, and improve the legal framework governing PPP. These include Decision No.71/2010/QD-TTg by the prime minister in parallel to Decree No.108/2009; Decree No.15/2015/ND-CP, which replaced those two documents; and Decree No.63/2018/ND-CP which replaced Decree 15. Decree 63 took effect in June 2018 as the key PPP legislation.
Decree 63 is the current legal instrument for relevant projects and includes provisions in line with international practices such as guarantees to keep the land use plan unchanged, to supply public utilities, and guarantees for covering the risk of government expropriation of assets or covering contracting authority obligations. However, the mechanism to share revenue risks has not yet been included.
Decree 63 also allows for government guarantees to be granted to make foreign currency available to the project company. Such a guarantee is important, especially now that the VND is not freely convertible due to restrictions on currency conversion.
However, there is no clear policy on the circumstances on which such government guarantees can be provided. The language of the decree is vague – based on the socio-economic development orientation, foreign exchange management policy, ability to balance foreign currency in each period, and the target and the nature of the project, the prime minister shall decide balance of foreign currency for projects, subject to approval. This lack of a clear policy and guidelines for providing a foreign currency convertibility guarantee is potentially impeding lenders and private investors from entering into Vietnam’s PPP market.
Solutions in the new decade
The country can increase its attraction to PPP projects only when all the barriers are solved. As Vietnam enters the last year of the 2016-2020 development period, the country needs more resources to serve its rapid development demands.
Together with recognising the determining role of infrastructure in national development, PPP is regarded as an important tool to promote infrastructure improvement. During 2019, the government was active in submitting a more complete legal mechanism to serve as a basis and a premise for infrastructure development – for example in organising seminars and requesting comments from the private sector, including associations and domestic and foreign enterprises.
The draft law on PPP submitted to the National Assembly does not only serve as an elevation of regulations into a position of greater constitutional prominence compared to Decree 63, but also answers investor concerns relating to sovereign support.
The mechanisms for sharing revenue risks and foreign currency convertibility guarantees are introduced into the PPP draft law by the Ministry of Planning and Investment. In the submission, the government decides to apply a revenue risk sharing mechanism for qualified PPP projects in the form of adjustment of product prices, service fees, or adjustment of contract terms.
The government commits to sharing with investors and project enterprises no more than 50 per cent of the decrease between the actual revenue and the committed revenue in the contract. In exchange, the investors and enterprises commit to sharing with the government no less than 50 per cent of the increase in revenue.
In terms of foreign currency convertibility guarantee, it may be up to 30 per cent of project revenue in VND after subtracting the amount spent in the same currency. The PPP draft law also specifies three criteria to grant such a guarantee, thus enhancing its real-life applicability.
It can be seen that the draft not only benefits investors through guarantee of the project’s outcome but also benefits the state as it promises to attract more investment capital to Vietnam. To maintain the fast pace of development and industrialisation, the country needs more new infrastructure works. However, public financial resources are inadequate to fulfil these requirements, thus the mobilisation of private capital is of the essence. The law draft has provided solutions to such concerns.
The draft law is expected to be passed and promulgated in 2020, opening a new chapter in the country’s attraction of private investment when a new development period starts. It will provide legal guarantees and ensure a reasonable risk-sharing structure for projects. Therefore, it shall create expectations and attract new projects not limited to traditional areas like roads, energy, and water supply, but also those requiring large capital, advancing national competitiveness, and creating a great number of jobs such as rail and aviation.
Key to attracting investors
A key factor in investor decision making is cash flows as business by nature comes down to pursuing profit. They also serve as a useful tool for investors to call for project financing from lenders or sponsors. Cash flows include both the input – revenues received from the off-takers or customers – and output, as in the money spending for the project’s interests (see chart). Capital providers shall invest in a project if its estimated profitability has potential, together with considering the internal rate of return.
To control these cash flows, investors need to allocate and mitigate the risks generated from a PPP project. In practice, the determining factors of a PPP project’s cash flows, among others, are categorised into three main groups: the capability of the investors, the revenue risk sharing mechanism, and foreign currency convertibility guarantee.
The capability of investors is the assessment in all aspects that affect the outcome of a project, including the financial situation, experience, business connections, and more. Revenue risk sharing means reducing the likelihood and impact of uncertainties, while the foreign currency convertibility guarantee ensures that capital providers receive their domestic currency in spite of market fluctuations. While the risk sharing, to some extent, ensures the revenue gained by the investors, the foreign currency convertibility guarantee aims at the liquidity of such revenue and provides investors with an effective tool to attract more capital.
While the first factor falls under the responsibility of investors, the state should assist its private partners with the two remaining mechanisms as a PPP project benefits both parties.
In nature, a PPP project is implemented to provide public services using private capital and/or private management. It means that in case the private sector is not engaged, the state must spend its budget or mobilise official development assistance loans (meaning the state must bear all risks and responsibilities). Therefore, if the state wants to call for financial resources and exploit the knowledge and management capacity from all economic sectors to make up the budget deficit, it must also ensure the feasibility of the project through supports and guarantees in exchange.
Therefore, to improve PPP investment in Vietnam, the state should focus on the revenue risk sharing mechanism, and the foreign currency convertibility guarantee.
Considering the improvements from current PPP regulations and the effects possibly arising, the law on PPP should be passed and promulgated soon. The law is highly anticipated to be one of the most important legal changes in 2020 and in following years, thus contributing the country’s socio-economic development for the new five-year term and longer.
Experts believe that together with the introduction of this law, if the state plans not to increase the debt ceiling but still increase the economy’s size through several methods – for instance, careful selection of investors and consultants – the country’s economic picture will be greatly and positively influenced.