At ninth session on 18 June 2020, the National Assembly passed the law on public-private partnership investment (“the PPP Law”), which takes effect as of 01 January 2021. This is the first time the state of Vietnam has promulgated a legal instrument specifically governing this form of investment.
The PPP Law introduces various new regulations, ranging from scope and scale of investment, project classification, to the competence to decide on investment policy, participation of state capital. In the PPP Law itself, there are breakthrough regulations that during the drafting process, the agency-in-charge had to consult very carefully, on all aspects, and to research from international experience as well as domestic practice.
The purpose of this article is to help our clients have a more comprehensive view of the provisions of the new PPP Law, as well as the positive legal consequences that the PPP Law brings to both enterprises and the State in the forthcoming time.
1. Narrowing the field of investment
The PPP Law has narrowed investment fields down to five essential areas for investment under PPP method in order to focus investment resources, namely:
- Power grid and plants (except for hydropower plants and those subject to the State’s monopoly pursuant to the Law on Electricity);
- Irrigation, clean water supply, water drainage, treatment of waste and wastewater;
- Healthcare, education and training; and
- Information technology infrastructure.
Many fields will no longer be permissible for investment under PPP method such as: culture; sport; travel; science and technology, hydrometeorology; agriculture and rural development; services for the development of linking production with the processing and sale of agricultural products, etc.
The five selected groups of investment fields are those important and essential development of infrastructure development, provision of essential services, and ensurance of social security, which are in alignment with the development of the 4.0 industrial revolution, promoting the country’s socio-economic development and improving the quality of life of all citizens. The narrowing of the investment fields shows the central orientation on areas that need to attract investment, thereby avoiding excessive investment, causing leakage and losses to the state budget and assets.
2. Competence to decide on investment policy
According to the Law on Investment and its guiding Decree, the authority having competence to decide on investment policy for PPP projects includes: (1) National Assembly; (2) Prime Minister; (3) Ministers, Heads of ministerial agencies, Government bodies; (4) Provincial People’s Councils; (5) Provincial People’s Committee.
However, according to the PPP Law, the authority of provincial People’s Committees is removed. This leads to the consequence that there is no longer any separation of authority between the People’s Council and the People’s Committee, whereby all PPP investment projects falling under the local scope are under the jurisdiction of the People’s Council. This amendment contributes to facilitate the uniform and transparent implementation of PPP investment projects on provincial scale.
3. Scale of investment projects
In order to focus resources, and avoid spreading thereof, the PPP Law stipulates that PPP investment projects with e-commerce activities must have at least VND200,000,000,000 (two hundred billion Vietnamese Dong) in capital, except for projects in areas with disadvantaged or extremely disadvantaged socio-economic conditions, or in the field of health, education and training (whereby the minimum investment capital is VND100,000,000,000 (one hundred billion Vietnamese Dong)). The requirement on minimum total investment of VND100,000,000,000 are targetted at mountainous areas, where many small-scale projects are implemented for purpose of socio-economic development, while the state budget is not sufficient.
4. Specifying the selection of investors
Different from the reference to the selection of investor for implementation of project as prescribed in the Law on Investment and relevant Decrees, the PPP Law has specified the various forms for selection of investors, as follows:
- Open bidding;
- Competitive negotiation;
- Appointment of investor; and
- Selection of investor in certain special cases.
With unclear provisions as before, investor selection was prone to asynchronous and negative implementation. Hopefully, with its fairly complete provisions, the PPP Law will contribute to ensuring the transparency of the investor selection process, thereby ensuring that private investors will be able to fairly and equally participate in investment activities under the PPP method.
5. Project Assessment Boards
The PPP Law stipulates that there are three levels of the PPP Project Assessment Boards: the State Assessment Board; Interdisciplinary Assessment Board; and Grassroot Assessment Board. These boards are responsible for organizing the evaluation and giving official comments on the submitted pre-feasibility study and feasibility study reports. This decentralization policy helps ensure close-knit, efficiency and feasibility before a PPP project is released to the market, improving the ability to attract investment.
6. Auditing of PPP projects
Pursuant ot the PPP Law, auditing activities of the State shall cover the following:
- Auditing the management and use of public finance, public assets and activities related to the management and use of public finance and public assets invested in PPP projects in accordance with the law on state audit;
- Auditing the process for implementation of the revenue risk-sharing mechanism; and
- Auditing the values of all assets of PPP projects upon transfer thereof to the State.
In addition, the private investment capital will also be audited in the form of an independent audit. Under the provisions of the PPP Law, the dual operation of the State Audit and the independent audit will ensure strict supervision, while ensuring the correct nature and requirements of PPP projects, which are implemented with the combined funding from both the State and the private sector.
7. Revenue risk-sharing mechanism
The PPP Law has finally provided for revenue risk-sharing mechanism. This is considered as a new regulation, consistent with current practice, making the investors more confident when there are changes from the State that affect the project. The revenue risk-sharing mechanism is applied to all eligible PPP projects and on the basis of annual revenue control.
Accordingly, when the actual revenue is more than 125% of the revenue in the financial plan in a PPP project contract, the investor and the PPP project enterprise will share with the State 50% of the difference between the revenue actual and the 125% of committed revenue in the financial plan. The revenue increase sharing is applied after adjusting the prices, fees of product, public services, adjusting the duration of the PPP project contract and auditing the revenue increase by the State Audit.
When the actual revenue is less than 75% of the revenue in the financial plan in a PPP project contract, the State shares with the investor and the PPP project enterprise 50% of the difference between the 75% of committed revenue in financial plan and actual revenue. The revenue decrease sharing is only applicable when specific conditions set out in the law are followed. The cost of handling the revenue decrease sharing is allocated from the state budget reserve.
The determination of the threshold of 75% and 125% for risk sharing in the PPP Law is relatively consistent with the current development stage of this investment method in Vietnam, ensuring the harmonization of benefits between the State, the investor and the PPP project enterprise.
8. Capital mobilization
Apart from the traditional capital mobilization channel from banks, the PPP Law allows PPP project enterprises to issue corporate bonds to mobilize capital for implementation of their projects.
This is a very reasonable regulation and consistent with the current practice in Vietnam, since mobilization of current domestic credit for PPP projects in the field of transportation, in particular, and PPP projects in general are very difficult. The reason is that PPP projects often have a large total investment capital and long loan periods. Currently, domestic banks are using short-term deposits for long-term loans, while the State Bank is planning to gradually reduce the proportion of short-term capital sources for medium and long-term loans to ensure system safety and compliance with international practices.
Therefore, the expansion of the scope for capital mobilization contributes to speeding up the implementation of PPP projects, and facilitates development for individuals and enterprises in the market.
9. Participation of state capital in PPP projects
The PPP Law specifies the purpose for using the method of state capital management in PPP projects. Accordingly, for state capital in support of construction of works, infrastructure systems, site clearance, resettlement costs, compensation costs, the participation limit in a PPP project is not more than 50% of the total investment capital. This investment amount is managed and utilized by two methods:
- Splitting a PPP project into sub-projects; and
- Designation of state capital into specific work items according to the rates, value, progress and conditions specified under the contract.
10. BT projects
The PPP Law institutionalizes the policy of ceasing implementation of BT projects in the upcoming period. Accordingly, the transitional regulations for ongoing projects are specified in the PPP Law. It is to be noted that, as of 15 August 2020, implementation of BT projects that have not been approved for investment policy must cease.
It can be seen that the issuance of the PPP Law brings great meaning to private investors, solving many problems and difficulties that Decree-level instruments could not handle in the past. With a complete institutional system, the PPP Law establishes a playground with legal regulations, fairness, openness and transparency, preventing cases of “VND0 ” or “relative investor” winning bids. The investors, apart from the obligation to comply with the prescribed principles, will benefit from the State’s commitments, which highly increases their capabilities for project implementation.