PPP To Boost Infrastructure Development Investment
Reason for and Role of Public-Private Partnership
Despite considerable efforts to improve Vietnam’s infrastructure, the overall system remains in critical need of development. In particular, Vietnam’s transport systems are weak, small scale and below technological standards - the country has not yet developed deepwater seaports and standard highways, and urban road systems in large cities and developed areas have not been fully connected to national transport system.
According to Asian Development Bank (ADB) statistics, during the last ten years, the nation’s investments in infrastructure reached an average of 9-10% of GDP. To maintain the current growth, such investments should increase to 11-12% of GDP. This figure is premised on an expected average GDP growth rate of Viet Nam in the 2005 - 2010 period of between 7.2% and 8%, and an estimation that the growth of demand for power will be twice the GDP growth rate.
As estimated by the Ministry of Planning and Investment (MPI) in its draft plan on socio-economic development for the next five years, demands for investment capital are equal to about USD 139.4 billion. In particular, investment in transport infrastructure from now to 2020 requires about USD 7.4 billion; however, the available financial sources from the state budget, ODA and government bonds amount to a total of only USD 2-3 billion.
This draft plan also determines expenditures for specific branches; for example the power sector needs around USD 2.5 billion each year, and the transport and urban circulation systems need about USD 44 billion. According to the MPI, the top source of funding for the plan in the next five years will be private capital (in the form of PPP projects) at a sum of VND568-607 trillion, followed by VND356 trillion in public sector investment, and VND252-277 trillion in foreign direct investment.
Private capital will be raised through Public-Private Partnerships (PPP). A new approach to development whereby the public services and infrastructure are provided through the combined efforts of the public and private sectors, PPP permits the mobilization of abundant capital, the exploitation of management practices from various entities for investment, and more efficient service delivery. The public sector’s contribution is limited to funding financial gaps and providing institutional commitments to projects.
Therefore, the Vietnamese Government and relevant ministries recognize that in addition to traditional financial sources, it is necessary to attract and raise capital from the private sector and from banks and credit institutions, regardless of whether they are domestic or foreign. Regarding the private sector, capital for infrastructure investment will be raised by issuing construction bonds; attracting FDI in forms of BOT, BT, etc.; and relying on voluntary and compulsory contributions of the people in rural transportation. Meanwhile, capital from banks and credit institutions will be mobilized through consortiums that grant loans to infrastructure projects promising high profit at market interest rates.
However, ADB studies reveal that capital from the private sector currently plays only a modest role in the provision of infrastructure services in Vietnam. Only 18 BOT and BCC projects were implemented in the country with foreign partners during the last 12 years, representing about 15% of the total capital invested in infrastructure. Most of these projects are concentrated in the energy and telecommunications sectors.
This problem may be explained by the Government’s inconsistent attitude toward private investment and a low expectation of efficiency brought by this economic sector. More specifically, the process for using governmental guarantees is not clear, the term for transfer of BOT projects has not been determined for many fields, and the dispute settlement processes of Vietnamese and international laws differ in significant ways.
As observed by the World Bank, fundamental factors for success include planning, solid revenue and cost estimations as part of a feasibility study, compliance with contractual agreement, strong institutional arrangements, and competitive procurement. But perhaps the most important factor of all is a solid and clear legal framework that specifies the “rules of the game” for the private sector, thereby reducing risk, and improving the success rate of PPP projects.
Legal framework for PPP
In general, Public-Private Partnership is not new to Vietnam, especially in the field of infrastructure development investment. Popular forms in this field include: (i) BOT Build – Operate – Transfer (BOT) contract, (ii) Build – Transfer – Operate (BTO) contracts, and (iii) Build – Transfer (BT) contract. However, even now, there is still no legal concept of PPP or a separate law on PPP in Vietnam.
The current legal landscape for infrastructure development PPP in Vietnam consists of a varied mix of construction, investments and enterprise laws and regulations on investment, based on BOT, BT and BTO contracts issued by the Government between 1977 and 1999. More than ten years ago, on June 18, 1997, the Government issued Decree No. 77/CP promulgating the Regulation on investment in the form of BOT contracts applicable to domestic investment. One year later, on May 15, 1998, the Government issued Decree No. 62/1998/ND-CP promulgating the Regulation on investment in forms of BOT contract, BTO contract and BT contract applicable to foreign investors in Vietnam. Later, Decree No. 62 was amended and supplemented by Decree No. 02/1999/ND-CP of January 27, 1999, to improve implementation. In our opinion, these three decrees represented the initial legal framework for PPP in Vietnam, encouraging and supporting the participation of the private sector in investment and operation of socio-economical infrastructure works for the development of Vietnam’s economy.
Though there is currently no single law covering all aspects of PPP, in recent years a variety of legal instruments have addressed the topic. These include: the 2005 Law on Investment (LOI) and its guiding documents; the 2005 Law on Enterprise (LOE) and its guiding documents; the 2003 Law on Construction (“Construction Law”); the 2005 Law on Tendering (“Law on Tendering”); the VAT Law and the Corporate Income Tax Law; and the Ministry of Finance’s Circular No. 149/2007/BTC of December 14, 2007. This last document provides guidelines on management and use of state budget funds applicable to activities of competent state agencies in managing investment projects in forms of BOT, BTO, BT, and so on. In addition, any foreign investor who wants to execute a project in Vietnam should refer to Vietnam’s WTO commitments providing specific conditions for foreign investors’ presence in each domain.
(i) In response to the rapid development and deep international and regional integration of Vietnam’s economy and under the pressure of the country’s WTO accession, the National Assembly issued new LOI and LOE laws on November 29, 2005. These laws are regarded as legal reforms for investment and business activities in Vietnam in general.
- The LOI regulates investment activities for business purposes, specifying (i) rights and obligations of investors, (ii) guarantee of investors’ lawful rights and interests, (iii) encouragement of investment and investment incentives, (iv) licensing requirements and prohibited sectors, and (v) state administration of investment activities.
Under Article 13 of the LOI, investors have the right to autonomy in investment and business activities such as: (i) selection of the investment sector, investment form, method of raising capital, geographical location and investment scale; investment partner(s) and operational duration of a project; and (ii) registration of a business in one or more industries and trades, to establish enterprises and to make their own decisions concerning the registered investment and business activities.
Under the LOI, investments in the form of BCC, BOT, BTO and BT contracts are permitted in addition to direct investment forms. It means that investors are permitted to sign a BOT, BTO or BT contract with a competent state body in order to implement projects for new construction, expansion, modernization and operation of infrastructure projects in the sectors of transport, power generation and business, water supply or drainage, waste treatment and other sectors as stipulated by the Prime Minister.
- Concurrently, setting up corporate entities in Vietnam is governed by the LOE, which provides rules regarding the establishment, organizational management and operations of limited liability companies, joint stock companies, partnership and sole proprietorships. Under the LOE, which established the first united legal framework for foreign-invested and domestic enterprises, enterprises of all economic sectors have the right to conduct any line of business not prohibited by law. In addition, enterprises are encouraged and facilitated by, and enjoy favourable treatment of the State to participate in the production and provision of public services and products.
(ii) The LOI, the LOE, the Construction Law and the Law on Tendering have paved the way for the issuance of Decree No. 78/2007/ND-CP (“Decree No. 78”) by the Government on May 11, 2007 providing for the sectors, conditions, orders, procedures and incentives applicable to investment projects to develop infrastructure facilities on the basis of BOT contract, BTO contract or BT contract. Decree No. 78 is a key legal document for investment in the forms of BOT contract, BTO contract and BT contract. In our opinion, in the actual context of Vietnam, it seems to be the “law on PPP in Vietnam” for the time being.
Under Decree No. 78, all investment projects relating to infrastructure are encouraged by the Government. In addition to the state bodies’ lists of projects calling for investments in forms of BOT, BTO and BT contracts, which are prepared and issued annually based on socio-economic development planning and orientations in each period and specific fields, investors can propose their own projects.
Three forms of contract applicable to infrastructure development investment projects include: (i) BOT contract, (ii) BTO contract, and (iii) BT contract. Other similar forms may be decided by the Prime Minister.
It is the investor’s responsibility to seek funds for the implementation of a project. For the first time, Decree No. 78 imposes the minimum thresholds of the investor’s own capital: at least 30%, if the project’s total investment capital is under VND75 billion; 20%, if total capital is between VND75 billion to under VND1,500 billion; 10%, if total capital is VND1,500 billion or more.
The investor, except for the investor of a project proposed by himself/herself, may be selected via a national or international bid or assigned by the State to enter into negotiations on the project contract. The MPI is responsible for evaluation and issuance of investment certificates for BOT, BTO and BT projects.
The investor is obligated to take measures to secure his/her contractual obligations in the form of a bank guaranty or other forms that are valid from the official signing date of the project contract until the date of construction completion. Unlike previous regulations, Decree No. 78 also specifies the minimum levels of the amount of such security: at least 1% if the project’s total investment capital is VND1,500 billion or more; 2% if total capital ranges from VND75 billion to under VND1,500 billion; and 3% if total capital is less than VND75 billion.
A new provision allows the parties to choose foreign laws as governing laws for the BOT, BT or BTO contract and relevant contracts.
(iii) The State of Vietnam reserves several tax and other incentives for investment in infrastructure, with the most favourable policies being applied to BOT, BT and BTO projects. Under Decree No. 78, BOT and BTO enterprises enjoy a corporate income tax (CIT) preferential rate of 10% for 15 years, and CIT exemption for 4 years, and half reduction for 9 subsequent years. The project enterprise and the subcontractors are entitled to duty exemption applied to goods imported to form fixed assets. The objects under industrial property protection, technical know-how, technological processes and technical services for the implementation of the project are all exempted from taxes relating to technology transfer and royalty income. The same tax incentives are applied to other projects implemented by the investor to recover the capital invested in BT projects. The project enterprise is also exempted from land use levy or rental for the project’s lifespan.
In particular, projects in the field of power and clean energy (solar, wind, etc.) are classified in special incentive sectors which enjoy a CIT preferential rate of 15% for 15 years, CIT exemption for 4 years (when enterprises become profitable), and a 50% reduction for 9 subsequent years. Furthermore, new power plant construction is entitled to a CIT rate of 20% for 10 years, CIT exemption for 2 years, and a 50% reduction for 3 subsequent years. Projects in industrial zones, export processing zones or economic zones enjoy a CIT rate of 15% for 12 years, CIT exemption for 3 years, and a 50% reduction for 7 subsequent years.
However, challenges exist in attracting private investment due to the lack of specific regulations regarding new forms of PPP. As yet, there is no clear regime relating to financial arrangements between state budget, financial institutions, banks, domestic and foreign enterprises. The sharing role between public and private sectors is not expressly specified. Government support remains inadequate. Product prices of most infrastructure projects are under state control. In the context of economic slowdown, the Government follows the trend of reducing guarantees.
Therefore, fostering private investment in infrastructure will require (i) strong government commitments to support the private sector through implementing policies and regimes that facilitate procedures, providing assistance in capital, technology and training, and sharing risks; (ii) effective legal mechanisms such as BOT and PPP - particularly in the form of mixed financial arrangements between different sources comprising ODA, state development funds, state-owned enterprises’ capital, commercial banks’ loan, and private capital contributions; (iii) stronger guarantees and warranties for investment such as government guarantees and initiatives to provide raw materials, fuels and public facilities, and to purchase products to support the projects; and (iv) new appropriate capital-return regimes.
In our opinion, PPP has a bright future in Vietnam, because the State has undertaken efforts to create a level playing field and a clearer and more open legal corridor for investors in order to mobilize all available financial sources to back up Vietnam’s overall and sustainable development. These improvements represent a significant step toward achieving Vietnam’s goal of becoming an average-income country.
Vision & Associates