Financial mechanisms further clarified for public-private partnership ventures

The country targets an additional 5,700km of highway this decade. Photo: Le Toan

The issuance of Decree No.35/2021/ND-CP providing detailed guidance on the Law on Public-Private Partnership Investment, and Decree No.28/2021/ND-CP providing guidance on financial control mechanisms of such projects, have marked an important milestone for potential businesses.

Decree 35 continued exactly where the law left and built upon the foundations. Firstly, compared to previous regulations, Decree 35 has expanded the types of incentives available to an investor. In addition to the 5-per-cent incentive for having an approved public-private partnership (PPP) project proposal, an investor may also be entitled to up to another 5 per cent if they use sufficient local contractors, goods, and products for project implementation.

Secondly, Decree 35 now specifies the level of performance guarantee for PPP concessionaire agreements and provides a threshold of 1.5-3 per cent of total investment capital for projects with a value of up to $13.04 million and 1-1.5 per cent of total investment capital for projects with a value higher than that amount.

Finally, Decree 35 has laid out in detail the selection process for PPP investors, from qualifying requirements, applicable selection methods, and selection time limit to guidance for each selection method, including principles to review bids. Potential investors will appreciate this transparency, having received legal insurance that authorities will review their proposals transparently and fairly.

There are also many positive changes regarding Decree 28, which regulates the financials of the PPP project – arguably the most crucial factor to the success of any project. One significant difference compared to previous regulations is that the cashflow to calculate a PPP project’s financial plan is now expressly specified as after-tax. Investors will appreciate this change when formulating their financial plan for bidding proposals, as they can now better account for a critical cost for the PPP project company.

Secondly, Decree 28 has removed the caps on loan interest rates previously imposed on companies. Previously, PPP project investors were required to specify an interest rate in their bidding proposal, which would serve as a cap in interest rate. If the investor is directly appointed, they will be subject to a direct cap of no higher than 1.5 times the interest of the Vietnamese 10-year treasury bond, which can be artificial and does not follow market conditions. With the cap removal, firms will have much greater flexibility in estimating costs and arranging finances for their projects. Thirdly, Decree 28 has clarified the law on PPP investment’s innovative revenue-sharing mechanism. Chapter V of Decree 28 is dedicated solely to explaining how the revenue-sharing mechanism will work in practice. Specifically, under Article 16 of Decree 28, if the actual income of the PPP project company falls below 75 per cent of the estimated income in the financial plan, the state budget will pay an amount equalling 50 per cent of the difference between the estimate and actual income.

Such income will be considered income arising out of public goods and services and exempt from VAT. On the other hand, if the revenue of a project company surpasses 125 per cent of the estimated income in the financial plan, the company shall have to pay into the state budget 50 per cent of the differences between the estimated and actual amount.

Nevertheless, there remain deficiencies with Decree 28 and Decree 35, which we hope will be addressed in the future. Decree 28 has arguably failed to address the long-standing problems with PPP projects in Vietnam till now – long delays to capital contribution from the state. Numerous projects have experienced this issue. The Deo Ca Tunnel project is one example where the government failed to contribute VND1.18 trillion ($513 million) even after the company had completed construction and commissioning. Another notorious example is the Hanoi-Haiphong build-operate-transfer (BOT) project, where the government’s promised capital support of over VND11.7 trillion ($510 million) was never contributed. As a result, the company had to borrow emergency capital to cover immediate needs, incurring huge long-term costs in the process.

Under Article 8.2 of Decree 28, state capital contribution will only be made when the authority issues a capital plan and budget estimates. As a result, where the government cannot arrange finances, it has a legal ground to defer its capital contribution obligations. Worse still, Decree 28 also failed to specify the responsibilities of the government to compensate in case of a late contribution. As a result, companies are likely to be left in limbo about whether they can recover any compensation or overdue interest paid to the lenders.

Secondly, Article 8.3 of Decree 28 provides that state capital contribution for construction works will only be made after the works have been completed. As a result, in most projects, private investors will have to make payments for construction works first, and only after these works have been completed, they will be able to claw back monies from the state. Another issue is that the procedure for payments of shared revenue is also arguably too long and too complicated. A PPP project company and the signing authority under the concessionaire agreement will annually review the actual and estimated income of the project. If the requirements to apply the mechanism are met, the state audit will be invited to audit income differences. The signing authority will then estimate shared revenue and submit a dossier for payment to the relevant authorised financial body (Ministry of Finance or provincial/municipal department of finance).

These bodies will review within 60 days of receiving the dossier and issue a decision. If approved, the signing authority will send a request to the relevant authorised financial body to issue a payment order, which may then be submitted to the State Treasury for payment to the PPP project company’s account.

Under the State Audit Office of Vietnam’s (SAV) Decision No.03/2020/QD-KTNN released last year on regulations on organisation and operation of state audit teams, an audit by the SAV could take up to 60 days. The signing authority reviews revenue differences and the authorised financial bodies review whether to approve the revenue sharing (up to 60 days). Finally, the State Treasury has to examine the payment dossier. This whole process could take over six months or more to complete. For a PPP project company, this is too long. If the company is entitled to payments under the revenue sharing mechanism, it has had an underwhelming year.

As such, it could be in dire need of liquidity to pay due financial obligations to lenders, contractors, and suppliers. Suppose it must wait another six months for the supporting money, those obligations may have become overdue, and lenders may have triggered their default provisions. In that event, the revenue sharing monies might have become too little, too late.

Overall, Decree 28 and Decree 35 should still be a welcoming addition to the legal PPP landscape, and they could not have come at a better time either. Drafts of Vietnam’s development plans for crucial infrastructure, including electricity and transport for 2021-2030 were first circulated for opinions in 2021. Under these draft plans, Vietnam aims to construct an additional 5,700km of highway and 137.2GW of electricity capacity.

Such goals can be described as ambitious but costly. Total investment is estimated to be around $128.3 billion for electricity alone. A substantial portion will have to come in the form of private investments, including within PPP projects.

With transparent processes, increased incentives, and much more flexibilities granted to companies, decrees 28 and 35 have the potential to attract more private interest and investments to PPP projects. The signing of two BOT concessionaire agreements to develop the North-South Highway in May are positive signs.