New law pours clearer water into glass of PPP investment

By Giles T. Cooper Partner, Duane Morris LLP

Whilst the new law provides a much-needed legislative framework for the facilitation of public-private partnership (PPP) investment, it also covers several drafting uncertainties. A recently-published draft decree serves to clarify such uncertainty, providing further guidance in several key regulatory areas.

Eligible sectors and investment size

The law introduced several general eligible sectors for PPP investment (for example, transport, power, water, waste, healthcare, education and training, and IT) but needs to provide further guidance on the specific sub-sectors or investment amounts pertaining to each. The draft decree confirms the following:

- Transportation projects require a total minimum investment amount of VND1.5 billion ($65,220) for projects in road, rail, inland waterway, maritime, and aviation;

- Power plant and grid projects require a total minimum investment amount of VND2.3 trillion ($100 million);

- Clean water supply projects require a total minimum investment amount of VND1.5 trillion ($65.2 million) in urban areas, VND200 billion ($8.7 million) in rural areas, or VND100 billion ($4.35 million) in difficult or especially difficult socioeconomic areas;

- Wastewater drainage and treatment projects require a total minimum investment amount of VND1.5 trillion in urban areas, VND200 billion in rural areas, or VND100 billion in difficult or especially difficult socio-economic areas;

- Health, education, and training requires minimum total investment amount of VND100 billion; and

- IT requires minimum total investment amount of VND800 billion ($34.8 million) for concentrated IT park developments and VND200 billion for technical IT projects (that is, national information systems, government e-platforms and databases, information security, and technical infrastructure, amongst others).

Introduction and role of project evaluation councils

For each proposed PPP project, a state evaluation council (for National Assembly-level investment) or inter-sector evaluation council (prime ministerial-level investment), or grassroots evaluation council (people’s council-level investment) will be established.

Such councils are tasked with arranging an evaluation and official opinion on the submitted pre-feasibility and feasibility study reports. Councils will comprise of official representatives from the Ministry of Planning and Investment and other relevant agencies as decided by the prime minister.

The draft decree introduces the potential for domestic or foreign organisations to be formally hired as consultants to assist with such evaluation, as approved by the prime minister or relevant people’s council.

The ability of investors to self-propose projects

Importantly, the draft decree seems to confirm that investors will be able to self-propose PPP projects. Specifically, investors are required to submit formal proposals to the local department of planning and investment (DPI). The proposal must satisfy several criteria as detailed under Article 27.1 of the Law on Public-Private Partnership Investment. Following this, investors will be required to prepare a pre-feasibility report for submission.

Where two or more investors submit proposals for the same project, the DPI will select the most feasible project based on several factors, including investor capacity and expertise, financial considerations, and potential socioeconomic impacts, amongst others.

New law pours clearer water into glass of PPP investment

Project conversion: public to private

Projects currently funded by way of public capital may seek to formally convert to a PPP form under the new law. Conversion will require the current authorised agency to withdraw their public capital portion, with the investor undertaking the relevant re-capitalisation.

It is unclear at this point if any limitations will apply to potential conversions. For example, a restriction on the conversion of projects which are already at a particular development phase (such as the construction phase).

Whilst the opportunity to invest in underperforming pre-existing public projects is attractive and potentially lucrative, corporate restructuring under Vietnamese law is highly complex and requires careful further legal consideration.

Project contract – takeover rights

The new draft decree provides that where an investor commits a serious breach of their contractual responsibilities and is unable to remedy such breach within a reasonable time, the procuring agency is granted a statutory right to temporarily takeover the management and operation of the project facility.

Such rights apply broadly, arising when the project is in the pre-construction, construction, and operational phases.

Termination rights – procuring agency

The draft decree details broad circumstances leading to the rights of a procuring agency to terminate for serious contractual breach by the project enterprise:

- Pre-construction: Failure to procure essential financing options; failure to execute the PPP project contract or to incorporate a project enterprise prior to the specific contractual deadline; failure to obtain the necessary licenses or approvals; failure to commence basic construction works or lodge formal project design documentation;

- Construction: Failure to comply with building regulations or design criteria; failure to complete works within the agreed schedule; failure to comply with labour regulations and other public laws; and

- Operation: Failure to supply services pursuant to quality standards prescribed by law and under contract; failure to comply with price controls, temporary interruption to the supply of services without consent; failure to maintain the facility in accordance with agreed quality standards; failure to comply with any imposed administrative sanctions or penalties.

Such termination rights are broad and potentially uncertain, greatly favouring the procuring agency, and will thus likely be an unwanted contractual risk for any prospective investor.

Termination rights – project enterprise

Conversely, a project enterprise is provided with very limited grounds for termination should the procuring agency commit a serious contractual breach:

- Acts of corruption or bribery;

- Failure to make the required payments to the project enterprise;

- Failure to obtain the necessary licenses to operate the facility where such failure is not the fault of the project enterprise; and

- Failure by the procuring agency to provide necessary support for the performance of the project contract.

Compensation for contractual termination

The draft decree confirms that compensation for termination should be included in the project’s contractual agreement as specifically negotiated between the procuring agency and the project enterprise.

The draft decree also contemplates that a compensation clause should include reference to the fair value of work already performed up to the point of termination, as well as any further expense or loss, including loss of profit.

Conclusion

The passing of Vietnam’s first Law on Public-Private Partnership Investment provides an exciting development in the evolution of Vietnam’s PPP market. Whilst the new law serves to protect investors via the codification of key legal rights, the drafting of the law is not without concern and numerous uncertainties exist as to statutory application.

It is anticipated that several guiding circulars and decrees will be issued to assist in the implementation of the new law. The first such decree, albeit currently in draft form, provides important further clarification on eligible PPP sectors, investment size, and the role of project evaluation councils, contractual termination rights, and compensation terms.