Transformation ahead in PPP investment risk mechanisms

Investors are looking for assistance in entering major PPP transport infrastructure ventures across the country

At last week’s roundtable to discuss solutions to infrastructure development under the public-private partnership (PPP) model, changes in the latest version of the draft law on PPP were top of the agenda, with revenue risk sharing mechanism, foreign currency convertibility guarantee, fields of PPP investment, scale of projects, types of contracts, and state funding being the areas of focus.

Nguyen Dang Truong, head of the Ministry of the Planning and Investment’s Public Procurement Agency which directly compiles the draft law, said that in order to share risks with investors, the draft would add a minimum revenue guarantee/revenue risk sharing mechanism, and a foreign currency convertibility guarantee. “These measures are only applied to particularly important national projects whose investment plans are approved by the National Assembly (NA) and the prime minister,” said Truong.

Therefore, for the first time a law in Vietnam would likely allow the state to commit to sharing revenue risks with private parties. It is also expected to allow the contracting state agency to agree to increase the tariff or service fees (or extend the operational term) of the project if the actual revenue derived from the project is lower than that in the financial model agreed in the concession contract.

If such adjustments are not sufficient to cover the project’s operating expenditures, the government may consider paying up to 50 per cent of the difference between the actual revenue of the project and the amount agreed in the concession contract. If the scheme turns a profit, PPP ventures share at least 50 per cent of the difference.

There would also be a cap on a foreign currency convertibility guarantee of 30 per cent of the net VND revenue.

The other highlighted changes state that a business which is established to carry out a PPP project is permitted to issue business bonds to raise funds, and that the fields of investment are limited but with flexible regulation.

While emphasising the positive alterations, several state agencies, experts, and investors are still concerned about the supply of foreign currency, the ability of PPPs to ­access this currency, and ­inconsistency with other relevant laws.

Nguyen Mai, chairman of the Vietnam Association of Foreign Invested Enterprises, argued that the draft law on PPPs should clarify the ­government guarantee mechanism, and that the state needs to pledge site clearance support to help financers carry out projects on schedule.

“In PPP investment, the risk-sharing mechanism is the most ­important aspect. A lack of it has limited attractiveness to international ventures for years,” said Mai.

PPP financiers also have similar worries. Tran Chung, chairman of the Association of Investors in Vietnam Road Traffic Works, told VIR, “These changes are ­meaningful to our members who are seeking opportunities in PPP projects, ­especially the eight sections of the Eastern Cluster of the North-South Expressway project,” Chung said.

“However, their involvement faces a challenge because of difficulties in accessing bank loans. Moreover, the overlapping of the draft law on PPP is also an issue.”

Tran Van The, vice chairman of Deo Ca Group, one of the biggest PPP transport project developers in Vietnam, said, “The draft law should verify regulations on the transfer of rights and obligations, because there is still controversy concerning the Law on Enterprises 2014 and the amended Law on Securities. We also agree that the issuance of business bonds should be allowed in the construction process to help investors raise funds.”

To ease concerns, Nguyen Duc Kien, Vice Chairman of the NA Economics Committee, cited Articles 75 and 76 of the draft stating that PPP investors have the right to buy foreign currency from currency trading units.

“They are given first priority in case the state authorities have to intervene as foreign currency trading units fail to meet their demands,” said Kien.

He added that in addition to the draft law on PPP, there are three related laws all being revised to ensure their relevance. Specifically, a regulation on allowing PPPs to issue individual bonds is being added to the draft amendments to the Law on Securities, while the Law on Investment 2014 and the Law on Enterprises 2014 are being revised towards facilitating fundraising, and giving power and responsibility to businesses.

As scheduled, the draft law on PPP will be debated next week at the NA’s ongoing session.