Vietnam’s PPP law is up and running

By Don Lambert - Principal private sector development specialist Asian Development Bank

The spending required to close the infrastructure gap is significant. Latest by 2030, Vietnam will need an estimated $237 billion for infrastructure investments to achieve the Sustainable Development Goals. To fund this investment, the Global Infrastructure Hub estimates that Vietnam will need to mobilise an estimated $49 billion above what it has historically spent.

The government already shoulders 90 per cent of infrastructure spending, and public investment as a proportion of GDP at 8 per cent is relatively high. Therefore, Vietnam cannot afford a large increase in its infrastructure budget, given the fiscal pressures the pandemic introduced.

Public-private partnerships (PPPs) could help to address the shortfall. In June 2020, Vietnam passed its first Law on Public-Private Partnership Investment. In March, the government issued Decree No.35/2021/ND-CP on the implementation of the PPP law and Decree No.28/2021/ND-CP on the financial management of PPPs. Vietnam’s legal framework for PPPs is largely in place. So what is next?

Successful PPPs begin with solid preparation. Given the volume of potential partnerships, effective project screening is essential to identify the most promising projects.

These projects then need to be prepared to a high standard. This includes not only proper financial structuring that allocates risks to the parties that can best manage those risks, but also application of the G20 Principles for Quality Infrastructure Investment. The latter takes a holistic approach to project preparation, emphasising lifecycle costs, the environment, natural disaster resilience, social impacts, and governance.

Such high-quality preparation is expensive. There is an understandable tendency to minimise costs at this stage, but a well-prepared project can pay for itself many times over, whereas a poorly prepared one can become a financial liability.

In the short term, Vietnam can tap donor support to fund some of these project preparation costs. In the medium term, it should develop a mechanism that recovers project preparation costs and recycles them toward future projects. Farsightedly, the PPP law anticipates such a mechanism.

The next priority is to achieve early successes that can become benchmarks. The Dien Chau-Bai Vot section of the North-South Expressway completed investor selection in December 2020, and construction commenced in May. Two other sections of the expressway have also been bid out and will start construction this year. As the first projects under the new PPP law, it is critical that they meet the expectation of all stakeholders to build momentum.

These projects, however, were tendered under national competitive bidding and were unlikely to attract significant interest from international investors for reasons both within and outside the government’s control. The next round of PPPs must be able to attract international investors.

International competition in large infrastructure projects can deliver better technology, expertise, and overall value for the government and users. It can also mobilise international capital, which is essential because the domestic capital markets are too small to meet all Vietnam’s capital needs.

Most expertise for PPPs and infrastructure planning is at the central level. The more this knowledge is diffused to municipalities and provinces, the more local projects will be able to leverage the efficiency of PPPs.

With support from the Canadian government, the Asian Development Bank (ADB) has recently approved technical assistance to develop such capacity at the subnational level. Moreover, whereas the Ministry of Planning and Investment and the Ministry of Transport have developed substantial expertise, efforts are needed to build capacity in ministries that historically have had less exposure to PPPs. Strong project preparation, successful pilots, and capacity building are the immediate priorities, but there are other milestones ahead.

First is sector diversification. The road sector, particularly given the government’s target to construct 5,000km of expressway by 2030, will remain a priority, but this should not be to the detriment of other sectors.

The PPP law can be applied to water, health, education, and IT projects. The e-government procurement project that was prepared with ADB support and commenced implementation in 2020 demonstrates that Vietnam can successfully use PPPs to develop soft infrastructure.

The PPP law arguably favours these projects. Its provisions for build-lease-transfer and build-transfer-lease projects are more robust than for projects that rely on the law’s revenue risk sharing mechanism. Soft infrastructure projects are more likely to be structured with one of the build-lease models.

Second is tapping the domestic bond market. Vietnam has relied heavily on its banks for domestic infrastructure. This creates a mismatch between bank’s short-term deposits and infrastructure’s long-project life. Concurrently, Vietnam’s institutional investors have few options for long-term investments. Strong performing infrastructure projects can be refinanced through project bonds placed with institutional investors. The new law introduces the legal framework to facilitate such marriages.

Third is rethinking the use of government guarantees. In comparison to countries at a similar level of socioeconomic development, the PPP law treats guarantees for project termination, revenue shortfalls, and foreign currency convertibility very conservatively.

On one hand, it protects Vietnam from building up contingent liabilities that might not be well understood. On the other hand, it puts Vietnam at a disadvantage in the international competition for capital. It also leaves money on the table. A greater use of targeted guarantees could raise private investment for infrastructure that would otherwise be financed by the state or not built at all. The passage of the new law was a crucial milestone. The work of its implementation is now beginning in earnest, and the ADB stands with Vietnam and its other development partners.