INTRODUCTION TO DECREE 15 ON PPP

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1 INTRODUCTION TO DECREE 15 ON PPP After nearly two years of drafting and stakeholder consultation, the Vietnamese Government has promulgated a unified legislation (Decree No. 15/2015/ND-CP) governing private public partnership (PPP) investment projects (PPP Decree). The authors of this article have assisted the Government throughout the development of the PPP Decree and below present a basic overview of the key elements of the new decree, based on their understanding of the intent behind the drafting, relationship of the PPP Decree with other existing and forthcoming legislation and their experience with PPP projects throughout the region. The views of the authors do not reflect or otherwise represent the views of the Government of Vietnam. This article should not be taken as legal advice or a complete analysis of the PPP Decree. The PPP Decree was issued on 14 February 2015 and will be effective from 10 April Dedicated specifically to the identification, preparation and implementation of PPP projects, the PPP Decree will replace the current regulations governing the regime for pilot PPP projects (formerly, Decision 71) as well as the regime for build-operate-transfer (BOT), build-transfer-operate (BTO) and build-transfer (BT) projects under Decree 108. In developing the PPP Decree, a number of lessons were taken from challenges faced by investors and Government alike under the previous regulations. The PPP Decree aims to form a more consistent and effective regime for all PPP projects (including BOT, BTO and BT) and has been drafted to provide more guidelines for both State authorities and investors in order to facilitate project preparation and implementation. The PPP Decree was drafted with a focus on improving the transparency of the project development process in order to promote more foreign investment in infrastructure development across key sectors such as transportation, energy, environment, water supply, waste treatment, etc. New concepts are being introduced, such as viability gap funding, value for money and PPP structured feasibility studies, for which new terminology in the Vietnamese legal context (such as State Investment Capital, economic efficiency and project proposal) has needed to be developed. Intro to PPP Decree, page 1

2 The PPP Decree introduces some new features that distinguish it from preceding regulations, including: It sets out a PPP project cycle that includes screening and publication of projects, reliance on a feasibility study (or project proposal for smaller projects) to determine optimal contract structure, approval of State support and competition amongst investors to win project awards; It provides basic eligibility requirements for PPP projects to assist agencies in the screening of projects; It applies a wider scope of investment sectors; It introduces new contract types based on a broad division between user fee type contracts and availability payment type contracts and contemplates variations of the stipulated contract types; It does not cap the use of State capital participating in project implementation as a percentage of the total investment cost but seeks to determine the optimal use of State capital based on the project needs; It makes available financial support during project selection and development by introducing the funding regime for such support, which would include the Project Development Facility (assisted by Asian Development Bank and the French Development Agency); It provides for the possible use of State support (State Investment Capital) as a form of viability gap funding for PPP projects; It reiterates lenders' step-in rights and right to assignment; Foreign governing law may be permitted for foreign invested projects; and Foreign arbitration may be permitted for foreign invested projects. The remainder of this article highlights a few of the key elements found in the PPP Decree. PPP project cycle The PPP Decree introduces a step-wise PPP project cycle applicable to both authorized state agencies (ASAs) developing projects and investors alike. The effect is a more transparent and predictable process for project development and investment in Vietnam. Intro to PPP Decree, page 2

3 Under the PPP Decree, except for Group C projects (among others, projects with total investment costs (i.e. CAPEX) of up to 120 billion VND (approximately 6 million USD) as defined under the regulations on public investment), PPP projects must be implemented in accordance with the following procedures: Project screening and formulation of a project proposal (a new form of prefeasibility study report); Approval of the project proposal, allowing the publication of the project for moving to the feasibility study phase; Formulation, appraisal and approval of a feasibility study report; Investor selection, negotiation and signing of the project contract; Issuance of investment registration certificate and establishment of project enterprise; Project implementation; and Hand-over of the project facility at the end of the PPP contract term. The procedures for implementation of smaller sized (Group C) projects are simplified. There is no requirement for the preparation of a feasibility study report and establishment of project enterprise for those projects. Eligibility Requirements In previous regulations, there was a lack of clear eligibility requirements for selecting projects to be developed under PPP investment form. The PPP Decree introduces the concept of PPP as a contractually based investment form (now contemplated across a number of laws) and specifies basic requirements that projects must satisfy in order to be implemented in such investment form. The eligibility requirements include that the proposed project shall: conform with development plans and master plans of the sectors and regions, and the plans for socio-economic development of localities; be within the investment sectors set out in the PPP Decree; be capable of attracting commercial funding, technology and management experience of investors; Intro to PPP Decree, page 3

4 be capable of delivering, over the term of the contract, products and services of which the quality is satisfactory to users (as specified in the contract); and have at least a total investment capital (i.e. CAPEX plus the initial capital for project operation) of 20 billion VND (approximately 1 million USD) or more, except for projects developed under operate & manage (O&M) contract and agricultural projects. The PPP Decree also provides that the projects, which are able to recover capital from conducting business activities, shall have priority over other projects. Wider Application Scope Compared to the pilot regime for PPP projects under Decision 71, the PPP Decree covers more sectors, such as projects in commercial infrastructure, many social sectors (in addition to healthcare) and agriculture. More specifically, it allows not only projects for construction of infrastructure facilities to be implemented under PPP form, but also covers projects for provision of public services, such as agriculture services. The sectors covered under the PPP Decree are as follows: Transportation: transportation infrastructure facilities and relevant services; Lighting systems; water supply systems; drainage systems; waste and wastewater collection and treatment systems; social housings, resettlement housings; cemeteries; Power: power plants, power transmission lines; Infrastructure in social sectors: infrastructure facilities in health, education, training, culture, sport sectors and relevant services; office buildings of State agencies; Commercial infrastructure: commercial, scientific and technological, and hydro-meteorological infrastructure facilities; infrastructure facilities of economic zones, industrial zones, high-tech parks, IT parks; IT applications; Agriculture: agriculture and rural infrastructure facilities; development services for connecting the production with the processing and sales of agriculture products; and Other sectors as decided by the Prime Minister. Intro to PPP Decree, page 4

5 Contract Types Expanding on the BOT, BTO and BT contract forms that were formerly permitted under Decision 108, the PPP Decree introduces and regulates new contract types, such as build-own-operate (BOO), build-transfer-lease (BTL), build-lease-transfer (BLT) and operate-manage (O&M) contracts. Broadly speaking, the Government has adopted a division of contract forms based on the source of income for the project that is found in some other countries with PPP programs namely user fee based contracts and availability payment based contracts. It is contemplated that BOT, BTO and BOO contract forms permit the investor to recover its investment through charging user fees to off-takers or end users for delivering services. This is the form currently used in Vietnam s existing BOT projects. The new contract forms, such at BTL and BLT, would permit the investor to recover its investment through periodic fixed payments by the ASA, as set out in the contract. This form of availability payment based contract may be considered new to Vietnam, but is not conceptually different from how capacity charges are structured under the typical BOT power projects. The PPP Decree permits investors in BT contracts to recover their investment through an exchange of the BT project for another project (called other projects ), which may yield higher return, such as via a grant of land to develop for commercial purposes. This form of land-project swapping has already been seen on other BT projects. However, in implementing the PPP Decree, the ASAs would be cautioned to properly value the other project and to ensure the BT contract clearly requires delivery milestones to be met on the BT project before allowing investors to fully exploit the other project. To achieve greater flexibility in project structure and to avoid introducing an alphabet soup of new project contract forms, the PPP Decree would permit ASAs to utilize other similar contract types that use State investment capital. Such other contract form should be introduced on the basis of the optimal structure determined in the feasibility study. Intro to PPP Decree, page 5

6 Availability of State Investment Capital without Specific Limits Decision 71 capped the State s investment in a project at 30% of the total investment cost, regardless of the nature and actual needs of the project. Use of State capital above such 30% cap was subject to approval by the Prime Minister. Such a cap had a chilling effect on investor s interest in Vietnam s PPP program, especially in social sectors such as hospitals where early projects would almost certainly require State contribution in greater amounts, as end user fees are simply too low to pay for the underlying project. PPP investors expect that a country s PPP program will provide viability gap funding, which has been introduced as State Investment Capital in the PPP Decree, to bridge the gap between total project costs and the return needed to make the project financial viable. The PPP Decree entails greater flexibility with respect to Vietnam s ability to offer viability gap funding to projects, as there is no longer a specific limit on the State s capital participation in project implementation in the PPP Decree. The level of State Investment Capital is to be determined for each project on the basis of the project s actual need for viability gap funding. The allocation of State capital for a project would be pre-approved at the project proposal phase in accordance with the regulations on public investment. The amount of viability gap funding would be identified from the financial model produced by the State s transaction advisors during the feasibility study phase (or project proposal phase, for a smaller project of Group C) of the project. The recommendations gleaned from the feasibility study are then weighed against the ability to mobilize and balance State capital and approved by the competent authority (i.e. the Prime Minister or the ASAs, depending on the project types) together with the approval of the feasibility study report. The PPP Decree provides for three forms of State supports, as follows: Supports for the construction of facilities, i.e. CAPEX support, which applies to user fee based contracts such at BOT and BTO projects; Payments to the investor providing services, i.e. availability based payments, which applies to mainly BTL, BLT contracts and other similar contracts; and Supports for the construction of ancillary facilities, to organize compensation, land clearance and resettlement. Intro to PPP Decree, page 6

7 The introduction of CAPEX support and availability payments by the PPP Decree represent an important improvement over past legislation and give the ASAs more options for structuring projects. However, it remains to be seen whether a project can benefit from both CAPEX support and availability payments from the State. Availability of Project Development Facility (PDF) The PPP Decree now enables the operation of funding sources for project preparation, including Project Development Facility (PDF), a USD 30 million ODA supported program to assist ASAs to fund project screening, preparation of project proposals and feasibility studies and conducting investor selection by way of bidding. Under the PPP Decree, such funding sources are available to fund the above preparation activities for solicited projects, which are approved to receive the funds. The PPP Decree also contemplates that the selected investor must reimburse the costs for project preparation to support other projects, which will be informed to investors in the tender documentation. Incentives for PPP Projects Incentives for PPP projects under the PPP Decree include: Tax incentives for the investor, project enterprise as well as contractors participating in project implementation in accordance with tax regulations; Exemption or reduction of land use fees or land rent for the investor and project enterprise; Guarantee on the provision of raw materials, sales of products, services and performance obligations of State-owned enterprises selling fuel, raw materials, purchasing products and services to the investor or project enterprise; Right to mortgage properties, land-use rights and right to operate the project facilities to lenders in accordance with civil code and land laws; Assurance of unchanged land use purpose throughout project implementation term; Assurance of foreign currency balance to satisfy the needs of important projects; Assurance of provision of public services; and Intro to PPP Decree, page 7

8 Assurance of the right to possess properties. Most of the incentives under the PPP Decree are similar to the incentives provided under Decision 71 and Decree 108 with little improvement. Differences include the fact that the PPP Decree offers incentives not only for the project enterprise but also for the investor. Regarding mortgage rights, for the first time, the PPP Decree allows mortgage of right to operate the project facilities to lenders. Step-in Rights The PPP Decree confirms the lenders' step-in rights for a PPP project which has been existing under Decision 71 and Decree 108. Pursuant to the PPP Decree, lenders shall have the right to take over on its own, or to appoint another competent organization to take over, all or part of the rights and obligations of the investor or project enterprise, in the event that the investor or the project enterprise fails to fulfil the obligations under the project contract or loan agreements. An improvement of the PPP Decree is that it contemplates a direct agreement on step-in rights must be signed between the lenders and the ASA. Such a clear statement in regulations for lender's step-in rights coupled with a right of lenders to receive assignment of the project contract have long been sought by lenders supporting the project financing of Vietnam s infrastructure projects. Governing Law Similar to the approach of Decree 108, parties may select the application of foreign laws in their project contracts to which a foreign investor is a party, as well as contracts that have performance obligations guaranteed by the Government. The agreement on the use of foreign law must not be contrary to Vietnamese law on selection and application of foreign law. This provision provides further clarity for the interpretation that the compliance with Vietnamese law is required for the selection of foreign law, but not a requirement relating to the contents of foreign laws. Intro to PPP Decree, page 8

9 Dispute Resolution The PPP Decree maintains the approach of Decree 108 on dispute resolution, under which the disputes between the ASAs and the foreign investor or project invested enterprise shall be resolved by Vietnamese courts or Vietnamese arbitration or an arbitration as agreed by the parties. That said, foreign arbitration is allowed to resolve disputes between the ASAs and the foreign investor or foreign invested enterprise. This is consistent with the provision of the current law on investment and the new Law on Investment (effective as of 1 July 2015). Unsolicited Proposals The PPP Decree recognizes unsolicited proposals although it only contemplates key principles for handling unsolicited proposals and does not provide detailed guidelines. Potential investors may propose projects, which have not been approved and published by the ASAs. Those potential investors may also include State-owned enterprises. A wholly State-owned enterprise wishing to propose a project to develop under PPP must form a consortium with another enterprise to make the proposal. Enterprises with State capital of less that 100 per cent are permitted to propose unsolicited projects without forming such consortia. Key principles affecting unsolicited proposals are as follows: The project proponent may submit a project proposal to an ASA, commencing the unsolicited proposal process. Information on the unsolicited project and the unsolicited proponent will be published after the project proposal of the proponent is approved by the ASA; The project proponent may be assigned to prepare the feasibility study report for the unsolicited project. Such assignment must be via a written agreement between the ASA and the proponent which sets out, among others, the agreed requirements and preparation costs of the feasibility study and what happens (i.e. reimbursement of costs) where the proponent is not selected to implement the project after tendering; Intro to PPP Decree, page 9

10 After the feasibility study report is approved by the ASA, the project will be put to tender for selection of investor implementing the project. The project proponent is allowed to enjoy incentives during the tender; Unsolicited projects are not entitled to the support or reimbursement of costs from the project development facility; and Unsolicited projects are not entitled to receive State investment capital except for projects, which are funded by ODA or concessional loans from international donors. Investor Selection Investor selection may be conducted via open bidding or direct appointment. The detailed procedures and cases where direct appointment may apply are subject to the Law on Public Procurement and the forth coming Investor Selection Decree. The Law on Public Procurement provides that direct appointment of PPP projects may occur in the following cases: Only one investor has expressed its interest to participate in the implementation of the project; There is only one investor capable to implement the project for the reason that it concerns specific intellectual property, commercial secret, technologies or funding arrangement; The Investor, who has proposed the project, satisfies the requirements for implementing the project with feasibility and highest efficiency in accordance with regulations of Government. Conclusion The PPP Decree, coupled by other amendments to investment and procurement laws, demonstrates Vietnam s commitments on PPP, as a means to attract greater investment towards the country s infrastructure needs. The PPP Decree represents a departure from past practice. Amongst other changes, it seeks to introduce new project evaluation concepts, new project contract and financing structures, a greater focus on competitive bidding and more certainty in the overall project development process. This step forward Intro to PPP Decree, page 10

11 will require changes and adaptation by ASAs and investors alike, and accordingly, one should expect a number of new challenges to arise on the first projects being implemented under this decree. Having learned from the case of Decision 71, which struggled with actual implementation after it was approved, the implementation phase of the PPP Decree has been carefully considered and supported by the Government and its development partners. In the background, a broad based training program is already under way involving the central and provincial authorities to create a better, more consistent understanding of how PPP projects work. Advisors have been retained to support the preparation of the first pathfinder projects and a PPP advisor panel, similar to that used in other countries, is being put into place under the PDF. Various guidelines and bidding documentation are currently being drafted and several potential PPP projects are in the project proposal phase. Thus, Vietnam s PPP program has significant momentum, which one can hope will translate into tangible projects over the coming months. About the authors: Stanley Boots, CEO, and the team of Frontier Law & Advisory ( specializes in public private partnerships, infrastructure projects and government advisory across the region and has been advising the Ministry of Planning and Investment under technical support grants during the drafting of the PPP Decree and preparation of the environment for PPP in Vietnam. The views expressed in this article are those of the Frontier team and do not represent the views or positions of the Vietnam government or any of its development partners. This article only touches on some of the key elements of the PPP Decree. For more information, please contact: stanley@bold-frontier.com. Intro to PPP Decree, page 11