Long-awaited regulations implementing Vietnam's PPP Law have now been issued

In Brief

Last year we report on the promulgation of Law 64/2020/QH14 on Public-Private Partnership (the PPP Law) in which we highlighted a number of matters with respect to which we anticipated further guidance would be provided in the implementing regulations. These long awaited regulations have now been issued in the form of Decree 35/2021/ND-CP detailing and guiding implementation of the PPP Law (Decree 35) and Decree 28/2021/ND-CP on financial management mechanism of PPP projects (Decree 28) on 26 March 2021 (collectively, the Decrees). Both Decrees took effect from their signing dates, with the exception of Article 90 of Decree 35, on use of public assets to make payments to investors implementing an investment and construction project in the Build-Transfer form, which took effect from 1 October 2019 (noting that the PPP Law came into effect from 1 January 2021).

We consider below whether and to what extent the Decrees address the issues we raised previously and what further guidance has been provided.

Contents

1. Criteria for projects eligible to be implemented in PPP form
2. Guidance for preparation of standard form PPP contracts
3. Government performance guarantees
4. Investor selection process
5. Financing
6. Early termination payments
7. Local content
8. Transitional provisions

Criteria for projects eligible to be implemented in PPP form

The PPP Law set low capital thresholds for projects to be eligible to be carried out as PPP projects – VND 200 billion and VND 100 billion depending on the specific sector (approximately US$8.7 million and US$4.3 million respectively). Decree 35 provides for more specific and higher capital thresholds applicable to each sector. In addition, Decree 35 further clarifies what types of projects can be implemented as PPP projects. We set out such types of projects (with the respective capital threshold required) below:

• Transportation: projects in roads, railways, inland waterways, maritime and aviation must have total investment capital of at least VND1,500 billion (approximately US$65 million);
• Power:
  • coal-fired, gas-fired (including LNG) projects, nuclear power projects and power grid projects (except for projects for which the State has a monopoly as prescribed by the Law on Electricity) must have total investment capital of at least VND1,500 billion (approximately US$65 million); and
  • renewable power projects must have total investment capital of at least VND500 billion (approximately US$21.7 million).
• Irrigation: clean water supply, water drainage and wastewater treatment, and waste treatment projects must have total investment capital of at least VND200 billion (approximately US$8.7 million);
• Healthcare and education – training: investment projects must have total investment capital of at least VND100 billion (approximately US$4.3 million); and
• Information technology (IT) infrastructure works: investment projects in, among others, digital information and economic infrastructure, shared national platforms, applications and services, and ITC infrastructure for smart cities projects must have total investment capital of at least VND200 billion (approximately US$8.7 million).1

Given the Law on Promulgation of Legal Instruments provides that where legal instruments provide differently on the same matter, the legal instrument of a higher ranking shall prevail, there is a legal question as to whether the higher thresholds for total investment capital provided in Decree 35 can be effective given the lower thresholds prescribed in the PPP Law. Arguably, the lower thresholds prescribed in the PPP Law still apply and the higher thresholds prescribed in Decree 35 are ineffective.

Guidance for preparation of standard form PPP contracts

Decree 35 includes, in its Appendix VI, guidance on the contents of a standard form PPP contract based on which each line ministry is responsible for preparing standard form PPP contracts for their sector, depending on the nature and characteristics of such sector, as well as the type of PPP contract applicable. Decree 35 doesn't provide any specific timetable for ministries to issue these standard forms.

The guidance in Decree 35 follows the basic contents of a PPP contract as provided in the PPP Law but adds more detail about what should be covered for each specific issue. Though the guidance suggests that a PPP contract may include other contents as negotiated by the parties2, Decree 35 remains silent as to the extent to which prescribed contents will be negotiable. The Ministry of Planning and Investment, which is in charge of drafting the PPP Law and the Decrees, has verbally confirmed that the guidance is for reference only (ie will not compulsorily apply). It remains to be seen in practice how strictly any authorised state bodies will follow the guidance.

Based on past experience, we anticipate that standard form contracts are likely to closely follow the guidance, leaving limited room for negotiation.

Amendments to the PPP contract

As discussed in our PPP Law article, it is unclear whether the new provisions on contract amendment under the PPP Law confer an enforceable right to amend project contracts or merely give rise to a basis to attempt to reach agreement on amendments in certain circumstances. The guidance on standard form PPP contracts under Decree 35 states that the PPP contract must provide for (i) conditions to determine whether a specific event constitutes a triggering event for contract amendment, and (ii) agreement of the parties on amendment of the contract upon occurrence of such event (subject to the procedure3 provided under the PPP Law). This suggests that the right to insist on contract amendment on the occurrence of certain circumstances is an enforceable statutory right. Ultimately, however, it will depend on the specific language of the PPP contract. For example, a PPP contract might just state briefly that the parties will agree on amendment of the contract upon occurrence of such events which, being a mere agreement to agree, lacks teeth and value and may only complicate efficient implementation of PPP contracts.

Governing law

Similar to the PPP Law, the guidance on standard form PPP contracts under Decree 35 allows the parties to agree specifically on their rights, obligations and responsibilities 'for matters for which Vietnamese laws do not regulate'. Ideally this will be interpreted to mean that parties can freely agree on important matters such as liquidated damages, limitation of liability and indemnification. However, this will remain subject to the view of the authorised state body conducting the negotiation of the PPP contract.

Government performance guarantees

As mentioned in our PPP Law Insight, specific provisions on guarantees of counterparty performance obligations that were provided for in Decree 63 have not been carried forward into the PPP Law. Decree 31/2021/ND-CP of the Government dated 26 March 2021 implementing Law 61/2020/QH14 of the National Assembly dated 17 June 2020 on Investment (the LOI) (Decree 31) provides that the Prime Minister (PM) may decide to grant such guarantees with respect to those projects for which the investment policy decision is made by the National Assembly or the PM and other important infrastructure development projects. Such guarantees can be in the form of support for foreign currency 'balance' or other forms as determined by the PM. Decree 31 also mentions that guarantees for PPP projects may be considered to be granted on the basis of Chapter II of the LOI and other laws relating to PPP activity. We note that Chapter II of the LOI and the laws on PPP provide for certain forms of guarantees relating to no nationalisation, rights of foreign investors to transfer their assets overseas, change in law, dispute resolution, tax incentives, land rent incentives and foreign currency balance. However, these provisions are silent on guarantees of obligations of state-owned enterprises.

Notably, the PPP Law introduced the possibility for parties to agree in a PPP contract to use third party guarantee services with respect to obligations of the contract signing agency.4 Decree 35 has now clarified that such guarantee services can be provided by credit institutions, branches of foreign banks, insurers and branches of foreign insurers operating lawfully in Vietnam.5 Implementing this in practice could be challenging because foreign banks or branches of foreign insurers operating in Vietnam may not be willing to guarantee obligations of contract signing agencies, and state-owned banks are not obliged to provide such guarantees.

Investor selection process

Decree 35 provides a detailed process for selection of investors for PPP projects via open bidding, competitive negotiation and direct appointment. The step-by-step process for each method of investor selection, together with the responsible parties and the corresponding provisions in Decree 35 for each step, have been put into flowcharts, which make it easier to follow.6

Generally, the investor selection process comprises the following key steps: investment policy decision for the project; short-listing; preparation for investor selection process; evaluation of the tenders; submission for approval, approval and publication of the results for investor selection process; negotiation, finalisation and execution of the project contract. The sub-steps in each step can slightly vary for each of the forms of bidding, competitive negotiation and direct appointment but the key steps remain the same for all these forms.

Financing

Decree 28 provides further clarity on the financing provisions of the PPP Law, including:

• The financial plan to be included in the pre-feasibility study or the feasibility study shall include the following contents: total investment capital; the sources of the capital including state capital (if any), owners' equity, capital to be mobilised by the investors including total amount, the tenor and terms of corporate bonds (if any), schedule for disbursement of the capital mobilised by the investors, costs for capital mobilisation; proposals for incentives and guarantees (if any); profits on the equity; expected expenses during operation of the project; the plan for recouping the investment capital, profits for the investors; the criteria used for analysis and evaluation of the feasibility of the project, etc. The contents of the financial plan are the basis for the relevant authorities to formulate the bidding invitation documents and execution of the PPP contract.
• Owner equity: Decree 28 clarifies that an invitation to bid will specify the basis for determination of the investor's owner equity, as well as the timing for such determination to serve as the basis for evaluation of the investor's financial capability at the tendering stage.7
• Bond issuance: Decree 28 provides that a PPP project company can only issue bonds after signing the PPP contract and must comply with the PPP Law and regulations on bond issuance. Purchasers of bonds for private placement in Vietnam are limited to 'professional investors' only.
  In case of early termination of a PPP contract, the replacement investor will take over the obligation to repay the issued bonds in accordance with the bond terms. If the PPP project is taken over by a competent authority, the PPP project company will be obliged to repay the principal and interest prior to maturity of the issued bonds from the purchase price of the project or the compensation payable for early termination and other legitimate capital sources of the PPP project company.8

• State capital: Decree 28 also provides for the management, use and payment of state capital in PPP projects.9

Process for revenue and loss sharing: Annually, based on the report by the project company, the contract signing agency and the project company will review and compare the actual revenue against the revenue stipulated in the PPP contract; adjust the tariff of the public goods and services, and adjust the term of the PPP contract. Where there are triggers for application of the revenue sharing mechanism, the contract signing agency shall request the state auditor to audit the increase or decrease in the actual revenue that will be the basis for the sharing. Based on the report of the state auditor, the contract signing agency determines the amount for sharing and will report to the relevant authority. The project company must pay any revenue to be shared with the State within 60 days from the date of the report of the state auditor. In case the State has to share the loss with the project company, the project company is required to submit an application file to the Ministry of Finance or Department of Finance (as applicable) consisting of a copy of the state audit report and report of the contract signing agency to the relevant authority on the amount to be paid. The relevant finance body shall pay the amount within 60 days from receipt of a full application file.

Early termination payments

As mentioned in our previous PPP Law Insight, early termination payments are allowed only in very limited circumstances. Decree 35 now clarifies that if a PPP contract is terminated early due to a material breach in performance by the contract signing agency, early termination payments can be made from the public investment capital provision or other valid sources subject to the procedure to form a project using public investment capital.10 It appears that Decree 35 does not require a project using public investment capital to be formed until the contract signing agency is materially in breach of its obligations under the contract.

Decree 35 also provides that the PPP contract must provide for a formula or the methods for determination of the costs for dealing with early termination of the contract. After the parties have agreed on the conditions for termination of the contract, the contract signing agency must report to the relevant authority for determination on whether to pay such costs for dealing with early termination of the contract, the method, the amount and the sources for making such payments.11 While not expressly clear, it appears that the decision of the contract signing agency is not final but subject to a decision of the relevant authority. Practically, we would expect a consultation process to be conducted between the project company, its sponsors and lenders, the contract signing agency and the relevant authority before the agreement on the conditions for termination of the contract is reached such that there is more certainty of the outcome for the project company, its sponsors and lenders.

The above process deviates significantly from the current practice and provides less certainty for the project company, its sponsors and lenders. The practice for the existing PPP power projects is that the formula for early termination payments for different termination scenarios is stipulated in the PPP contract and no further negotiation on how the payments are calculated upon termination will be required. The mechanism provided for in the PPP Law and Decree 35 will be more difficult to implement in practice because it requires greater cooperation of the concerning parties when the contract is terminated. This is certainly one of the factors that would affect the appetite for investors and lenders for PPP projects in Vietnam in the future.

Local content

Our PPP Law Insight mentioned that project companies are encouraged under the PPP Law to use domestic contractors for work that domestic contractors are capable of implementing. The LOI, however, provides that the State will not force investors to give priority to the purchase or use of domestic goods or services, or to purchase or use goods from a domestic producer or services from a domestic service provider.

Interestingly, the guidance on standard PPP contracts in Decree 35 stipulates provisions on contract penalties, including in case of non-compliance with commitments to use of domestic contractors, goods, materials and equipment.12 The form of penalties can be payment of cash, temporary cessation of operations of the project or other forms.

Transitional provisions

The PPP Law is silent on how to deal with projects that had initialled project documents or an executed investment agreement before the effective date of the PPP Law.

Interestingly, the transitional provisions of Decree 35 allow those projects  to proceed without re-negotiation.

It is unclear how this will play out in practice given the PPP Law provides, at least, that the governing law of a PPP contract has to be Vietnamese law and there must be a mechanism for profit and loss sharing - requirements that may dramatically affect the whole structure of a contract and project, resulting in renegotiation of such provisions being unavoidable in practice.

The transitional provisions of Decree 35 provide further guidelines on how to deal with projects at different stages before the PPP Law takes effect. In essence, they require such projects to follow the provisions of the PPP Law and Decree 35.

FOOTNOTES

1. Article 2 of Decree 35.

2. Item 32 Section 2 Appendix VI Decree 35.

3. Article 50.2 PPP Law.

4. Article 47.1(g) of PPP Law.

5. Item 18 Section II Appendix VI of Decree 35.

6. Appendix V of Decree 35.

7. Article 5 of Decree 28.

8. Article 6 of Decree 28.

9. Article 7 of Decree 28.

10. Article 82.2 of Decree 35. Public investment capital is defined in the Law on Public Investment to comprise: state budget funds; legitimate revenues of state agencies and public service units that are retained for investment purposes as provided in that law.

11. Articles 82.1 and 82.4 of Decree 35.

12. Item 20 of Appendix VI of Decree 35.