Vietnam’s National Assembly recently codified the provisions on public-private partnership (PPP) projects into law. Set to take effect on January 1, 2021, the new PPP Law reduces uncertainty from other laws or decrees that may apply in a given situation.
The following article provides a brief overview of some of the key changes from the old legal framework.
5 notable changes from the previous PPP framework
Investment sectors: The scope of investment sectors has been reduced to five – transportation, healthcare, education, transmission grid, and water. Investors engaged in the aforementioned sectors can benefit from incentives, such as preferred corporate income tax, exemption or reduction of land lease fee, credit support, and more.
Investment capital requirement: PPP projects need to meet a minimum threshold of VND 200 billion (US$8.56 million) in total investment capital. This requirement is lower depending on the type of project and area in which it is located.
State capital participation: The new law sets a limit of 50 percent of total investment capital for state investment in PPP projects. This includes the funding for land clearance.
Revenue risk-sharing mechanism: PPP projects facing a drop in revenue can benefit from revenue risk allocation. The state will share with the investor and the PPP project enterprise 50 percent of the difference between the actual revenue and 75 percent of the committed revenue in the financial plan.
Government guarantees: Given that investment attraction is the main goal for the new law, Vietnam is committed to providing guarantees to private and foreign investors. Examples include guarantees of access to land and land use, provision of civil service, right to the mortgage of property, and revenue risk sharing, among others.
Spotlight on infrastructure
The new PPP law reflects a growing need to find new sources of funding in response to the increasing needs and demands, particularly in the five targeted sectors.
According to Fitch Solutions, the new PPP law is set to boost infrastructure development in Vietnam. The firm forecasts construction growth to be 6.8 percent a year on average from 2021 to 2029.
With more than 98 major infrastructure projects at the planning stage earmarked as PPPs – 58 of which are in the roads and bridges sector – the new PPP law will certainly be put to the test. Previously, the North-South Expressway project linking Hanoi to Ho Chi Minh City failed to be implemented under a PPP scheme due to complications relating to bidding. There are hopes that the new law will revive PPP opportunities as the need for investment in quality infrastructure increases.
Foreign investors will play an increasingly important role over the next decade, particularly in Vietnam’s infrastructure and construction market. Private and foreign companies see opportunities in areas where they have competitive advantages: designing, consulting, building and managing technically challenging projects, and supplying high-value industrial goods, to name a few.
The openness and competitive nature of Vietnam’s infrastructure market is reflected in the mix of nationalities of countries operating in the country. Leading the way is South Korea which holds 17 percent of market share, followed by Japan at 14 percent and China at approximately 10 percent. Overall, foreign companies account for 57 percent of the market share, which indicates that the proportion of local dominance is lower in Vietnam relative to other Southeast Asian countries.
3 issues investors need to keep in mind
While the new PPP law is certainly an improvement over the previous legal framework, investors need to be aware of a number of potential challenges.
First, the disbursement of state funds can be difficult, especially given that overlapping regulations in some legal documents can deter special-purpose entities from receiving investment capital from the government.
Second, dispute settlement may be difficult for foreign investors given that the process usually goes through Vietnamese courts instead of international arbitration centers.
Third, lengthy and unclear administrative procedures need to be completed before investment and operation. However, the government has already enacted a number of measures to improve the business environment, which is an encouraging sign.
Overall, the new PPP law introduces some clear improvements designed to attract more private and foreign investment.
While there are still some uncertainties regarding the application of certain provisions, the changes reflect responsiveness to investors’ concerns.
As such, the government and investors need to be in constant dialogue and continuously work together to improve and strengthen the current framework.