26 September, 2019
At last week’s roundtable meeting held by the Ministry of Planning and Investment (MPI), the compiling board of the draft Law on Public-Private Partnership, and the National Assembly’s (NA) Economic Committee to collate comments for the latest draft law on PPP, Nguyen Dang Truong, director of the MPI’s Public Procurement Agency, said that the latest draft includes the risk-sharing mechanism on revenue and government guarantee for foreign currency balance.
Under the draft, the government will offer a foreign currency guarantee for key projects decided by the NA and the prime minister. The guarantee will be based on foreign currency management policies and the ability for currency balance in each period of time, with a ceiling of 30 per cent of project revenue in VND.
The other highlight is the addition of the risk-sharing mechanism on revenue. The projects subjective to this mechanism on revenue will be key ventures decided by the NA and the prime minister.
Specifically, for the risk share on revenue in PPP contracts, the government will consider allowing investors to increase tolls and public services, or to extend the PPP contract duration in the case of real revenue being lower than revenue estimated in the financial plan of the contract. Meanwhile, tolls and public services can be reduced, or the contract can be shortened in the case of real revenue becoming higher than revenue estimated in the financial plan of the contract.
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If there is still a failure to reach the minimum revenue to maintain project operation, the government will decide the application of the government risk-sharing mechanism on revenue, with the ability to balance financial resources in consideration. Accordingly, the government is committed to share a maximum of 50 per cent of the revenue loss compared to the estimation in contracts. On the other hand, investors have to share at least 50 per cent of any revenue increase compared to the estimation in contracts.
The additions show the government’s determination to further open the door to private domestic and overseas funders to join PPP projects by building a bankable legal framework in alignment with international commitments on investment and trade, and deal with differences in other laws.
The moves are being supported by businesses and experts. According to Lynn Tho from EY Singapore, a global firm in assurance, tax, transaction, and advisory services, Vietnam already spends 5.7 per cent of GDP on infrastructure, the highest in Southeast Asia and ahead of India.
“Financing of infra-structure projects using government sources alone would be challenging. Attracting private investment would significantly help bridge the infrastructure gap and accelerate its development in Vietnam,” said Tho.
Many governments have put in place mechanisms to support risk share which has been instrumental in kick-starting investment into PPP projects. Indonesia, Turkey, South Korea, and India are outstanding examples of lessons for Vietnam, who the World Bank estimates needs investments of up to $25 billion a year in sustainable infrastructure.
India established the Viability Gap Fund for providing financial support at the construction stage, and issued clear guidelines on the eligibility criteria and disbursement mechanism for PPP projects. It also established Model Concession Agreements which helped standardise such agreements and risk allocation principles in different sectors.
Indonesia and South Korea also have a similar mechanism. In South Korea, a minimum revenue guarantee, early forms of financial support, enabled the rapid growth of PPPs in the country. Now the guarantee is no longer available and has been replaced by a revenue risk sharing scheme construction subsidy, with financial support of 30-50 per cent of the total project cost at the construction stage.
Tetsu Funayama, president of Japan’s Mitsubishi Corporation Vietnam said that Japanese companies are continuing to expand investment in Vietnam and are recently more interested in PPP projects, especially in power generation, expressways, airports, and railways. “Japanese investors and others are waiting for the establishment of the government guarantee mechanism to help them ensure foreign currency exchange and to ensure minimum revenue to recover investment,” he said.
While the wanted government guarantee is added to the draft law, the State Bank of Vietnam and the Ministry of Finance, among others, have voiced concerns about state budget constraints and the public debt ceiling. Investors will have to wait until October when the final draft law on PPP is submitted to the NA for discussion before looking towards May 2020, when it is expected to be adopted.
The state funding in PPP projects has been, for years, a special issue of concern among all types of investors when they join such projects in Vietnam, and controversial among government agencies.
So far, the development of PPP ventures in many areas has proven less attractive and less successful due to the lack of a fund or mechanism. This is with the exception of the power sector, which has been able to attain successful overseas investment in build-operate-transfer projects.
Thus far Vietnam has attracted 336 PPP projects in transport, technical infrastructure, energy, water supply and drainage, the environment, culture and sports, education and training, among others.
Nguyen Duc Trung – Deputy Minister of Planning and Investment
The draft law on PPP is expected to inherit the previous regulations and the positive results during the project development, while comprehensively looking into problems and barriers so as to build feasible and bankable regulations.
The building of the draft law on PPP shows the Vietnamese government’s strong determination and commitment in developing a bankable and legal framework with long-term effectiveness, thus creating more favourable conditions for private investors to join PPP projects.
For further information, please contact:
Dang The Duc, Partner, Indochine Counsel
duc.dang@indochinecounsel.com
