|Tony Foster, managing partner at Freshfields Bruckhaus Deringer LLP|
The Ministry of Planning and Investment (MPI) released the first draft law on investment in public-private partnerships (PPP) in May. Three months of energetic seminars and correspondence between the government and the private sector ensued. In late August, the MPI introduced a new draft in which we saw the fruits of such labour, with the government submitting an updated draft law on PPP to the National Assembly for review.
Financing PPP projects
The draft law shows how seriously the government has taken comments from sponsors, financiers, and their long-suffering lawyers.
Revenue risks allocation
For the first time, a law in Vietnam would allow the state to commit to sharing revenue risks with private parties. The draft decree would allow the contracting state agency to agree to increase the tariff or service fees (or extend the operational term) of the project if the actual revenue derived by the project is lower than that in the financial model agreed in the concession contract. If such adjustments are not sufficient to cover the project’s operating expenditures, the government may consider paying up to 50 per cent of the difference between the actual revenue of the project and the amount agreed in the concession contract. But this will be limited to important ventures – the provision only applies to projects approved by the National Assembly or the prime minister.
The draft law would also allow project companies to issue bonds after completion of construction. Recent changes in the legal framework for the issuance of corporate bonds have abolished the prior requirement that an issuing company must be profitable the year before the bond issue. This new provision provides sponsors with an alternative financing source for PPP projects.
Constraints under other laws
One issue that has bedeviled PPP to date, to the extent that the existing regulations have not really been used outside certain build-operate-transfer (BOT) contexts, is that the law cross-refers to other laws that were designed more for public procurement than PPP. The problem continues into the draft law.
– The process of allocating state capital to PPP projects (including capital expenditure support and availability payment) would remain subject to the Law on Public Investment, resulting in a complex process of project screening and approvals.
– The feasibility study of a PPP project must contain elements required under “other specific laws.” But these “other specific laws” (for example laws on environment protection, construction, and technology transfer) apply when the investor and the specifications of the project have been identified, which is not the case for feasibility studies that are subject to tender results.
– The draft law refers to the land laws with respect to mortgages of land use rights. Since the beginning of time (in PPP terms), the land laws have restricted mortgages of land use rights (and assets attached to land) to foreign lenders, and have only allowed a project company to mortgage land use rights domestically if it pays the land rental in full up front (deemed impossible if the land is rent-free as for certain projects). The draft law once again cannot duck the issues.
Outstanding bankability issues
The draft law would enshrine into the law a couple of positions that already exist in practice (and one wonders why the country feels the need to lose the flexibility that currently exists):
– There would be a cap on a foreign currency convertibility guarantee of 30 per cent of the net VND revenue;
– There would be a maximum 18-month time limit after signing of the concession contract to achieve financial close.
The biggest own goal of the draft law requires the governing law of the main project contracts between the sponsors and Vietnamese state authorities to be Vietnamese law.
This new condition will deter major international lenders from financing projects in Vietnam. International lenders have consistently required that most project documents (including the concession contracts) be governed by a well-established legal system to avoid ambiguity and uncertainty in contract interpretation and implementation. A requirement that Vietnamese law must be the governing law of the concession contract will result in a stillbirth for the draft law if the goal is to attract internationally-funded PPP.
In the official explanatory statement of the MPI on the first draft PPP law released in May, the MPI explained that this prerequisite is needed because:
– PPP projects are implemented entirely in the territory of Vietnam, so they must comply with Vietnamese laws;
– The application of Vietnamese laws will ensure “legal efficiency and safety” during the implementation of the projects in Vietnam;
– The application of a foreign law will expose Vietnamese governmental authorities to many risks;
– The United Nations Commission on International Trade Law recommends that PPP project contracts should be governed by the laws of the host country to avoid disputes. Similarly, the World Bank in its 2015 Report also has the same view with respect to governing law of concession contracts, and
– The laws on PPP of certain other countries also require the application of domestic law as the governing law of the concession contracts.
The reasoning is highly debatable, and we assume that the National Assembly will challenge the explanations vigorously. Below are some pointers:
– The MPI states, “PPP projects are implemented entirely in the territory of Vietnam, so they must comply with Vietnamese laws”. Of course this is true. But it does not mean that the governing law of the concession contract has to be Vietnamese. The law relating to interpretation of a contract can be foreign even if the substantive law regulating the operations the project company is Vietnamese. The Civil Code and the Law on Investment both recognise this fundamental fact.
– The MPI is also concerned about “legal efficiency and safety”. The issue here is that Vietnamese business law has developed only over the last 25 years or so. English law has been developing over 250 years or more. It is not surprising that Vietnamese law has technical issues that have been resolved under English law. Lenders do not accept the risk of unpredictability and uncertainty in contract interpretation. Choosing an established and well-tested legal system to interpret a contract should benefit all contracting parties, including the Vietnamese governmental authorities.
Most importantly, there are a number of contract law concepts which are not clearly defined or recognised under Vietnamese laws but which are important to international lenders. Examples would include liquidated damages, indemnity, reasonableness tests, waivers, and joinder of disputes. The application of Vietnamese laws to interpret those contract law concepts would result in significant unknowns, which lenders will not accept.
– The requirement that all concession contracts must be governed by Vietnamese law is contrary to the provisions of the Civil Code and the Law on Investment of Vietnam. These laws allow parties to a contract in which at least one party is a foreign party to choose a foreign law as the governing law of the contract.
In light of all of the above, it is critical for the PPP law to leave the governing law for negotiation between the parties. That would mean that Vietnamese law is still a possibility if the government insists on it in a particular case and the sponsor decides that it is bankable. But it would not be mandatory if that would kill the financeability of a deal.
The first non-BOT PPP regulations were issued almost 10 years ago. They have been replaced or amended several times, but still have not worked (if one ignores the pre-existing BOT regulations that have worked well in the power sector). Vietnam’s vast infrastructure needs would benefit from a PPP law that works.
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