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III. Problems Faced When Bringing a BOT Project to Closure

As discussed above, the BOT Decrees address currency issues, dispute resolution, mortgage of assets, and they define the stages for negotiation and approval of BOT Enterprises and projects. Why isn"t this sufficient? Why have so few foreign-invested projects been licensed as BOT Enterprises since BOT-enabling legislation was introduced in 1992? Why have projects stalled both before and after having been licensed?

One explanation is that the clearly-defined negotiation process set forth in Decree 62 masks the fact that the authorized Vietnamese government negotiator has limited authority to settle substantive issues that arise during BOT contract negotiation. For example, the right to foreign currency may be provided in Decree 62, but another organization, the State Bank of Vietnam ("SBVN"), with a different agenda, must actually provide the guarantees. The right to mortgage assets may be set forth, but the procedure to implement and enforce mortgages does not exist. Existence of a framework to resolve disputes obscures the fact that enforceability -- as a general matter -- is a problem in Vietnam. Furthermore, the detailed formulation for dispute resolution is based on a distinction between foreign and local companies. As a result, some contracts related to a BOT project may have to be resolved in Vietnam while others may be resolved overseas, opening up the possibility of related disputes being heard before different forums.

Therefore, although steps in the negotiation process are clearly set forth, the problems which have arisen relate to the realities of the decision-making process and business practices in Vietnam. There are also practical problems arising from the government's perception that the Vietnamese people may be unable to pay a tariff or toll that the BOT Enterprise says is necessary to obtain an adequate return on its investment.

As illustrated in the chart, only one foreign-invested BOT project has actually begun operations. It is the Binh Duong Water Supply Plant, a US$ 36 million project to supply clean water to Ho Chi Minh City. This project, the smallest of three desperately-needed foreign-invested BOT water projects for Ho Chi Minh City, was inaugurated four years after its investment license was granted. Its operation is welcomed, but the Water Supply Company, which distributes the treated water, is paying VND 8 billion a month to Binh Duong Water Supply Plant for the water, while revenue from customers is VND 3 billion a month. This fact is overshadowing the construction of two other BOT water projects in the area. The Lyonnaise Vietnam Water Supply Company, a US$ 120 million project licensed in 1997, is under construction and is proceeding slowly toward completion. There is concern that revenue will not sustain its operation. It has recently been announced that the third water project, the Saigon River Supply Project, may proceed to its second stage and construction will begin in mid-2000. This has come about as a result of an agreement between the BOT Enterprise and Ho Chi Minh City on a formula whereby water would be sold to customers at different prices, depending on the stage of the project. Ho Chi Minh City has yet to announce its plans to address a significant related problem: The three water projects will increase water supply from 750,000 m/3 a day to 1,850,000 m/3 a day. However, the existing water distribution network can only handle 800,000 m/3 a day.

The fundamental question, ie, whether Vietnamese will pay a tariff that allows the foreign investor to operate the project with a reasonable return on investment, plagues other projects. Oxbow International Power Group has withdrawn from the US$300 million coal-fired thermo power plant in Quang Ninh Province because, reportedly, the government is unwilling to set the electricity tariff at a rate that will permit the project sponsors to receive a reasonable rate of return. Other power projects with foreign investors such as Enron International, among others, have been slow to get off the ground because of the electricity pricing issue, especially because the demand for electricity decreased after the Asian financial crisis. While there have been reports of renewed interest by the government in proceeding with power plant projects, * the issue of the price of electricity must still be addressed. Similarly, the foreign investors in the Ho Chi Minh City - Vung Tau proposed expressway, with a value of US$ 370 million, will have to devise ways to receive an adequate return on their investment, given the fact that their investment cannot be recouped by tolls alone. Some proposals which have circulated have involved the government permitting the BOT Enterprise to establish service facilities along the expressway.

The Phu My 2.2 power project, which has not yet been licensed, is the first competitively-bid BOT project, which is considered by the private sector as a step forward for BOT projects. The parties are in the midst of negotiating the BOT contract and related gas purchase and power purchase agreements. Observers are watching with interest to see if the negotiations on these contracts will proceed more smoothly than those of other power project agreements. It has been said that the foreign investors will focus on addressing the possible lack of foreign exchange as well as the price of electricity. The outcome of negotiations will have an effect on the Phu My 3 BOT project, another gas-fired power plant located near Phu My 2.2 in the south of Vietnam. Another major power project, the Wartsila project, has stalled since Electricity of Vietnam ("EVN") requested the renegotiation of the power purchase agreement. The high tariff in the early years of the power project and concerns about the availability of foreign exchange were stumbling blocks in the negotiations. Thereafter, the foreign investor requested to withdraw from the project. It has been said that other BOT power projects have faced similar problems.

The BOT projects described above face similar issues as they proceed from the proposal phase, through licensing toward implementation. All of them, throughout the negotiation process, have had to obtain government interpretations, clarifications and have even been subject to changes in policies. Because the Authorized State Body has inadequate authority to resolve issues related to the BOT contracts, too many other bodies must be consulted, making an already complicated process even more complicated and slow. Parties to BOT negotiations complain that other involved bodies are also unsure of their role in the decision-making process and, therefore, are reluctant to sign off on projects. These problems exist in every phase of the BOT project. Although creative financing is an answer for some of these problems, we address below the weaknesses in the regulatory framework that affect the negotiation process.

Three Major Weaknesses in the Regulatory Framework

As investors have attempted to work through the process of negotiating BOT contracts, they have identified three major weaknesses either in the law and regulatory structure or in its implementation: availability of foreign currency, security for loans, and dispute resolution. Foreign investors have addressed these problems by requiring assurances or guarantees. Negotiations on these points have either resulted in delay or have derailed the BOT contract negotiations altogether. In the end, the value of assurances or guarantees may be of uncertain value.

1. Availability of foreign currency

The BOT Decrees state that BOT Enterprises may exchange Vietnamese dong earned from implementing BOT projects for hard currency in order to pay for imported materials, equipment, etc., to repay loans and make interest payments, and to transfer profits and capital overseas. Foreign investors ' two overriding questions are: Will the currency be available and approved for transfer when it is needed? When may money be transferred overseas - ie is it earned before or after taxes are paid?

The SBVN is responsible for authorizing the transfer of foreign currency. It also registers offshore loans,10 authorizes foreign bank accounts, and imposes controls on interest rates.11

Lenders and foreign investors seek assurances or guarantees from the SBVN that foreign currency will be available when it is needed and on their rights to convert dong to foreign currency. The objective is that the BOT Enterprise will receive the same amount of foreign currency it would have received if payment had been made in the designated foreign currency.

Investors also attempt to pin down the timing of profit remittance. Decree 12 does not permit remittances of profit until all applicable taxes have been paid.12. However, taxes are calculated on an annual basis. Foreign investors attempt to address this issue either through a special exemption incorporated into the investment license or through a provision in a government support agreement.

Reportedly, both the Phu My 2.2 and the Wartsila power plant projects indicate that the need for exchange assurances has been a significant element in the negotiation process.

2. Security for Loans

Foreign investors have been frustrated by regulations that restrict the securitization of available collateral. These restrictions include requirements that collateral have been financed by the proceeds of the foreign loan and prohibitions on the mortgage or pledge of after-acquired assets and the mortgage of land to overseas lenders or to foreign branch banks.13 Recently, after much prodding by foreign investors and banks, the government took significant steps to clarify this area.14 However,foreign investors await implementing regulations to see whether the changes are meaningful.

Decree 165 provides a general legal framework for secured transactions. It also applies to security arrangements for international financing of BOT projects. It addresses a number of issues that have thwarted the financing of BOT projects. For example, it provides that future assets such as new structures affixed to land, revenue streams under contracts, other contractual property rights, and income and benefits derived from mortgaged or pledged property may be taken as security.

Decree 165 adds two new types of pledgeable assets: equity interest in foreign-invested enterprises, including BOT Enterprises, and rights to exploit natural resources. Decree 165 did not remove the prohibition on enterprises mortgaging land use rights to overseas lenders, foreign bank branches and joint venture banks in Vietnam. Neither did it clarify the tax issues involved in the transfer of ownership rights, in the event rights in the secured property are exercised. Decree 165 has been welcomed by investors, but until implementing regulations are issued, which among other issues establish a system for recording security interests, investors and lenders will continue to be affected by uncertainty.

Another recently adopted regulation, Decree 178, addresses some of the same on-going concerns. Decree 178 defines methods, principles and conditions for commercial banks to provide loans on a secured or unsecured basis. It states that a loan may be secured by a pledge or mortgage of the borrower 's property, an asset-based guarantee of a third party, or a pledge or mortgage of assets created from the loan proceeds. It permits banks to foreclose on mortgages by borrowers or guarantors that default.

Although Decree 178 addresses foreclosure remedies, an area of importance to foreign investors, it raises concerns in other areas, such as: requiring secured loans to be secured by assets of a value greater than that of the loan and restricting securitization to assets purchased with loan proceeds. These clauses in effect run counter to the steps taken in Decree 165 to permit future assets to be taken as security. This decree too is awaiting implementing regulations, and it is hoped they will clarify the intent of the drafters.

Another uncertainty which makes it difficult to arrange financing involves step-in rights. A transfer of the share of a foreign-invested enterprise given as security requires government approval. Although MPI has recently agreed to provide " approval in principle" for the transfer of shares involving foreign-invested enterprises, such approval is not provided for in the BOT Decrees and if it were, in the case of BOT projects, it could only be given by the Government, not by MPI alone. Moreover, "approval in principle", by its own language, remains conditional.

3. Dispute Resolution: Choice of Law and Forum and Enforceability

Parties to a BOT contract may stipulate in the contract that foreign law will apply; however, that foreign law must not be contrary to the laws of Vietnam.15 This stipulation must be approved by the Ministry of Justice, which is issued in the form of an opinion letter.

The BOT regulations support negotiation and conciliation in the event of a dispute, with arbitration being an acceptable means of resolution in the event that negotiation and conciliation fail. However, for some contracts, and depending upon the parties to the contract, arbitration must be undertaken before a Vietnamese arbitration tribunal. For others, the parties may arbitrate abroad.16

Ideally, all BOT project-related contracts should be heard by the same dispute resolution body and contracts between the BOT Enterprise and state-owned enterprises should be governed by a sophisticated law. The parties should also be confident that an award will be recognized and enforced. However, whether arbitration occurs in Vietnam or off-shore, there are serious concerns about the enforceability of an arbitration award in Vietnam. Vietnam is a signatory to the 1958 New York convention on the enforcement of foreign arbitral awards, and has implemented the convention through the Ordinance on Recognition and Enforcement of Foreign Arbitral Awards ("Ordinance").17 The Ordinance requires that, before a foreign arbitration award is enforced, the applicant must obtain a decision on recognition and enforcement from the competent court through the Ministry of Justice. Upon receiving this decision, the applicant applies to the Department of Enforcement to implement the court 's decision. Although the court is not supposed to reconsider the underlying dispute, there is concern that as part of the process of obtaining the decision on recognition and enforcement, the parties may be required to re-litigate issues. Even if foreign law does apply, the domestic legal system is not sufficiently mature or sophisticated to apply foreign law.

IV. Avenues for Addressing Problems

The gaps in the regulatory system must be met by special measures. In order to obtain financing for a project, foreign investors have sought both performance and payment guarantees from the State for the obligations of the Vietnamese party to the BOT contract.

Investors in BOT projects sign contracts with a government agency. Although the government agency contracts on behalf of the State, the State does not thereby guarantee the performance or payment of each individual contract. Foreign investors have sought State guarantees to provide that the State will pay if a state-owned enterprise fails to pay. Thus far the Government has not guaranteed any loans for BOT projects. Currently, only state-owned enterprises or state-owned credit institutions are eligible to receive a government guarantee that it will repay a foreign loan.

Investors also seek specific performance guarantees. The Oxbow International Power Group reportedly sought guarantees of the price and availability of coal. Reportedly, Phu My 2.2 investors have asked for a risk guarantee to protect themselves from a possible shortage of gas and lack of foreign exchange. Wartsila, reportedly, also sought foreign exchange assurances.

In another instance not involving a BOT project, but one of a similar nature, investors sought: a foreign exchange guarantee; a guarantee on protection of the properties invested by the foreign investors during the project life; and a guarantee of the obligations of Vietnamese government agencies under relevant contracts, such as a gas purchase contract. The guarantees were provided in a document separate from the BOT contracts. The document was signed by the MPI on behalf of the State.18

Another form of assurance is pre-approval of the choice of law. However, it is uncertain whether in the event of a future dispute the Ministry of Justice 's opinion will be determinative.

Assuming it can be relied upon, the language of the opinion is very important and time must be spent ensuring that the Ministry of Justice 's opinion meets the foreign investors ' and lenders ' needs.

V. Prospects

As the region continues to recover from the effects of the Asian financial crisis, and if Vietnam continues to reform its economic policies, interest in Vietnam will return. This will highlight the need for infrastructure that can be provided by BOT project financing.19 The World Bank, ADB and other ODA providers are turning from funding infrastructure projects to poverty reduction and institution building, thus potentially making the BOT form of financing more attractive to the Vietnamese government.

The Vietnamese government has been receptive to many suggestions made by the private sector, international organization and bilateral donors to improve its investment environment. The Private Sector Forum ("PSF") is one significant example. The PSF was formed to build momentum for market-based economic development in the private sector. The PSF meets several times a year. Participants include representatives from the Vietnamese government and National Assembly, embassies, international organizations, including The World Bank, ADB, United Nations entities, and the private sector. Working groups prepare position papers, which are presented at the meetings and addressed by the respective ministries. At a recent meeting, issues addressed included banking, law, infrastructure, land rights, mining law and tax issues.

A number of the issues raised within the PSF will be addressed in draft amendments and supplements to laws for submission to the National Assembly. The draft amendments to the Foreign Investment Law reportedly will address investment security, dispute settlement, and government performance and payment guarantees of obligations of state-owned enterprises - the very issues which have hampered progress in infrastructure projects.

While it is unlikely that all of the factors that have hindered implementation of BOT projects will be resolved in the near future, the foundations have been established. The pioneering BOT investors described in this paper have highlighted a number of challenges. We expect that the next generation of BOT investors will enjoy a more certain regulatory and more realistic negotiating environment. These improved factors should lead to greater success in the future for BOT projects.




1 The Foreign Investment Law dated December 29, 1987 was amended twice, on June 30, 1990 and December 23, 1992, before being replaced by a new Foreign Investment Law dated November 12, 1996.

2 Vietnam licenses BOT, Build-Transfer ("BT") and Build-Operate ("BTO") projects under the same regulatory regime. However, for purposes of this article, we limit our discussion to BOT projects.

3 With respect to power projects in Vietnam, The World Bank now provides guarantees for some financial arrangements.

4 In 1986, Vietnam instituted the policy called " Doi Moi " or renovation, to restructure its economy and renovate its institutions with the aim of transforming its centrally-planned economy into a market-based economy promoting all economic sectors. Doi Moi promoted substantive market-oriented reforms, including the encouragement of cooperation and trading relationships between Vietnam and other countries.

5 Decree 62/1998ND-CP, August 15, 1998, and Decree 02/1999/ND-CP, January 27, 1999.

6 Decree 62 also addresses requirements for contracts between the BOT Enterprise and sub-contractors.

7 Decree 62, article 2.

8 MPI is a key government body. Its primary function is to issue investment licenses. But it also has advisory functions in all matters relating to the development of strategies and plans for Vietnam 's socio-economic development, including the targeting and promotion of domestic and foreign investment. It acts as chairman of national committees to approve economic and technical standards. MPI evaluates domestic and foreign investment projects, including BOTs, as it selects bid winners, serves as the central agency for the coordination, utilization, and management of ODA funds. Recently, MPI became the agency within the Government designated to receive business registrations under the new Enterprise Law.

9 Decree 88/1999/ND-CP of September 1, 1999, promulgating the Regulations on Bidding.

See note 19, infra.

10 Registration is not approval, and the terms of the loan are not free from subsequent challenge.

11 The ceiling on interest rates is currently set at Libor + 2.5% per annum for medium- and long-term loans. Decision 308/1999/QD-NHNN7. Bankers state that this is inappropriately low for Vietnam. Even if the capped rate did offer an acceptable return on a loan, the cap would curtail the ability of the lender to collect penalty interest in workout situations. In addition, most foreign lenders are now required to pay a withholding tax of 10% on loan interest paid on foreign loans. Circular 169/1998/TT/BTC regarding Interest Withholding Tax, January 1, 1999. In reality, it is the borrower who will pay this tax, further undermining the project economics and making it more difficult to come to financial closure.

12 Article 73, Decree 12/CP Providing Regulations on Foreign Investment, February 18, 1997.

13 Decision 217-QD-NH1 on Mortgages, Pledges and Guarantees, August 17, 1996. Decree 90/1998/ND-CP on regulations on the Management of Foreign Borrowing and Repayment, November 7, 1998.

14 Decree 165/1999/ND-CP on Secured Transactions, November 19, 1999, effective December 4, 1999; Decree 178/ND-CP on Security of Loans Extended by Credit Institutions, December 29, 1999, effective January 12, 2000.

15 Decree 62, articles 24 and 25, as amended by Decree 02, articles 2 and 3.

16 For example, disputes between the BOT Enterprise and Vietnamese enterprises during the implementation of the contract are resolved by Vietnamese arbitration organizations or courts in accordance with Vietnamese law. However, if a dispute arises among the parties of a BOT Enterprise during implementation of the BOT contract, the parties may agree to select one of the following dispute resolution alternatives: a Vietnamese court or arbitration body, a foreign arbitration body, an international arbitration body, or an arbitration tribunal established pursuant to an agreement among the parties. (Decree 62, article 25, as amended by Decree 02, article 4.)

17 The Ordinance entered into force on January 1, 1995.

18 However, the wording of the guarantees was general and although it guaranteed foreign exchange, when the investors sought approval of a specific foreign exchange schedule, reportedly, SBVN did not agree.

19 Recently, EVN announced it is considering building ten BOT power plants with a total capacity of 2,700 MW. This would bring the number of BOT power plants in various stages of negotiation or construction nation-wide to 15. Twelve of the 15 power plants are to be built with foreign investment.

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