Vietnam's first Public-Private Partnership Law 2020 (the "PPP Law") was passed by the National Assembly of Vietnam on 18 June 2020 and will come into effect from 1 January 2021. It is anticipated that further guiding decrees and circulars will soon be introduced to assist in the implementation of the PPP Law. Here we take a look at the good, the bad, and the ugly.

The Good

The current Vietnamese PPP legal framework consists of numerous outdated circulars, decrees, and decisions. The incoming PPP Law serves to unify the current patchwork of laws into a stand-alone legislative instrument, thereby attempting to govern the full life cycle of inbound PPP activity, providing greater legal clarity and comfort to prospective foreign investors. The availability for the first time of codified minimum revenue guarantee and viability gap mechanisms will pique the interest of international investors and financiers. Likewise, the ability to select third country international arbitration provides increased comfort should a dispute scenario arise. Finally, the inclusion of competitive bidding processes enhances transparency and is welcomed.

The Bad

Concerns exist with respect to rigid project development timelines, restrictions on the assignment of rights, limitations in the scope of eligible investment sectors, and high minimum investment thresholds. Mandatory contract performance security and potentially mandatory use of template project documents are also areas of potential concern for investors and financiers alike.

The Ugly

From a project finance perspective, broad rights in favor of the procuring entity to terminate "in the interests of the nation", rigidity with regards to the timing of financial close, and limitations in the choice of contractual governing law are all notable concerns, resulting in unfavorable risk allocation for investors. Further, the lack of express change in law provisions, step-in rights for lenders, and the inability of international financiers to take direct security over land in Vietnam will likely further negatively impact forthcoming project bankability assessments.

The table below provides an analysis of the key features of the new law, with comparative commentary from the perspective of primary PPP participants - namely, the government, developers, and lenders:

Key Legislative Features The PPP Law 2020 Government View Investor View – Developers / Lenders
Permitted PPP Investment Sectors – Reduces the list of eligible PPP investment sectors to the following only: Transport; Power Grids and Plants; Irrigation, Water, and Waste; Healthcare and Education; IT Infrastructure.

– Current Vietnamese law under Decree 63 recognizes a broader list of PPP investment sectors, which in addition to the above, also includes public lighting systems, agricultural developments, social housing, commercial infrastructure for economic and industrial zones, water drainage systems, waste treatment systems, amongst others.

 – The reduced list clearly articulates and reinforces Hanoi's current policy priorities regarding target PPP investment sectors.

– Limited scope, seemingly excludes important sectors (agriculture, public housing, public lighting systems etc).

– Potentially excludes sub-projects connected to the primary project (i.e. terminals, pipelines, transmission lines, storage facilities etc).

– Ambiguities surround the statutory scope of "power plant." Potentially excludes some forms of renewables (i.e. rooftop solar systems).
Competitive Bidding – All proposed PPP projects must undergo competitive bidding, except for projects related to security, defence, high technology, and "other special cases as decided by the Prime Minister".

– Global best practice.

– Attracts top international expertise.

– Demonstrates policy commitment to ensure development of quality and transparent public infrastructure works.

 – Transparent process that encourages the participation of tier-one international expertise. However, implementation in practice must be transparent and efficient to be valuable.

– Some investors may however prefer to self-propose projects with the option of direct appointment.
Bid Security / Contract Performance Security – Investors must provide bid security of between 0.5%-1.5% of the total investment value of the project (to be later released).

– PPP project companies must provide contract performance security of between 1%-3% of the total investment value of the project (to be later released).

 – Ensures only investors who are genuinely committed to completing the tender process are selected.

– Provides the government with some form of compensation should a non-completion scenario arise.

 – Such requirements are problematic as financing may not yet be complete at this early stage of the PPP investment cycle.

– A lower security threshold or more flexible timing may be more appropriate.
Minimum Total Investment Threshold – Minimum investment threshold of USD 8.7 million (for projects in the specific permitted investment sectors) reinforces current government policy focus on large-scale PPP ventures.

– NB: Minimum investment threshold lowered to USD 4.3 million for projects located in geographical areas with difficult or extremely difficult socio-economic conditions.

– Minimum investment threshold does not apply to O&M contracts.

 – Reinforces Hanoi's policy preference for large-scale high-impact PPP investments.

– Small-scale projects of significant social value may still require private sector investment and expertise, and thereby be unnecessarily excluded.

– Particularly relevant for smaller projects in health, education, science and technology, and environmental protection.
Statutory Definition of "Project Enterprise" – The new law narrowly defines "project enterprise" to that of an entity executing and implementing a single PPP project contract. – Unclear policy objective but may be linked with desire to clearly ring fence projects for ease of administration (e.g. - assessing revenues and applying tax incentives). – This would seemingly prevent the enterprise from executing ancillary sub-projects connected to the primary project (e.g. construction of regasification assets connected to proposed gas turbine power plant development).

Assignment of Rights – Restricts equity investors from assigning their shares/capital contribution/rights in a PPP project company until after the completion of the construction phase.

– Ensures only qualified investors are selected and thus genuinely capable of implementing the proposed project agreement.

– Rigidly prohibits assignment. Share ownership group structures should be flexible and allow for supplemental participation, including new and affiliate membership.

– The participation of new members can potentially add significant value and expertise to a project.
Contractual Governing Law – The PPP project agreement must be governed by Vietnamese law.

In contrast to the incoming provision, the Vietnamese Civil Code permits parties to a PPP contract to select foreign law where the contract includes a "foreign element."

 – Projects are located in Vietnam and it is standard global PPP practice for the agreement's governing law to be the same with that of the host government or procuring entity. – Important concepts of commonly used contract laws (e.g. English law) are not recognized under Vietnamese law. For example, Vietnamese law does not recognize agreement on liquidated damages.

– The unpredictability of Vietnamese law will likely discourage foreign lending syndicates from providing debt funding and therefore significantly impact the project's bankability assessment.
Dispute Resolution – Where contractually agreed, parties to a project agreement may opt for international arbitration as a dispute resolution mechanism.

– The new law also references international treaties as a means to resolve disputes where applicable, leading to a possible application of formal Investor State Dispute Resolution.

 – The potential to resolve disputes via international arbitration in a third country (i.e. Singapore International Arbitration Centre) is attractive and provides additional comfort to prospective foreign investors should a dispute scenario arise.

– Potential application of Investor State Dispute Resolution under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership / EU-Vietnam Free Trade Agreement is welcomed.

Viability Gap Funding – Allocation of public funding designated for the construction phase, site clearance and compensation, and resettlement capped at 50% of the total investment amount. – Provides a tangible incentive for private investors to participate in projects which may otherwise not be economically viable or financially attractive.

– Use of viability gap funding mechanism to attract investment is consistent with other comparative regional PPP markets (e.g. Indonesia, the Philippines, and India) and is welcomed.

Minimum Revenue Guarantee – Subject to satisfaction of certain conditions, where revenue reaches less than 75% of the revenue in the project's financial plan, the government shall share with the investor and the PPP project company 50% of the difference between 75% of the revenue in the financial plan and the actual revenue realized. – Important financial risk allocation mechanism, providing additional encouragement to international financiers to join PPP infrastructure developments. – Availability subject to satisfaction of complex terms and conditions, heavily weighted against the private investor.

– Restricts revenue risk sharing to that of a change in plan, policy, or law scenario.

– Fixed threshold creates financial feasibility concerns.

– Threshold should be flexible and adjusted on a case-by-case basis, dependent upon the specific investment sector.
Financial Closing Timeline – Equity and debt financing into the project vehicle must be completed within 12 months (or 18 months for projects whose decisions on investment policy fall within the approval of the National Assembly or the Prime Minister) from the execution of the project contract.

– Deadlines ensure funding is provided in a timely manner, injecting the requisite equity and debt amounts into the project vehicle. – Too restrictive and unnecessarily prescriptive and threatens financial feasibility.

– Financial closing should be more flexible and account for the different forms of potential funding (i.e. bond solutions may take more time to prepare than bank solutions).
Step-in Rights: Lenders – Where a project contract is terminated early, the procuring entity, lender, investor, and project company have the ability to agree to coordinate with the government entity in the selection of an alternative investor.

– This is more restrictive compared to the current position under Decree 63, whereby lenders have the right to step in on their own or to appoint another competent organization to take over all or part of the rights and obligations of investors and project companies if investors or project companies fail to discharge the obligations prescribed in the relevant project contracts or loan agreements.

 – Allows participants to agree on the selection of an alternate investor should a termination scenario arise. – Too restrictive and inconsistent with global PPP best practice. In practice, lenders will not lend without pre-agreed step-in rights recorded in Direct Agreements and we do not expect this to change.

Termination – Government may terminate in the "interests of the nation." – Provides protection and contractual flexibility should proposed investments become unviable or inconsistent with the public interest. – Reference to national interests creates a very broad termination basis in favor of the government entity and is inconsistent with international best practice.

– Parties should be free to directly negotiate and define specific termination events in the project agreement.
Foreign Lender Security – The requirement to mortgage in accordance with the Law on Land remains, meaning that security over land use rights and real property is only available to domestic lenders. – The incoming law remains consistent with key Vietnamese concepts in relation to foreign legal interests over real property. – Foreign lenders' inability to directly take security over land and assets attached to land is a serious impediment to attracting international project finance funding.

– The use of local security agents to hold land-related security remains fraught with uncertainty and practical constraints.
Change in Law – No specific stand-alone change in law provision. Government will however allow for amendment of project contract terms where changes in law result in actual project revenue to be 75% less than the anticipated revenue projected in the initial financial plan.

– Apparent policy decision to allocate change in law risk to investors though, more likely, in knowledge that terms will be subject to case-to-case negotiation and agreement.

– The PPP Law or government-issued contractual template should provide specific clauses protecting investors regarding change in law scenarios, as consistent with global PPP best practice.

– Particularly important given Vietnam's evolving legislative landscape.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.