Fast-growing Vietnam is facing an infrastructure bottleneck. With the state lacking the budgetary might to finance the nation's much-needed highways, tracks and tunnels, experts are increasingly looking towards the private sector to fill in the financial shortfall.
Amid such constraints, the continuing mobilisation of financial resources from non-state sectors for transport infrastructure development is urgently necessary. According to the Asian Development Bank (ADB), Vietnam will need up to US$17 billion for infrastructure investment between 2015 and 2025.
In recent years, the Government has made moves to create a transparent legal framework for investment projects, under the public-private-partnership (PPP) programme. PPP is a form of investment between a government agency and a private investor for projects in construction, renovation, operation and management of infrastructure, as well as the provision of public services. Through PPP, governments can leverage efficiencies and expertise in the private sector to achieve their development goals.
However, shortcomings and limitations plague the sustained implementation of such projects and investors are wary of signing up in the current climate.
Although a number of decrees have been put forward to facilitate investment, critics have noted that the environment is not attractive and investors are not granted the necessary flexibility regarding these projects. PPP investment activities were regulated by Decree 15/2015/ND-CP on PPP investment and Decree 30/2015/ND-CP guiding the implementation of some articles of the Law on Bidding, as well as several other documents.
From 1990 to 2016, the country completed 84 PPP projects amounting to US$16.2 billion, with 79 percent of the projects in the energy sector. However, since the issuance of the PPP pilot programme in 2011, no PPP project has been signed under this framework. Compared with regional neighbours, foreign investment in infrastructure in Vietnam is lagging behind.
Recently, the government issued Decree 63/2018 (Decree 63), replacing Decree 15/2015, specifying the areas, investment conditions, and procedures for PPP projects in Vietnam. The new decree increases the investor equity ratio for PPP projects to 20 percent. Decree 63 takes effect in June this year.
Does this go far enough?
Inspection and audit results on build-operate-transfer (BOT) and build-transfer (BT) projects showed that most applied limited tendering in choosing investors, leading to low competitiveness and a lack of transparency. Meanwhile, the announcement of projects has yet to be implemented in an open manner.
At the same time, the supervision of projects' implementation has been ineffective, leading to low quality construction works and many other problems.
In response to this range of issues, Vietnam's National Assembly has requested that the government come up with a PPP law that removes such difficulties and legal restrictions in order to promote this form of investment.
3 things a successful PPP law should include
- A clear risk-sharing mechanism
Authorities have yet to clarify a risk-sharing mechanism in which the government guarantees a certain minimum revenue flow for the developer, agreeing to top it off if it isn't met. This is especially important in the case of infrastructure, where projects can often carry significant risk. Some regulatory clarity would help investor confidence.
The current model transfers most of the risk on to the private sector. To attract private sector investors and operators, a transparent policy framework and fair allocation of risk are key. Similarly, attractive deal structures with a clearly defined project scope and adequate guarantees on the expected financial return will help to encourage participation in PPP deals.
- Exchange rate guarantees
Vietnam's infrastructure projects will sell their output in the local currency, the Vietnamese dong, while long-term financing will be provided in a foreign currency. This has a negative impact on the bankability of such projects. A new and successful PPP law would need to improve on this point by including a mechanism for government guarantees of convertibility, so investors can be sure of the same exchange rate over the course of a long-term construction project.
Limitations on the remittance of foreign currencies overseas will also need to be scaled back.
These obstacles, and the risk of currency fluctuations, have a big impact on investor confidence. Their removal would go a long way in attracting the kind of projects needed to keep the country moving.
- Financial incentives
As a typically long-term investment, infrastructure projects will need added incentives and guarantees on return in order for investors to make the 20-30 year commitments required for big constructions.
To offset the risk, the government could look to rewarding investors with part of the spillover effect of development. Incentives could help to reduce the uncertainty inherent in infrastructure development, where revenues can depend on traffic flows and unpredictable circumstances in the future.
In short, to attract willing investors, Vietnam needs a framework that ensures transparency, fairness and predictability, including reliable policies and regulations as well as specialised PPP branches of government that investors can trust.
Other factors, like life cycle cost, safety, resilience and environmental impact also need to be taken into account.
The demand for infrastructure development in Vietnam is robust, but the legislative environment is not currently conducive to the signing of PPP projects that are viable or bankable. Clarification in the form of a PPP law that covers the above points would improve the situation by increasing transparency and reducing risks for enterprises eyeing the country.
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.
