PPP schemes to be reviewed to woo more private investment

Vietnam will reform its approach to boosting the attraction of private investment into public-private partnership projects.
The government is reviewing policies regarding public-private partnership to lure in more private investment
The government is reviewing policies regarding public-private partnership to lure in more private investment

Deputy Prime Minister Tran Hong Ha has just given specific tasks to ministries, sectors, and localities in order to implement feasible solutions to remove difficulties for projects under the public-private partnership (PPP) format.

The Deputy PM assigned the Ministry of Planning and Investment to coordinate with relevant ministries in assessing the implementation of the Law on Public-Private Partnership Investment enacted in 2020 and reviewing and collecting all obstacles in the deployment process of Decree No.35/2021/ND-CP, dated March 29, 2021, on detailing and guiding the implementation of this law. On that basis, they must propose amendments and supplements, and then report to the prime minister in the second quarter of 2023.

Ministries and localities are also required to research and propose policies and solutions to attract international financial funds and international capital sources to participate in the implementation of PPP projects in Vietnam, and then report to the prime minister in the second quarter of 2023.

Especially, they are also ordered to study sources of payment capital for enterprises implementing the PPP projects in the case of the revenue sharing mechanism is applied and contracts are terminated ahead of time. A report on this job must also be presented to the prime minister in the third quarter of 2023.

Deputy PM Ha also tasked the Ministry of Finance to combine with relevant ministries to review and collect difficulties in the implementation of Decree No.28/2021/ND-CP, dated March 26, 2021, on the mechanism on financial management of PPP investment projects; Decree No.29/2018/ND-CP, dated March 5, 2018, on the order and procedures for establishing ownership rights of the whole people; and Decree No.69/2019/ND-CP, dated August 15, 2019, stipulating the use of public assets to pay for investors with projects constructed under the form of BT (build-operate) contracts. They are also ordered to propose amendments and supplements, and then report to the prime minister in the third quarter of 2023.

Meanwhile, the Ministry of Transport must coordinate with the ministries of Planning and Investment, Finance, and Justice, and the State Bank of Vietnam in reviewing and making recommendations to allow authorities to handle problems related to transport projects implemented under the BOT (build-operate-transfer) format which are now so cash-strapped that it may lead to the termination of contracts ahead of time.

In Vietnam, PPP projects currently often refer to infrastructure development such as roads, expressways, bridges, water, electricity, and healthcare, among others.

Hong Kong-based law firm King & Wood Mallesons cited to the World Bank’s PPP database for Vietnam as stating that 147 PPP projects have reached financial closure since 1990, accounting for 27.8 billion USD, with a significant portion of these projects being in the energy and power generation sectors.

“The PPP law focuses on a wider range of strategic sectors deemed critical for the future socio-economic development of Vietnam. These include transportation, power generation, transmission and distribution, irrigation, clean water supply, waste-water treatment systems, health and education, and information technology infrastructure,” stated King & Wood Mallesons. “However, the energy sector will likely remain the dominant sector for PPP projects.”

For example, during the conference on the National Power Development Plan VIII for the 2021-2030 period with a vision to 2045 held in Hanoi in 2020, the Vietnam Energy Institute reported that a total investment of 133.3 billion USD would be required until 2030 to cover imminent needs for power generation projects (96 billion USD) and the development of the national power grid (37.3 billion USD). While the forecasted power generation segments have been revised as a result of Vietnam’s COP 26 commitments, the Vietnamese government’s aggressive push towards increasing installed power generation is clear.

At the Vietnam Business Forum (VBF) organised in Hanoi on March 19, the VBF’s Infrastructure Working Group (IWG) underlined the development of sector specific policies to enable long term and large-scale energy and infrastructure investment.

“The Law on PPP is not working - no project has been implemented and financed on a project (non-recourse) basis under this law. A thorough review and amendment of the Law on PPP is required urgently,” the IWG stated in a proposal sent to the government. “Guidelines and best practice negotiations should be open for project contracts in each specific sector, which should be devised with the goal being a bankable solution for BOT project development.”

When it comes to tendering, the IWG suggested that in addition to open bidding process which has not been successful under the Law on PPP and the Law on Investment (LoI), “legal frameworks and policies should be allowed for competitive bidding process on selection of investors for PPP and non-PPP projects based on investors’ capabilities.”

At the VBF, its Investment and Trade Working Group (ITWG) also stated that numerous issues related to investment in Vietnam would need to be resolved in order for investors to feel secure when joining PPP projects in Vietnam.

“We would like to seek for various government guarantees from the viewpoint of ensuring bankability in order to ensure the loans from international financial institutions for large-scale infrastructure investment projects by flexibly applying special investment assistance or investment assurance provided by Article 20 of the LoI and Article 3.2(a) of Decree 31/2021/ND-CP, dated March 26, 2021, on elaboration of some articles of the Law on Investment,” the ITWG said in a proposal sent to the government. “In recent years, there has been a tendency that many investors are trying to obtain the permits for these large-scale infrastructure projects under the scheme of the LoI instead of in the form of a PPP project because of the prolonged investment process under the PPP regulations. The government guarantee under the LoI shall also be granted for the eligible investors in PPP projects to ensure bankability of these projects.”

According to experts from the Asian Development Bank (ADB), despite significant gains in the last decade, Vietnam’s infrastructure lags regional peers, such as Indonesia, Malaysia, and Thailand.

The spending required to close the infrastructure gap is significant. Between 2021 and 2030, Vietnam will need an estimated 237 billion USD for infrastructure investments to achieve the Sustainable Development Goals. To fund this investment, the Global Infrastructure Hub based in Australia has estimated that Vietnam will need to mobilise an estimated 49 billion USD above what it has historically spent.

The government already shoulders 90% of infrastructure spending, and public investment at 8% of GDP is a relatively high rate. Therefore, Vietnam cannot afford a large increase in its infrastructure budget, particularly given the fiscal pressures that the COVID-19 pandemic has introduced.

Thus, PPPs can help to address the shortfall, according to the ABD experts who said that Vietnam’s legal framework for PPPs is largely in place. So, what is next?

“Successful PPPs begin with solid preparation. Given the volume of potential PPPs, effective project screening is essential to identify the most promising projects,” said Don Lambert, principal private sector development specialist at the ADB.

“These projects then need to be prepared to a high standard. This includes not only proper financial structuring that allocates risks to the parties that can best manage those risks but also application of the G20 Principles for Quality Infrastructure Investment. The latter takes a holistic approach to project preparation, emphasising lifecycle costs, the environment, natural disaster resilience, social impacts, and governance,” Lambert continued.

According to Lambert, such high-quality preparation is expensive. There is an understandable tendency to minimise costs at this stage, but a well-prepared project can pay for itself many times over whereas a poorly prepared one can become a financial liability.

In the short term, Vietnam can tap donor support to fund some of these project preparation costs. In the medium term, it should develop a mechanism that recovers project preparation costs and recycles them toward future projects. In the long term, the PPP law anticipates such a mechanism.