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Framework to drive PPP forward   2011-01-04 - VIR

The Vietnamese government had issued the trial public private partnership investment form, which will commence on January 15, 2011.


Gide Loyrette Nouel law firm partner Samantha Campbell talks with Bich Ngoc issues about this investment form’s future in Vietnam.


What are your comments on Decision 71/2010/QD-TTg dated November 9, 2010 on the trial PPP investment form? Is this a major milestone for PPP project implementation?


The need for Vietnam to develop PPP legislation has been a subject of much discussion over the past few years and during the course of 2010 in particular. There has sometimes been a lack of clarity about what was being sought from these regulations in the Vietnamese context, although the fundamental hope is that they will be a panacea to Vietnam’s infrastructure financing needs.


As an initial comment, the concept of PPP can be extremely wide, covering any cooperation between the private sector and the public sector for infrastructure development or public services. This is reflected in the definition of “PPP investment form” in the decision, which also mentions that the cooperation must be based on a contract.


Based on this definition, PPP is not new to Vietnam. A number of infrastructure projects are already being carried based on the relatively comprehensive legal framework set out in Decree 108/2009/ND-CP for build-operate transfer (BOT), build-transfer-operate (BTO) and build-transfer (BT) structures - these forms of investment are all included in the PPP family.


However, these models have historically not always been the most efficient in terms of the allocation of state resources and the use of the state’s balance sheet. The key driver for PPP legislation was therefore to open up other possibilities for structuring infrastructure projects in view of the tens, if not hundreds, of billions of dollars required in infrastructure and public services funding over the coming years, and the finite resources of the Vietnamese state and official development aid. The decision is a first major step in this direction.


From the perspective of the international business community, there has also been concern over the absence of a legal framework permitting other types of private participation in infrastructure, for instance in the long-term management or regeneration of infrastructure. Although there is little or no “build” component in these projects, the costs of implementation can be very high, for example in river dredging or waste water/sanitation services projects and the legal uncertainty around the framework for implementing projects of this type has actually prevented investments into Vietnam. The new decision is very much welcomed in this context, although it is, of course and as has often been commented, very short on detail.


The decision is most definitely a major milestone as introduces a number of new concepts that are key to promote the development of infrastructure and the participation of the private sector in public services on a sustainable basis with less reliance on government assets and guarantees, and opens the door to more flexible project structuring using a range of PPP techniques.


PPP projects are a way to address Vietnam’s infrastructure shortfalls


It is not unusual for the Vietnamese legislator to introduce pilot regulations with a view to adapting them for wider application once they have been tried, tested and further developed. It is therefore expected that the implementation of pilot projects under the decision will lead to the development of more detailed legislation, which is clearly requires to flesh out the existing framework of the decision with a view to more general application.


What are your views on the criteria for choosing pilot PPP projects?


For a project to be implemented as a pilot project under the decision, it must satisfy only one of the following criteria:


- Be an important and large project, urgently required for the development of the economy in accordance with Decision 412/QD-TTg (this sets out a number of expressways, including the first pilot project to be implemented under the PPP regulations the Phan Thiet-Dau Giay expressway, seaports, airports, bridges and railways)


- Be able to return capital to the investor from realistic revenue sources receivable from the users of the project


- Take advantage of the technology, managerial and operational experience of the private sector and effectively utilize the financial capacity of the private sector


- Comply with other criteria as decided by the prime minister.


These criteria have generally been criticised as being to vague and discretionary, and will likely be further refined in the future. The following aspects should, however be viewed as positive conceptual developments:


The second criterion listed above - for the project to cover its costs (including debt financing costs) and to derive enough profits to warrant private investment through its own revenue generation capabilities - goes to the heart of what should make PPP attractive for Vietnam. The challenge will lie in how to actually ensure that this is the case in practice. This will require very careful project structuring from a financial perspective, taking into account the serious limitations imposed by low utilities prices in Vietnam, which are well known to be problematic for the financial viability of projects.


The third criterion is also very important to note. The main focus of the government to date has understandably been the mobilisation of funds for project construction. However, PPP models can also allow infrastructure and public services to develop much more efficiently to the benefit of end users by allowing the public sector to harness the expertise and technology of specialised private sector operators. These often boast “best in class” facilities and operations across different sectors, from healthcare to environmental and transport services.


It is said that this regulation will push domestic private investors away from PPP projects because they cannot mobilise huge funds without a government guarantee. Do you agree?


The decision restricts the availability of direct government guarantees for the debt or loans incurred by the private sector to lenders in financing their portion of project costs. In this context, it is true that lenders to large infrastructure projects typically require government guarantees in respect of their exposure.


However, the government is constrained in real terms by the amount of contingent debt it can have on its balance sheet, and guarantees can no longer be viewed as a long-term sustainable solution to infrastructure development.


One of the key drivers of a PPP structure is to ensure that lenders, as well as investors, are confident that the project is financeable on a stand alone basis (taking into account any state capital contribution). In the longer term, the credit decision of the lenders should be based on the financial capacity of the equity investors in the project, as well as the project itself when it is up and running, and not the credit rating of Vietnam.


On this basis, international lenders may be more comfortable with the risk profile of foreign investors with long PPP track records, making it more difficult for domestic investors to raise funds. However, certain local construction companies are already teaming up with international companies to mitigate against this, and to build up their own experience for the future.


The prospective financing of the Phan Thiet-Dau Giay expressway, where Bitexco is a domestic investor, should help illustrate the feasibility of this structure.


Do you think that the decision is attractive enough for private investors to join in PPP projects?


The PPP regulations were eagerly awaited by the international investor community. There are reports that, after the decision was issued in November, a number of foreign private investors were very encouraged and began discussions with the authorities about the inclusion of their projects, airports in particular, as PPP trial projects.


While there is a great deal of optimism around the decision, there are still a number of details that remain to be clarified through more comprehensive regulation and, most importantly, through the practical implementation of the decision. Market participants will be watching closely to see how the current pilot projects develop and the decision itself will likely not be enough on its own to attract them. In particular, it will be very important for the government to maintain a central specialised PPP unit in order to harmonise and capitalise on the experience that the authorities gain in the implementation of PPP projects across all sectors during all stages of the process, from the development of standard tendering documents, to the selection of investors and contract negotiations. This will help develop a process, and documentation, that will render PPP project implementation much smoother.


What should the Vietnamese government do to make PPP projects more attractive to the private sector?


A regulatory framework is by no means the only hurdle for private participation in PPP projects. The most important is of course the feasibility and viability of the project for the private investor.


Net revenue calculation is key, with or without a viability gap funding mechanism in place, and the long discussions between state entities and investors around the level of risk the state is willing to assume through granting support for supply (for instance, raw materials) risk and output or usage (for instance, commitments relating to the amount of traffic throughput) will continue to discourage investors. Any consideration by the government of the assumption by it of local currency convertibility risk would of course be much welcomed.


The preparation of the project for competitive bidding is an area of focus of both Decree 108/2009/ND-CP and Decision 71/2010/QD-Ttg. It is an area where great practical improvements can be made investors need to know what they are bidding for in order to provide meaningful bids, which in turn are to the advantage of the state for comparative purposes. The technical requirements, government commitments and any viability gap funding should be clearly set out and backed up by international standard reports and studies.

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