VIETNAM - INFRASTRUCTURE DEVELOPMENT – OUTLOOK ON THE EUROPEAN UNION VIETNAM FREE TRADE AGREEMENT (EVFTA)

1. VIETNAM - INFRASTRUCTURE DEVELOPMENT – OUTLOOK ON THE
EUROPEAN UNION VIETNAM FREE TRADE AGREEMENT (EVFTA)
By Oliver Massmann
The Government has enacted several laws in order to promote infrastructure development
especially through private investment. The latest one, Decree 15/2015/ND-CP on public-private
partnership investment (the PPP Decree), was very promising regarding the forms of contract
concerned, the various sectors targeted, the State support or participation and tender
requirements. As a matter of fact, its enforcement revealed that more efforts were needed to
achieve a successful PPP program.
To implement the PPP Decree, many documents were adopted in various sectors: project
development procedures with Circular 02/2016/TT-BKHDT and Decision No. 06/2016/TT-
BKHDT issued by the Ministry of Planning and Investment; financial management of PPP
projects with Circular 55/2016/TT-BTC issued by the Ministry of Finance; power and energy
tackled by the Ministry of Industry and Trade in Circular 23/2015/TT-BCT and Circular
38/2015/TT-BCT and finally transport sector with Circular 86/2015/TT-BGTVT issued by the
Ministry of Transport.
Transparency and clearance of the PPP program
The issues remaining after the PPP Decree implementation concern the viability gap funding
(VGF) and the project development fund (PDF) which differentiate PPP projects from Build-
Operate-Transfer (BOT) ones. Indeed, through availability payments incurred for PPP project,
private operators are guaranteed with a profitable VGF regardless of the users’ fees and of the
time before being profitable. Regulations on VGF and PDF should be established in order to
fully control the PPP scheme.
Furthermore, infrastructure projects do not necessarily have to comply with PPP requirements
since other contracts may be less demanding in terms of obligations and using incentives stated
in the Investment Law of 2015. The idea, within the PPP program, is to attract private investors
such as banks or credit institutions into financing highly-efficient projects and therefore relieving
the State from the projects’ funding. This implies granting of more incentives to motivate foreign
and local non-state banks.
Under the former regime concerning BOT contracts, a double licensing system was necessary for
investors to qualify at selection stage and then for approval of the project and their own
capacity. The new PPP Decree does not clarify the process therefore a simplified procedure
should be adopted.

2. Some difficulties, stated during the development of the drafts of the PPP Decree, are restraining
project lenders. The first one concerns the impossibility of a mortgage on land use right for
foreign contractors in BOT contracts and the issue regarding the interpretation of the land law. A
provision of this law stipulates that a mortgage of land use rights is only possible if all land rents
have been paid, whereas in BOT contracts land is granted for free. The Government decided then
that a mortgage under this circumstance was impossible as no rent has been paid. The PPP
Decree seems to allow payment of a nominal rent but this does not solve the mortgage problem
for BOT foreign contractors. A practical provision should allow a certain land security for
private investors.
Uncertainty regarding Government’s guarantees
Another concern tackles the guarantee on convertibility and remittability of VND income.
Without such a guarantee, some BOT projects would not be bankable and sponsors even with the
guarantee of exchange rate might be left with a residual risk of unconvertible income. A clear
position on guarantees of exchange rates for project with VND revenues would remove the
uncertainty.
The governing law for projects with a foreign contracting party or guaranteed by a competent
authority in case the parties are two Vietnamese entities, may be a foreign law if not
contradictory to the Vietnamese conflict of law rules. There is an uncertainty as whether the
Government guarantees offtake or revenues for PPP projects or contracts under foreign or
international law.
Furthermore, projects in sectors such as transport, renewable energy as well as traditional
thermal power projects should be prioritized and if PPP projects’ proposals were not satisfactory,
this implies to attract more foreign investors to develop sustainable projects. In this idea, the
Vietnamese Government should financially support projects through guarantees or profitable
VGF. In addition, establishing new guidelines on the preparation of PPP program will enhance
projects’ planning and financing.
Opportunities within the PPP program
Many PPP projects are signed or about to be signed and all information related to PPP programs
are compiled in a dedicated website provided by the Ministry of Planning and Investment and the
Authorized State Agencies (ASAs), the latest also having its own list of projects. Achieving a
successful PPP program and promoting infrastructure development in Vietnam require more
efforts which could start with letting investors choose between PPP Decree and Investment Law.
Indeed, imposing the PPP Decree as the exclusive way of developing infrastructure would be
counter-effective regarding economy competitiveness.

3. As power demand is increasing in Vietnam, coal-fired power projects are under negotiations to
be set in place for the time renewable energy will be sufficient to replace coal-fired energy. Due
to the Paris Agreement, private investors in the coal-fired power sector will be getting rarer to
turn to green energy projects.
Finally, the road sector is vital for economy and climate and yet, the risk allocation and
concession principles as well as precisions on the bidding process are still expected in the
Vietnamese legislation. Those issues should be solved to allow foreign investors’ involvement in
the development of transport infrastructure.
Outlook on the EVFTA
As the EVFTA, officially signed on December 2nd
2015, is expected to enter into force by
January 2018, many consequences will emerge. Concerning access to market, Vietnam will be in
a privileged situation as the only country of South-East Asia (except for Singapore which does
not stand as a direct concurrent) to have signed such an agreement. Both Vietnam and the EU
will access a market of hundreds of millions people.
Besides, Vietnam and the EU’s commitments go further than the World Trade Organization’s
ones especially in power/energy sector, maritime transport which shows a real effort to create the
most sustainable and profitable environment for business and investment. In this idea, the
Vietnamese legislation has been amended to become investor-friendly like the Law on
Enterprises, the Investment Law and the PPP Decree. Some regulations still need development or
implementation but we can expect new provisions and legislation with the entry into force of the
EVFTA.
Most important issues
- The impossibility of a mortgage on land use rights for BOT foreign contractors must be
rearranged urgently by allowing a certain form of land or building security to insure BOT
projects.
- The licensing procedure for BOT investors and contractors should be simplified and
regulations on VGF and PDF should be provided.
- A review of the Government’s guarantees and conditions of granting guarantees should be
established as to avoid investors’ discouragement at the preparation phase.
- Investment in coal-fired sector might become rarer due to the Paris Agreement which
encourages investment in green energy.
- The road sector investment is uncertain when it should be supported to allow foreign
investors’ involvement in transport infrastructure development.
***

4. Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you
have any questions or want to know more details on the above. Oliver Massmann is the General
Director of Duane Morris Vietnam LLC.
Thank you!