VIETNAM - MAIN ISSUES RESTRAINING INFRASTRUCTURE DEVELOPMENT AND OUTLOOK ON THE EUROPEAN UNION-VIETNAM FREE TRADE AGREEMENT (EVFTA)

1. VIETNAM - MAIN ISSUES RESTRAINING INFRASTRUCTURE
DEVELOPMENT AND OUTLOOK ON THE EUROPEAN UNION-
VIETNAM FREE TRADE AGREEMENT (EVFTA)
By Dr. Oliver Massmann
Vietnam’s ability to continue expanding its economy is linked to competitiveness. It is clear that
supporting institutional regulatory reform and infrastructure development will ensure economic
growth in the country. In practice, this approach is feasible by promoting public-private partnership
(PPP). This goal includes a long-term investment in infrastructure that harmonizes PPP investors
and Vietnamese Government’s interests.
By way of illustration, State-owned enterprises (SOEs) remain dominated in Vietnam. However,
due to budget pressure, the government is committed to reform SOEs. Accelerating the
development of foreign investment requires new approach to create a favorable legal framework
for PPP. The issuance of a long awaited Decision 58/2016/QD-TTg (Decision 58) on classification
of SOEs, is expected to facilitate the process.
Another key aspect to consider is SOE equitization for revenue reasons. In 2016, the State received
approximately USD800 million from equitization and allocated some of these funds to reduce
budget deficit.[1] Although the equitization process started in 1992, only around 2,600 firms have
been equitized in the first 13 years of that program.[2] Meanwhile, the goal during 2014-2015 was
to equitize 432 SOEs.[3] According to Decision 58, it is expected to rearrange 103 SOEs and
equitize 137 SOEs within 2016-2020 period.
The historic poor performance of SOEs equitization is about to change gradually. Furthermore,
there are some questions to address from the investors perspective since the State plans to retain
ownership from below 50% (in 106 enterprises), 50%- 65% (in 27 enterprises) and above 65% (in
4 enterprises) by 2020 across different sectors.
Despite the efforts to enhance investments in infrastructure and energy, many issues related to the
implementation of current regulations that affect transparency and enterprise value remain
unresolved, namely:
Share price
Currently share price as determined by the Government must be market price. There are cases
when market price is determined based on the listed price or transaction price in the UpCom
market. However, such market price determination is not fair and accurate when the shares are

2. sold to strategic shareholders due to the nature of the participants in the securities markets (i.e.,
participants are mainly financial institutions and speculators) as well as the minority percentage of
listed stock compared with the total shares of the listed companies. Indeed, share price when sold
to strategic shareholders must be the lowest successful bid price in an IPO. In addition, share price
of joint stock companies listed on UpCom market must not be within the price range of that
securities code on the transfer date.
Public-private partnership (PPP)
Implementation of Decree 15 on PPP has shown certain limitations. Opening a new chapter of PPP
requires further work in understanding strategic factors that make PPP effective and ensure that
key risk minimizing solutions are undertaken properly.
Bankability is a crucial issue during the project structuring phase. The requirements for a project
to be bankable differ from sector to sector or by jurisdictions. However, there are common factors
that render the project bankability and raise its risk exposure such as restrictions on mortgaging
land use rights to foreign lenders, complex investment approvals to investors (e.g., land acquisition
process), and payment ability of an SOE off-taker. Therefore, practical preferential policies should
be issued to strengthen PPP investment.
In addition, investment in the form of PPP is more complex than public investment. However, in
the management of PPP projects, public investment laws and regulations have currently been
applied, resulting in lengthy investment procedures. Furthermore, there is a problem regarding the
limited resources allocated to authorized state agencies (ASAs). It is expected that Decision 522
on managing and using project development fund raised by Asia Development Bank and Agence
française de développement (AFD) will help to support the ASAs in preparing for the project
development.
With regard to infrastructure projects, the current legislation allows some flexibility regarding the
use of incentives under the Investment Law. Nevertheless, the principle of the PPP framework is
to develop highly-efficient projects through loans from private investors such banks or credit
institutions and thus releasing the State from financial burdens. If local companies borrow from
commercial state banks, this will not meet the PPP principle. In addition, the limited attractiveness
of PPP framework also deter local and foreign non-State banks from offering loans.
It is worth considering a risk allocation framework that harmonizes with the general principle that
risks should be allocated to parties that are in the best position to manage them or make reasonable
determination of that risk.
Power project developments

3. One issue is project implementation timeline in Circular 43/2016/TT-BCT. Specifically, this legal
instrument requires project development commitments from investors and requirements to seek
the MOIT’s approval when there are delays in the project implementation. According to Circular
43, if a BOT project falls behind the agreed timeline, the adjustments will only be approved under
limited exceptions such as (i) force majeure events; (ii) the misconduct of competent authorities
or (iii) the misconduct of a third party. In practice, the schedule agreed between the MOIT and
investors is difficult to meet as a result of complex project preparation process as well as
involvement of many related parties.
Outlook on the EVFTA
The market access commitment in the EVFTA goes largely beyond both those in the WTO and
other FTAs ratified by Vietnam, thereby giving EU enterprises the best possible access to the
Vietnamese market. Accordingly, provisions on SOEs are considered the most ambitious
disciplines that Vietnam has ever reached. Such rules will put private enterprises on an equal level
with enterprises where the Government is the owner. Under the EVFTA, EU companies will be
permitted to bid for contracts in infrastructure, power distribution, railway and healthcare projects
the same as Vietnamese bidders.
Conclusion
Investment in infrastructure is considered as a strategic measure to reach sustainable development
in Vietnam. Indeed, the government has improved the legal framework to support PPP model and
privatization of energy and power sectors. However, it needs a much clearer plan in improving the
quality of new regulations in order to ensure a fair and transparent process. Furthermore, the
equitization progress seems to be disappointing since only 52 SOEs were equitized in 2016. In this
context, to ensure the equitization efficiency, it is urgent to address the impact of these remaining
issues on project’s viability and aim at the highest level of risk management. Finally, Decision 58
represents a good opportunity for EU companies to engage in large- scale PPP projects. However,
investors need to carefully conduct a due diligence before any investment.
***
Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com if
you have any questions or want to know more details on the above. Dr. Oliver Massmann is the
General Director of Duane Morris Vietnam LLC.
Thank you!