DRAFT DECREE: WILL PPP ATTRACT MORE INVESTMENTS?

The draft decree does address various points, however, there is still need for clarification with regard to for example the law governing PPP project contract, conditions related to equity transfer, disposal of collaterals, and restrictions on equity transfer as well as definition of policy enabling changes in developing a PPP project.

30 Jan 2021

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LEGAL UPDATE

Pursuant to the 2020 PPP Law, the Ministry of Planning and Investment has recently published a draft decree providing detailed regulations and guidelines for implementation of a number of articles of the 2020 PPP Law ( Draft PPP Decree). It is not known yet when the draft will be approved and enter into force.

This legal update provides a brief overview of concerns about the Draft PPP Decree that – in the future – would have to be taken into consideration by both private investors and lenders in this investment mode. Some points that are not clear yet are also set out.

1. Definition of Policy Enabling Changes in Developing a PPP Project

Among other risk allocation guarantees, the 2020 PPP Law provides for the concept of policy which may result in certain amendments to the in-principle approval, the PPP project contract or the feasibility study report of a PPP project; or trigger a sharing mechanism of revenue decrease sponsored by the State budget. The Draft PPP Decree provides a definition of the policy which is, however, limited to the Government’s resolutions and the provincial People’s Committee’s decisions only.

Such limitation seems to be designed to exempt the responsibility of the State from cases where a PPP project faces critical impact or incurs great losses due to amendments to policies which are not the resolution/decision of the Government or the provincial People’s Committee.

For instance, with respect to a traffic project, amendments to a traffic sign system or traffic divergence may cause a great impact to the traffic volume and the revenue of the project. The authority to provide these policies is vested in the transport management agencies such as the Ministry of Transport, the Directorate for Roads of Vietnam or the local Departments of Transport.

2. Governmental Responsibilities for Verification Opinions

Past implementation of PPP projects has shown a practical difficulty in determining responsibilities concerning opinions of relevant agencies in verifying a PPP project. In fact, many investors have raised the fact that, with respect to even a particular matter, decision of an agency in the verification phase and the phase when the project contract has been executed and put into exercise are inconsistent and, therefore, cause risks to the investors.

This is due to the law lacking to determine whether the opinions of the agencies in the verification phase represent the official opinions of such agencies, or are merely the opinions of an individual present in the verification committee.

Given that the organisation, operations and responsibilities of the verification committee are designed in the Draft PPP Decree to the extent that, the committee members are a representative of the relevant State agencies, rather than merely being a member of the committee as an individual. Therefore, it is recommended that the Draft PPP Decree be supplemented to also specify that the opinions of the committee members when participating in verification of the project are official opinions of the State agencies which are represented by such committee members in the verification committee.

3. Disposal of Collaterals by Lenders and Potential Restrictions on Equity Transfer

For fund raising purposes, investors may need to mortgage to lenders shares, capital contribution portions, or rights and obligations under the PPP contract. This is a common practice in developing PPP projects, especially those sponsored by loans and other credit facilities extended by international lenders.

Lenders shall then have the rights to dispose of such collaterals, meaning the rights to acquire the project from the borrower investor, also known as the lender step-in rights, which may not be subject to the usual conditions on project equity transfer, such as the examination of the new investor’s capacity as currently required in Article 54 of the 2020 PPP Law.

The Draft PPP Decree, however, fails to provide guidance codifying or otherwise reflecting this common practice. As a result, it remains unclear if lenders may need to undergo the capacity examination or satisfy other conditions applicable to new investors when disposing of the mortgaged shares, capital contribution portions, or rights and obligations under the PPP contract due to relevant defaults by the investors or project company.

4. Conditions on Equity Transfer amongst Investors in a Joint Venture PPP Project

Article 54.1 of the 2020 PPP Law provides that, where the PPP project company is established under a joint venture by (multiple) investors, such member investors shall have the right to transfer their shares or capital contribution portions to one another only when the statutory minimum equity rates applicable to each member investor are secured, meaning that the top member investor and the others in the joint venture must hold at least 30% and 15% of the company equity respectively upon the transfer.

Meanwhile, according to Article 54.2 of the 2020 PPP Law, investor(s) shall have the right to transfer their shares or capital contribution portion to other investor(s) after completing construction work with respect to projects that have a construction component or after moving to the operation phase with respect to projects that do not have a construction component.

It is however unclear whether the condition on the statutory minimum equity rates as per Article 54.1 no longer applies once the construction work is completed or the project is moved to operation phase as stipulated in Article 54.2. This is, not addressed in the Draft PPP Decree either.

5. Law Governing a PPP Project Contract

Article 55 of the 2020 PPP Law provides that a PPP project contract, its appendices and other relevant documents, signed between the State authority of Vietnam and the investor and/or the PPP project company are governed by the laws of Vietnam. With respect to those matters not stipulated under the laws of Vietnam, the parties may agree in detail in the PPP project contract on the condition that it is not contrary to the fundamental principles of the laws of Vietnam.

This language of the 2020 PPP Law does not clarify if

a. any template agreement or instrument if attached to the PPP project contract shall be regarded as an appendix and, therefore, be governed by the laws of Vietnam; this even though it might not be required by the specific law regulating such agreements or instruments; and

b. the parties may not agree in the PPP project contract to apply foreign laws to matters not stipulated under the laws of Vietnam, given the 2020 PPP Law does not make any reference to foreign laws; the Draft PPP Decree fails to address these concerns as well.

6. Conclusion

It seems that the Draft Decree needs to be amended to address several of the points set out above.

For more information, please contact:

Mark Oakley / Managing Partner

mark.oakley@acsvlegal.com

Huyen Pham / Senior Associate

huyen.pham@acsvlegal.com

© 2021 ACS Legal Vietnam Company Limited – All rights reserved

This legal update is not an advice and should not be treated as such.

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