Tag Archives: construction

Will a new PPP law pave the way for Vietnam’s infrastructure?

Fast-growing Vietnam is facing an infrastructure bottleneck. With the state lacking the budgetary might to finance the nation’s much-needed highways, tracks and tunnels, experts are increasingly looking towards the private sector to fill in the financial shortfall.

 

Amid such constraints, the continuing mobilisation of financial resources from non-state sectors for transport infrastructure development is urgently necessary. According to the Asian Development Bank (ADB), Vietnam will need up to US$17 billion for infrastructure investment between 2015 and 2025.

 

In recent years, the Government has made moves to create a transparent legal framework for investment projects, under the public-private-partnership (PPP) programme. PPP is a form of investment between a government agency and a private investor for projects in construction, renovation, operation and management of infrastructure, as well as the provision of public services. Through PPP, governments can leverage efficiencies and expertise in the private sector to achieve their development goals.

 

However, shortcomings and limitations plague the sustained implementation of such projects and investors are wary of signing up in the current climate.

 

Although a number of decrees have been put forward to facilitate investment, critics have noted that the environment is not attractive and investors are not granted the necessary flexibility regarding these projects. PPP investment activities were regulated by Decree 15/2015/ND-CP on PPP investment and Decree 30/2015/ND-CP guiding the implementation of some articles of the Law on Bidding, as well as several other documents.

 

From 1990 to 2016, the country completed 84 PPP projects amounting to US$16.2 billion, with 79 percent of the projects in the energy sector. However, since the issuance of the PPP pilot programme in 2011, no PPP project has been signed under this framework. Compared with regional neighbours, foreign investment in infrastructure in Vietnam is lagging behind.

 

Recently, the government issued Decree 63/2018 (Decree 63), replacing Decree 15/2015, specifying the areas, investment conditions, and procedures for PPP projects in Vietnam. The new decree increases the investor equity ratio for PPP projects to 20 percent. Decree 63 takes effect in June this year.

 

Does this go far enough?

 

Inspection and audit results on build-operate-transfer (BOT) and build-transfer (BT) projects showed that most applied limited tendering in choosing investors, leading to low competitiveness and a lack of transparency. Meanwhile, the announcement of projects has yet to be implemented in an open manner.

 

At the same time, the supervision of projects’ implementation has been ineffective, leading to low quality construction works and many other problems.

 

In response to this range of issues, Vietnam’s National Assembly has requested that the government come up with a PPP law that removes such difficulties and legal restrictions in order to promote this form of investment.

 

3 things a successful PPP law should include

 

  1. A clear risk-sharing mechanism

 

Authorities have yet to clarify a risk-sharing mechanism in which the government guarantees a certain minimum revenue flow for the developer, agreeing to top it off if it isn’t met. This is especially important in the case of infrastructure, where projects can often carry significant risk. Some regulatory clarity would help investor confidence.

 

The current model transfers most of the risk on to the private sector. To attract private sector investors and operators, a transparent policy framework and fair allocation of risk are key. Similarly, attractive deal structures with a clearly defined project scope and adequate guarantees on the expected financial return will help to encourage participation in PPP deals.

 

  1. Exchange rate guarantees

 

Vietnam’s infrastructure projects will sell their output in the local currency, the Vietnamese dong, while long-term financing will be provided in a foreign currency. This has a negative impact on the bankability of such projects. A new and successful PPP law would need to improve on this point by including a mechanism for government guarantees of convertibility, so investors can be sure of the same exchange rate over the course of a long-term construction project.

 

Limitations on the remittance of foreign currencies overseas will also need to be scaled back.

These obstacles, and the risk of currency fluctuations, have a big impact on investor confidence. Their removal would go a long way in attracting the kind of projects needed to keep the country moving.

 

  1. Financial incentives

 

As a typically long-term investment, infrastructure projects will need added incentives and guarantees on return in order for investors to make the 20-30 year commitments required for big constructions.

 

To offset the risk, the government could look to rewarding investors with part of the spillover effect of development. Incentives could help to reduce the uncertainty inherent in infrastructure development, where revenues can depend on traffic flows and unpredictable circumstances in the future.

 

In short, to attract willing investors, Vietnam needs a framework that ensures transparency, fairness and predictability, including reliable policies and regulations as well as specialised PPP branches of government that investors can trust.

 

Other factors, like life cycle cost, safety, resilience and environmental impact also need to be taken into account.

 

The demand for infrastructure development in Vietnam is robust, but the legislative environment is not currently conducive to the signing of PPP projects that are viable or bankable. Clarification in the form of a PPP law that covers the above points would improve the situation by increasing transparency and reducing risks for enterprises eyeing the country.

 

For more information about investment in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam’s Special Economic Zones – sorting fact from fiction

A significant amount of recent media coverage has been devoted to the subject of special economic zones (SEZs) and controversies surrounding their establishment in Vietnam. Faced with mounting public anger, Vietnam had delayed a final decision on the establishment of three new SEZs.

 

Economic zones are not a new phenomenon, with 18 coastal economic zones and 27 border economic zones already present in Vietnam. The establishment of these areas was part of the country’s early economic reforms and they were designed to offer a range of incentives to investors, including free tariffs on selected items, lower personal income tax and reduced rent and fees. There are a further 325 state-supported industrial parks, which offer a more limited range of incentives.

 

What is an SEZ?

 

An SEZ is a designated area in a country that is subject to unique economic regulations that differ from other areas in the same country. Such areas are used to convey financial and legal advantages on businesses and encourage them to invest. SEZs are one of the most widely used methods to attract foreign direct investment (FDI), and have been deployed successfully around the world.

 

The Vietnamese government has shown a strong desire to develop SEZs, where it hopes relaxed regulations will in turn spearhead regional and national growth. This issue has been high on the agenda, especially at a point where the country needs breakthrough institutional reforms to maintain its growth momentum.

 

To ensure the success of SEZs in Vietnam, the Ministry of Planning and Investment studied experiences from 13 other countries around the world with both successful and failed SEZ development models. Based on that research, a model for SEZ development suitable for Vietnam’s economic conditions was drawn up in the new Law on Special Administrative-Economic Zones.

 

At a cost of VND1.5 trillion (US$66 billion), three new SEZs were proposed for the provinces of Quang Ninh and Khanh Hoa, as well as on the southern resort island of Phu Quoc. As per the plan, investors were to be offered greater incentives and fewer restrictions than available in other parts of the country, kickstarting investment. The freedom from local regulations is expected to make them competitive internationally and foreigners were to be lured with tax breaks and streamlined routes to permanent residency.

 

Notably, based on the specific geographic advantages of the three SEZs, the MPI proposed several preferential industries to focus on and develop for each zone, including high-tech sectors, tourism and trade.

 

The development of Phu Quoc in particular is high on the agenda, as the government has highlighted its potential as a commercial, service and trade hub which adheres to international standards. Indeed, land prices shot up on Vietnam’s largest island following news that it was slated to become an SEZ and authorities stepped in to suspend land use conversions and land transfers in the zones until a new SEZ law is passed.

 

Among infrastructure projects planned for Van Don, in the northern province of Quang Ninh, is an international airport which would connect the area with other Asian cities such as Shenzhen, Shanghai and Hong Kong. This is in line with the government’s plans to establish Van Don as a tourist hub.

 

Courting controversy

 

The draft legislation on the new SEZs submitted to the National Assembly earlier this year sparked concern over an article allowing land in the three special zones to be leased by foreign investors for up to 99 years.

 

Critics of the bills say allowing foreigners to own land for nearly a century could pose serious threats to the country’s national security, with simmering tensions over the South China Sea an ominous backdrop to the proposals.

 

Attempting to allay concerns, the Prime Minister announced that the 99-year term would be reconsidered. Even so, approval of the plan has been pushed back until the next session of the National Assembly so that kinks can be ironed out.

 

Unfortunately, reducing such terms could limit the ability of SEZs to attract foreign investment. Experts have argued that such provisions are essential to incentivise and stabilise long-term investment projects. Extended timeframes for land allocation are crucial to attract the big investors required to ensure success of the zones. In comparison, legislation in other countries allows significant extensions when investing in an SEZ.

 

Other issues raised include the generous tax incentives, which could breed unhealthy competition, and a lack of consideration for environmental issues.

 

Investing in three SEZs at the same time is a risky gamble for Vietnam and requires careful management and resource distribution to ensure their success. Quibbles over the details risk unsettling investors, and watering down attractive land use and tax policies could doom the endeavour before it’s begun.

 

The development of SEZs should be considered a framework for testing economic reforms for the economy as a whole, creating spillover effects and building experience to perfect institutions.

 

A reform-oriented mindset and willingness to experiment with incentive models will be crucial in bringing the SEZs to life. More thought will be needed to address the concerns of voters, but lawmakers shouldn’t lose sight of the need to incentivise investors with radical ideas.

 

For more information about investment in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Risk and reward in Vietnam’s real estate as investors ignore uncertainty over future of land rights

Vietnam has emerged as an attractive destination for foreign investors looking to enter the real estate market. Driven by a fast-growing economy, high rate of urbanisation and expanding middle-class, cities like Hanoi, Da Nang and Ho Chi Minh City have become dynamic and lucrative metropolises. For those willing to shoulder the risks, the market offers substantial rewards and great potential over the coming decades.

 

Much of the development can be attributed to the implementation of the Land Law (No. 45/2013/QH13), Law on Housing (No. 65/2014/QH13) and Law on Real Estate Business (No. 66/2014/QH13), which effectively opened the floodgates to foreign investment in real estate.  In principle, these laws allow foreigners most of the same rights as locals when it comes to purchasing and owning real estate.  Many foreign development companies are jumping at the chance to develop new residential and commercial properties in one of the world’s fastest growing economies.  Question marks remain however over the underlying rights foreign-invested developers enjoy in the land on which these buildings sit and it remains to be seen how this will play out.

 

Lack of Certainty 

 

For many developers the country’s political landscape remains a hurdle. In Vietnam, land is collectively owned by the people, and administered by the State on their behalf. Under this system, property owners are denied full and legal ownership over the land. Their rights to the land are limited to ‘land use rights’ within the scope permitted by law.  A land user is issued a land use right certificate (LURC) that recognises the land user’s rights over the property.  There are different types of land use rights possible and some come very close to being analogous to freehold ownership as many would know it in the West (use right in perpetuity, subject to reversion and compulsory public works acqusitions, right to sell, transfer, mortgage etc).

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