PPP Law in Infrastructure Projects (Part 2): Incentives and Guarantees

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General incentives

Broadly speaking, investment incentives under the PPP Law include tax incentives, rights to mortgage project assets, rights to use land, rights relating to the purchase of foreign currency and foreign currency balancing, rights to utilize public services, and rights relating to ownership of assets.

Government guarantees

The significant deviation from Decree 63 is that the PPP Law does not expressly include the grant of a government guarantee to investors to a PPP project to guarantee the performance or payment obligations of State counterparties (e.g., to supply fuel or to purchase electricity from BOT or renewables power plants). The Ministry of Planning and Investment is currently drafting a decree for implementing the Investment Law which give the Prime Minister the authority to issue government guarantees for important projects.

Foreign currency availability guarantee

Although modified from Decree 63 and subject to certain regulatory criteria, the PPP Law continues to allow foreign currency guarantees and the Government will decide whether to apply policies ensuring the availability of foreign currency of up to 30 percent of the revenue in Vietnam dong (after payment of operating costs in Vietnam dong) of projects approved by the National Assembly and Prime Minister.  This is effectively the same as what has been achieved in recent BOT power projects in Vietnam, although it remains to be seen whether the PPP Law or its implementing regulations will change how this 30-percent rule is applied.

Revenue sharing and support schemes

The PPP Law marks the first time a law in Vietnam allows the State to commit to revenue sharing and revenue support mechanisms with private investors.  This could offer a major boost to PPP projects where the project is taking market or usership risk (e.g., toll road or rail projects).

When actual annual project revenues reach more than 125 percent of the projected revenue in the base case financial plan set out in the PPP contract (the Financial Plan), the investors and project company will share with the State half of the project revenues over and above the 125-percent level.  Such revenue sharing will be applied after the project company has adjusted the price, the usership or tolling fee and the term of the PPP contract, and the State Audit Office has audited the revenue amount subject to the revenue sharing mechanism. 

When actual annual project revenues fall below 75 percent of projected revenue in the Financial Plan, subject to certain regulatory conditions, the State shall support the project by making up half of the revenue shortfall below the 75-percent level. 

If applied, the revenue support mechanism shall be set out and approved under the AIP at the outset.  While it is not clear how the project company will be entitled to adjust the price, fees and PPP contract term unilaterally, the concept of revenue support mechanisms should be seen as a significant positive step.

Process for PPP Projects

The PPP Law sets out the following steps, including detailed guidance in relation to each, for the implementation of a PPP project: (shown on the slides)

Note that for PPP projects applying high technologies (per the list of high technologies prioritized for investment and development under the regulations on high technologies) or new technologies, the implementation process varies slightly in that the investor would be selected before formulation, evaluation and approval of the feasibility study report, and approval of the PPP project.