|By Dr. Le Net*|
However, even in view of this draft, the lack of a successful track record in all public-private partnership (PPP) aspects, except for some build-transfer projects, underlines the fact that both practical and legal shortcomings still confront Vietnam’s PPP approach. This article explores the implementation of PPP forms in Vietnam and will conclude with a set of recommendations to improve upon the PPP investment environment.
As a personal idea regarding the PPP, the debate between the private and public sectors about PPP is moot. Given that the purpose of PPP does not rest in protection for either public or private interests, PPP as a form is a venture which contains inherent risks. The lenders’ interests, on the other hand, should be protected as lenders are the primary source of funding for most PPP projects. Hence, I personally believe that policies should pay attention to protecting the interests of lenders so as to facilitate further investment.
Initial hype and fade-out
In fact, the number of PPP investments has been declining over the past three years. In 2010, the number of new projects initiated in the form of build-operate-transfer (BOT) and build-transfer (BT) contracts was six. From 2010 until 2012, no new projects under these forms were approved. It was only until 2013 when the country saw one project initiated with the registered capital of $44.72 million, the progress of which began to be made. Most PPP projects are BT projects and rely on road and bridge construction, such as the Phu My bridge and the Ha Long expressway, or BOT projects such as the Phu My 2.2 thermal power plant. Clearly this list doesn’t represent demand.
Unwelcoming environment for BT projects
The MPI recently proposed to remove the state-payment BT investment form because of the high risks involved in the time and investment cost management stages.
In relation to time management risks, the delay in handing over site clearance has led to a situation whereby investors have raised their investment capital as a consequence of paying larger interest on loans. These risks may have also resulted from or been compounded by delays of works due to investor incompetence or lack of funds.
Ministry of Transport statistics show that in the last six years, the total investment in projects that have proceeded through the implementation process has increased by an average 180 per cent compared to the increase in approved total investments (100 per cent). For instance, some BT projects, such as the Tham Luong-Ben Cat wastewater treatment plant and the Binh Tien road bridge, are still facing cash-flow problems.
In relation to cost management risks, land price fluctuations and the tendency by investors to amass unverified investment expenses are the main factors leading to a cost failure in BT projects.
However, government agencies are still considering this matter because the BT investment form is the most attractive form of PPP to investors. Hence, a careful examination of risks and the improvement of government management, rather than outright prohibition, are highly recommended.
Streamlined legal procedures which put the emphasis on protecting lenders will boost PPP activities
Photo: Le Toan
Tan Son Nhat-Binh Loi and GS Land in Thu Thiem
Commentators have frequently regarded the Tan Son Nhat-Binh Loi and GS Land in Thu Thiem, which was executed as a BT project, as a failure. The shortcomings of the project arose from the investor’s plan for capital recovery – the so-called “land for infrastructure swap” model.
In this case, GS E&C was engaged to build the Tan Son Nhat-Binh Loi outer ring road. In return, GS E&C would receive five plots of land with completed land clearance. The Ho Chi Minh City People’s Committee was responsible for land clearance and providing financial support. The rights and obligations of GS E&C in the Tan Son Nhat-Binh Loi outer ring road were independent from its rights and obligations over the plots of land.
When issues appeared in the land clearance stages, GS E&C was hesitant to continue the project. Instead, the company switched emphasis to financially exploiting the five plots of land.
Saigon South Expressway and Phu My Hung
Another typical BT project in which the “land for infrastructure swap” model was also applied, was the Phu My Hung urban project. However, in this case, the model proved a success.
The authorised agency and the Taiwanese partner established the Phu My Hung Corporation as a joint venture, hence the project was granted numerous incentives and received strong backing by the Vietnamese government as a contributor to the joint venture. Here, the rights and obligations of the investor over the plots of land were bound by the execution of the main project. As a result, the project was rapidly completed.
In light of the circumstances of these two BT projects, there are valuable lessons that can be taken away. Firstly, authorised agencies should seek competent investors who are able to properly execute the projects; secondly, when applying the “land for infrastructure swap” model, the authorised agencies should link the rights and obligations of the investors in the projects to the plan for capital recovery and refunding loan capital; and thirdly, due to the important role of the lenders, the government should establish a roadmap of support for projects in their initial stages, or at least guarantee the execution of the projects as well as the recovery of their capital based on revenue such as in BOT projects.
Renewed efforts – new gateway for foreign investors
Following the patchy record of success for PPP projects, Vietnam has taken a renewed approach in attracting investment in other PPP forms. This approach has been encapsulated in the new draft.
Government agencies have also acknowledged that they expect to spend approximately VND20 trillion (almost $1 billion) from the state budget on PPP projects in the 2014-2015 period.
Therefore, despite the downturn in BT projects and the shortcomings of the past, Vietnam’s renewed efforts to enhance its legal framework and create resources have opened opportunities for foreign investors to enter Vietnam through PPP projects.
During the course of seeking opinions, the lawmakers are likely to revise the draft to attract investors in the following way. Firstly, regarding the time for completion, the government must set up and ensure the progress of land clearance, as well as help investors access land. Moreover, easing access to capital should be planned by authorised agencies.
Secondly, regarding the financing side, the government must carefully consider the financial feasibility of the project, including the impact of inflation during construction. Furthermore, reviews and adjustments of the estimated costs in order to reflect the actual costs more accurately are needed. Also, the plan for capital recovery must be rationally-based on local conditions and the quality of the construction.
Thirdly, regarding the plans to address traffic obstructions, in the present case, the local authorities lacked a long-term vision by failing to have an overall traffic plan in the first place. Hence, government policy is a concern that the public party must take into account.
Having said this, the draft still limits interest rate payments investors would be liable to pay in calculating the cost of a project. The draft still provides some guarantee of profits to the investors which might not be in the interests of the lenders and may increase the costs of investment. Until both the private and public sectors shift the focus from their own or their counterparty’s interests to the lenders’ interests, the PPP regulations could continue to fail to attract investors.
(*) Partner at LNT & Partners