-
 The
legal framework for BOT investment in Vietnam has not
effectively facilitated the flow of foreign investment into
infrastructure development. During the last decade, there were a
number of BOT projects that failed, such as Wartsila Power Plant
(a foreign BOT project) and Binh Trieu Bridge (a local BOT
project). Only a few foreign BOT projects have been successful,
including the Phu My 2.2 Power Project.
Project financing is a critical issue, as during any BOT project
implementation, most of investors (i.e., concessionaires) need
to raise funds from commercial banks and international financial
institutions. To attract more BOT investment, the government
should not only improve tax and licensing issues (which are also
unfavorable), but also establish a legal framework that enables
investors to arrange project financing. BOT investors in Vietnam
currently face difficulties in persuading banks and other
sponsors to grant loans for at least two key reasons: i) due to
a lack of collateral, foreign-invested companies cannot raise
funds from local banks, and ii) foreign banks are not allowed to
grant a mortgage based on land use rights to foreign borrowers.
Moreover, banks are often only interested in a BOT project so
that they can sell their interest in it to a third party, but
this requires approval from the Vietnamese contracting
authority, which, in many cases, is the Ministry of
Transportation or Ministry of Industry. This is a significant
barrier to obtaining financing for BOT projects.
There are ways to improve this situation. First, BOT enterprises
should be able to raise funds from different sources. In
addition to bank loans, they should also be able to access funds
by issuing bonds and other financial instruments in the capital
markets. Second, foreign banks should have the rights to manage
and sell BOT projects. In case a BOT project's financial
projections fall below a bank's expectations, the bank should
have the right to take over (i.e., step-in rights) and sell its
interest in the project to the third party. If the local
counterpart does not approve of the third party, then, provided
all involved parties agree, it should be able to take over the
project.
Moreover, most BOT enterprises are interested in getting the
rights to develop and operate certain value-added services, but
this is not addressed in the BOT decree. Investors in one
project may also want to invest in additional projects in the
surrounding area. For example, when building a road, they may
also want to set up some gas stations, restaurants, or even (in
the case of Phu My Hung) luxurious apartments nearby! Currently,
because licenses to provide value-added services for BOT
projects are approved on a case-by-case basis, it takes
investors a great deal of time and resources to obtain them.
Instead of ignoring such interests, the government should
consider allowing public-private partnerships that facilitate
the development of these types of value-added services.
Another important issue is that of transferring equity
participation. Investors need to be informed about which
administrative procedures they will need to deal with, how long
those procedures will take, and whether the “silence is consent”
principle will apply if they do not receive any feedback from
the authorities within a certain period of time. It may also be
advisable to require the local authorities to specify the
reasons for any refusals, and in such cases, the state should
step in and take over the projects.
Negotiating a BOT contract requires balancing the public
interest and investor profits. Government officials should have
the necessary expertise and experience to achieve this. Also, to
save time and costs for investors, licensing authority should be
decentralized to local government levels.
Mr. Le Net, Partner
LCT Lawyers
-
 The
latest draft of the BOT Decree provides welcome changes and can
help to encourage private investment in infrastructure
development. For example, it clarifies the provision for
privately-funded projects, stating that investors will be
informed of approval within 45 days of submitting the relevant
documents. Also, the decree permits project participants to
select foreign laws as the governing law for their projects,
provided that such laws do not contradict the basic principles
of Vietnamese laws. The decree clarifies the provision on
performance security: for projects above VND 1,500 billion, the
performance security is 1%, while for projects below that
amount, it is 3%. In addition, the decree exempts investors from
land rents for the entire term of the project.
There is still room for improvement, however. It is still
unclear what form of government guarantees, which are a major
factor in the feasibility of any BOT project, will exist. The
opening words of Article 38, “where necessary, depending on the
nature of the contract,” are ambiguous. Furthermore, the new
decree changes the provisions on legal capital: now the minimum
equity for projects of 1,500 billion VND or more is 20% and for
projects below that amount, it is 30%. It would better if it
were still possible for investors and authorized government
bodies to be more flexible and negotiate lower percentages.
Mr. Oliver Massmann, Partner
International Lawyer, Baker & McKenzie, Hanoi
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