Vietnam: Bringing a BOT Project to Closure In Vietnam: Problems and Prospects (Part 1)

Last Updated: 11 August 2010
Article by Ellen Kerrigan Dry and Sesto Vecchi

I. Introduction

Vietnam introduced the concept of Build-Operate-Transfer ("BOT") investment projects1 when it amended its Foreign Investment Law in 1992. 2 . Since then, only one foreign-invested BOT enterprise, a water supply plant, has begun operations. Negotiations concerning several power plants have floundered on the price at which electricity can be sold. Two water supply plants have reportedly had difficulties coming to financial closure because the cost of supplying the water is greater than the cost which the Government says the Vietnamese people are willing to pay and because, as a result of inadequate planning, the current distribution system cannot handle an increase in water supply. Other projects are under discussion. Many more have been proposed, but have disappeared from the negotiation table. [See chart for a list of BOT projects and their status.]

Many reasons have been advanced to explain the slow pace of development. The Asian financial crisis has had some impact. Slower growth within Vietnam has, for example, dampened demand for power and thus slowed negotiations on power plant BOT projects. Official development assistance ("ODA") from international organizations such as The World Bank and the Asian Development Bank ("ADB") and bilateral donors has allowed Vietnam to pursue large infrastructure projects without the help of foreign investors.3 Where foreign investors have participated, they have encountered difficulty in arranging financing because, among other reasons, the bank regulatory regime interferes with a fundamental element of project finance: cash flow financing.

For BOT projects that have moved past the initial planning stage, foreign investors have claimed that Vietnamese negotiators appear to have insufficient authority to make necessary decisions. Moreover, excessive bureaucracy and an incomplete regulatory framework have slowed the negotiation process. Foreign investors have had to address obstacles in taking security over land-use rights, the guarantee of income streams, the impact of Vietnam's limited foreign exchange reserves, and the difficulty for Vietnamese to pay a price that will ensure commercial viability. Perhaps as a direct result of these factors, the availability of risk capital for Vietnam has declined. Investors have increased their expectations of risk adjusted returns on capital while the availability of credit for Vietnam has contracted.

Layers of opaque bureaucracy continue. However, there have been some recent positive changes in the regulatory framework, especially with respect to secured transactions. This implies a readiness by Vietnam to address regulatory problems that discourage investment. There are reports that proposals to establish a mechanism for obtaining government guarantees of large infrastructure projects will soon be presented to the National Assembly, along with other amendments to the Foreign Investment Law. With or without these regulatory improvements, foreign investors interested in future BOT projects may find more direct routes to their goals if they are informed of the factors which have slowed or defeated others.

This article focuses on problems which, from a legal perspective, have plagued the negotiation of BOT projects. It comments on what is being done to address the problems and comments on prospects for the future.

II. The Legal and Regulatory Structure, In General

Less than fifteen years ago, Vietnam looked inward. It had a centrally-planned economy and lacked a legal structure that would permit private, commercial rights and obligations to be created and enforced. 4 Since 1986, laws have been promulgated in the areas of foreign investment, land, economic and civil contracts, private and state-owned enterprises, intellectual property and banking. A securities market is being organized and many towns and cities reflect the energy of Vietnam's people as they take advantage of new-found opportunities in business and commerce.

However, the reforms that have occurred must be considered first steps. Omissions and inconsistencies in the regulatory structure have contributed to making it problematical to finance projects, in particular, large-scale infrastructure projects.

The Legal Framework for BOT Projects

The Foreign Investment Law encourages investment in the construction and development of infrastructure projects. Decree 62 and a subsequent amending decree, Decree 2 ("BOT Decrees"), 5 define and establish the basic parameters of BOT contracts involving foreign investment in Vietnam. 6 While either a foreign organization or individual may be the foreign investor in a BOT contract, the local party is designated by the Prime Minister, and may be a ministry, governmental body, or centrally-governed provincial or municipal People's Committee. The BOT project itself is implemented through a "BOT Enterprise", which may be either a joint venture or a 100% foreign-invested enterprise.

The BOT Decrees: establish preferential tax treatment for BOT Enterprises, including import and technology transfer tax exemptions; specify the BOT Enterprise's right to convert profits into hard currencies; and address issues which relate to the mortgage of assets and dispute resolution. The BOT Decrees allow Vietnamese enterprises to take part in BOT projects when permitted by the responsible State authority ("Authorized State Body"). They also provide that the Authorized State Body may "sponsor the implementation of commitments involving a Vietnamese enterprise's financial obligations."

Negotiation of a BOT Project

The government encourages foreign-invested BOT projects in the areas of transportation and communications, power production and trading, water supply, drainage and waste treatment.7 Investment in other sectors, such as airports, seaports, railways and telecommunications, is restricted.

Anyone, including a foreign investor or a State-owned enterprise, may propose a project to the Prime Minister for BOT treatment. Even so, Decree 62 authorizes the Ministry of Planning and Industry ("MPI") 8 to submit to the Prime Minister a list of proposed projects, showing necessity, location, designed capacity, estimated investment capital needed and suggested modes to choose foreign investors. The Prime Minister designates which projects will go forward and nominates the Authorized State Body which will be responsible for negotiating the relevant contracts, coordinating with ministries, and assisting the foreign investors to set up and implement each project.

Once the Prime Minister approves a project and designates the Authorized State Body, that Body gives instructions for the preparation of feasibility studies, which are used as a basis for choosing the foreign investor. The Authorized State Body must recommend a foreign investor based on Vietnam's bidding regulations 9 and must forward its recommendation to the Prime Minister for final approval.

After the designated foreign investor prepares a more detailed feasibility study, the Authorized State Body coordinates with various ministries, branches and central government People's Committees to consider and approve the feasibility study. In the event that matters arise which the Authorized State Body is not authorized to address, such matters are referred to the Prime Minister for resolution. Upon approval of the feasibility study, the Authorized State Body and foreign investor negotiate the relevant contracts, until an agreement in principle is reached. The contracts are then submitted to MPI for assessment before being sent to the Prime Minister for approval. Following Prime Ministerial approval, the agreements are signed and MPI issues the investment license to the BOT Enterprise. Next, the BOT Enterprise submits the technical design to the Authorized State Body, which then consults with the Ministry of Construction and other relevant ministries and People 's Committees to assess the technical details. Once approval is obtained, the BOT Enterprise may begin the project.

Click here to read Part 2 of this Article

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