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Official Gazette

Wednesday, April 1, 2020

Who’s afraid of BOT contracts?

Updated: 14:03’ - 02/11/2007

Decree No. 78 represents an effort to clear up some of the confusion surrounding a useful means of financing infrastructure projects.

Ho Chi Minh City Law University


On May 11, 2007, the Government promulgated Decree No. 78/2007/ND-CP (Decree No. 78) on investment in the form of build-operate-transfer (BOT), build-transfer-operate (BTO) and build-transfer (BT) contracts, which perpetuates contents of the BOT regulations applicable to foreign and domestic investments in Decree No. 62/CP of August 15, 1998, and Decree No. 77/CP of June 18, 1997. Decree 78 also institutionalizes new ideas about BOT contracts in the spirit of the unified investment law, thereby creating a uniform and equitable legal mechanism for all investors.

Aiming to establish a favorable institutional and social environment for infrastructure development with private capital in the context of limited state budget funds, Decree No. 78 reflects the Party’s and the State’s major policies on non-discrimination against investors and sources of capital (as manifested in the promulgation of the 2005 Investment Law and Enterprise Law). However, it has fallen short of creating a truly equal and transparent legal framework for investors and comprehensively regulating large infrastructure projects.

Decree No. 78 provides for some new forms of private investment in infrastructure. By law, only foreign investors may perform BT contracts, but before the promulgation of Decree No. 78 they concentrated on only BOT projects as there were no clear provisions on how the Government would help them recover capital and gain profits after they completed and transferred works to the State under BT contracts. Decree No. 78, for the first time, stipulates that the Government may arrange capital recovery and profit payment for BT projects on infrastructure construction as agreed in BT contracts. BT projects are also eligible for the same preferences as BOT or BTO projects.

Beside BOT, BTO and BT contracts, investors may also invest in infrastructure in similar forms as decided upon by the Prime Minister. Decree No. 78, however, does not identify which similar forms may be applied: build-operate-ownership (BOO), build-operate-sell (BOS), or build-lease-transfer (BLT). In other words, investors are unsure of how to implement projects similar to BOT projects.

Parties to BOT contracts

Parties to BOT contracts are authorized state agencies and investors. According to Article 2.5 of Decree No. 78, those authorized state agencies include ministries, ministerial-level agencies, government-attached agencies, provincial/municipal People’s Committees and their authorized, attached units. This is a new point compared to previous regulations, under which only ministries, ministerial-level agencies, government-attached agencies and provincial/municipal People’s Committees could be authorized by the Prime Minister to enter into BOT contracts.

However, the definition of authorized state agencies may be construed in two ways. In the first way, they would include (1) ministries, ministerial-level agencies, government-attached agencies, (2) provincial/municipal People’s Committees, and (3) units attached to the agencies mentioned in (1) and (2) which are authorized by these agencies to conclude BOT contracts. In the second way, they would include (1) ministries, ministerial-level agencies, government-attached agencies, (2) provincial/municipal People’s Committees, and (3) units attached to the agencies mentioned in (1) and (2), all three types of agencies of which must be authorized by the Prime Minister to conclude BOT contracts. So, there should be a uniform interpretation of the Decree’s provision on contractual parties.

The Decree also has no provision identifying which competent state agency assumes primary responsibility for negotiating and concluding a BOT contract, an issue currently settled based on common practice and on a case-by-case basis. For example, it is the provincial-level People’s Committee, for a BOT project on water supply; the Ministry of Industry and Trade, for a BOT contract on power plant construction, or the Ministry of Transport, for a BOT project on seaport building. This partly explains why investors hesitate to invest in BOT projects.

The Decree also fails to specify how the agencies are authorized to enter into BOT contracts, and some state agencies authorized to enter into BOT contracts are not fully competent to negotiate every contractual issue. To decide on such issues as foreign currency balance, compensation, buy-back, termination of contracts ahead of time, prices, charges or taxes of projects, they all have to consult relevant agencies. Meanwhile, the law has not clearly determined the ambit of powers and obligations of authorized state agencies in the course of performance of BOT contracts. It becomes unclear whether these agencies can solve problems arising in the course of performance of BOT contracts.

Since the maximum amount of state budget capital a state enterprise might invest in a BOT project was also not specified, not a few state budget-funded projects saw funds misused, affecting the role and social significance of BOT contracts.

Addressing this shortcoming, Article 2.6 of Decree No. 78 recognizes a state enterprise as a party to a BOT contract and sets the extent of their participation in such contracts.

As to investors under BOT contracts, Article 1.6 of the regulation on foreign BOT investment said: “Foreign investors entering into BOT, BTO or BT contracts may be foreign organizations or individuals implementing BOT, BTO or BT projects that take full responsibility for their commitments in BOT, BTO or BT contracts.” Meanwhile, Article 2 on domestic BOT investment stipulated that domestic organizations and individuals could be investors concluding BOT contracts. Both provisions caused problems.

First, how can “individuals” as a party to BOT contracts be understood? Do they include all Vietnamese nationals, foreigners, and overseas Vietnamese? It seems, according to the Decree, that any individual may be selected to sign a BOT contract. A typical characteristic of BOT contracts is that contractual parties are also investors and managers of BOT enterprises. But under the Enterprise Law, not every individuals may establish and manage enterprises. Hence, unlike parties to other contracts, parties to BOT contracts should follow the restriction provided for in the Enterprise Law.

Second, the definition of “investor” in Article 3.4 of the Investment Law is wider than that in Decree No. 78, covering also “other organizations prescribed by law.” In other words, the definition of “investor” in Decree No. 78 is inconsistent with that in the Investment Law. A question is whether political or social organizations having capital and wishing to become investors may participate in bidding for BOT projects or be proposed for execution of those projects?

Third, even though Decree No. 78 says the Government encourages investors with adequate financial, technical and managerial capacity to mobilize capital for implementation of BOT projects and investors or enterprises under BOT contracts are obliged to mobilize capital for project execution according to schedule and are fully responsible for changes in investment capital, except in cases of force majeure, it does not specify whether an authorized state agency may request addition or replacement of investors in case they are incapable of mobilizing enough capital for BOT projects.

Bidding on BOT contracts

Under previous regulations, procedures and formalities for selection of foreign investors to sign BOT contracts had to generally comply with Vietnamese law on bidding; selection results needed to be approved by the Prime Minister. However, whether domestic investors had to be selected through bidding was not specified.

Under Decree No. 78, investors in BOT projects may be selected in either of two ways: bidding or appointment. The Decree also sets conditions on appointment of investors to directly negotiate BOT contracts and deals with the situation in which an investor proposes a project other than one on the promulgated list.

Today, when the management of investment and construction has been enhanced and investor access to BOT investment opportunities widened, the selection of BOT contractors through bidding is highly necessary. However, in this regard, Decree No. 78 still has shortcomings.

It gives the Prime Minister full power to appoint investors to negotiate BOT contracts without setting conditions on the exercise of this power. Investors, therefore, can make use of their personal relations to avoid bidding and be appointed to perform BOT contracts. According to some foreign laws, the prime minister may decide on which investors will negotiate BOT contracts only when the BOT projects are related to national secrets, security or defense.

Article 54 of the Investment Law stipulates: “When two or more investors show interest in an important project already identified in the master plan of an industry, the project’s investor will be selected through bidding in accordance with the Bidding Law.” Article 73 of the Investment Law goes on to say that it is necessary “to organize bidding to select contractors for the provision of consultancy services, goods procurement or construction and installation for state budget-funded investment projects in accordance with the Bidding Law.”

Under the Bidding Law, an investor to negotiate a BOT contract is selected through bidding only when it is a state enterprise expected to contribute 30% of capital to the BOT project, or when the State provides a guarantee or financing for a BOT project. Here, it is unclear whether Article 54 of the Investment Law implies cases in which the Bidding Law can still apply even if no state capital is contributed to a BOT project.

Many BOT projects involve state enterprises through long-term procurement contracts, such as electricity sale contracts between BOT enterprises and the Electricity of Vietnam (EVN) under BOT projects on electricity. However, the Bidding Law does not specify whether state enterprises buying products of BOT projects have to go through bidding.

Prices of products and services offered by BOT projects

Unlike the previous regulations, Decree No. 78 requires that a BOT contract must have a term on the costs of products and services of the BOT project. Article 27 of the Decree stipulates that costs of products and charges of services provided by project enterprises are determined on the principle of fully offsetting expenses, taking into account market prices and ensuring reasonable profits for project enterprises and users. All must be specified in the BOT contract.

The Decree requires that an increase in costs or charges must be agreed upon and stipulated in the BOT contract. In the case of an adjustment in costs, charges or other collections, project enterprises must notify authorized state agencies 30 days in advance. If such adjustment has been provided for in the BOT contract, it must be approved by the authorized state agency. An increase in product costs or service charges, of course, depends on factors which are unpredictable to long-term investors, and doesn’t take into account the inequality between parties, which restricts the State from applying a fair solution to setting principles on price increases.

Second, under Article 28 of the Decree, project enterprises are all given favorable conditions to collect properly and fully revenues and charges from project works and, when necessary, may request support from authorized state agencies. But when and how they may request state support remains unclear and the law provides no guarantee for investors in this regard.

Third, Article 29.1 of the Decree stipulates that investors are not allowed to discriminate against lawful users of their products and services. They are prohibited from abusing their right to business to discriminate against users or refuse to provide services. This provision remains unclear in the case in which some BOT investors are obliged to sell all products of BOT projects to sole buyers under long-term sale contracts and may not do business with parties other than those they have contracted.

Enterprises and investors

Article 15.2 of Decree No. 78 permits parties to a BOT contract to reach agreement on the application of one of the following modes if they fully adhere to the terms of that contract. A BOT enterprise may, after establishment and registration of the BOT contract, join an investor to formulate a party to that contract; or a BOT enterprise accepts rights and obligations of an investor for execution of a project (in this case, acceptance must be expressed in the form of a written agreement between the BOT enterprise, the investor and an authorized state agency, which constitutes an integral part of the BOT contract).

So, Decree No. 78 has set ways of determining the rights and obligations of BOT enterprises in the implementation of BOT projects. It does not require the tripartite agreement on acceptance of the investor’s rights and obligations in a BOT contract to be approved by the Ministry of Planning and Investment, but it is still limited in the following respects:

First, the way a BOT enterprise accepts the rights and obligations of an investor under a BOT contract by joining the investor in signing the contract to form a contractual party may be infeasible. The Decree fails to specify whether a BOT enterprise may be established before officially signing a BOT contract or not. If not, it cannot join the investor in forming a party to that contract.

Second, the current provisions still restrict an investor from accepting the rights and obligations of others in implementation of a project. While the previous regulation on foreign BOT allowed BOT enterprises to accept the rights and obligations of investors in any way provided that it is approved by the Ministry of Planning and Investment, Decree No. 78 allows them to apply only either of the two above-mentioned ways.

Under the previous regulations, sources of capital for a BOT contract may be one of the following: domestic and foreign loans; state budget capital, including state bank loans; state budget capital and capital contributed by enterprises and individuals, including domestic and foreign loans.

Under Article 4 of Decree No. 78, investors must by themselves arrange capital for implementation of BOT projects. To ensure project feasibility, it also requires that investors’ ownership capital must represent no less than 30% of the total capital of a project capitalized at under VND 75 billion; 20% of the total capital of a project capitalized at between VND 75 billion and VND 1.5 trillion; and 10% of the total capital of a project is capitalized of VND 1.5 trillion or more.

The Decree also has a new provision on mobilizing capital under a BOT contract. Accordingly, state budget capital contributed to a BOT project must not exceed 49% of the investor’s own capital in that project. This provision helps address the issue of the state budget deficit, ensuring that BOT projects are really an effective instrument to raise private sector capital for infrastructure construction. It also helps tackle investor difficulty in mobilizing capital for BOT projects in line with actual circumstances in our country.

Because a BOT contract often requires a large amount of capital beyond the financial capacity of an investor, provisions capping the amount of capital are unworkable. They create major barriers to enterprises in the mobilization of capital. In fact, most investors are incapable of meeting these requirements and request an exception.

That Decree 78 sets a minimum level of capital for investors while such is not required by the Investment Law and the Enterprise Law is a restriction on BOT investment, compared to other forms of investment. Even if this provision aims to ensure a project’s feasibility, this aim can hardly be achieved and is unnecessary as lenders often base themselves on financial plans and potential revenues of projects rather than on own capital of enterprises.

Although Decree 78 says the State encourages investors with adequate financial, technical and managerial capacity to jointly mobilize capital for implementation of BOT projects, it does not provide an explicit incentive mechanism for investors to know which incentives they are entitled to.

Finally, Decree No. 78 also does not specify whether a BOT enterprise may be organized in any form under the Enterprise Law, i.e., a stock company, a limited liability company, a private company or a partnership. Hence, it is unclear whether or not a BOT enterprise may issue shares and bonds to mobilize capital for implementation of a BOT project.

In general, the promulgation of Decree 78 with new provisions on BOT contracts applicable to both domestic and foreign investors show Vietnam’s specific and proactive steps in the attraction of private capital for infrastructure development. However, there remain several matters which should be considered and solved in order to bring the Decree into full play. An urgent requirement is to further improve the law on BOT contracts, reasonably dealing with related legal, economic and social issues, which will facilitate infrastructure development on one hand and contribute to improving the law on contracts, investment and enterprises on the other.-


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