Vietnam introduced the concept of Build-Operate-Transfer (“BOT”) investment projects when it amended its Foreign Investment Law in 1992. Simply stated, in a BOT project, the investors assume the cost and risk to construct an infrastructure project, to operate and manage it for a predetermined period of time, and then to transfer the investment (without compensation) to the government when the term expires. This investment form remained dormant and useless for nearly 15 years when the concept was finally fleshed out by the Law on Investment adopted in 2005, and by its implementing Decree 108. The BOT investment form was further elaborated in the Law on Public-Private Partnership (“PPP”) adopted by the National Assembly in 2020.
While the PPP may change that, private investors have not been attracted to invest in infrastructure or public services because of the lack of a comprehensive legal framework, inappropriate allocation of risks, unclear bankability, and weak government guarantees and incentives, etc.
BOT projects are inherently complex projects that require sensible policies for all stakeholders (eg, banks, investors, end-users, authorized state authorities, and the community where the project is located). But eligible BOT projects may carry advantages and features that other types of projects may not have (eg, government guarantees, revenue risk allocation, contract prices denominated in foreign currencies), termination payments; foreign mediation/arbitration, (but not foreign law) can be selected to settle disputes arising from BOT contracts and from auxiliary agreements involving state-related entities, etc.
To date, about 150 BOT projects have been licensed. The term of some of those projects has expired, and some projects have been suspended or terminated. Four coal-fired power plants have had difficulties because changes in the financial market have created a non-friendly market for projects which pollute. Many projects have been proposed, but many have disappeared. Few have actually materialized.
Foreign investors observe that Vietnamese negotiators appear not to have sufficient authority to make decisions, so the process stalls. Excessive bureaucracy and an incomplete regulatory framework in some sectors have slowed negotiations. Also, foreign investors and lenders have to address obstacles to take security over land-use rights, the guarantee of income streams, and the difficulty for Vietnamese consumers to pay a price that will ensure commercial viability.
However, there have been some recent positive changes in the regulatory framework, especially involving secured transactions, foreign currency guarantees, contractual currency of BOT contracts, and risk allocation between investors and the Government. This may imply a readiness by Vietnam to address fundamental regulatory problems that have discouraged investment.
We focus on the problems which have plagued negotiations for BOT projects. We comment on what is being done to address the problems, and we comment on prospects for the future.
The General Legal and Regulatory Structure
In the past, BOT projects were regulated by a collection of decrees and regulations (sub-laws) issued by the Government from time to time. It was a regulatory patch-work with no over-arching theme. Now, BOT projects are regulated by Laws adopted by the National Assembly. As mentioned above, the key BOT legislation includes the PPP Law and the Investment Law. It includes some specialized laws (eg, Electricity Law, Maritime Law, Civil Aviation Law, Pricing Law, Planning Law, etc.). The BOT legal framework has been shaped, and it is significantly improved. The PPP Law is pivotal. It provides conditions and the process to develop a BOT project, the main contents of a BOT project contract, regimes to manage and utilize the state capital in a BOT project, selection of BOT investors, rights of lenders, investment incentives and government guarantees. Some changes are positive; some are seen to be negative. For example, in the past contracting parties to a BOT contract could select a foreign law to govern BOT contracts. Now, BOT contracts, appendices, and all related documents can be governed only by Vietnamese law. Some areas and sectors were limited and restricted to foreign investors, but now restricted sectors are open to foreign investors. But some omissions remain. These omissions may create problems when financing large-scale infrastructure projects. For example, there is only the general protection of the Investment Law, the PPP Law, and the Civil Code in case of change of law or in force majeure events.
The Legal Framework for BOT Projects
The PPP Law and the Investment Law encourage investment in the construction and development of both hard and soft infrastructure projects. Decree 35 , Decree 28 (“BOT Decrees”),5 define and establish the parameters of BOT contracts involving foreign investment. While a foreign organization or individual may be the foreign investor in a BOT contract, a local non-equity 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. It is not mandatory for a state-owned or state-related entity to hold an interest in a BOT Enterprise. A state-owned enterprise may be involved in a BOT project as a local supplier or as an operator. For example, Vinacomin or Petrovietnam (being state-owned enterprises) could be suppliers under, say a coal/gas supply agreement.]
The PPP Law provides investment incentives for BOT projects, including tax holidays, tax reduction, preferential tax rates, land rental exemption, land rental reduction, and other incentives. The PPP Law allows certain Vietnamese enterprises (“Vietnamese Counterparties”) to take part in BOT projects when permitted by the responsible State authority (“Authorized State Body”). These Vietnamese Counterparties are state-owned enterprises (eg, EVN, Vinacomin, PetroVietnam, etc).
The PPP Law does not specifically grant a government guarantee to investors to secure either performance or payment obligations of Vietnamese Counterparties. In past practice, the Government did provide guarantees for several BOT power projects (eg, guarantees for EVN’s obligations under power purchase agreements, for Vinacomin’s obligations under coal supply agreements). The situation is different now. It will be more difficult for Vietnamese Counterparties to obtain similar broad Government guarantees for new BOT projects. The PPP Law, however, does allow lenders to exercise “step-in” rights. This right must be specified and agreed in writing among lenders, the BOT enterprise, investors and the Authorized State Body.
The BOT Negotiation Process
Under the new PPP Law, the Government encourages foreign-invested BOT projects in the areas of transportation, electrical grid and power plants, irrigation, health care, education and training, and IT infrastructure. The BOT Decrees further specify the permitted sectors and the mandatory minimum investment capital for each type of project. In particular, Decree 35 allows investors to invest in the following sectors and areas… renewable energy; coal-fired power; gas-fired power (including LNG projects); nuclear power; electrical grid; except cases of state monopoly as prescribed in the Electricity Law (with a minimum investment capital of VND 500 billion for renewable energy projects, and VND1,500 billion for other energy projects).
Anyone, including a foreign investor or a State-owned enterprise, may propose a project to the Prime Minister for BOT treatment. Decree 35 requires any Authorized State Body to submit a list of proposed projects to the Prime Minister. It must show necessity, location, design capacity, estimated investment capital and suggested modes to choose foreign or local investors.
In the past, the appointment and selection of BOT investors did not require tender unless there were two or more investors interested in the same project. Now, the selection of BOT investors must be conducted through the bidding process set out in Decree 35. The appointment of BOT investors can be made only in limited circumstances, and appointment requires the Prime Minister’s approval. Subject to the nature and scale of a BOT project, the evaluation of BOT investors may be conducted either by central or by local authorities.
Upon proposal of the Ministry of Planning and Investment, the Prime Minister may decide to set up: (i) a state evaluation committee (“SEC”) authorized to evaluate important BOT projects that are subject to the National Assembly’s jurisdiction, or (ii) a multi-ministerial evaluation committee authorized to evaluate BOT projects which are under the Prime Minister’s jurisdiction. Local evaluation committees are authorized to evaluate BOT projects under ministries/provincial People’s Councils.
Selecting an investor is a large step–but it is only a preliminary step and there is still a long path ahead. Several other steps must be completed before commercial operation of a BOT project can be commenced. Firstly, the selected investors need to set up the BOT Enterprise. The next step is that the selected investors and the BOT Enterprise need to negotiate and conclude BOT contracts and auxiliary agreements with the Authorized State Body and the Vietnamese Counterparties. The PPP Law contains only the key terms and conditions of a BOT contract. Provisions which reflect the particulars or complexities of the project must be added. It can be expected that the negotiating process leading to a BOT contract will take several months.
After a BOT contract has been concluded, the BOT Enterprise needs to secure financing. There is a mandatory period (12 months from the signing date of the BOT contract) for the BOT Enterprise to complete financial closure. The 12-month period can be extended to 18 months.
The PPP Law introduces a new regime whereby the Government and investors can share supplemental revenues/losses if the actual revenue exceeds or is less than the agreed revenue. In particular: (i) If the actual revenue of a BOT project exceeds 125% of the projected revenue as calculated in the financial model under the BOT contract, the BOT Enterprise is required to share 50% of revenue in excess of 125% of the projected revenue. For example, if the projected revenue is US$100, and the actual revenue is US$135, then in such case the BOT Enterprise is required to share its supplemental revenue with the State: US$5 [(135-125) x 50%]; (ii) In return, if the actual revenue of a BOT project is less than 75% of the projected revenue as calculated in the financial model under the BOT contract due to change of law or policies, then the Government will share 50% of the revenue loss. For example, the projected revenue is US$100, the actual revenue is US$65, in such case the Government is required to share revenue loss with the BOT Enterprise: US$5 [(75-65) x 50%].
Problems Faced When Bringing a BOT Project to Closure
As discussed above, the PPP Law and BOT Decrees reference only key terms and conditions of a BOT contract. There are critical matters and clauses that are not discussed but which BOT investors will want to include in a BOT contract to ensure their rights and interests in a long-term contract with state authorities and state-related entities. We refer to currency issues, dispute resolution, mortgage of assets, force majeure protections, termination payments, “take or pay” arrangements, fuel cost pass thru, change of law clause, government guarantees, land matters, auxiliary agreements, etc.
There are other issues. The clearly-defined negotiation process set forth in Decree 35 masks the fact that the authorized Vietnamese government negotiator has limited authority to settle substantive issues that arise during BOT contract negotiations. For example, the right to foreign currency may be provided in the PPP Law, but another entity, the State Bank of Vietnam (“SBVN”), with a different agenda, must actually provide the guarantees. It is mandatory to obtain legal opinions of the Ministry of Justice (“MOJ”), before a BOT contract can be concluded. The language of the MOJ’s legal opinion is very important and time must be spent ensuring that MOJ’s legal opinion meets the foreign investors and lenders’ needs. BOT investors and Vietnamese government negotiators may have reached agreements on commercial matters, but these agreements may need to be changed in the final stage in cases where the MOJ does not issue a clean legal opinion. As mentioned, there are practical problems which arise from the government’s concern whether the Vietnamese public is able to pay a tariff or toll that the BOT enterprise says is necessary to obtain an adequate return on its investment and to try to assess both the short and long term.
Because the Authorized State Body has inadequate authority to resolve issues related to BOT contracts, other bodies must be consulted, making an already complicated process even more complicated and slow. Parties to BOT negotiations complain that other involved bodies are also unsure of their role in the decision-making process and, therefore, are reluctant to sign off on projects. These problems are apparent at every phase of the BOT project. Although creative financing is an answer for some of these problems, we address below some issues in the regulatory framework that affect the negotiation process.
Five Major Weaknesses in the Regulatory Framework
As investors have attempted to work through the process of negotiating BOT contracts, they have identified five major weaknesses either in the law and regulatory structure or in its implementation: currency issues, security for loans, payment upon termination, government guarantees, and dispute resolution and governing law. Foreign investors have addressed these problems by seeking assurances or guarantees. Negotiations on these points have often resulted either in delay or have derailed BOT contract negotiations altogether. In the end, the value of assurances or guarantees may be uncertain.
- Currency issues
1.1. What is the availability of foreign currency? BOT Enterprises may exchange Vietnamese dong earned from implementing BOT projects for hard currency in order to pay for imported materials, equipment, etc, to repay loans and make interest payments, and to transfer profits and capital overseas. Foreign investors’ two overriding questions are: Will the currency be available and approved for transfer when it is needed? And still unsettled, when may profits be transferred overseas–ie, is it earned before or after taxes are paid?
Under the PPP Law, the Government may provide foreign exchange guarantees for important and large-scale BOT projects which are subject to the jurisdiction of the National Assembly and the Prime Minister. However, a guarantee, if given is limited to 30% of VND revenue.
The SBVN is responsible to provide guarantees for foreign currency. It also registers offshore loans, and authorizes offshore bank accounts
Lenders and foreign investors seek assurances or guarantees from the SBVN (a) that foreign currency will be available when it is needed, and (b) on their right to convert dong to foreign currency. The objective is that the BOT Enterprise will receive the same amount of foreign currency it would have received if payment had been made in the designated foreign currency.
Investors also attempt to pin down the timing of profit remittance. The Ministry of Finance’s (“MOF”) regulations do not permit remittance of profit until their financial statements have been audited, all applicable taxes have been paid, and there are no accumulated losses in their financial statements.
1.2. Can contract prices be determined in foreign currency? In the past, the Ministry of Industry and Trade (“MOIT”) allowed BOT power projects to denominate their prices in foreign currencies. The relevant MOIT Circular was an implementing regulation of old BOT decrees. But this MOIT circular is no longer valid. There is no specific law and no regime that allows BOT Enterprises to denominate their prices in foreign currencies (especially in BOT contracts). The issue is open and presumably negotiable. In practice, BOT investors need to address foreign exchange risks and to seek appropriate contractual projections under BOT contracts and auxiliary agreements.
- Security for Loans
Most BOT projects are large-scale projects and require substantial loan capital. Only offshore lenders have sufficient capacity to finance BOT projects. A security package is obviously an important factor for offshore lenders. There are some limits on the security that offshore lenders can rely on. For example, a BOT Enterprise is not allowed to mortgage land use rights and assets attached to the land in favor of an offshore lender. In other circumstances, this legal constraint is resolved by way of a local bank acting as a guarantor to secure the BOT Enterprise’s obligations. In return, the BOT Enterprise is obliged to mortgage its land use rights in favor of the local bank. This is a possible but imperfect solution.
The Civil Code provides a general legal framework for secured transactions. It also applies to security arrangements for international financing of BOT projects. In brief, any asset (with a few exceptions) can be used as security if the following two conditions are fulfilled: (i) the asset must be under the ownership of the securing party, and (ii) the asset can be generally described, but must be identified. Assets are broadly defined in the Civil Code to include objects, money, valuable papers and property rights. Assets comprise immovable and movable assets. Immovable and movable assets can be in the form of existing assets. Certain types of to-be-formed assets can also be used as security.
Given the nature of a BOT project, use of the following assets is more common to secure the BOT Enterprise’s obligations:
- Land use rights can be mortgaged in favor of a credit institution licensed to operate in Vietnam (including a branch of a foreign bank in Vietnam) if (i) land use rights have been granted to the securing party by way of (X) land allocation with full payment of land use levies; or (Y) land receipt by land use rights transfer; or (Z) land lease with full upfront, lump sum payment of land rental for the entire investment period; and (ii) a land use rights certificate has been issued to the securing party (eg, borrower). If the BOT Enterprise is entitled to a land rental exemption, it cannot mortgage its land use rights.
- The plant/factory of the project can be mortgaged to a credit institution which is licensed to operate in Vietnam once the ownership certificate has been issued to the securing party (ie, borrower). The mortgage of the plant/factory can be made separately or together with the underlying land use rights attached to the land on which the plant/factory has been built, if the conditions mentioned above are met.
- The following assets of a BOT project can be used as collateral;
- Machinery, equipment and movable assets of the BOT project;
- Cash deposits in a bank account (including the project operating account, debt service account, savings account or term deposit account, etc.) of the securing party;
- Receivables of the securing party (including insurance compensation under an insurance policy);
- Shareholders’ equity in the project company incorporated in Vietnam;
- Shares in the parent company incorporated abroad, and which holds shares in the Vietnam-based company.
In addition, lenders may also ask the borrower to provide a parent guarantee or shareholders guarantees.
- Payment upon termination
A BOT project may last for 20 to 30 years. Unforeseeable and unpredictable events may occur during the course of contract implementation as a result of force majeure or government acts or changes of law. BOT investors will often seek adequate protection in case the BOT contract is terminated due to these events. The process to negotiate and include a “payment upon termination” clause in a BOT contract requires the investors’ patience, creativity, and compromise.
- Government guarantees
As discussed above, there is a mechanism to seek the government’s guarantee to secure foreign exchange risks. This guarantee applies only to important and large-scale projects. Neither the Investment Law nor the PPP Law specifically deal with the grant of a government guarantee to investors to offset risks. But, while the PPP Law is not specific, the Government is still able to provide such a guarantee. It is unlikely, however, that the Government would grant guarantees for small-scale projects.
- Dispute Resolution and Governing Law
In the past, contracting parties to BOT contracts were free to select a foreign law as the governing law of a BOT contract on the condition that the stipulation was approved by the Ministry of Justice in the form of an opinion letter. Now, parties to BOT contracts can select only Vietnamese law as the governing law. With respect to matters that are not regulated under Vietnamese law, the parties may reach specific agreements in a BOT contract on condition that such agreements are not in breach of basic rules of Vietnamese law.
The BOT regulations support negotiation and conciliation in the event of a dispute, with arbitration being an acceptable means of resolution in the event that negotiation and conciliation fail. However, for some contracts, and depending upon the parties to the contract, arbitration must take place before a Vietnamese arbitration tribunal. For others, the parties may arbitrate abroad.
Ideally, all BOT project-related contracts should be heard by the same dispute resolution body. The parties should also be confident that an award will be recognized and enforced. However, whether arbitration occurs in Vietnam or offshore, there are some concerns about the enforceability of an arbitration award in Vietnam. Vietnam is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and has implemented the Convention through the Code of Civil Procedure (“COCP”). The COCP requires that, before a foreign arbitration award is enforced, the applicant must obtain a decision on recognition and enforcement from a competent court through the Ministry of Justice. Upon receiving the decision, the applicant must then apply to the Department of Enforcement to implement the decision. Although a court in Vietnam is not supposed to reconsider the underlying dispute, there is concern that as part of the process of obtaining a decision on recognition and enforcement, a local court may ignore the award or succumb to government pressure.
Avenues for Addressing Problems
Gaps in the regulatory system must be met by special measures. In order to obtain financing for a project, foreign investors have sought both performance and payment guarantees from the State performance of the obligations of a Vietnamese party to the BOT contract.
Investors in BOT projects sign contracts with a government agency. Although the government agency contracts on behalf of the Government, the Government does not thereby guarantee the performance or payment of each individual contract. Foreign investors have sought Government guarantees which provide that the Government will pay if a state-owned enterprise fails to pay. Only state-owned enterprises or state-owned credit institutions are eligible to receive a government guarantee that it will repay a foreign loan. To our knowledge, the Government has not guaranteed any loans for BOT projects.
The World Bank, ADB and other ODA providers have turned from funding infrastructure projects to poverty reduction and institution building, thus potentially making the BOT form of financing more attractive. Vietnam’s GDP growth has remained positive even during economic crises. Vietnam’s GDP is expected to continue to increase despite blips. All of this highlights the need for infrastructure and public services that can be provided by BOT project financing.
But problems surrounding the BOT format are real. While it is unlikely that all of the factors that have hindered implementation of BOT projects will be easily resolved, some foundations for resolution have been established.
Nguyen Huu Hoai
 Decree 108/2009/ND-CP of the Government dated November 27, 2009 (“Decree 108”)
 The PPP Law took effect on January 1, 2021.
 According to Report no. 1562 of the Government Office dated March 13, 2022, four coal-fired plants have financial difficulties: (i) BOT Nam Dinh (1,200 MW); (ii) BOT Quang Tri (1,200 MW); (iii) BOT Vinh Tan 3 (1,980 MW); and (iv) BOT Song Hau 2 (2.120 MW).
 Decree 35/2021/ND-CP of the Government dated March 29, 2021 (“Decree 35”)
 Decree 28/2021/ND-CP of the Government dated March 26, 2021 (“Decree 28”)
 At this writing, the approximate exchange rate is US$1.00 = VND 23.500
 Article 295 of the Civil Code.