Vietnam is in desperate need of new and improved infrastructure to continue its growth. To create more favourable conditions for foreign investors participating in infrastructure development, the Vietnamese government recently issued Decree 108/2009/ND-CP (Decree 108) dated November 27, 2009 on investment in the form of BOT, BTO and BT contracts, which takes effect as of January 15, 2010 and replaces Decree 78/2007/ND-CP dated May 11, 2007 (Decree 78).

We understand that the Ministry of Planning and Investment (MPI) and the Ministry of Finance (MoF) are working on two draft implementing regulations which are expected to be passed in early 2010.

Below are the main issues and key changes brought by Decree 108 that are likely to affect foreign investment in BOT projects in Vietnam.

Similar to the old decree, there are three ways in which investors can be selected to carry out projects, through tendering, projects proposed by investors and direct appointment.

The general rule for selection of investors to participate in infrastructure projects is selection through an open domestic or international tendering. The former Decree 78 failed to set out a detailed and transparent process for selection of investors. In practice, this was a bottle-neck in numerous BOT projects. For instance, the Nghi Son 2 power project has faced several long delays and missed milestones during the tender process, and short-listed investors have waited more than a year for the authorised state body to provide revisions to the project documentation. Decree 108 requires the MPI to draft implementing regulations to address the tender process.

Projects proposed by investors are to be published on the list of BOT projects calling for investment, permitting the promoting investor to negotiate directly with the authorised state body. However, tendering will be required where other investors respond by notifying an interest in participating in developing the projects.

Under Decree 108, direct appointment of an investor is still allowed in certain cases. In particular, direct appointment of investors is only allowed where only a single investor registers for the project; or where there is an urgent need for an infrastructure facility (proposed by the relevant ministries/provincial people' s committee) as decided by the prime minister.

Authorised state body ("ASB") and licensing authority

A BOT contract is negotiated and executed between investors and the ASB. Under Decree 108, the ASB can be (i) a ministry, (ii) a ministerial equivalent government body, (iii) a provincial people's committee, or (iv) an authorised subsidiary body of these state authorities. It should be noted that the scope of authorisation is limited to small/medium scale group B and C projects as classified under Decree 12/2009/ND-CP dated February 12, 2009 on management of construction investments.

In the past, only the MPI had the right to issue investment certificates for a BOT project. Under Decree 108, the licensing authority of the MPI is limited to projects of national importance, (projects to which a ministry or branch (or a body delegated by such ministry or branch) is the ASB and projects implemented in an area covering two or more provinces.

Provincial-level people's committees will issue investment certificates for the remaining projects. It is expected that such decentralisation will speed up licensing procedures of BOT projects.

Investment certificates and investment vehicle

An investment certificate is required for a foreign investment project of any nature in Vietnam, including for the implementation of a BOT or other infrastructure project.

Decree 108 distinguishes between investors (the companies or bodies investing capital in the project) and the project enterprise (the joint venture vehicle set up by the investors to carry out the project). The investment certificate issued for the implementation of the BOT project will concurrently be the incorporation certificate of a project enterprise with foreign participation.

Decree 108 allows any form of project enterprise established in accordance with the law on investment and the law on enterprises to be used for BOT projects. Our experience suggests that joint ventures with a local partner will be regarded positively by Vietnamese authorities. Decree 108 still falls short of investor requests that the law permit a project enterprise be the sole signatory to the project contracts. As with the former Decree 78, it is the investor that enters in the first instance into contract negotiations for a BOT project and executes the project contracts. Therefore, prior to establishment of the project enterprise, obligations under the BOT contract remain exclusively with the investor. This system leaves open for negotiation the level of risk and surety that an investor may face despite the establishment of the project enterprise-a proposition that current investors strongly resist. To avoid commercially impractical and time consuming arguments over investor support for project enterprise obligations, it would be preferable for Decree 108 to clarify that obligations are imposed directly on the project enterprise and do away with investor counter-signatures.

Capital requirement and construction security

Decree 108 retains provisions requiring investors to meet a minimum equity ratio but amends the thresholds.

Although the equity requirements for projects with investment capital below l,500 billion dong have been reduced significantly from 20-30%, most BOT projects will fall into the category with investment capital of more than 1,500 billion dong for which the minimum equity requirement has been slightly increased from 10%.

As under the former decree, Decree 108 further requires that investors provide security to guarantee implementation of the project contract.

Lenders' security and step-in rights

Creditors' rights have traditionally been very limited under Vietnamese law. Lenders have historically relied on the strength and breadth of their step-in rights to salvage an investment in the circumstances of project company default. In a BOT context, a lender's step in rights must be pre-approved by the relevant

ASB counterparty. However, in practice, It may be difficult for lenders to obtain sufficiently broad consent to cover all the circumstances where a lender may wish to step into a project experiencing distress. Project Transfer and Amendment of BOT Contract Decree 78 failed to address conditions and procedures applicable to transfer of a BOT project. Decree 108 provides provisions on assignment of rights and obligations under a BOT contract. Provided that the transfer does not adversely affect the objective, size, technical criteria and schedule for implementation of the project or other conditions agreed in the BOT contract, assignment is allowed. However, a project transfer must be approved by the ASB and be implemented in compliance with conditions and procedures set out in investment/construction regulations and other relevant legislation. Note that the current provisions on investment projects are quite general and impractical. As a result, they do not foster a smooth implementation of a project transfer. In addition to the transfer of the project contract, investors are allowed to amend the signed BOT contract due to changes in project scale, technical specifications or investment capital of the project already agreed, changes due to force majeure events and changes in conditions/circumstances as stipulated in the BOT contract. Any amendments of the BOT contract must be approved by the investment certificate-issuing body.

Government guarantee and investment incentives

Investors have previously had some success in obtaining government guarantees to support the obligations of the state-owned enterprise involved in the project. A requirement to obtain the prime minister's approval of a government guarantee prior to contract negotiations was abandoned with Decree 108. Thus, the government may grant a guarantee at any stage of the BOT project. There are various incentives available to investors undertaking a BOT project. These include exemption from applicable land use fees or land rent, exemption from import duties on goods imported to carry out the project, as well as reduced corporate income tax and tax holidays for investments to develop infrastructure in sectors entitled to special investment incentives. It may be possible for investors to negotiate additional incentives for a particular project.

Impact on existing projects

All investors who entered into a project contract prior to 15 January 2010 but have not yet been issued an 'investment certificate must attend the project contract and carry out procedures for issuance of an investment certificate in accordance with Decree 108, unless the prime minister's permission is obtained. Although the new decree shows progress on a couple of issues, it has failed to address most of them.

Concerned parties now have eyes on the recent PPP Framework for Vietnam, which if implemented correctly has indeed the potential to reduce risks. Also, in order to generate enough interest in Vietnam's infrastructure market it is important for the government to develop a pipeline of well prepared projects. Attracting international investors remains crucial for the country.