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BOT Projects–The Path To Closure In Vietnam – Investment Strategy

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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 1081. The BOT investment form
was further elaborated in the Law on Public-Private Partnership
(“PPP”) adopted by the National Assembly in

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 plants3
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 354 , Decree 285 (“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
6 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.

1. 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

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

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.

2. 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 fulfilled7: (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

Given the nature of a BOT project, use of the following assets
is more common to secure the BOT Enterprise’s obligations:

  1. 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.

  2. 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.

  3. The following assets of a BOT project can be used as

    1. Machinery, equipment and movable assets of the BOT

    2. 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;

    3. Receivables of the securing party (including insurance
      compensation under an insurance policy);

    4. Shareholders’ equity in the project company incorporated in

    5. 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.

3. 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.

4. 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.

5. 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

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

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

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.

An earlier version of this article, previously published by
Mondaq, has been totally revised and updated and this version of
the article is current.


1. Decree 108/2009/ND-CP of the
Government dated November 27, 2009 (“

2. The PPP Law took effect on January
1, 2021.

3. 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).

4. Decree 35/2021/ND-CP of the
Government dated March 29, 2021 (“Decree 35”)

5. Decree 28/2021/ND-CP of the
Government dated March 26, 2021 (“Decree 28”)

6. At this writing, the approximate
exchange rate is US$1.00 = VND 23.500

7. Article 295 of the Civil

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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