PPP can't turn a bad project into a good project

1 out of 5 component projects of the North-South Expressway is implemented in the form of public-private partnership. Source: Internet.

Traffic PPP - high credit risk area

The PPP Law, effective from January 1, 2021, was expected to create a boost to mobilize capital from the private sector for infrastructure projects, reducing pressure on the state budget.

However, at present, there are very few PPP projects approved for investment, some provisions in the PPP Law and guiding documents have revealed many shortcomings, making it difficult for management agencies and investors to implement infrastructure projects in the form of PPP.

Regarding the reason why the private sector is not really interested in investment projects under the PPP model, Nguyen Minh Duc, Legal Department of the Vietnam Confederation of Industry and Commerce (VCCI), said that for many projects the state offers very attractive options, but still does not attract private investment, because capable businesses are no longer excited because they are hindered by many methods, in which most as these businesses cannot access credit.

Currently, transport PPP projects account for about VND114 trillion, equal to more than 1% of the total credit balance of the whole system. The bad debt of traffic credit by the end of 2021 is VND7.4 trillion, equivalent to 6.5%, much higher than the system's average bad debt of 1.5% at the same time. Therefore, PPP transport becomes a high risk area.

Another problem related to traffic BOT projects is that the project's "life cycle" usually lasts 20-30 years, but these projects are also tightened by loan policies. Thus, the two factors mentioned above make it difficult for the private sector to get loans for PPP projects.

According to Nguyen Minh Duc, the Ministry of Transport is currently managing 72 projects and 139 PPP investors. Among the ongoing projects, there are 49 projects with lower revenue than expected, four projects have not yet collected tolls or have to stop collecting one station, and many projects only received 13-15% of the estimate.

Average revenue is only about 50-80% of the estimate. That is also the reason why PPP projects have to return to the public investment mode. If compared with other PPP fields such as environment, urban infrastructure, etc., transport PPP has advantages in terms of human resources and project management experience. Besides, the legal basis for implementation and documents are also prepared more methodically but are not currently in use.

“Many foreign investors said that the quality of infrastructure is a big barrier when implementing investment projects in Vietnam. So far there is no strategic, medium and long term plan for PPP. Therefore, the implementation of PPP does not have a clear direction, leading to thinking that is difficult, infrastructure projects do not have a priority order," Dau Anh Tuan, Head of Legal Department (VCCI) added.

Soon to complete the legal regulations on O&M

From the perspective of the management agency, Nguyen Thi Linh Giang, Chief of the Public-Private Partnership Office (Ministry of Planning and Investment) affirmed, that if the State has enough money, it should make public investment. Public investment has advantages that PPP does not have, in that management capacity including State agencies, contractor partners are much better, and the legal framework is also more transparent and clear.

With PPP, although it has been 20 years of implementation, it is still just starting to develop in a few areas. The Law on PPP has only been in effect for 1.5 years. Therefore, in terms of project management ability, the ability of capital and budget is an important factor to decide whether to invest in PPP or public investment.

“Of course, PPP also has better factors such as management capacity, project development capacity of the private sector, creativity, and better management. In the management of an infrastructure investment project, the private sector will be able to save more and be more transparent,” said the chief of the public-private partnership office.

In addition, according to Giang, another important factor is the feasibility of that project. PPP projects are only worth doing when they are financially feasible. “PPP is not a tool to turn a bad project into a good one,” emphasized Giang.

In order to remove difficulties and attract high-quality capital for projects in the near future, many experts believe that it is recommended to improve the legal policy on the PPP Law and other related legal documents to synchronize the legal framework for the PPP sector.

In addition, according to VCCI's recommendation, after the North-South expressway projects have been converted to public investment, many businesses are aiming for O&M mechanism (in the form of business and maintenance contracts) therefore, it is necessary to soon complete the legal regulations on traffic O&M under the new PPP Law.

Particularly for credit issues, VCCI recommends classifying each project. For example, open toll projects often lose more revenue than closed fees because they have to give exemptions to local people.

“Perhaps a circular on debt restructuring, keeping the debt group unchanged for transport projects, is similar to Circular 03/2021/TT-NHNN and Circular 14/2021/TT-NHNN on restructuring debt, maintaining the same debt group for customers facing difficulties due to Covid-19. Commercial banks also need to actively monitor revenue to minimize credit risk for customers who have had bad debts from previous BOT projects,” the VCCI representative suggested.

According to Doan Tien Giang, an international consultant on PPP under USAID, in fact, in many PPP projects, private investment enterprises are often interested in the market, not just the projects; which includes factors such as the number of good projects, clear and consistent policy, implementation capacity of the Government, long-term fiscal sustainability and good implementation process.

Within the framework of fiscal management for PPP projects, PPP contracts often generate government financial liabilities including long-term payment obligations and potential threats of fiscal liability when risks arise. Therefore, the private investor wants to be sure that the state will be able to meet its obligations when needed. Therefore, when implementing fiscal obligations, it is necessary to require a commitment to consistent implementation of legal policies throughout the term of the project; need coordination to align different interests, opinions, and views and need voluntary cooperation in implementation and not self-determination at the discretion of the unit.

“International experience shows that, in many countries and territories, they always give priority to the management of direct financial assistance such as in India, Indonesia, the Philippines or Chile or the establishment of financial support. To manage potential liabilities, in Chile, we chose to build a contingency fund in the budget, and in Indonesia, we chose to set up an infrastructure guarantee fund; Korea chose to set up an infrastructure credit guarantee fund, while in Colombia, it chose to set up a fund to manage potential liabilities of government agencies," Doan Tien Giang said.