Vietnam’s Public-Private Partnership Law, which came into effect on 1 January, has been heralded as an indication of the country’s commitment to attracting more private capital into its infrastructure sector.
For investors focused on Southeast Asia, however, Vietnam has been an ideal investment destination for quite some time.
“In the solar and wind sectors, projects just kept getting completed and commissioned, even during 2020 [at the height of the pandemic]”
The country’s relatively open approach to foreign direct investment, combined with its government’s laser-like focus on economic growth, has meant that Vietnam has long stood out from other countries in the region, according to SUSI Partners managing director Wymen Chan.
“Southeast Asia is one of the fastest-growing regions in the world but notoriously difficult to invest in,” Chan says. “Most countries have some form of investment restrictions in terms of foreign investments [whereas] Vietnam is generally open to foreign investments and has relatively few restrictions.
“There is also almost a singular focus on economic growth in that country. They go ahead and jump straight into implementation. And that creates a lot more clarity for a foreign investor, in some ways.”
Tim Fourteau, a Singapore-based partner at law firm White & Case, agrees.
In addition to free trade agreements and tax incentives that help to bring foreign investment into the country, he believes the government’s willingness to embrace infrastructure – as well as an ability to see FDI as essential to keeping pace with the country’s infrastructure needs – is another reason Vietnam has been a particularly attractive option for investors.
“The Vietnam[ese] government recognises infrastructure is key to its development and growth and also that it’s being strained as a result of that growth,” Fourteau says. “Freight volumes have reportedly increased tremendously, roads are being utilised, and the grid is being pushed [because of] the additional electricity usage in the factories that have come online. As a result of that, [the government] is looking and incentivised to bring [private] capital into the sector to ensure that the infrastructure keeps pace with the economic growth and does not hamper it.”
New law, new challenges
Although the enactment of the PPP Law is expected to be an added boon for Vietnam’s infrastructure sector, there are elements of the legislation that have given decision-makers in the Asia-Pacific infrastructure investment space pause for thought.
“It’s hard for me to think of an international investor or developer that is not looking seriously at opportunities in Vietnam”
White & Case
According to Fourteau, despite the law being a step in the right direction in terms of providing more certainty for foreign investors, “the verdict is still out” in terms of what kind of impact it will ultimately have.
“On the one hand, it provided a lot of clarity because there were many different laws that dealt with these types of investments and the PPP Law brought them all together,” he
says. “On the other hand, it does contain features and proposes risk allocations that may not incentivise investment in the country.
“For instance, it does not reference that the government will guarantee the obligations of state-owned enterprises. And I think this is a feature that many foreign investors look to, because a lot of the SOEs that they contract with may not have the creditworthiness that they would need to invest.
“It doesn’t say that [a government guarantee] wouldn’t be available, but the fact that it doesn’t reference it is a gap that has been identified.”
Another potentially problematic feature of the law from an FDI point of view is the requirement for project agreements to be governed under
Vietnamese law. Previously, offshore governing laws for revenue-generating contracts had been available to international investors, and this change to what has been considered the norm could represent a barrier to future investment.
“[It’s possible that] through time and education, international investors will become more comfortable with Vietnamese law as the governing law, as they have in other jurisdictions like Indonesia for instance,” Fourteau adds. “But this has been a shift in the law that was not expected by, or necessarily welcomed by, international investors
“In a nutshell, it is great that this law has been passed because it did provide clarity to the various different laws that would have applied to infrastructure investments but it does pose some questions to the community and raises certain issues and points for thought.”
Fellow Singapore-based White & Case partner Matthew Osborne agrees that the new law may present some challenges for those in the investment community. He is hopeful, however, that the great strides the country has made in opening its market to more international players in recent years will continue, as long as the government continues to show a willingness to consider and adapt to foreign investors’ needs.
“The enquiries that we’re fielding are typically in the energy space [and in particular relate to] renewable energy opportunities”
White & Case
“In recent times, there [has been] an observation that the government has listened to the challenges that international investors face and is accommodating adjustments that cater to making [them] comfortable to invest into projects and, in turn, for their financiers to lend money to these projects,” Osborne explains.
“It’s not to say that [the government] wholeheartedly embraces international market practice – and there are examples of where these challenges remain – but I do remain optimistic that Vietnam is a country that does demonstrate this willingness to try to accommodate measures that are likely to appeal to international investment, which I feel is a very positive sign.”
All eyes on renewables
Alongside growing potential in the development of transport and social infrastructure in the country, Osborne says interest among investors and developers in energy transmission and energy transition projects is especially high at the moment. “The enquiries that we’re fielding are typically in the energy space [and in particular relate to] renewable energy opportunities,” he says.
Chan, who heads up SUSI’s Asia Energy Transition Fund and has a particular interest in clean energy, says the growth of Vietnam’s renewables sector has been “impressive”.
He adds that the country’s ability to allow for the much faster deployment required of clean energy projects compared with conventional power is yet another demonstration of Vietnam’s willingness to adapt.
“The pick-up rate in Vietnam has been extremely quick,” Chan says. “In the last five years, they’ve more than tripled the capacity in the country in terms of solar and wind.
“[Clean energy] remains an attractive sector because all of the power that we are building is additive – it’s not a replacement for the conventional energy that exists. The energy demand is growing in that country and these clean power infrastructure [projects] are required to meet the growing demand.”
Allard Nooy, chief executive of infrastructure development and investment firm InfraCo Asia, agrees that the renewables sector in Vietnam is growing fast thanks to an attractive tariff and clear regulations allowing for projects to be brought to market. One potential concern for the sector, however, stems from a lack of transparency around the country’s upcoming Power Development Plan VIII, which has yet to be made public.
Specifically, the short deadlines in place for tariffs may have a detrimental effect on the future of wind projects in Vietnam, especially given the relatively quick implementation of solar projects.
“The development of a wind power project takes much longer than a solar power project,” Nooy says. “You monitor wind data over a 12-month period as you need to have that seasonality in place before you can develop a bankable wind power project.
“If you keep your timelines on tariff settings the same for solar and wind, the country will lose FDI in the wind power industry, no doubt about it.”
Osborne says the kinds of projects seeing heightened interest from investors are typical of countries like Vietnam, with growing populations and a growing middle class. “It’s the types of infrastructure projects that accommodate these population growths and the movement of populations [that attract the most interest],” he adds.
Chan also singles out Vietnam’s growing population, which he says is one of the country’s best features from a foreign investor’s point of view.
“Vietnam has built up a domestic capability that is impressive over the last 10 years,” he says. “It has accelerated so much that, during the pandemic, infrastructure in the country continued to grow.
“In the solar and wind sectors, projects just kept getting completed and commissioned, even during 2020 [at the height of the pandemic]. Without importing skilled labour, they were able to see projects through on their own. That is a hallmark of where the country is headed in terms of its growth.”
“The country is on an upswing,” Fourteau adds. “It’s hard for me to think of an international investor or developer that is not looking seriously at opportunities in Vietnam.
“It really is the country of the day, of the moment.”