Special Vehicles for Foreign Investment in Vietnam
Jun. 21 – To fuel development, the Vietnam government has created forms of vehicles for investment other than the standard 100 percent foreign-owned enterprise and joint venture. These special investment vehicles give foreign operators and private capital the opportunity to access specific projects for shorter periods of time or in formerly publicly managed businesses in cooperation with the State.
These vehicles are primarily business cooperation contracts and specific authorized projects, which include build-operate-transfer contracts, build-transfer-operate contracts and build-transfer contracts. These contractual forms are particularly suitable for the infrastructure and service sectors and can vary in terms of partners, degree of foreign investor participation, project duration, sector, and application procedure. These vehicles are mainly regulated by the Law on Investment, along with other relevant legislation.
Business Cooperation Contracts
A business cooperation contract (BCC) is signed between multiple parties, typically between a foreign investor and a local company or the government, with the objective of jointly conducting business operations in Vietnam on the basis of mutual allocation of responsibilities and sharing of profits or losses. This is done so without the need to create or form a legal entity in Vietnam. For example, France Telecom entered into a BCC with state-owned Vietnam Post and Telecommunications to install 540,000 fixed-telephone lines over seven years.
This form of business is a means of private financing without transferring management control to a foreign partner. BCCs are usually used for short- and medium-term projects lasting five to fifteen years in sectors where participation is conditional or restricted.
BCC contracts envisage the possibility of setting up a coordination board, if necessary, to ease daily operations, made up of an equal number of representatives nominated by the parties. A foreign business cooperation party can also set up an executive office in Vietnam to act as its representative in the performance of the BCC.
Specific Authorized Projects
Build-operate-transfer contracts (BOT), build-transfer-operate contracts (BTO) and build-transfer contracts (BT) are specific projects carried out by foreign investors and an authorized government agency.
These additional investment vehicles have been introduced in Vietnam to entice international capital into the infrastructure sector and help spur development on a commercially viable basis. Business scopes can range from traffic, electricity, production and business, water supply or drainage, waste treatment and other conditional or restricted sectors as stipulated by the Prime Minister.
BOT contracts are assigned either through competitive bidding or direct negotiation. Winning investors build an infrastructure project and then commercially operate it for a fixed period of time in order to earn back the capital they invested, as well as collect profit. The project is then handed back to the government.
Under a BOT contract, the investor is completely in charge of the construction and management of a project over a specific period, after which the project is to be transferred to the State without further compensation.
BTO contracts are almost identical to BOT contracts in terms of procedure and scope, the difference is that the transfer procedure from foreign investors to state agencies occur before the project operation starts.
Under a BTO contract, title must be transferred to the State immediately upon completion of construction, but the State allows the investor to operate the project over a period of time agreed to in the contract by both parties so that the investor can recover both capital and earn reasonable profits.
BT contracts concern projects that investors can carry out in a limited period of time. Since investors often do not have the chance and the time to regain the whole capital invested, the remuneration comes with the offering of other projects and opportunities to gain back capital previously invested. In March 2012, Garmuda Berhaf Group (Malaysia) signed a BT with the representative of Hanoi’s Department of Natural Resources and Environment on the construction of Yen So Waste Water Treatment Plan.
With a BT contract, the project is transferred to the State upon completion of the construction and the State pays the investor by granting it the right to implement another project or by making payment as agreed to in the BT contract.
In order to apply for one of these investment vehicles, the contract underlying the investment project needs to be guaranteed through a bank-issued bond or other security means for the entire period of operation. The value of the guarantee and the private investor’s contribution depends on the project value and the amount of total capital:
The State partner can contribute a maximum of 49 percent of the total investment capital of the project.
In order to carry out the project in accordance with the BOT-BT-BTO contract, the partners involved need to establish a new enterprise or adjust the business scope of an existing Vietnamese legal entity.
The incorporation of the new enterprise has to comply with the procedures and provisions in the Law on Enterprises and Law on Investment. The project can enter into operation once the investment certificate has been issued.
To finalize the application process and certify their effective participation in the project, investors need to register projects with the government authority in charge within 30 business days from the official publication of the project in the newspaper.
For BOT-BTO-BT, within a six months period after the licensing, investors need to provide the state authority with an audited balance sheet displaying the project total capital expenditure. The balance sheet should be audited by a qualified audit company selected by the investor and approved by the authority prior to the balance sheet creation.
Through the balance sheet, the state authority evaluates the total cost of the project and determines defects and damages. The investor can eventually be required to remove flaws with reference to procedures and terms already specified in the contract.
Portions of this article was was taken from Vietnam Briefing’s Doing Business in Vietnam technical guide. This guide aims to assist foreign investors in understanding the business environment of Vietnam, including reasons to invest and the challenges for which to prepare for. This publication is available as a PDF download in the Asia Briefing Bookstore.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
You can stay up to date with the latest business and investment trends across Vietnam by subscribing to Asia Briefing’s complimentary update service featuring news, commentary, guides, and multimedia resources.