Private public partnerships contract and proposals for vietnamese legislation

ABBREVIATION PPPs Private public partnerships PFI Private Finance Initiative PSP Private Sector Participation EU European Union US United States UK United Kingdom Decree 108/2006/ND-CP D

HO CHI MINH CITY UNIVERSITY OF LAW

MANAGING BOARD OF SPECIAL PROGRAMS

BACHELOR’S THESIS MAJOR: COMMERCIAL LAW

PRIVATE PUBLIC PARTNERSHIPS CONTRACT AND PROPOSALS FOR VIENAMESE LEGISLATION

Student Mai Thi Thanh Phuong

Student ID 0955010178

Instructor LL.M Nguyen Hoang Thuy Trang

HO CHI MINH CITY, 2013

HO CHI MINH CITY UNIVERSITY OF LAW

MANAGING BOARD OF SPECIAL PROGRAMS

BACHELOR’S THESIS REGULAR ACADEMIC AFFAIRS COURSE 34 (2009 – 2013)

PRIVATE PUBLIC PARTNERSHIPS CONTRACT AND PROPOSALS FOR VIENAMESE LEGISLATION

Student Mai Thi Thanh Phuong

Student ID 0955010178

Instructor LL.M Nguyen Hoang Thuy Trang

HO CHI MINH CITY, 2013

COMMITMENT

I hereby commit that the thesis “Private public partnerships contract and proposals

for Vietnamese legislation” is my work of research All information or data raised in

this thesis is completely cited honestly Besides, author also personally gives arguments and opinions relevant to issued problems in the thesis with the instruction of LL.M Nguyen Hoang Thuy Trang – lecturer of Faculty of Commercial law, not absolutely copy from any precious works I sincerely appreciate family’s encouragement and especially devoted guidance from my instructor I am responsible for this commitment

Ho Chi Minh City, 15 July 2013

Mai Thi Thanh Phuong

ABBREVIATION

PPPs Private public partnerships

PFI Private Finance Initiative

PSP Private Sector Participation

EU European Union

US United States

UK United Kingdom

Decree 108/2006/ND-CP Decree 108/2006/ND-CP of providing detailed

provisions and guidelines for implementation of a number of articles of the Investment Law

Decision 71/2010/QD-TTg Decision 71/2010/QD-TTg of promulgating the

regulation on pilot investment in the public private partnership form

Directive 2004/18/EC Directive 2004/18/EC of the European Parliament

and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts

ICSID International Center for Settlement of Investment

Disputes OECD Organization for Economic Co-operation and

Development BOT Build – Operate - Transfer

BTO Build – Transfer – Operate

BT Build - Transfer

DB Design - Build

BOO Build – Own – Operate

BOOT Build – Own – Operate – Transfer

DBFO Design – Build – Finance – Operate BLT Build – Lease – Transfer

BDO Build – Design - Operate

TABLE OF CONTENT

Introduction 1

Chapter 1: Overview of PPPs procurement and PPPs contract 7

1.1 PPPs procurement 7

1.1.1 History of PPPs procurement 7

1.1.2 Concept of PPPs procurement 9

1.1.3 Importance of PPPs procurement 15

1.1.4 Classifications of PPPs procurement 17

1.2 PPPs contract 21

1.2.1 Nature of PPPs contract 21

1.2.2 Distinguishing PPPs contract and other contracts 27

1.2.2.1 PPPs contract and traditional procurement contract 27

1.2.2.2 PPPs contract and civil contract involving foreign elements 28

Chapter 2: Proposals for several institutions of Vietnamese legislation on PPPs project contract 30

2.1 Overview of PPPs procurement development in Viet nam 30

2.2 Context of PPPs procurement’s regulations in Viet nam 31

2.3 Proposals for improvement to regulations on PPPs contract 32

2.3.1 Defining PPPs contract as administrative contract 32

2.3.2 Promulgating a standard - form contract 33

2.3.3 Specifying legal position of the Public sector 35

2.3.4 Governing law 39

2.3.5 Dispute resolution mechanism 38

2.3.6 Advancing several specific institutions in contract 43

2.3.6.1 Time for validity 43

2.3.6.2 Modification of contract 44

2.3.6.3 Termination of contract 45

2.3.6.4 Force majeure 47

2.3.6.5 Step-in right 48

2.3.6.6 Projects transfer 48

Conclusion 50

INTRODUCTION

1 Rationale for research

Based on modern economic outlook, a synchronous infrastructural system and a steady public services network have come to be a prime drive for national economic growth They not only provide foundation for economic activities but also facilitate investment environment as well as represent potentiality of an attractive economy However, regardless of considerable efforts in adopting different models, economic recession and financial crisis have lately put the nations on the status of facing up to budget constraint which leads to unmet demand of infrastructure Becoming aware of this situation, countries eagerly seek for more effective solutions for addressing the requirement of additional infrastructure The government of each state has begun implementing far-reaching reforms by replacing inefficient traditional frameworks with appropriate procurement approaches over the past years Private Public Partnerships (PPPs) are one of preeminent consideration among current processes In reality, despite its recent formation, concept of the PPPs becomes increasingly familiar

to nations as a favorable project delivery mechanism PPPs recognize that participants, including both public and private sectors have certain advantages, and by following each to do what it does best, whilst public services and infrastructure can be provided

in the most efficient manner As a result, many countries are keen to have specific and enforceable regulations, especially legislation for the application and promotion of PPPs structure to create regimes for legal actions widely and successfully

In a developing country like Viet nam, the development of infrastructure and public services is extremely dominant for fostering procurement delivery, answering domestic external pressures and meeting demand for global integration The statistics show that from now to 2020, Vietnam needs an investment capital of about 30-40 billion USD each year to develop essential infrastructure system, including transport, electricity and water supply Meanwhile, the mobilization capacity of tradition investment channels meets only around 50-60 percent of the demand.1 In response to growing demand for

1 http://tuoitrenews.vn/business/8207/foreigners-contribute-opinions-to-PPP-regulations

infrastructure, the government has implemented PPPs as the best suited option in conformity with complicated management and huge source of capital In doing so, the government enables the private partner jointly with public sector to construct, finance and manage public infrastructure projects with the wish to strengthen the participation

of domestic and foreign private economic areas in Vietnam’s infrastructure development At the same time, Viet nam has been too preparing all necessary conditions to implement the PPPs scheme, in which completing a legal framework on PPPs is extremely important Originally, Viet nam has officially allowed conducting some methods of PPPs program such as BT, BOT, BTO under Law on foreign investment in Viet nam 1996, then Law on investment 2006 and guidance documents

In recent times, Decision 71/2010/QD-TTg of promulgating the regulation on pilot investment in the public private partnership form has been enacted to publically acknowledge entire methods of PPPs procurement and not just three above ones It signifies the importance of PPPs procurement in the state’s growth strategy regardless

of being pilot regulations

PPPs substantially call for the presence of both public and private sectors and provide

a win-win solution between two seemingly conflicting premises In this partnership relation, the government looks for private sector’s significant role in funding, innovation and skill in delivery of infrastructure and public services, whereas, the private may find great business opportunities as return or reward Although PPPs offer partners such advantages, it is not easy to implement in fact It originates in serious concerns and intense interests from the investors of unequal legal position in relation with public sector in many activities of PPPs procurement such as bid, negotiation and signing contract, implementation of project… Hence, law provisions are effective instrument of facilitating invested participation and protecting private partner, especially regulations on project contract PPPs contract is considered as the best place

to express a whole of negotiation process with binding commitments for both parties

As a result, it becomes foremost prominence of the investors to secure their best interests and need to be taken into account in PPPs program However, Viet nam’s regulations have only stopped on several general principles for project contract Knowing that parties may freely negotiate and unite any terms of contract, a set of detailed instructions for complicated and long-term contract like PPPs contract is very crucial In reality, PPPs contract currently often transfer obligations to private sector

rather than emphasizing the opportunity for partnership The regulations of project contract also have the tendency of expressing the upper hand of the state which certainly leads to the restriction of facility investment To build a transparent and efficient mechanism for PPPs contract, the setting of a clear provisions or guidance in detailed in the contract is required It may help the investors predict and calculate risks

as well as benefits when jointly cooperating with a special party like the state and then strive for investment attraction

The above reasons make the study of PPPs contract valuable to the practice of the private parties In addition, it is of the author’s interest to learn more about the nature

of PPPs contract due to its special characteristics Therefore, the topic

Private-public-partnerships contract and several regarded recommendations for Vietnamese legislation to attract investment is selected to be discussed in the author’s graduation

- “BOT contract – Method attracts foreign invested capital in Viet nam” by Le Nguyen Thuy Dung (2000): This bachelor’s thesis gives an overview of content and implementation of BOT contract

- “Reality and improvement on foreign investment based on BOT method” by Nguyen Thi Lang (2003): This is PhD thesis which provides the reality of legislation enactment of BOT contract and recommendations

- “BOT contract in prevailing law provisions and practical application in Viet nam” by Nguyen Thi Lang (2008): This master thesis researches the reality

of procedure of BOT, legal position of parties, BOT contract with special treatment and proposals

- “BOT contract based on foreign investment law in Viet nam: reality and improvement” by Hoang Chau Man Tu (2004): this thesis focuses on problems of BOT investment method and reality of signing and implementing the contract

3 Research purposes

The focus of this thesis is to present and analyze the regulations on PPPs contract from the viewpoint of Vietnamese legislature, to put forth fundamental shortcoming then to provide some recommendations to reform it

To begin, the author seeks to provide general understanding about PPPs procurement, the characteristics and objectives of PPPs in modern globalization The thesis also refers to the forms of PPPs program to provide a more whole comprehensive understandings of PPPs After that, the thesis introduces important position and specific traits of PPPs contract which are considered as one of crucial contents of this thesis Then, the author will highlight its own features in comparison with several different methods by getting special mentions on concerning aspects so as to give a comprehensive view of the distinctive nature of PPPs contract

The other vital part of this thesis focuses on Vietnamese prevailing regulations by analyzing several necessary regimes related to PPPs project contract: parties entering into contract, sample contract, dispute resolution, modification, termination, applied law… At the same time, the author discusses shortage and drawback of prevailing regulations of PPPs contract which is considered as the heart of PPPs procurement to

be amended and supplemented to harmonize potential PPPs investor and Vietnamese state interests

Last but not least, this thesis makes some suggestions for improvement to regulations

on PPPs contract in Viet nam by selecting and recommending some foreign regulations proper to Viet nam

4 Thesis delimitation

Due to restrictions on the available materials and the time frame for the research, it is the author’s intention that the thesis is limited in scope as defined below:

Firstly, the thesis takes on the task of legal research on PPPs procurement in general and PPPs contract in particular with giving prominence to their objects and characteristics in the scope of law provisions in Decree 71/2010/QD-Ttg, Decree 108/2006/ND-CP In the light of these legal documents, significant features of PPPs are reachable, especially subjects entering into contract, dispute resolution, classification of PPPs contract and several specific regimes of private sector in conformity with the purpose of thesis

Secondly, the thesis refers to understandings of PPPs contract in the light of Civil code

2005 in case of involving foreign elements The author will define several regulations with regard to scope of thesis from the theory aspect according to Civil code and related major law

Thirdly, the thesis aims to research into foreign law that adjusts effectively PPPs contract to acquire necessary experiences It was the states that conduct and guarantee successfully the mechanism of PPPs such as: EU (Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts), Japan (The Act on Private Finance Initiative), Canada (Municipal Act 2001), the United State (The Model Code for public infrastructure procurement 2007)… These would need to be in compliance with the relevant regulatory regime in Viet nam to enhance proficiency of infrastructure development

Finally, the author also take consideration to essentially primary sources, including printed books, law journals articles, online databases on PPPs procurement as well as PPPs contract to improve background knowledge

5 Research methodology

To execute this thesis with defined purpose, the author has applied multiple methods in the research process The most common methods used to analyze information are traditional methods such as induction, deduction, list, analysis and comparison They are at times combined in order to digest then to summarize the information under control The author researches and collects primary problems with respect to original

theme then arranges the provisions into proper categories according to relative legal issues identified before

To complete this thesis, particular methods are used to various facets For example, historical method is used to highlight the development of PPPs procurement and explain different applications through various names of this method Survey method is carried out over several typical legislation systems in the world to identify the strength

in regulating relevant problems, especially in the second section of the thesis In addition, comparative method is notified when making difference between PPPs contract and other contracts to focus on specific features of this program

6 Thesis structure

After the introduction, the content of this legal research is presented in two chapters as followed:

The first chapter on Overview of PPPs procurement and PPPs contract provides

general understanding of history, characteristics, objects and forms of PPPs procurement as well as PPPs contract

The second chapter on Several institutions of Vietnamese legislation on PPPs project

contract and recommendation presents Vietnamese current law on PPPs contract,

noticeable shortcomings and some recommendations to improve

At the end, the whole presentation is summarized in a short brief

Chapter 1: OVERVIEW OF PPPs PROCUREMENT AND PPPs CONTRACT

1.1 PPPs procurement

1.1.1 History of PPPs procurement

PPPs procurement is a method of public facilities delivery in which the public and private sector jointly implement projects It has many features building up a specific structure different from traditional procurement, typically the contributed participation

of the private sector as a partner in provision of public assets or services Therefore, the history of PPPs procurement should be approached from the viewpoint of the presence of private sector in public works

Actually, it has been a long time since forms of PPPs method emerged Records prove the involvement of the private sector from the time of Caesar Augustus.2 The Roman Empire authorized the Salassi tribe to raise money from travellers going across the saint Bernhard Pass then requested private builders to construct temples, thermal springs, libraries and aqueducts In return, the tribe maintained the pass and provided guidance across the mountain.3 It can be stated that emperors gave concessions to the tribe and gained funds as desired

The existence of private engagement in public affairs also has become popular in Europe since the 13th century.4 For example, the London Bridge’s construction was financed by the release of tolling rights.5 During a long time, private sector involved in many situations like English fleet contribution under Spanish War, turnpike in England

in 1706 or even colonial expansion… Generally, the presence of the private sector in public affairs at that time until the 20th century was not popular, besides a mutual shift

of their function between two sectors sometimes appeared

2 Sarah Jamil (2008), The miscellaneous desirability of PPPs and an approach to design an appropriate constitution, Department of general economic analysis, D-79085 Freiburg, p.4

3 Sarah Jamil, Ibid, p.4

4 Sarah Jamil, Ibid, p.4

5 Sarah Jamil, Ibid, p.4

PPPs as a method for procurement in nation’ strategy as well as legislation are officially recognized and widely accepted in the 90s upon great demand of infrastructure and public services PPPs originally known as Private Finance Initiative (PFI), was first introduced as part of neo-liberalization process in the UK in 1992 by the Conservative government.6 At that time, it sought to get private enterprises involving in the provision of public services, especially transportation projects PPPs and PFI, in the UK or even in many other countries, can be used interchangeably because of their common nature.7 Despite being launched as an effectively alternative method in replacement of traditional procurement like PPPs, PFI attached too much importance into financial mechanism to obtain private finance which could satisfy the political need to increase investment in the infrastructure “without affecting public borrowing, guarantee large contracts for construction companies and create new investment opportunities for finance capital”.8

This may result in the exposure of many significant weaknesses of PFI which made this model not satisfactory: “demand for state financial guarantees”9, “insufficient transparency on the future liabilities”10

brought in costs to be completely charged by the public sector… The rapid deterioration of PFI in the late 90s led to many notable changes into an improving PPPs method Therefore, PPPs started being used more often and become familiar to procurement Then, PPPs as well as PFI subsequently has been expanded across the world under relative adjustment and implementation

The history and development of PPPs vary from country to country In the United States, the private sector has essentially been participated in infrastructure projects in many manners for approximately 75 years.11 For example, the investors may finance private-owned or private-operated projects that serve public purposes, whereas the US federal government and many state governments have granted tax exemptions to interest paid on bonds Hence, it can be concluded that the PPPs model is not really

9 Dexter Whitfield (2001), Ibid, p.5

10 HM Treasury (2012), A new approach to PPPs, p.6

11 Mary Rose Brusewitz (2005), PPPs in the United States, Legal advisers review, p.70

new in the United States, as many of these projects involve contractual structures in which the private sector plays one or more of several roles.12

PPPs procurement in Australia has considerably evolved since early the 1980’s It was used to deliver infrastructure services with a very wide range of sectors of economic infrastructure, for example roads, rail, airports, etc and social infrastructure, namely schools, hospitals and prisons, etc.13 In contrast, the utility of PFI in Japan has been quite restricted to a some number of projects, says, government buildings, schools, hospitals and recreational facilities.14 In fact, legislation in Japan prohibits the use of PFI in certain sectors such as economic infrastructure The development of PFI in Japan limits to construction and finance of private sector participants without allowing them to “take a whole life view” of service delivery As a result, the preferred delivery model for the majority of PFI projects in Japan has been the Build – Transfer – Operate (BTO) model.15

Germany and Austria both historically have had experiences with public private sector partnerships since at least the 19th century The development of PPPs in these countries has improved their system of infrastructure Nevertheless both countries have been latecomers in the recent PPPs - movement.16

Broadly speaking, PPPs procurement has existed for a long time, not “a feature of new era”17

as currently widely assumed However, this method is just recently officially recognized in the development of public service procurement From initial stages in the

UK, PPPs have considerably taken further development steps in various countries all around the world

12 Mary Rose Brusewitz, Ibid, p.70

13 Japan External Trade Organization (JETRO) (2010), PPPs in Australia and Japan: facilitating private sector participation, Asia and Oceania Division, Overseas Research Department, p.4

14 Japan External Trade Organization (JETRO), Ibid, p.4

15 Japan External Trade Organization (JETRO), Ibid, p.20

16

Ronald W McQuaid, Walter Scherrer (2008), Public Private Partnership in the European Union: Experiences

in the UK, Germany and Austria, Uprava letnik VI, p.7

17 Sarah Jamil, Ibid, p.5

1.1.2 Concept of PPPs procurement

PPPs procurement is approached in many contexts and under different viewpoints to such an extent that there is no overarching and widely accepted concept of it Conceptual issues associated with defining PPPs are often proclaimed based on important aspects in which PPPs is used as a tool for development strategy or as a financial arrangement.18 There are some cases, besides, in which any form of participation of the private sector is acknowledged as PPPs

(i) PPPs procurement as a tool for national development strategy on

infrastructure

PPPs are popularly defined as a tool by which the state performs its core functions toward nation’s development process The dominant key is that PPPs provide an effective approach to deliver infrastructure and public services to citizens Most concepts which are presented under this perspective emphasize on acknowledged participation and division of specific roles as well as responsibilities between the public and private sectors PPPs procurement is considered as “arrangements between government and private sector entities for the purpose of providing public infrastructure, community facilities and related services Such partnerships are characterized by the sharing of investment, risk, responsibility and reward between the partners.”19

Similar prospects are found in definitions of Ireland, Czech Republic government For example, “PPPs are essentially partnerships between public sector organizations and private sector investors for the purpose of designing, planning, financing, constructing and/or operating infrastructure projects normally provided through traditional procurement mechanisms by the State.”20

Also, legislation of Viet nam currently shares the common points in this nation’s approach According to Decision No.71/2010/QD-TTg, investment in the PPPs form means that “the state and investor jointly implement projects on development of

infrastructure or provision of public services on the basic of project contracts.”21Generally, there are some common points between nation’ definitions under this perspective First, PPPs are the jointly cooperation between two sectors: public and private one PPPs can result in some new and better products or services that no single sector either the public or the private produces better alone The second refers to public infrastructure and services as object of PPPs procurement Third, appropriate allocation of resources, risks and rewards is an important incentive for partners in this sustainable cooperative relation

(ii) PPPs procurement as a tool of financial arrangement

PPPs method is also emerging under economic perspective as a tool of financial arrangement, especially on the ground of economic organizations’ statements The International Monetary Fund states that PPPs “involve private sector supply of infrastructure assets and services that have traditionally been provided by the government An infusion of private capital and management can ease fiscal constraints

on infrastructure investment and increase efficiency.”22 The concept of the European Commission, in broad terms, has the same meaning Accordingly, “PPPs concern the transfer to the private sector of investment projects that traditionally have been executed or financed by the public sector.”23

In addition, public finances in Economic and Monetary Union (EMU) even directly mentions to financial role of private sector:

“What instead distinguishes PPPs from the traditional public procurement model is the origin of the funds to accomplish the project Instead of relying on government borrowing, most PPPs are financed through bonds issued by the private operator.”24 In doing so, PPPs method takes advantage of using private finance in the provision of public infrastructure or public facilities without escalating pressure on government budgets In other words, private sectors conduct many activities, including designing, building, financing, operating or maintaining by their own capital or together with public entities These definitions primarily put emphasis on financial investment of private sectors In some way from investment angle, PPPs are a method by which one

21 Article 2.1 of Decision No.71/2010/QD-TTg

22

IMF Fiscal Affairs Department (FAD) (2004), “Public-Private Partnerships”, SM/04/94, p 4

23 European Commission (2003), “Public Finances in EMU,” European Economy No 3/2003, p 128

24 European Economy (2003), Public Finance in EMU 2003, Directorate – General for Economic and Financial

Affairs, No.3/2003, p.128

or both partners who are the main actors involved in financing allocation make some effort to gain the shared aim In reality, service delivery objectives of the government are really aligned with the profit objectives of the private partners

(iii) PPPs as any form including participation of the private sector

Another alternative view of PPPs concept is expressed in any form which has the involvement of the private sector In other words, “PPPs” is as a generic term that means definitions under this perspective do not take any notice of the fact that whether PPPs procurement is a method, a strategy, a tool or not “PPPs” is considered as a

“shell of language”, whereas crucial point is those which are contained in the content

of PPPs as virtual nature Approach of PPPs in UK legislation is applied based on this method The term PPPs is used to describe a wide variety of working arrangements formed between the private sector and public bodies “from loose, informal and strategic partnerships to design build finance and operate (DBFO) type service contracts and formal joint venture companies.”25

In the light of this approach, several terms like “Private Sector Participation (PSP)” or

“Privatisation”, in some circumstances, are used with the similar understandings as of PPPs However, these terms essentially generate different expression in comparison with PPPs

PSP method focuses on transferring obligations from the state to the private sector than co-operation opportunity for mutual benefit In PSP, after handing over business (construct, operate infrastructure and deliver services) to private sector, the state only makes management through law tools, administration, finance (tax), whereas all risks are taken over by the private; whilst, in PPPs, the public is not only a subject with the responsibility of management but also a partner with specific rights and obligations.26The PPPs procurement is also attributed to a type of privatization due to privatization

“encompasses a broad range of private sector participation in public services.”27

not be denied that by transferring services or assets to the economy’s private sector, both of two methods improve economic efficiency, productivity and innovation in a stagnant context of public sector In fact, they are intrinsically different from each other Privatization method refers to “the disposition or transfer of an infrastructure asset”28, namely selling shares in essence which belong to the state’s ownership to privately-owned businesses, concurrently puts an end to its rights for originally state-owned property, enterprise institution… Indeed, although PPPs may correspond to variable transfers of rights, depending on the agreement, “partnership” means that public authorities keep control over key property rights in the last resort, whatever the form partnership takes, which makes it different from full privatization Furthermore, motivation as well as objective of each method has also taken into consideration Privatization focuses on the cash gained from the sale of the assets, unlike the partnership in PPPs Therefore, PPPs should be approach with fully acknowledged essence under a generic term without mistaking any misleading term

In conclusion, although the term PPPs maybe interpreted in different contexts from the review of different approaches, it is essentially characterized by some features which attribute the differences toward conventional investment form

(i) PPPs are the form of cooperation between the public and the private

sector

The fact that private sector is always involved in partnership with public one is the specific feature in this method It is characterized by long-term cooperation between partners in the life of project Instead of assigning the tasks for the private zone as in conventional methods, public sector essentially together with private one reach the sharing of certain advantages and even disadvantages in the performance of specific tasks with the aim of promoting collaboration and delivering facilities In PPPs method, the state may give preferential treatment as forms of participation include state capital, investment incentives and relevant financial policies, whereas these superior advantages like capital, technology, technique, innovation or management… is contribution of private sector The state has also give concessions to the investors by allowing them to operate and benefit from the project

28 http://water.epa.gov/grants_funding/cwf/privatization.cfm

In general, parties in PPPs program have contributed their own strength into the life of contract In doing so, Design-Build (DB) approach is considered not within spectrum

of PPPs in some countries, typically Canada.29 DB is outsourcing in essence It means that this method requires the private to design and build infrastructure to meet public sector performance specifications, based on a fixed price paid by the public and the risk of cost overruns is completely transferred to the private sector The public sector

in this model just plays a role of assigner or purchaser without conducting any cooperatively contributed manner

(ii) Object of PPPs procurement is public services

It is confirmed that PPPs procurement is the method only for public services In principle, public services or public facilities (including public goods/assets and services) are originally provided by the State for the benefit of people living within its

jurisdiction They are featured by two main characteristics: “non-excludability” (one

individual is impossible to prevent someone else from using good or service) and

“non-rival” (good or service can be used by more than one person without reducing its

availability to others)30 which are different form private goods However, it is not always that PPPs procurement directs to all kind of public services as its object Only types tend to be as market incentive to provide and as facility to become which is regulated under nation’s legislation to be considered Generally, PPPs have raised predominantly high expectations in such sectors which are of particular significance due to their strategic impact on the economy such as: telecommunications, energy, transportation, and water and sanitation…

(iii) PPPs procurement takes “value for money” as its objective

Some have stated that participation of the public sector turns PPPs procurement into the “commercialization” of a public function by the creation of a state-owned enterprise This is the fatal misunderstanding about the real objective of this method PPPs procurement is really a tool for “value for money”.31

29 http://www.PPPcouncil.ca/resources/about-PPP/models.html

30 http://www4.agr.gc.ca/AAFC-AAC/display-afficher.do?id=1260310931947

31 HM Treasury, Ibid, p.65

For a government, PPPs financing from private sector can be a source of vital infrastructure investment without necessarily increasing governmental or quasi-governmental debt levels as constraints From this angle, PPPs are considered as significantly emerging means of obtaining private sector capital and management expertise for infrastructure investment At the same time, the private sector may offer managerial or operational expertise and efficiency, leading to better quality and perhaps a lower cost For the private sectors, PPPs can present business opportunities

in areas from which they were previously excluded Indeed, the investor receives a benefit or financial remuneration according to predefined performance criteria In fact, the private sector will receive either a stream of payments from the government or user charges levied directly on the end users, or both Last but not least, PPPs arrangement brings to the taxpayer “value for money” when it demonstrates the lowest cost alternative of public utility

(iv) Legal form of PPPs procurement is the project contract

Formerly, to conduct its function toward public services implementation, the state would assign the tasks to competent authorities or company through political decision

or instruction As a result, there is not any contractual partnership to regulate this kind Meanwhile, PPPs procurement refers to the delivery of infrastructure, goods and services between partners under contractual approach Hence, it must be definitely manifested by a project contract that fully holds all each party’s agreement under terms

or provisions and defines clearly the legal position as well as the right and obligation

of parties as the key points for a sustainable partnership

In summary, PPPs procurement has many notable characteristics that positively promote partnering between the public and private sectors Hence, it is necessary to noted that PPPs are a long-term partnership contractual agreement between the public and the private sector under different forms for the purpose of developing and delivering public services traditionally provided by the public sector When taking on public works under PPPs method, risks and awards are distributed among the partners for mutual benefit, depending on their ability and responsibility under negotiation between partners

1.1.3 Importance of PPPs procurement

PPPs procurement is really a breakthrough in new development age Due to undeniable advantages, PPPs are emerging as a great method to provide greater infrastructure solutions PPPs also enhance credible commitments of both the private and the state in order to create the basis for a trust-based long-term relationship, concurrently perform investment attraction policy of nations

(i) PPPs are an effective incentive for the development of infrastructure of

economy

An actor in running effectively infrastructure services is one of critical functions which the states or the governments must perform for the purpose of serving their citizens.32Therefore, the supply, quality and affordability of infrastructure are considered essential for stimulating growth of a nation First, infrastructure development supports various kinds of economic activity by facilitating the flows of goods, services or even people Second, in some certain respects, infrastructure has a bearing on a country’s attractiveness to foreign investors and on its ability to compete with other jurisdictions Therefore, the failure to provide appropriate infrastructure services represents a significant limitation to economic development by loss of quality of life and impediment of international competitiveness This results in sustainable efforts from the state to create higher level of efficiency throughout the nation’s infrastructure However, conventional method conducted by the state itself or between investors together in the small-scale manner hardly matches the unmet demand

In recognition the gravity of this situation and all opportunities to be presented in terms

of options for investment, the promotion of PPPs is taken for granted to serve best increasing infrastructure target in accelerating construction of infrastructure In reality, PPPs in many countries are a key instrument for implementation of priority infrastructure projects

In fact, it is not by chance that PPPs are so popular among nations Infrastructure is a complex investment category reserved for highly sophisticated institutional investors

in capital, management expertise, innovation… First, the participation of the private sector is as an alternative additional source of funding helps the state face constraints

32 http://www.effectivestates.org/ten.htm

on public budgets or resources and fiscal space It is a mean of obtaining private sector capital for infrastructure investment, both to carry on where privatization had left off and as an alternative where there had been obstacles to privatization Second, PPPs would also introduce private sector innovation and management expertise and would result in improved speed of delivery, value-for money and efficiencies through the higher productivity of labor and capital resources Third, prominence of risk allocation

in PPPs agreement creates security among partners when deciding to invest long-term project with too much obstacles

In conclusion, the biggest achievement of PPPs is the exploitation of private sector competencies and the allocation of risk to the party best able to manage it in comparison with conventional method

(ii) The acknowledgement of PPPs method expresses the state’s policy on

investment, especially for foreign investors

Traditionally, nations devote more attention to raising domestic resources for its own development regarding public services It is still not enough to produce desirable outcome for infrastructure Faced with the growing perception that existing infrastructure was both insufficient and inefficient, countries begin to open up the sector to foreign participation Among of applied methods, PPPs are considered as an effective one to call for investment from foreign development partners to fund new initiatives In reality, the market for private participation in infrastructure is highly concentrated and dominated by large and experienced multinational enterprises “with the required expertise and financial stability to assume the financing and risk of the PPPs investment”.33 This would be even more the case in developing countries With the strength of capital and technique, they may meet the demand of large-scale projects effectively However, owing to uncertainties arising from the legacy and to the capital-intensity of the investment sectors, the number of investors willing to undertake projects in several countries at once is limited Therefore, recognition and extend of law regulations which allow involvement of foreign investors play an imperative role This facilitates long-term joint venture cooperation and brings mutual benefit for both public and private sector in term of the delivery of high quality public services

33 The private-public infrastructure advisory facility, Drawbacks of PPP, Toolkit for PPPs in roads and

highways, p.30

(iii) Create opportunities for private sector growth and contribute to the

overall economic development of nations

PPPs method gives the private sector investment opportunities to generate business with the relative certainty and security through agreement with the public Alternatively stated, the private can access payment provided through a contracted fee for service or through the collection of user fees – and the revenue stream may be secure for as long as 30 years or more Many achievements in efficiency of facilities may be constituted based on managerial, technical, finance and innovation capabilities The private can also expand their PPPs capacity and expertise which can then be leveraged to create additional business opportunities

Moreover, it is shortcoming without referring to competitive ability among investors in selecting the most proper The attractive point of PPPs procurement has concerned the extent of efficiency gains which depends strongly on the competitive structure of the market This encourages the participation of adequate investors to seek for investment opportunities and creates dynamic free competition

Finally, success of PPPs method is the contribution of private sector in helping

to overcome shortfalls in both the quality and quantity of Indeed, although the state has the central role in ensuring the provision of basic services in infrastructure, it is not obvious that the state must be “the only provider, or a provider at all”34

Besides, owing to insufficient attention to cost-recovery pricing and tariff collection, public sector, typically state-owned enterprises always shows many shortcomings associated with overstaffing, waste… Hence, to improve these limitations and meet the best demand of society, the state forces to seek for the reliance from strengths of private sectors However, in fact, a desired involvement of private sector allows it to respond

to the market effectively rather than political decisions The state concurrently expresses its strong cooperative will by appealing and giving special treatment institutionalized into economic strategy as well as legislation Beside that, private management is always more efficient Since a “spirit of enterprise” is meaningful for the government, “neutrality” and “profit spirit” are fundamentally compatible with this method

34 Dexter Whitfield, Ibid, p.34

1.1.4 Classifications of PPPs procurement

PPPs cover a wide range of different types of contractual and collaborative partnerships Classification of PPPs project is based on many backgrounds from different viewpoints with varying degrees of public and private sector involvement First of all, division of PPPs is based on cooperation property PPPs method is classified into “purely contractual PPPs” and “institutionalised PPPs” It is the common method in EU’s members.35

Although both arrangements involve delegated responsibility of operation, finance and the collection of tariffs before the end-users, these two models have very different features In the first one, the partnership between public and private sectors is based solely on contractual links In other words, rights and obligations are regulated by an administrative contract which covers a variety of tasks assigned to the private partner, including the design, funding, execution, renovation or exploitation of a work or service Meanwhile, in the light of institutional nature, there is cooperation between the public and the private sectors within a distinct entity The public sector and a private company usually create a third company to deliver an infrastructure service.36 Generally, the public sector retains corporate control, while management of technical operations is normally carried out by the private company

Besides, the method of gaining profit of private sector is also a way to classify PPPs

In this way, PPPs concept includes both “pure PPPs” – i.e projects where the main source of revenue for the private partners is the government (in the form of regular payments or a unit charge) – and “concessions” (where the main source of revenue is user charges levied by the private partners on the beneficiaries of the services)

Furthermore, different classification of PPPs can be assessed against the sector objectives and forms of contract supported by many hybrid approaches

- Service contract: The private sector provides a wide range of specific services to a public utility, but the public sector retains overall operational responsibility and asset ownership Projects of this type have short duration

(usually 1 to 3 years) and in this case, private sector partner can induce quick and substantial but limited contributions to the efficiency of the system There are two common contracts in practice:

Management support: The private operator supplies human and technical resources for a fee It provides technical know-how on all operational and financial aspects of project management remaining within the jurisdiction of the public authority

Operation and management: The private operator is in charge of daily maintenance of the facilities Hence, the private operator may in some cases take on the responsibility for operating the facilities The private operator is paid for its services by the public authority according to specific and qualified performance criteria

- Lease contract: The government delegates the responsibility of managing and operating an already existing facility to the private sector partner However, asset ownership and responsibility of capital investment is still with the public sector partner The public authority remains responsible for all new investment and compliance to existing norms The private operator invoices the end-users directly

- Concession contract: Full delivery of public services is delegated by the government to the private partner for a period of 30 years or more This includes operation, maintenance and management of the facility and construction of new facilities within the existing project In this case, significant investment risk is assumed by the private sector partner For those projects, the facility may or may not be transferred to the public sector partner at the end of the contract period

In these above forms of PPPs, the service contract and lease contract are viewed as conventional procurement methods which blur the line with pure PPPs

Finally, type of PPPs may be consistent with scheme From this viewpoint, it sounds to introduce very different incentive structure as all forms of concession in detail Although, there are many different arrangements, it should be focused on several ones:

- Build-Operate-Transfer (BOT): This is considered as the most common of these arrangements In this case, the project is constructed and operated by the private sector for the concession period The private sector partner receives income from running the infrastructure After the expiry of the concession period, the facility will be transferred to the state Ownership of the project may or may not remain with the state during the contract period BOT is typically used to develop a discrete asset rather than a whole network.37

- Build-Transfer-Operate (BTO): The private sector transfer infrastructure facility to the state after completion of construction The state, in turn, grants the private sector the right to commercially operate such facility within the contract period in order to recover investment capital and gain profits

- Build-Own-Operate (BOO): The private sector is granted the right to construct and operate a new facility The private owns the project outright and retains the operating revenue risk as well as profit operating revenue The state may buy back the facility based on agreed price This approach is quite common in the power generation sector

- Build-Own-Operate-Transfer (BOOT): A BOOT structure differs from BOT

in that the private owns the facility The specific characteristics of BOOT make it suitable for infrastructure projects like highways, roads mass transit, railway transport and power generation and as such they have political importance for the social welfare but are not attractive for other types of private investments

- Design-Build-Finance-Operate (DBFO): It is a project delivery method very similar to BOOT except that there is no actual ownership transfer With this approach, the responsibilities for designing, building, financing and operating are totally transferred to the private sector while the government is the true owner to only provide funding while the project is being used or active The private contractor recovers its investment solely out of payments from the public sector over the operational period It is most commonly used

in Australia

37 http://ppp.worldbank.org/public-private-partnership/agreements/concessions-bots-dbos

- Build-Lease-Transfer (BLT): This scheme is similar to BTO except that the government leases the facility to the private partner during the rest of the contract period

- Build-Design-Operate (BDO): The public authorities entrust the private operator for a fixed period of time with design, construction and operation of new facilities which remain the property of the public authorities The private operator assumes the risks linked to design and management of the facility It is paid a fee by the public authorities and commits to an overall cost for the facility’s construction and operation

Below is the table with related statistics of form of PPPs

Duration (years)

Management

support

Public and

Source: Gruber (2003) and OECD Secretariat

1.2 PPPs contract

1.2.1 Nature of PPPs contract

PPPs contract is acknowledged legal form of arrangement to orient and encourage the PPPs procurement in which the parties to be bound All terms signed by contractors associated with content of right and obligation, object, duration or others are definitely contractual agreement as a basic for two parties to perform However, it is essential to answer the question which type contract of PPPs method is This results in consideration of all appropriate provisions regulated effectively PPPs procurement activities

Moreover, PPPs contract is deemed subject to legal form for PPPs procurement which has many distinguishing features in comparison with other types of contract

(i) Object of the PPPs contract is the public goods or services

Alternately stated, PPPs procurement refers to public services as its object In this part, the author would go into the details of this matter According to some legislation, public services include all activities of state agencies with the purpose of exercise of state administrative management functions and attempt to provide facilities for the essential demands of society For example, under UK legislation, both “hard” services which are directly connected to the asset, like infrastructure and “soft” services which are not directly connected to the availability of the asset, like social services or catering 38 attributes to public services In France and Italia, several activities associated with management function of the state which completely conducted by public competent authorities, such as: granting visas, giving license… are even considered as a type of public services.39 However, object of PPPs contract is projects associated with social welfare facilities, including: public infrastructure, community facilities and related services

38

Dexter Whitfield, Ibid, p.6

39 Nguyễn Thị Hằng, Public services provision and socialized tendency – Investment under PPPs (Cung cấp dịch

vụ công và xu hướng xã hội hóa – Đầu tư theo hình thức đối tác công tư PPP), Documents for discussion about

Partnership methods between the public sector and private sector, p.25

In general, there are some opinions about defining public services PPPs refer to Firstly, these sectors capture a substantial part of network infrastructures often described as “critical”, which are pursuant to these characteristics: (i) supporting economic development and growth, for example road systems or energy; (ii) maintaining socioeconomic cohesion, which includes the provision of services guaranteeing property rights or safety of access to strategic facilities such as airports

or ports; (iii) promote social goals inherent to developed economies, for example providing basic access to communication means or to safe water and sanitation.40Secondly, simply than the former, PPPs have taken are legion, ranging from the construction of physical infrastructure, to public administration, to the provision of health and social services.41

General broadly, all these often are required large capital investment projects Infrastructure includes the basic facilities, services, and installations needed for the functioning of a community or society, such as transportation and communications systems, water and power lines, and public institutions including schools, post offices, and prisons.42 Public services have concern to education, health care, telecommunication or public broadcasting These objectives in PPPs contract are different from those which are objectives in procurement activities In reality, public sector represented by authorities enters into contract for purchase like machines, offices… and all is definitely not PPPs objectives

Moreover, the enlargement in public services management of the state entitles the involvement of private sector as the participant for provision of these public services

In other words, there is no need to put restriction on the state as the only provider

(ii) Subjects entering into PPPs contract include the public and the private

public sector (public authorities) and private sector (investors) Thee subjects entering into contract has some characteristics taken into consideration

First, it is necessary to identify the presence of public sector and private sector as partners in PPPs contract Public sector is controlled by the government or the state, represented by public administration bodies The fact that public sector entering into contract is popular In effort to perform the state management functions, many state-owned enterprise, government-owned corporation, state-owned entity are established

by and on behalf of the state or the government to undertake commercial activities All these subjects entering into contract as a legal entity independently have legal relations

by their own name and fulfill voluntarily its obligation by recourse to their own property; whereas, subjects in PPPs contract have some difference in comparison with those above In several countries, the state would establish a specific company specialized of PPPs procurement which has the status of legal entity to contract In others, public administration bodies would be on behalf of the state to enter into contract These bodies certainly are not legal entity As a result, the state has to bear all responsibility for these bodies’ actions Hence, it is almost impossible and unreasonable to call the state to court in case of dispute As for private sector, it is defined as a part of the economy or an industry that is free from direct governmental control Due to requirement of huge investment capital, different approaches of PPPs depict that the infrastructure PPPs mostly include business organizations as private sector However, reality of development of PPPs reveals that PPPs may include several types of private actors, such as not-for profit organizations, NGOs development agencies and international organizations, development institutions, international donor agents A PPPs method is clearly not a donation by a private party for a public good In reality, this sector participates in an investment project to serve its economic target of all time

Second, the legal position of parties is not proportionate Based on the nature of law is the will of ruling class and also the tool for reflection of legal status of subjects in society, the state is supreme in creating and governing the legal position of other subjects by establishing law system to be complied by others Therefore, in the legal system of each country, there is always unequal relationship between the state and other subjects PPPs contract also reflects this principle Because of the fact that the