The Latest in Project Finance in Vietnam

Introduction

The financial viability of a project is crucial for its bankability. Lenders prioritise a project’s ability to generate sufficient cash flow, as this directly impacts their financing decisions and the project’s capacity to meet debt obligations. Additionally, profitability must be secured through well-structured contractual agreements that guarantee stakeholders a return on investment and clearly outline profit distribution. These contracts should also include protective mechanisms to mitigate risks and safeguard the interests of all parties involved.

According to Vietnam’s investment legal framework, there are three investment models: traditional investment, public investment, and public–private partnerships (PPP). Private entities typically handle traditional investment, while public investment is managed by the government. The PPP model enables collaboration between the government and private sector to build and operate public projects, sharing risks and benefits.

Vietnam’s legal framework has evolved significantly, particularly with the National Electricity Development Planning for 2021–2030 and the vision for 2050 (PDP8), the Capital Law of 2024, and Resolution 98/2023/QH15. These developments grant Hanoi and Ho Chi Minh City greater flexibility in project management, especially in the energy and transportation sectors. While renewable energy projects are primarily driven by private investors, transportation infrastructure projects in Vietnam have notably focused on the PPP model.

Energy sector – the impact of legal framework on the project’s bankability

National Power Development Plan VIII (PDP8)

Following the issuance of the PDP8 of 15 May 2023, on 1 April 2024, The Prime Minister issued Decision 262/QD-TTg approving the Plan to implement National Power Development Planning for 2021–2030 period, with a vision toward 2050 (“Implementation Decision”).

The purpose and requirement section of the Implementation Decision mainly focuses on the development of renewable energy projects, such as small-scale hydropower, onshore wind power, biomass power, and waste-to-energy power, for each locality until 2025.

A significant factor contributing to the profitability of renewable energy projects are the substantial incentives related to land, marine resources, taxes, fees, and investment credits. Specifically:

• According to Decree No 31/2021/ND-CP, projects in the renewable energy sector, including solar and wind energy projects, are eligible for various incentives concerning land use, marine resources, taxes, and investment credits.
• Renewable energy projects benefit from a preferential tax rate of 10% on income generated from renewable energy production for a period of 15 years. Additionally, new investments in this sector are granted a tax exemption for the first four years, followed by a 50% reduction in taxable income for the subsequent nine years.
• The government also implements a Feed-in Tariff (FiT) programme for renewable energy projects, which guarantees a fixed price for electricity supplied to the grid, thus ensuring profitability for investors.

Additionally, the development of a carbon credit market, creating a system to help businesses reduce carbon emissions and support the long-term environmental objectives of PDP8. Vietnam has several regulatory documents at various levels concerning carbon credits, including the latest Directive No 13/CT-TTg dated 2 May 2024, issued by the government on enhancing the management of carbon credits to meet Nationally Determined Contributions.

Policy to resurrect transition power projects

Vietnam’s energy transition is advancing as the government introduces policies to rejuvenate previously stalled power projects. This shift focuses on the resumption of coal, gas, and hydro power projects that were initially postponed due to environmental and regulatory concerns. These policies seek to balance Vietnam’s immediate energy needs with long-term sustainability goals. The government has introduced flexible financing models and is exploring green bonds and other sustainable finance options to support these projects. Resurrecting transition power projects is expected to bridge short-term energy gaps while Vietnam builds out its renewable energy infrastructure.

For investors, this policy shift provides a unique window to fund projects critical to Vietnam's energy infrastructure, supported by mechanisms such as green bonds and sustainable finance options, which can align with ESG investment criteria. By participating, investors have the chance to engage in transitional energy projects that are expected to stabilise the energy market in the short term while laying the groundwork for Vietnam’s renewable energy expansion.

LNG projects

As of 2024, Vietnam has approved 13 LNG power projects as part of its key investment initiatives under Decision 500/QD-TTg. The goal is to develop 22,400 MW of LNG power capacity by 2030, representing approximately 14.9% of the nation’s total power capacity, with a projected output of 83 billion kWh. However, these LNG projects are currently facing challenges in meeting their deadlines. This extended timeline is primarily due to the intricate processes of approval, design, construction, and testing, all of which involve multiple rigorous checks. Further complicating matters, negotiations for power purchase agreements (PPAs) and loan arrangements introduce additional risks and delays due to the lack of a legal basis for long-term quantity offtaking (for example, the Nhon Trach 3 and 4 projects have reached 70% progress but have not yet completed PPA negotiations with EVN). Such delays could severely impact the cashflow of LNG projects.

I) Specific legal framework and bankability of LNG projects

a) Fifth Draft of the Electricity Law

The Fifth Draft of the Electricity Law, expected to be passed in 2025, introduces key mechanisms such as minimum production commitments, investment guarantees, and foreign exchange conversions. Article 28.3 of the draft stipulates that the government will set principles for pricing mechanisms, minimum production commitments, and technology transfer commitments. However, issues such as exchange rate risk, force majeure, termination clauses, and foreign law and international arbitration were not included. The potential approval of the amended law in 2025, with a chance for early approval in 2024, depends on the quality of the final draft.

b) The offtaking ratio commitment

To ensure financial bankability, a commitment to offtake electricity from the Vietnam Electricity Group (EVN) is crucial. The proposed offtake ratio is at least 70% over a maximum of seven years, which is 5% higher than EVN’s suggestion (65%) and 2–20% lower than the investors’ desired level. However, if investors of LNG power projects still want the electricity consumption rate which is EVN to commit to mobilising electricity output from these plants at 72–90% during the entire contract term – electricity users will have to pay higher electricity bills.

The offtake ratio is vital because it guarantees a stable cash flow for investors, enabling them to service their debts and secure LNG at reasonable prices. If the offtake ratio is too low, it could reduce investment attractiveness and impact project feasibility.

II) Trends and developments in LNG project finance in 2024

a) Long-term offtake commitment

Increased investment and financing in 2024 have led LNG projects in Vietnam to attract significant attention from international investors and financial institutions. Securing power purchase agreements (PPAs) with EVN is crucial for obtaining financial backing for projects. Therefore, long-term offtake commitment legal frameworks may be expedited, together with the development of government guarantee and tax incentives (if any).

b) Two-part pricing mechanism

The adoption of a two-part pricing mechanism for electricity, encompassing both capacity and energy charges, represents a significant trend in optimising the financial dynamics between LNG power project investors and EVN. This approach, initially applied to electricity consumers, is designed to mitigate the risk of sudden price increases that could burden consumers and destabilise the broader economy. By separating the costs into a fixed capacity price and a variable energy price, this mechanism aims to create a more predictable and balanced cost structure. The Ministry of Industry and Trade is now exploring extending this model to power plants, a practice already implemented in various countries. This shift seeks to enhance economic efficiency by aligning resource allocation with actual usage, improving system load management, and reducing the necessity for extensive new investments in power generation and grid infrastructure. Furthermore, it facilitates more favourable contract negotiations and attracts investment by providing clearer financial terms and stability for both producers and consumers.

Rooftop solar projects

In July 2024, Decree No 80/2024/ND-CP introduced a direct power purchase agreement (DPPA) mechanism, allowing for greater private sector participation in renewable energy projects. Additionally, the government has proposed new policies to incentivise the development of rooftop solar systems for self-consumption and sale of excess power to the grid.

I) New pricing mechanisms for rooftop solar

Prior to Decree 80, the pricing of rooftop solar power in Vietnam was primarily governed by a feed-in tariff (FiT) scheme, which provided a fixed, guaranteed rate for electricity generated from rooftop solar systems. However, this FiT policy expired in January 2021, leaving a gap in the regulatory framework. Recent trends indicate a shift from FiT to more market-oriented pricing mechanisms.

Decree 80 has introduced two new pricing models for rooftop solar projects (see CNC Counsel and VILAF):

• Private power line model – under this model, rooftop solar generators can directly negotiate power purchase agreements (PPAs) with large corporate offtakers, setting their own mutually agreed electricity prices. This provides greater flexibility and allows rooftop solar projects to potentially command higher prices based on the offtaker’s specific sustainability goals and willingness to pay. This model is attractive to investors seeking to secure long-term, bankable revenue streams.
• National grid model – for rooftop solar projects connected to the national grid, the electricity is sold to the grid at spot market prices determined by the Vietnam Wholesale Electricity Market (VWEM). The rooftop solar generator then enters into a contract for difference (CfD) with a large corporate offtaker, where the parties agree on a fixed “strike price” for the electricity. If the VWEM spot price is lower than the strike price, the offtaker pays the difference to the generator, and vice versa. This mechanism helps mitigate price volatility risks for both parties.

Decree 80 is expected to further accelerate this trend, as it opens up new avenues for rooftop solar development. According to the Ministry of Industry and Trade (MOIT), 24 rooftop solar projects with a combined capacity of 1,773 MW have already expressed interest in participating in the DPPA pilot scheme. Furthermore, the decree’s inclusion of rooftop solar systems, regardless of capacity, in the private power line model, could unlock significant potential for smaller-scale projects, particularly in the commercial and industrial sectors. This is a departure from the previous 1 MW capacity limit, which had constrained the development of larger rooftop solar systems.

However, risks such as the creditworthiness of corporate offtakers and exposure to spot market fluctuations under the national grid model still remain. Although the CfD mechanism provides some price stability, lenders may remain cautious due to potential market volatility. These factors require careful consideration when financing rooftop solar projects in Vietnam.

Looking ahead, the government’s target of achieving an additional 2,600 MW of rooftop solar capacity by 2030 as part of PDP8 is likely to be bolstered by the DPPA framework. However, the success of this policy will depend on how effectively it can address the remaining regulatory and bankability concerns.

Decree 135/2024/NĐ-CP, effective from 22 October 2024, also introduces new mechanisms and policies that reshape financing for rooftop solar projects in Vietnam by promoting self-production and self-consumption of solar energy. The decree seeks to enhance the financial viability of rooftop solar installations through incentives aimed at reducing initial investment costs for consumers and businesses. By increasing access to financing options and potentially providing tax benefits, it encourages investment in rooftop solar technology across residential and commercial sectors. This policy aligns with Vietnam’s goals to expand renewable energy use and is anticipated to support growth in the rooftop solar market by attracting new investment and encouraging tailored financing models for the sector.

Legal framework for transportation projects in Vietnam

A noticeable development is the novel Capital Law 2024, which clearly demonstrates the focus on transit-oriented development (TOD). The law introduces special mechanisms to attract strategic investors, addressing long-standing capital shortages in the transportation sector. A key aspect is the promotion of mass rapid transit (MRT) systems and TOD, which aim to enhance urban mobility and sustainability. The law facilitates EPC + F (engineering, procurement, construction + finance) contracts, allowing a single contractor to manage both construction and financing, thus streamlining project delivery and reducing risks for investors.

Further, since the enactment of the PPP Law in 2020, Vietnam has seen significant improvements in its legal framework for investments under this model. However, there are still issues in the regulations affecting project finance.

• Financial management mechanism – the financial management mechanism for PPP projects under Decree 28/2021/ND-CP lacks comprehensive criteria for financial feasibility assessment, complicating evaluations of financial viability. There are inconsistencies between the state capital ratio regulations in the PPP Law (Article 7.1.(b)) and the PPP Law (Article 69.2).
• Limitations on contract-signing authority – regulations that restrict the contract-signing authority to pay a maximum of 50% of the completed work value for sub-projects using public investment funds, complicating investors’ ability to arrange full project financing.
• Minimum investment scales – minimum total investment scales for PPP projects that exceed practical needs and local investment attraction requirements, making it difficult to attract smaller, promising projects.

To address the above issues, on 13 September 2024, the Government Office issued Official Letter No 6549/VPCP-CN approving amendments to Decree 35/2021/ND-CP and Decree 28/2021/ND-CP, alongside the ongoing process of refining the Planning Law, Investment Law, PPP Law, and Bidding Law.

Notable transportation infrastructure projects

Some notable transportation infrastructure projects are the metro systems in Hanoi and Ho Chi Minh City, which align with Transit-Oriented Development (TOD) regulations. Additionally, several segments of the North-South Expressway have been constructed under the Build-Operate-Transfer (BOT) contract model, highlighting the effectiveness of PPPs in advancing Vietnam’s infrastructure goals.

In addition, the Long Thanh International Airport project exemplifies a significant advancement in project finance within Vietnam's infrastructure sector, particularly through its innovative financing structure. Recently, a landmark credit agreement was signed, securing USD1.8 billion from three major state-owned banks – Vietcombank, VietinBank, and BIDV – to fund Component 3 of the airport's first phase, which has a total investment of approximately USD4.48 billion. This financing arrangement not only highlights the capacity of domestic banks to support large-scale projects but also marks a pivotal moment as it represents the largest foreign currency-funded initiative by Vietnamese commercial banks. The project's phased approach, ultimately aiming for a capacity of 100 million passengers annually, necessitates ongoing financial mobilisation for subsequent phases, with Phase 2 projected to cost around USD1.9 billion.

Challenges to bankability in transportation projects

I) Obstacles to practical implementation of PPPs

Despite substantial legal advancements, the practical implementation of PPPs faces several obstacles. A prominent example is the urban railway projects in Hanoi and Ho Chi Minh City. Although legal provisions allow PPP implementation, the lack of synchronisation among regulations on land, environment, and land clearance has led to delays and cost overruns. In 2024, many large urban railway projects remain stalled due to funding issues and land handover delays.

Article 82 of the PPP Law and Article 17.4 of Decree 28/2021/ND-CP are also inappropriate with practical conditions, reflecting the unstable cash flow and bankability of PPP projects, which discourages investors, especially in the context of high land clearance costs and long payback periods.

II) Return on investment

Another critical issue is the return on investment for metro projects. For instance, Ho Chi Minh City is projected to develop a total of 510 km of metro by 2060, with an investment capital of VND824 trillion, equivalent to USD34.39 billion. For Hanoi, the total capital requirement for the metro system by 2035 is approximately USD37.1 billion. Through review, over the next ten years, Hanoi can mobilise more than USD28 billion for the metro system. Currently, the ticket price for Hanoi’s metro ranges from VND8,000 to VND15,000, equivalent to USD0.33 to USD0.63, and it can transport between 15,000 to 20,000 passengers per hour. If we only consider the financial and cash flow aspects (not counting the cultural and social benefits), the capital metro project will break even and become profitable after approximately 2,944,444 hours (about 336 years), and that is without considering other factors over the course of such periods that would mean, realistically, that the statistics would probably be even worse as all other things are not equal in reality, and the value of money tends to fall over time, as history proves. Therefore, addressing the return on investment challenges of the metro project through legal solutions involves leveraging regulatory frameworks, contracts, and partnerships, which is expected to be a focus in the near future.

Conclusion

The legal framework governing the energy sector in Vietnam plays a crucial role in enhancing the bankability of both LNG and renewable energy projects. For LNG projects, the anticipated Fifth Draft of the Electricity Law and the commitment to a minimum offtake ratio are significant steps toward stabilising cash flow and attracting foreign investment. However, ongoing challenges, including lengthy approval processes and the complexities of securing power purchase agreements (PPAs), could impede project timelines and financial viability.

In the realm of renewable energy, recent developments, particularly Decree No 80/2024/ND-CP, represent a shift towards more flexible pricing mechanisms, such as private power line agreements and contract-for-difference models. These initiatives are expected to boost the attractiveness of rooftop solar projects by providing more negotiating power to investors and reducing reliance on fixed feed-in tariffs. Nevertheless, challenges remain, particularly regarding the creditworthiness of corporate offtakers and the potential volatility of spot market prices.

Regarding transportation projects, while Vietnam has made commendable strides in enhancing its legal framework for PPP transportation projects, challenges remain that must be addressed to ensure successful implementation and investment. The enactment of the PPP Law in 2020, along with subsequent developments such as the Capital Law 2024 and Resolution 98/2023/QH15, reflects a commitment to modernising the investment landscape and promoting Transit-Oriented Development (TOD). However, issues such as a lack of comprehensive financial management criteria, limitations on contract-signing authority, and overly ambitious minimum investment scales hinder the ability to attract diverse projects.

Furthermore, despite the existence of notable infrastructure projects like the metro systems in Hanoi and Ho Chi Minh City, obstacles such as inconsistent regulatory frameworks, funding challenges, and significant concerns about return on investment threaten the viability of these initiatives. The financial projections reveal that without addressing these return challenges, the timeline for profitability may extend unreasonably, raising questions about the sustainability of these investments.

To bolster the bankability of PPP projects, it is essential for the Vietnamese government to refine existing regulations, improve risk-sharing mechanisms, and create a more cohesive approach to land and environmental management. By fostering a more supportive investment environment, Vietnam can harness the full potential of PPPs to develop its transportation infrastructure, ultimately contributing to economic growth and improved quality of life for its citizens.