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Vietnam to learn by History of the Korean PPP market


Vietnam Economic Times

Recently I read "Overarching Legal Instrument"- Vietnam's new law on PPPs brings the entire industry under one coherent, self-contained framework, written by MR. ABDULHAQ MOHAMMED. The article introduced many features of the new PPP Act. Among others, the below caught my attention.

"When it comes to revenue sharing, it provides that project revenue greater than 125 percent of the forecasted revenue in the project model must be shared 50 percent with the State. At the same time, it offers the concession that where revenues are less than 75 percent of modeled revenue, the State will make up 50 percent of that hit."

Korean PPP history

MRG (Minimum Revenue Guarantee)

Korea had a similar structure to the new Vietnam PPP act. We named it "Minimum Revenue Guarantee (MRG)." Korea has abolished this scheme due to various disputes and anti-public opinion; most importantly, the Korean PPP market grew up and became the 'government's market' since it started in the late 1990s.


In contrast, when Korea first adopted a new PPP scheme in the 1990s, it was an investor's market, and the government needed private money to construct its infrastructures. Macquarie was the pioneer in the Korean PPP market as they took a certain unknown risk early. Early birds, including Macquarie, could secure MRG and the exclusive jurisdiction of international arbitration, which has become history now.


Intrinsic Risk-Assumptions behind the MRG

MRG is calculated based on an imaginary future revenue. Revenue is calculated by the traffic volume multiplied by the toll fee. As the toll fare is set, the main forecasting area is traffic volume. However, forecasting 30 years' future traffic is as hard as weather forecasting. There are too many variations and assumptions. A change of one assumption triggers a snowball effect. Besides, to minimize the toll fee, assumptions are inclined to be set with optimism. 20+ years of history of Korean PPP proves this as it's hard to find the case where forecasted traffic volume is lower than actual volume.


Anti-Public Opinion

When MRG triggers, the government needs to provide subsidies to the concessionaire. If the gap between forecasted traffic volume and actual volume increase, the government's burden increase. At the same time, the fare of infrastructure constructed by PPP is higher than other similar infrastructure constructed by the government in order to meet investors' returns. Also, after PPP becomes popular in Korea, investors are booming with a low-interest rate. In contrast, the interest rate was high when the concession agreement was executed. Thus, the concessionaire's target return was high, which was fixed for 30 years. Criticism arises about why government spends its money, mainly generated by taxes, to pay the high return of private investors.


Where the Misery started

Therefore, the Korean PPP market suffered numerous disputes, litigations, and local and international arbitrations. Macquarie was at the core of such brutal waves, and I was in the middle of Macquarie, who needed to fight, settle, and negotiate the alternatives as head of legal and governance.


Conclusion

There were clear lessons from these disputes. The whole system was upgraded, and new structures developed after abolishing MRG; law commentators wrote articles regarding the conflicts (mine will be published soon). The excellent sample shows how society evolves through "Challenge and Response." It was brutal but not meaningless.

Wise is the one who learns from another's mistakes. Less wise is the one who learns only from his own mistakes. The fool keeps making the same mistakes again and again and never learns from them. - Ravi Shankar

I hope Vietnam PPP leaders act wisely. Finally, I am ready to share my experience.

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