Abstract
Public-private partnership (PPP) projects have been present in Cambodia since the 1990s; however, up until now, there is still no clear applicable specific PPP laws governing such projects. Such projects are currently governed under the 1994Law on Investment (LOI) (later amended in 2021) and 2007Law on Concession (LOC). These existing laws have encountered many questions such as who plays a role in accessing the projects, whether lenders have step-in rights, is there any financial support mechanism from the government, what are the provisions in case of early termination of the contract and more. Later, a draft law on PPP was proposed, which sailed through the ministerial cabinet in October 2021. Therefore, this paper aims to highlight some of the issues with the main existing laws (in particular LOC and LOI), highlight if the draft law on PPP has addressed any of the issues, and highlight some of the relevant provisions under such laws and draft.
Nonetheless, the author assumes no responsibility or liability for any errors or omissions in the content of this article. The information contained in this article is provided on an as-is basis with no guarantees of completeness, accuracy, usefulness or timeliness.
Introduction
Over the past two decades, the economy of Cambodia hasgrown significantly, sustained average annual growth of 7.7 per cent between 1998 and 2019 as driven by growing exports, increased investment, and domestic consumption. It reached thelower-middle-income status country in 2015 and hoping to get the upper-middle-income status country by 2030.
Cambodia was ranked 144 out of 190 in theWorld Bank’s ease of doing business rank (number 1 being the country with the friendliest business regulations) and 106 out of 141 in the World Economic Forum global competitiveness ranking in 2019. Despite many improvements over the years, Cambodia still lacks much infrastructure including public transportation, energy, and technology. Moreover, this infrastructure is one of the determinative factors to attract investment from both local and foreign investors. In other words, good infrastructure will increase the country’s productivity, lower production costs, increase life quality, increase the country’s competitiveness, and attract more investments.
Like many other developing nations, Cambodia is not able to afford to invest in this vast demand of essential infrastructure completely from its national budget or loans. In realising this, Cambodia, through itsPhase 4 Rectangle Policy, has focused on the private sector through public-private partnership (PPP) mechanisms to fulfil this gap. Draft Law on PPP defines PPP as agreements between the government and the private partner to restore, repair, expand, build, manage the operation and/or maintain the operation of public infrastructure or project assets or to provide public services within a certain period of time. Under these agreements, the private partner shall invest, bear risks proportionally, and receive benefits based on performance and in accordance with the provisions stipulated in the PPP contract.
One of the many challenges of implementing PPP in Cambodia is the lack of a clear PPP legal framework. Therefore, the implementation and operation of the PPP projects in the country are generally made through ad-hoc arrangements. This paper is intended to highlight some of the issues with the main existing laws (in particular LOC and LOI), highlight if the draft law on PPP has addressed any of the issues, and highlight some of the relevant provisions under such laws and draft.
Current Legal Framework
Since the 1990s, PPP projects in Cambodia have been mainly governed by the LOI and the LOC. Though the laws can apply to the PPP projects, there are a lot of missing components compared to a comprehensive PPP framework, and the laws are mostly inconsistent with international practice. Theissuesinclude:
- The role of assessing PPP projects is unclear. Article 8 of LOC only mentions that the Council for Development of Cambodia (CDC) is the one-stop service entity for obtaining authorisations required to implement the investment projects, and it shall approve all investment incentives that the concessionaires are entitled to, specify all authorisations required to be obtained for the concession project, and obtain, in a timely manner, all required authorisations from the relevant institutions on behalf of the concessionaire, provided that all required information and documents have been duly supplied. Later in 2017, the Central Public-Private Partnerships Unit (CPU) under the Ministry of Economy and Finance was established. CPU plays a role as the Secretariat to the Inter-Ministerial Committee for PPPs, which is the overarching body responsible for PPP policy, regulations and projects.
- Lack of lenders’ step-in right. LOC allows the concessionaires to create security interests over any of its assets, rights or interests, including those relating to the concession project, and the shareholders of the concessionaire have the right to pledge or create any security interest in their shares in the concessionaire as required to secure any financing needed for the infrastructure project. However, it is unclear whether the lenders have rights to take over project assets and the ability to gain “step-in” rights if the project gets into any financial difficulties or to obtain compensation in the event of early termination.
- The laws provide very limited support from the government where assistance in obtaining land-use rights is the only expressly stated support from the government, and no government financial support mechanism such asViability Gap Fund (VGF) is mentioned.
- Other missing components under the current existing laws include the lack of an implementation guideline, provisions on early termination, evaluation criteria, comprehensive contract awarding procedure (both solicited and unsolicited proposals) etc.
Table 1: Highlight of the 2007 Law on Concession
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a) power generation, power transmission and power distribution. b) transportation facilities systems, including, but not limited to roads, bridges, airports, ports, railways, channels. c) water supply and sanitation. d) telecommunication and information technology infrastructure. e) supra-structure related to tourism projects, but not limited to tourism resort museums; f) gas and oil-related infrastructures including oil and gas pipelines; g) sewerage, drainage and dredging. h) waste management and treatment. i) hospitals and other infrastructure related to health, education and sport sectors. j) infrastructure related to special economic zones and social housing. k) irrigation and agricultural-related infrastructure. l) other sectors for which a specific law allows for the granting of concessions. |
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All competent institutions are entitled to undertake infrastructure projects within the eligible infrastructure sectors specified in this law, including ministries, institutions, state-owned legal entities, local governments which have been delegated the required institution in accordance with the laws. |
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CDC |
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International or national bidding and direct negotiation. |
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The concessionaires shall file their proposal to the CDC. Once awarded (through any means of selection), the contracting institution shall issue a notification of award to the selected candidate. The contracting institution and the concessionaire shall sign the Concession Contract within six months of the notification of award, except agreed otherwise. Later, at least within 60 (sixty) days of receiving the notification of awards, the concessionaire shall promptly establish and incorporate the legal entity and apply a final registration certificate in accordance with the LOI to the CDC. |
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a) the nature, scope and standards of works to be performed and services to be provided by the concessionaire; b) any incentives to be granted to promote cost-efficiency, accelerate construction and increase the quality of operation and maintenance to the benefit of the public interest; c) any fees, tolls, rentals or other charges to be applied by the Concessionaire and, when applicable, to be approved by the regulatory agency; d) agreed risk allocation or risk-sharing; e) service levels and standards required from the concessionaire in the operation and management of the infrastructure facility and consequences of non-compliance with the set service levels and standards; f) payment mechanisms; g) required commitment and cooperation of the contracting institution and other competent institutions to support the implementation of the infrastructure project throughout the concession Period; h) may provide for such other matters, as the parties deem appropriate. |
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The concession contract shall not exceed 30 (thirty) years from the date of signing unless otherwise approved by the Government. The concession period shall not be extended except as a result of the following circumstances: a) completion delay or interruption of operation due to breach of contract by the contracting institution or by acts of other competent institutions; b) completion delay or interruption of operation due to an event of force majeure as specified in the concession contract and provided the concessionaire would not be able to recover the costs or losses brought about by such circumstances during the original Concession Period, including by way of customary project insurance; and c) to allow the concessionaire to recover additional costs arising from new requirements of the contracting institution not originally foreseen in the concession contract if the concessionaire would not be able to recover such costs during the stipulated concession period. |
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The concessionaire shall provide training to Cambodian nationals in order that they can further take over positions at all levels for the operation and maintenance of the infrastructure facility. |
Table 2: Highlight of the 2021 Law on Investment
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Under the new amendment, the investment incentives are classified into three (3) types, being: (1) basic incentives, (2) additional incentives; and (3) special incentives. |
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The investors (QIP registered) have two (2) options to choose from. First option: the investors are entitled to receive a Tax on Income exemption between three to nine years depending on the investment sector and activities. After the income tax exemption period has expired, the investor will be entitled to paying income tax at a rate proportional to the total tax due as follows: 25 % for the first two years, 50 % for the next two years and 75% for the last two years. Second option: the investors are eligible for the special depreciation. This includes: – Deduction of capital expenditure through special depreciation as stated in the tax regulations in force; – Eligibility of deducting up to 200 (two hundred) per cent of specific expenses incurred for up to 9 (nine) years. Sectors and investment activities, specific expenses, as well as the deductible period, shall be determined in the Law on Financial Management and/or the Sub-Decree; – Prepayment Tax exemption for a specific period of time based on sectors and investment activities to be determined in the Law on Financial Management and/or the Sub-Decree; – Minimum Tax exemption provided that an independent audit report has been carried out; – Export tax exemption, unless otherwise provided in other laws and regulations. |
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In addition to the basic incentives, the investors receive additional incentives as follows: 1. value-added tax exemption for the purchase of locally made Production Inputs for the implementation of the QIP. 2. deduction of 150 (one hundred and fifty) per cent from the tax base for any eligible activities, and 3. entitlement to income tax exemption for the Expansion of QIP, which will be determined in the Sub-Decree. |
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Any specific sector and investment activities having high potential to contribute to national economic development may receive specific special incentives to be set out in the Law on Financial Management. |
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Draft Law on PPP
Since there has not been a comprehensive law governing PPP projects, and since the PPP project is one of the strategies to fulfil the lack of public infrastructure in the country, a draft law was prepared based on thePolicy Paper on PPPs for Public Investment Project Management 2016-2020. The draft was initiated by the MEF and later been approved by the ministerial cabinet during the cabinet meeting on 08 October 2021.
Many of the issues mentioned previously has addressed in the draft. The noticeable changes include:
- The appointment of the MEF as the competent authority to lead and manage PPP mechanisms in the country, including the task of assessing and approving PPP proposals. Almost all of the roles and responsibilities of the CDC provided under the LOC is now shifted to the Ministry of Economy and Finance.
- The parties to the PPP Contract can now agree on step-in rights in favour of the lender(s) to the project and/or the government to take over a PPP Project as stated under the PPP contract and/or loan documents related to the project.
- More availability of state support for the project implementation such as Viability Gap Financing (VGF), availability payment, government contingent liabilities, asset contributions, and investment incentive.
- A more comprehensive provision on the selection of the private partner through both bidding and direct negotiation. More detail can be found in table 3.
In a comparison of the draft to the other PPP codes, in developed countries such as France (1) or the UNCITRAL Model Legislative Provisions on Public-Private Partnerships, the draft might not be as comprehensive enough (for example, provision on the selection of private partner procedures and early determination). Nevertheless, the draft does cover all of the key provisions. Also, it is believed that further supporting regulations and guidelines will be included after the PPP law has been adopted. Thus, it is expected that a more detailed provision on PPP will be seen in the future time.
Table 3: Overall view of Solicited PPP Projects Cycle
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1 |
Project identification |
The implementing agency shall identify potential projects to develop and implement PPP. |
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Project selection |
The implementing agency that wishes to develop and implement PPP projects shall evaluate and prioritise the project before proposing to the Ministry of Economy and Finance to select and decide as to whether the proposal is qualified and put the proposal into the priority PPP project list. |
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Project development |
The relevant competent implementing agency of the qualified project shall arrange to have feasible studies of such project. |
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Project approval |
If the implementing agency approves in accordance with the feasible studies of the project, then it shall forward the proposal to the MEF for review proceeding with the procedure in force. |
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Procurement |
After the project approval, the implementing agency shall carry out the procurement to select a private partner candidate to implement the project. |
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PPP contract negotiation |
After the selection private partner candidate, the implementing agency shall lead a government working group to negotiate the terms and conditions of the draft PPP contract. |
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Approval of the final draft of PPP contact |
After the negotiation is complete, the implementing agency shall seek an approval from the Government on the final draft of the PPP Contract, given the MEF has also approved. |
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Singing of the PPP contract |
The implementing agency, which has been vested with the power under the applicable laws and regulations, on behalf of the state and private partner, shall sign the PPP contract alongside the signature of the MEF. |
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Implementation and management of the PPP Contract |
a) The private partner shall primarily be responsible for the financing, designing, engineering, implementation of procurement to select contractors, construction work, operations, and/or maintenance in accordance with the terms and conditions set out in the contract and applicable laws. b) The implementing agency shall manage, monitor, and prepare reports on the implementation of the PPP contract which is signed. |
Table 4: Highlight of the draft PPP law (as of 8 October 2021)
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Financial support mechanisms |
– VGF shall be paid based on the completion of specific performance milestones after commencement of construction and up to two years after completion of construction. – Availability payment is made in cases where the service fees collected from public users are insufficient, or where the fees cannot or should not be collected from public users. Availability payments shall not be made until after the construction phase is complete and the project Assets have commenced operations. – Government contingent liabilities include performance guarantee, sovereignty or political risk guarantee and other forms of guarantees approved by the government in accordance with the laws and regulations in force. – Asset contribution – Investment incentives |
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Competitive bidding process initiated by the government |
– The first ranking bidder shall be invited to negotiate the PPP contract with the government working group led by the implementing agency. In case the first ranking bidder fails to attend the negotiation within the stipulated time, the next ranking bidder will be invited to negotiate the PPP contract. – In case of failure to complete negotiations within six months from the date of invitation for negotiations, the next ranking bidder may be invited to negotiate the draft PPP contract. – Certain provisions of the draft PPP contract may be specified as non-negotiable in the request for proposals. |
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Step-in right |
– The parties to the PPP contract may agree on step-in rights in favour of the lender to the project and/or the Government. The person with the step-in right can take over and continue to exercise the rights and obligations stated in the PPP contract to ensure the continued performance of the private partner’s obligations under the PPP contract and/or loan documents related to the project. |
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Early termination |
– PPP contract shall determine circumstances for early termination such as in case any party does not fulfil its obligations, force majeure, and/or the government terminates the contract. |
Conclusion
There have been many PPP projects in Cambodia, including transportation and energy sectors, over the past three decades. However, there has never been a specific comprehensive law governing PPP projects. Instead, the projects are governed under the LOC and LOI. Issues such as accessing roles, step-in rights by the lender, government financial supports mechanisms, guarantees, and selection of private partner process have been the challenges and doubts to the investors who wish to invest in PPP projects in the country.
Thanks to the government’s Policy Paper on PPPs for Public Investment Project Management 2016-2020 and Phase 4 Rectangle Policy, the draft law on PPP began to grow over time and sail through the ministerial cabinet in late 2021. The draft addressed most of the key issues with the LOC. Also, it is believed that more provisions or guidelines relating to PPP will later be adopted. With this law, the PPP projects in the country will be better managed and implemented. At the same time, the draft will increase the country’s economic competitiveness on both the regional and international stages. Therefore, the better living standard of the local people is also expected to be seen as well.
Reference
The Public Procurement and Concession Agreements Code 2019; Ordinance 2018-1074 (portant partie législative du code de la commande publique); Decree 2018-1075 (portant partie réglementaire du code de la commande publique); and Decree No. 2018-1225 (portant diverses mesures relatives aux contrats de la commande publique).
About the Author
Mr. Chhuon Watanak is an LL.M Candidate at University of Strathclyde.
Editorial Team
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Preferred Method of Citation
Chhuon Watanak, “Brief Reflection on the Cambodian PPP Legal Framework: The Adoption of the Law on PPP” (IJPIEL, 4 May 2022)
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