July 2019 – Duane Morris Vietnam

July 26, 2019 by Dr. Oliver Massmann

VIETNAM – CUSTOMS REFORM AND WTO TRADE FACILITATION AGREEMENT (“TFA”) – HOW CPTPP AND EVFTA CAN EFFECT CHANGE

Every day I ride a boat along the Saigon River between Districts 1 and 2 when I am in Ho Chi Minh City. Monday through Friday, it is full of container barges moving containers to and from major distribution points. Saturdays and Sundays, however, are basically void of such traffic. I wondered to myself “why?” With the amount of import/export volume funneling through this major artery to trade, how could the weekends shut-down the volume of traffic this much? After reading the law on customs and the various other regulations and laws concerning Vietnamese customs and procedures, it became clear that a substantial portion of customs clearing and private transportation services did not operate on weekends; and if they did, it was sporadic. It would seem logical to assume that since worldwide shipping did not stop transport vessels in the middle of the sea because it was the weekend that major backlogs would occur on Fridays, Saturdays, and Sundays, hindering efficient clearance of goods. Mondays would be very intensive days for customs services and transportation.

The infrastructure for Vietnamese ports is growing and several large projects are already underway to accommodate the increased volume of shipping that is occurring.[1] Ports in Ho Chi Minh City are the main gateway for the region, accounting for 67 percent of the total throughput of all Vietnamese ports.[2] The enhanced infrastructure to absorb extensive increases to shipping volume is necessary and critical for Vietnam’s economic growth sustainability; however, it is the responsibility of customs to expeditiously accept and clear those goods for shipment to their destinations within Vietnam. Many developing (and, by the way, some developed) nations and economies have struggled with customs efficiencies for this new operational environment, and Vietnam is no different. The WTO TFA (Trade Facilitation Agreement; hereafter referred to as “TFA”) which entered into force 22 February 2017 was partly enabled to assist developing nations in streamlining their customs functions to facilitate a smoother, easier, trade process through a provision of assistance and support for capacity building for implementation of Section I [of the TFA].[3] Section I of the TFA includes Article 7 (Release and Clearance of Goods) and Article 9 (Movement of Goods Intended for Import Under Customs Control). How has Vietnam been addressing the concerns raised by these articles of the TFA and how do the CPTPP (Comprehensive and Progressive Trans Pacific Partnership; 2018) and EVFTA (European Union—Vietnam Free Trade; 2019) agreements add-to, or reduce, these concerns?

Article 7 of TFA

This Article provides standards for different factors that affect the release and clearance of goods such as expedited shipments, perishable goods, electronic payments, and pre-arrival processing. Article 7.3 calls for a separation of release of the imported goods from final determination of customs duties, taxes, fees, and charges. The article states that members shall allow importers to obtain release of their goods, under a guarantee, if required, prior to the final determination and payment of customs duties, taxes, fees and charges where the final determination is not done prior to, upon arrival or as rapidly as possible after arrival.[4] This is a wonderful measure for importers (to have their goods released with a very limited delay) and also for customs-efficiency as customs can receive legal guarantees of importers paying the final determination of any incurred fees at a later date. This can have the effect of rapidly clearing goods from customs intake/staging locations to create inventory space for more goods. Any reduction in delay of release of goods is a good thing, and according to a global trade report, full TFA delivery will help…”save 1.5 days of customs clearance for imported goods, down 47% from the present average and nearly 2 days of customs clearance for exported ones, down 91%.”[5] Vietnam’s logistics’ costs account for 16% to 17% currently [2018] of GDP, with 30-40 percent of that cost associated with custom’s clearances.[6]
In response to this concern—and under Article 7.3 of the TFA—Vietnam turned to CPTPP to address it. Under recently published Decree No. 57/2019/ND-CP (26 June 2019) governing Export/Import preferential tariffs under CPTPP, “…Within 1 year from the date of…export declarations, the customs declarant shall submit all documents proving that the goods satisfy the regulations specified…”[7] This mirrors the intent of TFA Article 7.3 and directly compliments it. Now, member states of CPTPP have increased flexibility in submitting any further documentation requested of Vietnam Customs instead of having those goods held and delayed for clearance until they were obtained. This is a great example of Vietnam aggressively pushing their regulatory changes forward to comply with TFA and CPTPP.

Article 9 of TFA

This article attempts to prevent bottleneck issues from occurring (mainly in developing or under-developed countries) at a customs port of entry by requiring member states to allow a customs-declarant to move goods from a customs port of entry to another customs office within the same customs territory (under customs control), and permit that declarant to clear them at the destination rather than at the port of entry. It is a straight-forward and fairly simple sounding statement; however, in practice, it is riddled with complexities.
Vietnam’s law on customs[8] delineates authority for customs responsibilities between 1) General Department of Customs; 2) Customs Departments of Provinces; and 3) Sub-department of Customs Sub-Departments, Customs control teams and equivalent units. Additionally, under Article 16 (5) of same, “The arrangement of manpower and working time must meet the requirements of import, export, exit, entry and transit activities.” Furthermore, Article 23 (4) requires, “Customs authorities…to carry out formalities for goods on public holidays and weekends and overtime hours in order to ensure timely loading and unloading of imported and exported goods…in conformity with practical conditions of customs operating locations [emphasis added]”. On paper, this would indicate a fully-developed system for expediting customs clearances and/or processes for clearing goods through a port of entry to another custom’s operations area for clearance seven days a week (and the customs law does further state that unless a shipment requires a physical inspection for certain agricultural or health reasons, it should be expedited to a different clearance location).

In application, it can vary greatly by whoever is the customs authority in charge of the inspection location. Decree 08/2015/ND-CP (Ministry of Finance) Article 29 (2) states, “Head of the Customs Authority who is in charge of…inspection [places] shall make a decision on any change to the level or form of physical verification and bear responsibility for their decision.” This gives the customs director of a facility broad authority, but thanks to the last clause of the sentence, “…bear responsibility for their decision”, many customs officials will be hesitant to use that discretion in fear of making a “wrong” decision; therefore, they most likely will physically hold and inspect every shipment coming into their zone of control. One facility operating in that fashion can bottleneck an entire section of the country. Additionally, the provincial customs authority or facility director has broad discretion in determining the “practical conditions” to conform to. In Vietnam, it is doubtful a customs facility director will require personnel to facilitate customs procedures during “Tet” (Vietnamese New Year); therefore, for one week little customs activity occurs at that location.

Indeed, many issues that are problematic to the law on customs were supposedly being addressed by Circulars 38 and 39 (issued in 2018). In fact, on 10 July 2019 a $21.7 million USAID Trade Facilitation Program was granted to support the Government of Vietnam to adopt and implement a risk management approach to customs and specialized inspection agencies, which will strengthen the implementation of the World Trade Organization’s Trade Facilitation Agreement [TFA].[9] The General Department of Vietnam Customs (GDVC) organized six consultative workshops to gather feedback and recommendations on amending Circular 38 and Circular 39 – regulation guidance on Vietnam’s Customs Law. The workshops would help identify the challenges and practical compliance-burdens faced by import-export businesses in relation to implementation of the circulars.[10] It is evident that between the many iterations of decrees, circulars, directives, and laws regarding customs and procedures, every agency and business involved in the process is confused.

Decision 15 (12 May 2017) provides a clear example of the confusion customs officials and businesses encountered[11]; chiefly, that it did not specify what is considered the “entry gate” for carrying out customs procedures? Was it the place that goods were imported to, or the port listed on the bill of lading? Businesses (and officials) were receiving conflicting information and backlogs inevitably ensued.[12] Decision 23, recently issued 27 June 2019, addressed this issue and specifically identifies the proper port of entry for each type of transport.[13] CPTPP and EVFTA also affected Decision 23 in that it amended the type of goods requiring specific inspection procedures to comply with CPTPPs input-materials-for-production provision, and also EVFTAs (and CPTPPs) stricter requirements regarding potentially environmentally-hazardous materials.[14]

With the myriad regulations affecting customs, how can either the CPTPP or EVFTA assist Vietnam in resolving the predicament? Statutorily, the EVFTA already has. It mirrors portions of the TFA (such as creating trade facilitation committees), but also goes one step further in requiring Vietnam to comply with Article 2.12, in which Vietnam “…shall administer in a uniform, impartial and reasonable manner all its laws, regulations, judicial decisions and administrative rulings pertaining to…issues affecting…distribution, transportation…warehousing inspection…or other use of goods for customs purposes.” This section of the EVFTA is forcing Vietnam to take a hard look at their current system, and streamline and consolidate all their varying regulations concerning customs administration for efficiency. A quick solution Vietnam can implement now to help alleviate physical storage problems is EVFTA Article 2.15 which allows foreign pharmaceutical companies to establish their own warehouses inside Vietnam.[15] If Vietnam declares those warehouses as “customs operational locations”, that would free-up other customs warehousing space for other inventory.

Private Sector Must Be Engaged

Outside of the regulatory environment, private businesses have a crucial role in relieving bottlenecks. Even if everything flows smoothly and correctly through the government customs process and goods are cleared, it takes private businesses to physically move those goods out to make room for others. If the trucking company hired to move containers does not “work” on weekends, is short-staffed, can’t find anyone to work, drivers call out sick, etc., those containers do not move—they sit there. Many of the transport barges moving along the Saigon River are private contractors. You can see their entire family lives and works on that barge. If that barge does not want to work that day, it is not going to work. While most of the port terminal operations are conducted by State-owned enterprises (SOEs), they still struggle with general employment issues that affect port operations and add to the bottleneck issue as well.

Government can provide a statutory environment for success, but without private enterprise completing the circle, nothing will be resolved. Perhaps an incentive system for non-traditional work days for private contractors can help the situation; better screening of potential employees; requirements specifically spelled-out; any and all solutions need to be examined. The bottom-line is while regulatory efficiency is needed to allow for the legal and operational environment to flow seamlessly, the private sector must close the loop.

Summary

There is a regulatory quagmire surrounding Vietnam’s customs arena. The TFA is intended to assist developing and under-developed nations (primarily) with their trade processes to better facilitate trade on a global level so that all parties benefit. Vietnam’s growing economy and role as a Southeast-Asian trade hub are requiring substantial changes to current regulations and processes. Only a few examples of the many that could be given show that while Vietnam is making strides with reform, they need to accelerate that change. It cannot be haphazardly done, though. It must be structured, reasonable, and determined with both governmental and private sector collaboration. Vietnam followed that exact process for obtaining CPTPP and EVFTA. Those agreements should be the primary guiding documents for Vietnam to reform their customs legislation to, as they will affect Vietnam’s economic growth exponentially. They can provide the framework for statutory solutions to many of the customs issues Vietnam faces; however, without private-sector buy in, those statutory solutions cannot be efficiently implemented. The entire customs-cycle must be embedded into the mindset and carried out at the individual level for there to be a truly systemic change.

Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com or any other lawyers in our office listing if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

THANK YOU !

July 22, 2019July 22, 2019 by Dr. Oliver Massmann

VIETNAM – PUBLIC-PRIVATE-PARTNERSHIPS (PPP) AND CPTPP AND EVFTA/IPA DISPUTE SETTLEMENT PROVISIONS AND THE DRAFT PPP LAW

Public-Private-Partnerships (PPP) have long been used as a vehicle for both emerging and developed markets to further enhance their public infrastructure to support growing socio-economic needs. Vietnam, however, has experienced an explosive economic growth over the past decade and is poised for even further expansion with their acceding to the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) and European Union—Vietnam Free Trade (EVFTA) agreements. With these two new growth mechanisms in-force, Vietnam’s infrastructure is struggling to accommodate that growth. The statutory cap on public funds utilization of 65 percent is rapidly approaching and the most viable investment form left for Vietnam is a functional PPP program.

Both CPTPP and EVFTA/IPA (Investment Protection Agreement) lay out very broad frameworks for supporting infrastructure development such as preferring renewable energy over environmentally-damaging alternatives and establishing development committees to determine how best to support that effort.[1] With the core of those agreements addressing elimination of almost all duties and tariffs on goods and services between the parties (over time), it makes the cost of acquiring hardware for energy infrastructure less. Additionally, the restrictions on cross-border trade in services required to construct and maintain technologically advanced platforms are lessened; further reducing the cost of an infrastructure project. Vu Tien Loc (president of Vietnamese Chamber of Commerce and Industry) speaking at an event “EVFTA and EVIPA: Opportunities for Business” held on July 1 by the Ministry of Industry and Trade, stated that EVFTA is the best FTA Vietnam has ever signed.[2] Vietnam is heading towards a foreign direct investment (FDI) generation, with higher quality, more advanced technologies, higher added value and a more eco-friendly environment, so the EVFTA will open the door for EU companies to complete these targets, Loc said.[3]

With these opportunities presented for Vietnam’s economic future, a draft law on PPP was drawn to address some of the concerns foreign investors have had regarding the regulatory environment for PPP in Vietnam. Mainly that there is not an appropriate level of risk allocation (too much on the investor), and there is not enough regulatory stability to support a long-term PPP project (generally 25-30 years). Many of the primary concerns have been discussed in other various articles; however, CPTPP and EVFTA/IPA have two restrictions reserved by Vietnam that can hinder the potential for expansive FDI in energy infrastructure (specifically power distribution)—CPTPP Annex IV and EVIPA Annex 2.1. Conversely, they also include dispute settlement provisions between member countries that can attract PPP investment if incorporated into the draft PPP law.

CPTPP Annex IV and EVIPA Annex 2.1

CPTPP Annex IV states, “[Regarding] all state-owned enterprises[4]…Viet Nam may require or direct the Entity [CPTPP member] to: (b) accord preferential treatment to…enterprises that are investments of Vietnamese investors in the territory of Viet Nam…pursuant to a government measure.” EVIPA Annex 2.1 states, “Viet Nam may adopt or maintain any measure with respect to the operation of a covered investment that is not in conformity with Article 2.3 (National Treatment); (h) …power transmission and/or distribution.” Both annexes allow Vietnam to require a potential member-country investor to use only Vietnamese domestic enterprises (majority-owned by Vietnamese nationals) in accomplishing the PPP project, if Vietnam so chooses. The EVIPA Annex is even broader than CPTPP by allowing “any measure” (regarding power transmission/distribution). It is also interesting to note that in EVFTA Appendix 8-B-1[5] (Specific commitments by Vietnam) Vietnam has agreed to virtually no restrictions on any construction companies or engineering services, including having a 100% member-country-owned commercial presence in Vietnam’s territory. In essence, CPTPP and EVFTA/IPA allow freer, fairer access to goods/services and investments; however, Vietnam can require any investor to utilize strictly Vietnamese resources regarding power or energy production and distribution. Most nations want to maintain national sovereignty and control of specific industries and resources they consider critical in supporting that sovereignty—that is not the issue here. This issue raised is one of regulatory uncertainties for investors.

These competing sections can cause consternation for a potential PPP investor. They may be able to complete the project for far less costs using their own member-country resources, but arbitrarily required at some point to utilize Vietnamese-owned companies that perhaps charge far more for the same good or service. The current draft PPP law is silent on this issue. PPP investors could be reassured, through contractual stability, of the guaranteed resources and services to be provided (and by whom) from the outset of the project. At a minimum, the draft PPP law should include a method for an investor to challenge a regulatory ruling or decision through an impartial, third party. While this issue might not derail a project, it could cause a qualified, reliable investor not to even want to bid a project; therefore, possibly driving the cost up or having a lower quality platform that will cost more in repair and maintenance in the long term. What the draft PPP law needs is to adopt the dispute settlement and resolution provisions of the CPTPP and EVFTA/IPA. In its current form, it does not mirror them.

Dispute Resolution Provision

Under Article 112 of the draft PPP law (dispute resolution) parties must use negotiation and conciliation first. This is the same as both CPTPP Chapter 28 and EVFTA Chapter 15/IPA Chapter 3. Continuing, a dispute involving a foreign investor (and between a State Agency) will be resolved through a Vietnamese arbitration organization or court, “unless otherwise agreed in the contract or unless otherwise stipulated in an international treaty of which Vietnam is a member.” If not stipulated in the contract, this means that if the foreign entity is a CPTPP or EUFTA/IPA member country, those agreements’ dispute chapters apply—maybe. Both agreements state that dispute resolution will be accomplished via mediation and arbitration for disputes generated under those agreements. There is no specific PPP language in the agreements; therefore, it will have to be proven that either of the agreements govern the project. This will add time and costs to the project, the government, the investor, and ultimately, the public.

Many PPP projects do not involve one, single foreign investor. There could be any number of various investor combinations to complete a specific project. A purely domestic, Vietnamese, single investor will be required to use Vietnamese arbitration or courts under Article 112—understandable. Any dispute between investors (state agency not involved) in which there is at least one (1) foreign investor will be resolved: “First, in Vietnamese court(s); then second, Vietnamese arbitrator(s); lastly, Foreign arbitrator(s).” Unless the foreign-investor here is a CPTPP/EVFTA member, or they have an international arbitration clause in their contract, there is no real option for the investor except for Vietnamese arbitration/courts.

The current draft PPP law’s Article 112 is more in line with general business transactions and not the magnitude of most PPP investments. They generally include multiple entities and financial vehicles/lenders, both foreign and domestic, ranging in the hundreds of millions to billions of USD. With the level of involvement regarding PPP projects, the draft PPP law should just state plainly that any dispute shall be resolved through international mediation and/or arbitration (unless stipulated otherwise in the contract). In effect, mirror the CPTPP and EVFTA/IPA Dispute Settlement Chapters. This will provide potential investors with the regulatory certainty they have been looking for. It will also alleviate any concerns around objectivity and neutrality for all parties. UNCITRAL stated in their UN guidelines for PPP in 2000, “…procedures should be established for handling disputes… (This is where arbitration should be a risk concession by the government…allowing international standards of the infrastructure sector to have an equal voice) [Emphasis added].”[6] Changing dispute resolution in the draft law to mirror the current trade agreements and UNCITRAL will help attract FDI for PPP infrastructure projects.

Summary

Vietnam needs to rely on the private sector to take their socio-economic growth to the next level. Government cannot satisfy the country’s requirements without it. Regulatory reform has been one of the biggest hurdles to overcome in satisfying the private sector’s concerns. From a statutory perspective, the CPTPP and EVFTA/IPA are able vehicles that give a wide berth for PPP projects to flourish. Within those landmark agreements, some conflicting areas do remain that can cause investor concern. From an operational perspective, government agencies need to streamline their processes to deliver services effectively under the laws and regulations (another major concern of investors). Eric Sidgwick, ADB country director for Vietnam, stated that Vietnam’s average disbursement rate is much lower than that of other recipients of the Asian Development Bank’s official development assistance (ODA) loans, largely due to cumbersome and time-consuming procedures.[7] While there is never a perfect solution for all parties, compromise is usually the most effective way to ensure buy-in from all involved. A way of alleviating investor’s concern over ambiguous and regulatory stability is to change the dispute resolution Article of the draft PPP law to mirror the already successful agreements of CPTPP and EVFTA/IPA.

Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

THANK YOU!

July 15, 2019 by Dr. Oliver Massmann

VIETNAM – CAPITAL MARKETS – HOW THE CPTPP, EVFTA/IPA CAN EFFECT MORGAN STANLEY’s 2020 RATING

One of the significant events Vietnam was hoping to occur this June unfortunately did not transpire—being on the Morgan Stanley Capital International (MSCI) watch list for emerging markets. Instead, Vietnam was not upgraded and remained on the frontier-market listing. It is estimated Vietnam could receive up to US $10 billion worth of foreign capital in frontier market-focused funds, but could receive much more from emerging market-focused funds.[1] The Vietnamese Government considers MSCI’s watch list as a top-priority target as it could lure a huge amount of foreign capital to the Vietnamese economy.[2] According to Nguyễn Thị Bích Nga, deputy director of the State Securities Commission’s International Co-operation Department, [Vietnam] has been making the best efforts to improve the legal framework, introduce new securities products and make the market more professional.[3]

One of those “best efforts” is the amendment of the securities law that would make the market fairer between domestic and foreign investors (draft law to amend law on securities; last revised by Decree 60/2015/ND-CP). That 2015 revision eased restrictions on Foreign Ownership Limits (FOL); however, MSCI wants to see even further progress on relaxing those restrictions. According to the draft version (as a general rule), foreign investors are allowed to own 100 per cent of the shares of a Vietnamese company that operates in a non-critical business sector. This applies to listed firms, equitized state-owned enterprises (SOEs), and private non-listed businesses. Shareholders of each company will decide for themselves the amount of foreign-owned shares eligible.[4] This is different from the current Securities Law, which automatically sets the FOL at listed companies in Vietnam at 49 percent. Some sectors, such as banking or aviation, have a stricter limit at only 30 percent.

Experts believe that with the relaxed rules, Vietnam would be likely to attract at least US $5 billion of new capital from abroad and receive the upgrade that it has been waiting for.[5] With fewer restrictions on foreign ownership, Vietnamese firms would become more attractive to major investment funds who are willing to pour millions of USD into Vietnamese businesses. With more foreign-ownership, companies will have a broader, global, perspective and a level of accountability to help drive transparency and change. Mai Le, analyst at PYN Asia Research, noted that out of all the changes in the Securities Law, the [capital] market is most anxiously waiting the FOL rule to take effect.[6]

MSCI Decision and Criteria

Kuwait was upgraded to the MSCI emerging market watch list (and not Vietnam) specifically because of, “…enhancements [that] removed foreign ownership restrictions on listed banks and simplification of requirements for investor registration.”[7] Not coincidentally, those are the areas that Vietnam has not satisfied under MSCIs criteria.[8] Under MSCIs criteria of “Openness to Foreign Ownership”, Vietnam ranks as improvement needed in FOL level, foreign room level, and equal rights to foreign investors. Many experts felt that Vietnam has met more standards of an emerging market than similar markets such as Pakistan and the Philippines (or Kuwait), but also had the best qualitative indicators among frontier markets.[9] While that may be true, it is apparent that MSCI is more concerned with long-term sustainability, which is why “openness to foreign ownership” is MSCIs top criteria for assessing upgrades.

CPTPP, EVFTA, EVIPA and Their Potential Effects on MSCI 2020

If Vietnam rectifies the discrepancies in their laws regarding investments and securities with the trade agreements of CPTPP (Comprehensive and Progressive Trans Pacific Partnership), EVFTA (European Union—Vietnam Free Trade Agreement), and EVIPA (European Union—Vietnam Investment Protection Agreement), they will have a greater chance at making the MSCI watch list upgrade for 2020. Vietnam will most likely not make the list if they continue to table or endlessly debate these critical, progressive revisions. Streamlining the draft laws on investment and securities with CPTPP, EVFTA, and EVIPA, and implementing them expeditiously will give MSCI hard-data to use in their June 2020 evaluation instead of mere speculation.
Moving in that direction, one of the most significant changes in the draft law on securities is the expansion of the foreign holding cap in public companies. Accordingly, public companies would be subject to no restrictions on foreign holdings, unless otherwise prescribed by “treaties to which Vietnam has acceded or a specialized law.”[10] There is a minor legal distinction between “treaties” and “agreements”; however, in the spirt of the law and especially for cementing these new trading relationships, Vietnam should draw no distinction and apply them as such. Under the CPTPP and EVFTA/EVIPA, Vietnam has expressly restricted FOL in specific, listed industries that are of national significance or security[11]; therefore, the government should aggressively restructure their current drafts to mirror that CPTPP, EVFTA, and EVIPA specific language. The CPTPP does have FOL set to what the current Vietnamese law is (currently 30 percent); however, it only states that it is relative to whatever the “current” law is—so, change the law.

This would mean removing the 30 percent FOL cap in the banking industry that is currently in place (even in the draft law to revise the law on securities).[12] According to Long Ngo, associate director at the Research Department at Viet Capital Securities, investment trends in the banking industry will depend on when the government lifts the FOL.[13] As long as the government keeps FOL at the 30 percent level, Vietnam’s capital markets will not expand and MSCI will not consider Vietnam for the watch list upgrade.[14] By maintaining their current operational paradigm, Vietnam is only hampering its own development and future.

If Vietnam would internalize operating from a global perspective, there should be no distinctions between a foreign investor and a domestic one (other than protected industries of national security). CPTPP, EVFTA, and EVIFA create “National Treatment” of any foreign-investor, which grants (in effect) domestic status.[15] Article 9.1 of CPTPP stipulates all “covered” investments (EVIPA is essentially the same list), including: (a) an enterprise; (b) shares, stock and other forms of equity participation in an enterprise; (c) bonds, debentures, other debt instruments and loans;…(f) intellectual property rights; (g) licences, authorisations, permits and similar rights conferred.[16] If Vietnam would stipulate in their draft laws this position already agreed to in CPTPP, EVFTA and EVIPA, it would virtually eliminate all three of MSCIs concerns that it has with Vietnam currently.

With the guarantee of no distinction between a foreign-investor and a domestic one, entities that have been reluctant to invest millions of USD in Vietnamese businesses will now feel much more comfortable about the investment environment; thus creating a large influx into Vietnamese capital markets. MSCI will notice these changes and most likely add Vietnam to 2020s watch list for emerging markets, creating another large inlay to Vietnam’s markets. If the government would match their investment and securities laws with the current trade agreements of CPTPP, EVFTA, and EVIPA, they would realize their self-stated goal of achieving MSCI watch list for emerging-market status.

Summary

A major goal of Vietnam’s government was not realized in July. Despite strong economic activity and other positive indicators, MSCI did not place them on the highly anticipated watch list for emerging markets. If Vietnam takes a hard look at the criteria that kept them from the upgrade, it is apparent that the solution for most of the roadblocks cited have already been addressed in the CPTPP, EVFTA, and EVIPA. The government merely needs to incorporate the trade agreement language into their existing laws. The tabling until May 2020 of the passage of the draft law to amend the law on investments through Resolution 8 (July 2019) was not a strategically beneficial move for Vietnam in order to make the 2020 MSCI watch list. Several key provisions in that draft (if in-place and operational) would give MSCI concrete data to observe (rather than speculative) and improve Vietnam’s chances of an upgrade. Additionally, changes to the draft law on the law on securities to be in line with the provisions of CPTPP and EVIPA would also be in Vietnam’s favor. Investor’s (and MSCI) minds would be eased if Vietnam will aggressively pursue regulatory reform and potentially add another US $15 billion to their capital markets.

The best indicator that reform is required to the current draft laws on amending the law on securities and investments came from the government itself. “Some items are unclear while others are unreasonable and no longer fit the Vietnamese market’s conditions,” the Government said in a report submitted to the National Assembly’s Economic Committee.[17] Those issues may “befuddle investors, market members and regulators,” adding that “policymakers must adjust the law [emphasis added] so it matches international standards and agreements to which Vietnam is committed.”[18]

If you have any question on the above, please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Thank you very much!
________________________________________
[1] https://vietnamnews.vn/economy/520886/vn-hopes-to-enter-msci-watchlist-this-year-but-experts-are-uncertain.html#3jsO5FxXs7UjKbiz.97
[2] Id. Footnote 1.
[3] Id. Footnote 1.
[4] https://www.vir.com.vn/fol-ambiguities-in-new-securities-law-64118.html
[5] Id. Footnote 4.
[6] Id. Footnote 4.
[7]https://www.msci.com/documents/10199/238444/RESULTS_OF_MSCI_2019_ANNUAL_MARKET_CLASSIFICATION_REVIEW.pdf/f134c97c-73da-71c7-4b3c-d1f637c3eaee
[8]https://www.msci.com/documents/1296102/1330218/MSCI_Market_Accessibility_Review_Country_Comparison_2019.pdf/142b5a29-e385-2922-4f79-8d6f4a04a467
[9] Id. Footnote 4.
[10] http://vietnamlawmagazine.vn/draft-securities-law-proposes-expanding-foreign-holding-cap-6517.html
[11] EVIPA, Chapter 2, Article 2.1.2 ; Annex 2

July 12, 2019 by Dr. Oliver Massmann

VIETNAM—FOREIGN DIRECT INVESTMENT AND UNINTENDED EFFECTS AND OPPORTUNITIES OF CPTPP/EVFTA

According to the Ministry of Planning and Investment (MPI), in the first 5 months of 2019, foreign direct investment (FDI) projects were US $7.3 billion, up 7.8% as compared to the same period in 2018. In addition, FDI contribution to the state budget rose from US $1.8 billion during 1994-2000 to US $14.2 billion during 2001-10, and to US $23.7 billion during 2011-15. In 2017 alone, FDI contributed US $8 billion to the state budget, accounting for 17% of the total state budget.[1] Phan Huu Thang, Vice Chairman of Vietnam’s Association of Foreign-Invested Enterprises, told Vietnam Investment Review that hi-tech processing and manufacturing, smart agriculture, healthcare, education and training, and renewable energy will be the hottest sectors for FDI in the coming months and years.[2] All these numbers and projections sound fantastic, but there are always impediments to a flourishing FDI program, as well as untapped (or under-utilized) opportunities. More importantly, how can the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) and European Union—Vietnam Free Trade (EVFTA) agreements foster and support FDI?

Two important draft laws affecting FDI originally slated for passage in July 2019 have, unfortunately, been postponed for passage until May 2020 per Resolution 78 (78/2019/QH14) in the Vietnam National Assembly: the Law on Investment in the Public Private Partnership Form [Law on PPP] and the Law Amending the Law on Investment and the Law on Enterprises.[3] There will be more to come on the effect of those laws after passage.

Unintended Effects of CPTPP and EVFTA on FDI

In the first five months of 2019, Vietnam’s FDI attraction reached a total value of US $16.7 billion, up 69 percent over the same period last year.[4] Currently, there are 131 countries and territories with valid investment projects in Vietnam, of which the Republic of Korea (RoK), Japan and Singapore claim the top three places (Japan and Singapore are CPTPP countries).[5] Since the beginning of 2019, however, a new top contender is emerging—China. In the past, China has been the seventh largest investor in Vietnam (with US $15 billion total); however, in the first half of 2019, their FDI alone was US $2 billion.[6] This is not a great surprise as the US—China “trade war” continues, but it does highlight that China is intending to exploit Vietnam’s entrance into the CPTPP and EVFTA (Agreements that China does not currently benefit from). This year, the Vietnamese government licensed the US $280 million ACTR tire-manufacturing project in the southern province of Tay Ninh, and a US $214.4 million project by the Advance Vietnam Tire Co., Ltd in the Mekong Delta province of Tien Giang.

ACTR manufactures steel-radial tires for trucks and busses, and is a joint venture between China’s Sailun Vietnam Co., Ltd, (with 65% equity) and the US’s Cooper Tire and Rubber Co. (35% equity). Because of the more stringent Certificate of Origin (COO) requirements under the CPTPP, China could no longer import tire components from CPTPP countries and process them domestically to obtain CPTPP member-country benefits (or vice versa—export components for assembly). They would need to have a physical processing plant located in Vietnam to claim “Made in Vietnam” COO. With that member-country COO, China now enjoys zero-tariffs on those products exported to member nations. That is a significant counter to the US—China trade tariffs, and a direct result of CPTPP. Advance Vietnam Tire Co. (owned by Guizhou Advance Type Investment co., Ltd, of China) is an almost identical example to ACTR; other than Advance is not a joint venture. China could have invested in other CPTPP countries, but Vietnam is the most attractive and cost-effective venue for FDI compared to others.

The EVFTA contains similar provisions as the CPTPP regarding tariffs and duties. With the EVFTA now in force, China has poised itself to take advantage of this new regulatory environment for the European markets. Using the examples from above, China will now be able to compete (in effect with domestic-preference) directly with Europe’s largest physically domestic producer of tires, Michelin.

Before CPTPP, EVFTA, and the US—China trade tensions, Chinese investors were mainly small businesses with out-dated technology, but now many large corporations are funding large-scale projects. Five of the seven biggest foreign-invested projects in the last five months came from Chinese backers, including not only the ones already discussed, but also a US $260 million electronic equipment and multimedia audio products manufacturing project invested by Hong Kong-based Goertek Co., Ltd.[7] Chinese investors are also increasing merger and acquisition (M&A) activities. Hong Kong topped foreign investors in Vietnam with the US $3.8 billion purchase of Vietnam Beverage Co. Ltd, in Saigon Beer-Alcohol-Beverage Corp (SABECO).

It appears clear from the investment activity in Vietnam since the onset of CPTPP that it has had a substantial positive impact on FDI. With the advent of EVFTA coming in force (and providing similar—if not more—beneficial trade platforms), Vietnam will have a multitude of investors rushing to reap the benefits of those trade agreements. For Vietnam be able to absorb this inevitable expansion of its FDI landscape the government needs to adapt holistically (and quickly) to the new global trade environment they have embarked on to realize its full potential.

EVFTA and CPTPP Vocational Training Market Opportunity

As Phan Huu Thang mentioned, education and training and renewable energy will be some of the hottest sectors in the coming months and years for FDI. An often-overlooked aspect of FDI is Vocational Training Schools. Vocational training will be critical to the long-term success of Vietnam’s infrastructure platforms, especially when operating and maintaining an enhanced energy and power sector. With highly advanced and technologically complex energy platforms (especially renewables) comes a requirement for competently trained personnel to sustain them. Vietnam has a large workforce pool; however, technical training for these opportunities is currently limited.

The EVFTA and CPTPP both have provisions easing the access of engineering and technology support to assist in achieving the required knowledge and training skillsets.[8] Vietnam recognized this also and updated their regulatory requirements regarding vocational schools through Decree 15 (15/2019/ND-CP), which specifies the order and procedures for opening foreign-invested vocational training schools.[9] The FDI project would need to be in line with the national planning of vocational training in Vietnam, but the threshold capital requirements have been lowered to VND 5 billion (US $216,000) to open a vocational training centre, VND 50 billion (US $2.2 million) for a vocational secondary school, and VND 100 billion (US $4.4 million) for a vocational college.[10] In addition, if a project is aligned with an industry of national priority or significance (enter renewable-energy), the Ministry of Labour will be the sole authority on issuing licenses[11]—a departure from the traditional methodology in an effort to streamline the process. This is good news for many renewable energy projects. Not only will a foreign business have more opportunities for development under CPTPP and EVFTA, but they can also add a minimal supplement to that investment and create the necessary workforce to support it.

An example from USA clearly demonstrates the opportunity in vocational training schools. In 2011, Boeing, Inc. opened a final assembly facility for the 787 Dreamliner in Charleston, South Carolina. Along with that came a demand for technically trained personnel to operate the complex facility and to have personnel trained in the intricate technology involved in assembling the aircrafts. Boeing invested US $80 million to have an aeronautical vocational training facility built near Boeing’s assembly plant (completed June 2019).[12] This is a win-win for Boeing. They provided the initial funding to build the vocational facility; in return, they have professionally trained personnel, and the government takes over costs of maintaining the training facility. Boeing also gets guarantees from the government to repay Boeing’s initial investment through tax incentives and bond issuance. This is a textbook case of vocational FDI supplementing an already significant investment.

As many foreign investors establish their presence even more in Vietnam’s infrastructure landscape, this is another opportunity for FDI to affect Vietnam’s (and the investor’s) bottom-line. The EVFTA and CPTPP are enablers as they both allow services to flow less restrictively between the parties. Phan Huu Thang noted that for Vietnam to realize its fourth-industrial-revolution plan (4IR), local enterprises [must] be encouraged to cooperate with foreign-invested enterprises to learn experience, transfer technology, and receive support in training.[13] Vocational training centers will help fill that need.

Summary

Vietnam’s FDI has been steadily increasing for decades. FDI has helped transform Vietnam from a poor nation to the verge of a massive middle-class population. CPTPP and EVFTA are two vehicles that will propel Vietnam across that line and perhaps even further. The tangible benefits of CPTPP are already proving themselves as evidenced by the hard-data collected. The unintended effects on FDI from non-member countries, however, have a distinct possibility of compounding those benefits exponentially as others see the potential of CPTPP and EVFTA. Traditionally under-utilized sectors for FDI in education and training are also poised to take advantage of these trade agreements. While not the most high profile, E&T are necessary support vehicles to sustain the larger sectors. Vietnam has been slow, thus far, in aggressively changing their regulatory environment to adapt; however, they need to act expeditiously to fully reform their regulatory environment in order to meet this inevitable influx of FDI.

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If you have any question on the above, please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com or any other lawyers in our office listing. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
Thank you very much!

July 8, 2019 by Dr. Oliver Massmann

VIETNAM—POWER, ENERGY, AND THE AFFECT OF RECENT TRADE AGREEMENTS EU VIETNAM FREE TRADE AND INVESTMENT PROTECTION AGREEMENT AND THE COMPREHENSIVE AND PROGRESSIVE TRANS PACIFIC PARTNERSHIP AGREEMENT

Vietnam has had major stressors placed upon its power and energy grid for years, and it is only accelerating. At a recent April, 2019 conference on renewable energy in Ho Chi Minh City, experts noted that annual energy consumption in [Vietnam] had risen by 10 per cent in recent years, and the country was at risk of facing power shortages in the 2020s. Several factors have had an impact on this event a 2018 Harvard University study dubbed, “a crisis of success”. The major contributing factor was inefficiencies in the utilization of energy resources and infrastructure. Over time, these inefficiencies have compounded the problem Vietnam faces now with their entry into the European Union—Vietnam Free Trade (EVFTA) and Comprehensive and Progressive Trans Pacific Partnership (CPTPP) agreements. Luckily, those challenges may be alleviated if Vietnam changes their regulatory environment and embraces a new operating paradigm based on a global trade perspective. The transition may at times be turbulent, but necessary for Vietnam to achieve robust, sustainable development to meet their future needs.

Renewable Energy under EVFTA and CPTPP

Both the CPTPP (Chapter 20) and EVFTA (Chapter 13) require the parties to mitigate any damaging effects to the environment by trade practices and to incorporate any other treaties the parties are signatories of into the agreements. As Vietnam and the other parties of both the EVFTA and CPTPP are signatories to the United Nations Paris Agreement of 2015, this means Vietnam is required to reduce its traditional coal-fired power plants in favor of cleaner or renewable energy sources. The EVFTA and CPTPP specifically mention renewable energy as the preferred alternative, and the parties all agree to promote trade to that end.

Vietnam has been making strides to address their energy utilization situation such as the Power Development Master Plan for the 2011-2020 Period with the Vision to 2030 (revised PDMP VII). PDMP VII, for example, sets out to increase energy supply from solar power from the current negligible rate to 0.5% by 2020 and 3.3% by 2030, or, 850MW solar capacity by 2020, increasing to 12GW by 2030. PDMP VII is coal-centric, which is counter to what both the EVFTA and CPTPP call for. One reason for the coal-centric approach is that it is established, known, and cheaper—it is the path of least resistance—which is one reason why Vietnam does not place tariffs on imported coal from the US, but it does place a 20 per cent tax on its own domestic offshore natural gas (which is by-far a cleaner alternative). PDMP VII also sets forth the goal of universal connectivity to the national power grid for all of Vietnam by 2030. It is a lofty goal, but it is achievable. The best chance of success for the 2030 goal is to restructure the regulatory environment to favor and exploit renewable energy sources. PDMP VIII is the next evolution for Vietnam’s energy strategy (slated for year-end 2019) and—keeping with the global investment mind-set—Vietnam should have a blend of private and public sector representation on that advisory board to ensure CPTPP and EVFTA renewable requirements and opportunities are fully integrated.

Against this backdrop, how can the EVFTA and CPTPP help Vietnam achieve sustainable energy development? Concerns from the private sector have always plagued Vietnam’s regulatory framework. Permitting, risk-allocation, land use impediments, financing, and investment protection have been major causes for project derailment in the past. The regulatory environment has been the biggest hindrance to successful exploitation and integration of renewable energy. However, Solar Power holds particular promise.

Solar Renewable Power

Solar power (according to PDMP VII) is to provide the second-largest amount of renewable energy in Vietnam by 2030—at 3.3 per cent. That figure should be adjusted higher with the incorporation of a more aggressive renewable plan in PDMP VIII. On a macro-level, solar farms are becoming more and more prevalent in Vietnam’s southern regions with most of them being developed by foreign investment. Major investors in Vietnam in the approval, construction, or completion stage include
German ASEAN Power, B.Grimm Power Public Co Ltd, Trina Solar, Schletter Group, and JA Solar, to name a few. Twenty-five solar farms have signed power purchase agreements (PPAs) with EVN, not to mention another 221 projects are awaiting approval, with a combined 13,000MW of potential output. Reuters, Inc. suggests that Vietnam’s electricity sector will be bigger than Britain’s by mid-2020s.

EVFTA and CPTPP Impacts on Solar Sector

The driving force behind this level of investment so far has been the CPTPP (notably Japan and Korea); however, with the recent enactment of the EVFTA, further investment and expansion is a realistic expectation as there are no foreign-ownership restrictions placed on investors in those agreements. Furthermore, the European Union—Vietnam Investment Protection Agreement (EVIPA) grants specific safeguards for investors regarding the free transfer of capital based on foreign exchange convertibility as well as dispute resolution governed by international arbitration rules. These have been points of contention in the past for EU investors. On a broader scale, Vietnam, the EU, and the CPTPP signatories will all benefit as reduced tariffs and duties on the machinery and hardware to produce solar facilities will make it more cost-effective to develop that sector. Large-scale investment should be noticeable in the immediate future, and should be the definitive driver after five years when Vietnam removes restrictions on local-content and domestic partnering requirements in the EVFTA. Engineering services from the EU to support renewable infrastructure will also thrive as restrictions on that service in Vietnam are relaxed, promoting technical expertise and experience exchange and cooperation. These services will be especially crucial in upgrading and enhancing Vietnam’s grid capacity to maximize renewable energy integration into it.

Vietnam is making progress on changing their regulatory framework for renewable energy utilizing input from the private sector. An example is the latest change to the Feed-In-Tariff (FIT) regulations for connectivity to EVN national grid. Up until 30 June 2019, there was a flat FIT of US $0.0935/kWh regardless of size or scope of project. The low FIT coupled with high investment costs in newer technologies has always been a point of contention for private developers. As of 01 July 2019, the FIT system was revamped and broken-down by type of solar project and zones of irradiance.

The regional scheme is determined by annual levels of irradiance and is broken-down into four regions. Regions with higher irradiance are imposed a lower FIT while remote regions with lower irradiance are imposed a higher FIT. This is a direct result of government responding to private investors’ concerns.

Rooftop Solar PV (less than 1 MWp)

The FIT schedule also applies to smaller-scale solar rooftop development. According to Vietnam Electricity (EVN), 1,800 customers, including offices, businesses and households, are installing rooftop solar systems with a total capacity of 30.12 MWp. In Ho Chi Minh City, EVN has installed rooftop solar systems with a total capacity of nearly 1,130 kWp and is continuing to deploy other systems. EVN general director indicated this amount was far below the potential of Vietnam, and directly attributed the reason to a lack of specific regulations about electricity purchases when households connect their solar power systems to the national grid. The previous flat FIT applied to rooftop solar generating less than 1 MWp as well, but was a convoluted regulatory situation on how-and-who-gets-paid-when. Now, new rooftop solar constructed or installed on or after 01 July 2019 that generates less than 1 MWp has the option of: 1) negotiating their own price between buyer and seller (as long as the project is not connected to EVN national grid) or 2) accepting the FIT schedule for the region it is located in and connecting to the EVN grid.

This is a major change and development for the solar market. The Direct Power Purchase Agreement (DPPA / PPA) allows for individuals or organizations to install rooftop solar projects and sign their own buy/sell contracts among other individuals or organizations without connecting to the EVN national grid. Any excess power generated may be sold to EVN at the established FIT for the region. This can have an enormous impact on the load capacity of the current EVN grid by reducing demand on it.

The rooftop solar sector will be a key part of the puzzle in rectifying Vietnam’s energy inefficiencies. With EVFTA and CPTPP countries enjoying reduced or no tariffs on hardware and other products to support the rooftop solar sector, coupled with the regulatory reforms, it should only be a matter of time before there is a PV panel on every residential and commercial rooftop in Vietnam.

Summary

Vietnam has been struggling with efficiently growing and sustaining its energy and power infrastructure. The regulatory environment has traditionally been one of the major hindrances to private investors in infrastructure development. Although there is always a certain amount of uncertainty in any project of this nature, both the public and private sectors would serve their communities greatly by coming to a reasoned solution that suits both. There has been notable progress by Vietnam on this regulatory-front, such as PMDP VIII and the revised FIT and DPPA. Hopefully there will be much more to come in the latter-half of 2019 and into 2020. The CPTPP and EVFTA agreements have been (and will be) a major factor in Vietnam’s infrastructure development goals. Utilizing those agreements and advice and input from the private sector, Vietnam’s power and energy situation will be poised to efficiently and effectively capitalize on its enormous potential—especially with renewables.

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Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com or any other lawyer listed in our office list if you have any questions on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
THANK YOU VERY MUCH!