All posts by Giles T. Cooper

Why you shouldn’t miss out on Vietnam’s industrial property market

Though comparatively young among its regional peers, Vietnam’s economy is turning up some exciting areas of opportunity. One of the most promising is the industrial property market, comprising industrial land, ready-built factories, warehouses and other logistics properties.

 

Slowly but surely, the country is moving from a labour-intensive to a capital-intensive economy, and over the next few years we will continue to see a shift towards the more value-added sector.

 

This means that the industrial sector will begin to incorporate more sophisticated requirements, demanding a higher level of expertise and technical equipment. At the moment, industrial parks remain sparse and there is no concerted effort to gather industries on a regional level.

 

However, Vietnam’s manufacturing and processing sector accounted for over 40 percent of the country’s foreign direct investment (FDI) last year, which surged to a record high of US$36 billion overall. This trend looks set to continue.

 

Get in on industry

 

Currently, the city of Hai Phong and province of Bac Ninh are the two localities boasting the highest number of industrial parks in the country. They are also the biggest draws for industrial investment in the northern economic region.

 

France’s FM Logistic, a leading warehouse supplier, recently launched a 5,000 sq.m logistics warehouse in Bac Ninh while purchasing an additional 50,000 sq.m in the north to build the first European-standard storage centre in Vietnam.

 

Other areas around the country are showing similar signs of strong development and investors would be wise to get in early.

 

In fact, the country’s largest supplier of industrial property, the BW Industrial Development JSC, debuted in the southern province of Binh Duong earlier this year. BW is a joint-venture between US private equity fund Warburg Pincus and Vietnam’s Investment and Industrial Development Corporation (Becamex IDC), with investment of over US$200 million.

 

Betting on the country’s booming manufacturing sector and rising domestic consumption, the company has bought land for eight projects in five localities around Vietnam, with a focus on developing institutional-grade logistics and industrial properties.

 

A well-connected hub

 

Among several notable advantages increasing Vietnam’s attractiveness to industrial investors, the country’s proximity to some of the world’s major sea trading routes offers huge opportunities to develop maritime transport, particularly for logistics services.

 

The country’s border with China makes it a promising option for manufacturers looking at alternative locations in Southeast Asia while operating costs in China continue to head upwards.

 

Additionally, the nation’s household income is likely to increase. According to recent research, Vietnam is expected to enjoy the strongest growth in the middle-income population bracket, with a Compounded Annual Growth Rate (CAGR) of 19 percent from 2018-2020, and an increase of 14 percent from the previous decade.

 

A young population coupled with growth in average income will boost purchasing power and help the country retain its spot as a top investment destination in Southeast Asia.

 

The fruits of free trade

 

Vietnam’s industrial real estate sector is also expected to get a helping hand once the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) comes into effect.

 

The passage of the deal has been smooth so far, and players both at home and abroad are already considering ways in which they can benefit from each other’s markets. Tariff cuts and streamlined regulations will precipitate a surge in investment, and a big slice will go into the industrial sector.

 

Acknowledging the oncoming wave of interest, the Prime Minister approved spending of up to US$921 million on infrastructure development around economic zones and industrial parks by 2020. This heavy investment has been earmarked for roads, drainage and water waste treatment facilities, as well as power infrastructure for industrial parks and clusters, hi-tech parks and hi-tech agricultural zones.

 

Major cities are also eyeing increased industrial attraction, especially from abroad. Under the development plan for Hanoi, the city will have nine more industrial parks on a total area of 2,360 hectares by 2020, an increase of 132 percent against current supply.

 

Easing the entry of foreign players to such parks would help in boosting occupancy. It remains to be seen whether the pledged cash will complete the connection of factories to road networks, as well as promote the growth of residential and commercial areas around the parks. If the strong demand is anything to go by, these requirements are likely to be met soon.

 

For these reasons, Vietnam is becoming more appealing to foreign manufacturers, their associated suppliers and supporting industries. Investor interest in the industrial market is on the up, in industrial zones as well as in income-producing industrial assets, build-to-suit opportunities and logistics-based warehousing.

 

Huge opportunities exist in Vietnam for both existing players and new manufacturing firms to snap up significant market share and get in on the ground floor. This area is certainly one to keep an eye on.

 

For more information about Vietnam’s industrial sector, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Location, location, location – 5 areas to watch in Vietnam

With the second fastest growing economy in the world after China, Vietnam offers investors an almost overwhelming range of ways to get in on its continuing success story.

 

From energy to real estate, transport to tourism, a multitude of areas are experiencing growth and attracting domestic and foreign investment. The push to ease regulations is set to continue, and the government is working to ensure an evermore fertile business climate. But with so many options, where is a good place to start?

 

Here are five spots currently generating some real excitement:

 

  1. Soc Trang

 

The Mekong Delta province of Soc Trang recently held an investment promotion conference and, with the backing of the Prime Minister, managed to rally investment pledges totalling nearly US$5.4 billion. The 47 projects are mainly focused on clean power generation, high-tech agriculture and tourism services.

 

With work already underway to reform and streamline administrative procedures, a new injection of cash could inspire even more growth over the coming years.

 

During the conference, the PM set out an aggressive development strategy for the province, underlining his vision that the coming decade would see Soc Trang expand its economy to achieve middle-income status.

 

Specifically, the province was urged to set its sights on high-tech agriculture adapted to climate change, clean seafood production and processing targeting high-value markets and eco-tourism linked with ‘smart’ agricultural models. To achieve this kind of sustainable development, provincial authorities will need to invest in human resources and education. Co-operative models between farmers, investors, banks and distributors will help the development of value chains and quality standards for agricultural products.

 

  1. Ninh Thuan

 

For those with eyes on the renewable energy sector, the province of Ninh Thuan is looking like a hot prospect. Construction on the country’s biggest solar power plant, with a capacity of 168 MWp and total investment of roughly US$194 million, commenced in the southern province early in June.

 

The plant is a project by Singapore’s Sunseap Group – a large provider of clean energy solutions – and is slated to cover an area of 186 hectares. Once operational in June 2019, the plant is expected to supply over 200 million kWh of electricity to the national grid annually.

 

Sunseap is not the only player taking advantage of the province’s valuable location and abundance of sunlight, with four other plants kicking of construction this year in Ninh Thuan. With backing from provincial leaders, the province aims to become a renewable energy hub, with the generation of 2,000 MW of solar power by 2020.

 

So far, the province has 15 wind power and 27 solar power projects, with designed capacity of nearly 800 MW and 1,808 MW, respectively.

 

  1. Ho Chi Minh City

 

With properties priced at a fraction of those in neighbouring Singapore and Thailand, Vietnam is drawing a number of real estate investors and becoming a popular destination for foreign buyers.

 

Interest in Ho Chi Minh City, in particular, has been growing among foreign buyers with a number of projects already for sale and some approaching completion in the next one to two years. Given the political stability of the government, some investors see Vietnam as having the possibility to grow like China.

 

Home prices in Vietnam have been rising over recent years, making a modest increase last year on the back of 6.8 per cent economic growth and rapid increase in direct foreign investments.

 

  1. Coastal hot spots

 

The hotel and hospitality sector is experiencing a resurgence in Vietnam, with many properties reporting strong occupancy rates and a large number of new operators entering the market, especially in coastal areas such as Da Nang and Nha Trang.

 

These sites were already known as popular destinations for both domestic and foreign tourists, with the number of international guests visiting the country reaching over 13 million last year. In the first four months of 2018, more than 5.5 million international guests visited Vietnam, an increase of 29.5 percent over the same period last year. As interest continues to mount, so too do opportunities for investors in the hospitality sector.

 

Thanks to the strong development of tourism infrastructure and improvements in accommodation, cities like Da Nang and Nha Trang now offer a wide selection of hotels, luxury resorts and beach villas to suit a range of budgets and preferences.

 

Condotels are a growing trend in this sector, and several developers have adopted this model as a method of refinancing. Experts forecast that up to 18,000 condotel units will be added to the market in the next two years in key tourism destinations, accounting for 60% of the total new supply.

 

With major groups such as Vingroup, Sungroup, FLC, Muong Thanh and Empire, as well as well-known international brands snapping up segments of Vietnam’s hospitality market, this area will be one to watch in the coming years.

 

  1. Quang Binh

 

The central province of Quang Binh has drawn up a list of 48 projects to be completed in the 2018-2020 period, with total expected value of over US$2.2 billion.

 

The projects are expected to cover more than 8,000ha of land, with a focus on tourism, trade and services, industry, and agriculture, as well as education and health care.

 

Of the projects, 14 are in tourism, including coastal and ecological tourism and resort complexes. These are considered high-value projects that will spur local job creation, boost the budget and foster tourism development in the province.

 

For more information about investing in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

ベトナム:インフラ開発のジレンマにグリーンボンドは効くか著者:Giles T. Cooper

翻訳:志澤政彦(Masahiko Shizawa)

原文:https://blogs.duanemorris.com/vietnam/2018/05/15/are-green-bonds-the-answer-to-vietnams-infrastructure-dilemma/ 

ベトナムを含む東南アジア諸国では、急成長とともに安定した資金源の確保が困難になってきた。

このことは、インフラ事業において顕著である。アジア開発銀行(ADB)の報告書によると、経済成長に伴い、2030年までにこの地域では2.8兆米ドルに相当する道路、橋梁、鉄道が必要になるとされている。

不安定さを増す政治情勢に直面している東南アジア諸国は、この先数年のインフラ開発の資金調達の選択肢としてより安全なものに目を向けている。「一帯一路」政策の下ですでに1兆米ドルものプロジェクトを支援してきた中国への過剰依存は、国内的解決策を経済が志向するにつれ、その規模が縮小されていくものであろう。従前に表明した境界線を踏み越えようとする中国の計画への恐怖は、資金の不正流用及び失敗したプロジェクトという具体的教訓と相まって、この地域周辺の国々に「一帯一路」の活用の再考を迫ってきた。

南シナ海の領域問題をめぐる政治的緊張及び増加傾向にある国際的な保護主義を前に、ベトナムのような国々は将来的な資金調達を自前で行う途を探る方向でいる。この地域全般で国家予算への負担は増加傾向にあり、この先数年で強く求められる成長のため投下すべき他の資金元を探そうとしている。一つの提案は、「グリーンボンド」の発行促進である。

「グリーンボンド」について知らなければならないこと

グリーンボンドは債券の一つであるが、発行者によって調達された資金は「グリーン」なプロジェクト、つまり、環境に配慮し、気候への懸念を考慮に入れたものに割り当てられる。グリーンボンドの発行が特に利益になるセクターは、再生可能エネルギー、インフラ、および建設業界である。

道路、橋梁、トンネル、そして鉄道の建設には、地域的及び全国的な気候に多大な負担をかけてしまう。そのため、環境フットプリントの低減を志向するプロジェクトの優先度は最も高い。

環境に配慮したプロジェクトに資金調達を集中させることに加えて、グリーンボンドは発行者の持続可能な開発への取り組みの深さを強調する意義もある。さらに、発行者はグリーン・ベンチャーにのみ投資をする特定のグループのグローバル投資家にアクセスできるようになる。国外のプレーヤーによるグリーンな投資への注目が高まっている中、資本調達のコスト削減にも貢献しうる。

ベトナムにとって意味するものとは

ドイツの開発機構であるGIZによれば、現在の炭素依存的成長からより持続可能な道筋へと移行し、その約束草案(Intended Nationally Determined Contribution、INC)に向けた行動をとるため、ベトナムは2020年までにおよそ307億米ドルを必要としている。

グリーンな成長のための資金のうち30%程度は国家予算、すなわち中央と各省の予算及び政府開発援助、からの拠出が見込まれているが、残りは民間セクターから供給されることとなるとみられる。

ベトナム政府が2011年から2020年の期間について承認したベトナム・グリーン成長戦略(Vietnam Green Growth Strategy, VGGS)の下では、資本市場がその目標達成のカギとなるだろう。グリーンボンドが死活的な役割を果たすのは、まさにこの点においてである。グリーンなプロジェクトや事業体のため特別に資金調達を行い、グリーンな商品のデリバティブの流通の素地を作り、さらに民間セクターの投資を持続可能な開発のため活用することになる。

国外からの関心としては、ベトナムのグリーンボンドの発行により、持続可能な開発、再生可能エネルギー、そして環境に配慮した成長を志向している国際投資家の誘致が期待されている。世界中の投資家が、気候変動の課題やエネルギーの移行につき、前にも増して注視している。環境問題を考慮に入れた投資ツール、特に開発途上国におけるものについて要求する投資家は、増加の一途を辿っている。

この地域で、ベトナムが持続可能な資金調達の見通しを見据えている唯一の国というわけではない。アセアン・グリーンボンド基準(ASEAN Green Bonds Standards、AGBS)が2017年11月に開発・実行され、アセアンでのグリーンボンドの発行に共通の基準が制定された。マレーシア、シンガポール、インドネシアの会社は、すでにアセアン・グリーンボンドと称された債券を発行している。

これらのグリーンボンドの発行によって調達された資金は、再生可能エネルギー、廃棄物処理、グリーンな建築物やインフラといった、持続可能性の要件を満たしたプロジェクトに配分され、さらに統合、連帯、アセアン全体の成長といった共通の目標に貢献するものである。何よりも、地域のリーダーたちは将来世代の犠牲のもとに成長は成り立たないことに気づいてきている。AGBSのような新たな取り組みが、環境に配慮した投資への資源の分配を促進するだろう。

成長不全を来しているグリーンな成長

2020年までに達成されるべき指標の一つは、グリーンボンド市場を、現在およそ90兆米ドルのグローバル債券市場の少なくとも1%にまで拡大することである。これを現実のものとするため、ソブリン債発行者は断固たる決断をする必要がある。

流動性の欠如、債券の構造の限定的な多様性、及び確実に収益の見込めるプロジェクトの定期的で大きな流れの不在といったものが、未だにアジアの現地通貨によるグリーンボンド市場の特徴である。

加えて、社会的責任を果たそうとしている投資家からの恒常的な要求はまだ限定的であり、この市場の成長の可能性を阻んでいる。

そうはいっても、ソブリン債発行者が環境を整備し、強力な枠組みが適用される限り、現地通貨でのグリーンボンド市場の成長の見込みは大きい。制約となりうるのは、確実に収益の見込めるグリーンな投資の数と大きさであろう。

もしベトナムが「グリーンボンド」の動きを十全に活用しようとするなら、上述したような方法での資金の注入が解決策を示してくれるだろう。それは、インフラ事業における資金調達の穴を埋め、より速い拡張に向けた基礎を固め、そして、これまで長い間痛めつけてきた環境には休息をもたらすものであるはずだ。

ベトナムのグリーンボンドに関する情報については、GTCooper@duanemorris.comよりGiles弁護士または当事務所の弁護士一覧の弁護士にお問い合わせください。Giles はドウェイン・モリス・ベトナム法律事務所の共同代表であり、ドウェイン・モリス・ホーチミン支所の支所代表です。

What’s next for green energy in Vietnam – 4 steps to the future

Now that the United States has retreated from the Paris Climate Accords, and relinquished its leadership role in the fight against climate change, it remains to be seen whether smaller nations will stick to their pledges of greenhouse gas reduction.

Eyes are on countries like Vietnam to see if they keep to their commitments or revert to the pursuit of cheap and dirty coal-powered solutions for their energy needs.

Vietnam, in particular, faces some of the biggest risks. Global warming is a major threat to the country, where rising sea levels are predicted to swallow up nearly half of the Mekong Delta, a crucial area for domestic food production, in coming decades.

Currently, coal-fired plants in Vietnam contribute to thousands of premature deaths and air quality in big cities is getting worse. In 2017, the capital Hanoi enjoyed just 38 days of clean air, with contaminant levels four times those deemed acceptable by the World Health Organization.

Business as usual?

Unlike Obama, the Trump administration seems unlikely to apply any real pressure on other countries to pursue clean energy or combat climate change, and so it will be up to domestic forces to really push for change.

According to the government’s current national plan, electricity generated from coal will rise five-fold between now and 2030, and GHG emissions will increase in lockstep. This is at odds with Vietnam’s pledge to the Paris Climate Accord, which targets 8 percent emissions reduction by 2030, and could rise as high as a 25 percent reduction with international support, such as financing for solar panels and wind turbines.

Energy and environment experts worry that the country’s next national power development plan, which is under revision this year, could hold to those figures or, worse, embrace a more aggressive coal strategy.

The story, however, is not all doom and gloom. Vietnam does have the potential to become a regional clean energy leader, if only the country’s energy development and investment environment can be reshaped. Business involvement in this process will be crucial, as the commercial and industrial sectors consume more than 60 percent of Vietnam’s electricity.

Khanh Nguy Thi, founder of the Vietnamese nonprofit Green Innovation and Development Centre, recently won the 2018 Goldman Environmental Prize for her work convincing state agencies to increase their use of renewable energy. Her efforts were instrumental in halting the construction of two hydropower plants in a national park and securing a 20,000 MW reduction in planned coal expansion.

Government leaders have also demonstrated a desire to utilise Vietnam’s abundant sunlight and over 2,026 miles of coastline in the pursuit of renewable energy.

4 solutions for a sustainable energy sector

Clearly, clean energy opportunities are available, the question is how to encourage more investment. Obstacles persist with the regulatory environment, preventing the country from tapping its potential in this area. Here are four small changes which could bridge the gap between policy and implementation, ensuring the green energy dream becomes a reality:

  1. Streamline regulations regarding Power Purchase Agreements (PPA) and support the use of Direct Power Purchase Agreements (DPPA).

Negotiating standard PPAs with EVN, the sole power purchaser, is time-consuming, which cause rising total project costs. The streamlining of such deals would render them more attractive to power producers and cut lengthy approval time, which often leads to execution delays or complete abandonment of projects.

USAID and Vietnam’s Ministry of Industry and Trade are working together to enable private sector electricity buyers and renewable energy providers to enter into DPPA. This would allow industrial energy buyers to purchase electricity directly from independent renewable energy producers.

Such a mechanism would help companies enjoy constant power prices and ultimately save power costs. By signing a long-term DPPA to buy power from a clean energy generator, businesses can have a constant power price, reducing risk and helping firms establish long-term business plans with no surprises down the road.

  1. Improve the transparency of electricity rate forecasting.

Electricity prices will have to increase in order for Vietnam’s national utility to finance new energy projects, but the schedule for such increases remains vague. Better transparency of expected price increases will allow buyers and investors to more accurately value fixed-cost renewable energy contracts, which can offer some price protection.

Additionally, improving the quality and sourcing of data on renewable energy can help clarify for investors available locations, infrastructure capabilities and government targets, as well as other information to help reduce risk on investment decisions.

  1. Encourage supporting industries.

Supporting industries plays a crucial role in the development and adoption of renewable energy technologies. The government should promote domestic SMEs through capital subsidy and incentives such as tax breaks and preferential loans. A competitive supporting industry will help in reducing the tariff and investment costs for renewable projects, nurturing their development as part of Vietnam’s energy sector.

  1. Develop a renewable energy model for industrial parks.

Given the expectation that industrial areas will continue to play a big role in Vietnamese manufacturing and commerce, these parks are an important place to explore renewable solutions. Aggregating demand from tenants in the parks would help scale clean energy and make it more affordable for all.

Green power pioneer

Renewable energy has the capacity to power Vietnam and with the right policies in place, the country can deliver affordable, safe and clean power for continued economic growth.

Vietnamese businesses and the government could chart an unprecedented course for clean energy, and represent a role model for Southeast Asia — if they can address some key barriers. The changes detailed above would help drive the country’s energy transition toward a sustainable, greener future, and demonstrate that the fight against climate change can continue without American leadership.

For more information about Vietnam’s renewable energy sector, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Cometh the EU-Vietnam Free Trade Agreement

The Vietnam – EU Free Trade Agreement (EVFTA), a new-generation free trade agreement between Vietnam and the EU’s 28 member states, is a comprehensive and high-quality trade pact that is expected to bring a range of benefits to both Vietnam and the EU.

For many years the EU has been the second largest overseas market for Vietnamese products and Vietnam’s second most important two-way trading partner after China. On average, Vietnam’s exports of commodities to the EU account for around 19 percent of its exports to global markets. This figure has seen double-digit growth for the past decade, annualised at 13-15 percent, and even reaching 25 percent in certain years.

The EVFTA, which is expected to be signed this year, will have a wide-ranging impact on bilateral trade and investment thanks to tariff cuts and strong commitments from both sides. The deal has been heralded as the most ambitious of its kind between the bloc and a developing nation, and one which will put an end to 99 percent of customs duties on goods. Some predictions are that the agreement will boost the Vietnamese economy by up to 15 percent of GDP and exports to Europe by a third or more.

On top of providing more development opportunities for Vietnam’s industries it will also help to improve the country’s investment environment and raise the quality of its export products.

What can investors expect to change with the new deal?

The most prominent benefits to be expected are an increase in the trade of goods promoted by the reduction or elimination of tariffs and non-tariff barriers, whereby key economic sectors as textiles, footwear and the high-technology industries in Vietnam would benefit most.

One sector in particular hoping for a big boost is fisheries. Under the EVFTA, aquatic products, excluding canned tuna and fish balls, will enjoy a zero tax for a maximum of seven years. Similarly, in good news for shrimp processing firms, Vietnam will enjoy a reduction in import duties on raw shrimp and export duties on processed shrimp to the EU.

The reduction of tariff lines will help Vietnamese seafood exporters reduce prices significantly, improve competitiveness and export turnover. Vietnamese aquatic firms will also have space to improve technology and product quality, join regional supply chains and diversify supply sources.

Additionally, Vietnam’s commitments to ensure an open and transparent investment and business environment will help to boost high quality investment from the EU into Vietnam.

Sink or swim

However, Vietnamese companies should also be aware of the challenges brought about by free trade agreements, and especially the EVFTA. These are related to higher requirements from the EU market in terms of transparency and competition, both for private and state-owned enterprises (SOEs).

The FTA is not necessarily seeking complete privatisation, but rather the opening up of those economic sectors where SOEs are present. Vietnamese enterprises may expect to see an impact from this process, provided that the FTA promotes reforms in public procurement.

The tax cuts will put a greater burden of competitiveness on domestic producers in terms of prices, product quality and food hygiene and safety. Firms will face a choice – either adapt and move up the global supply chain, or stand by while imported goods flood the market.

The livestock industry is forecast to be at the biggest disadvantage as taxes on chicken and pork will be cleared under an 8 to 10-year roadmap, while import duties on beef, milk and dairy products will be eliminated over a shorter period of 3 years. Consequently, over the short and long term, the animal husbandry industry will be under fierce competition with products imported from the EU.

Additionally, many Vietnamese products have not yet met the necessary food hygiene and safety regulations or the technical standards of importers.

To benefit from the trade deal’s incentives will require exports to satisfy the EU rules of origin, which presents its own challenges for several Vietnamese sectors. For instance, the EU has set rather stringent rules of origin on the cashew nut sector that depends on 63 percent of imported materials. To satisfy all EU regulations, Vietnam is required to use local raw material supply.

The EVFTA also stipulates detailed regulations on procedures and legally binding conditions covering the time-limit and manner in which countries must obey certificates of origin procedures for each specific case. This is a big challenge for Vietnam as the origin traceability capacity to prove those origins remain inadequate and the necessary system for such diligence is yet to be seen.

Short term pain, long term gain?

As Vietnam’s economy grows and the country continues to integrate more deeply into the global marketplace, the kind of dilemmas thrown up by pacts like the EVFTA will become more commonplace. In the short term, domestic firms may feel the heat as increased competition takes its toll. However, greater export opportunities and requirements to reach higher standards will underpin future economic growth.

If predictions are correct and the EVFTA is signed within the next few months, Vietnam is destined to become the most promising business destination for European businesses in ASEAN.

For more information about investing in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Will a new PPP law pave the way for Vietnam’s infrastructure?

Fast-growing Vietnam is facing an infrastructure bottleneck. With the state lacking the budgetary might to finance the nation’s much-needed highways, tracks and tunnels, experts are increasingly looking towards the private sector to fill in the financial shortfall.

 

Amid such constraints, the continuing mobilisation of financial resources from non-state sectors for transport infrastructure development is urgently necessary. According to the Asian Development Bank (ADB), Vietnam will need up to US$17 billion for infrastructure investment between 2015 and 2025.

 

In recent years, the Government has made moves to create a transparent legal framework for investment projects, under the public-private-partnership (PPP) programme. PPP is a form of investment between a government agency and a private investor for projects in construction, renovation, operation and management of infrastructure, as well as the provision of public services. Through PPP, governments can leverage efficiencies and expertise in the private sector to achieve their development goals.

 

However, shortcomings and limitations plague the sustained implementation of such projects and investors are wary of signing up in the current climate.

 

Although a number of decrees have been put forward to facilitate investment, critics have noted that the environment is not attractive and investors are not granted the necessary flexibility regarding these projects. PPP investment activities were regulated by Decree 15/2015/ND-CP on PPP investment and Decree 30/2015/ND-CP guiding the implementation of some articles of the Law on Bidding, as well as several other documents.

 

From 1990 to 2016, the country completed 84 PPP projects amounting to US$16.2 billion, with 79 percent of the projects in the energy sector. However, since the issuance of the PPP pilot programme in 2011, no PPP project has been signed under this framework. Compared with regional neighbours, foreign investment in infrastructure in Vietnam is lagging behind.

 

Recently, the government issued Decree 63/2018 (Decree 63), replacing Decree 15/2015, specifying the areas, investment conditions, and procedures for PPP projects in Vietnam. The new decree increases the investor equity ratio for PPP projects to 20 percent. Decree 63 takes effect in June this year.

 

Does this go far enough?

 

Inspection and audit results on build-operate-transfer (BOT) and build-transfer (BT) projects showed that most applied limited tendering in choosing investors, leading to low competitiveness and a lack of transparency. Meanwhile, the announcement of projects has yet to be implemented in an open manner.

 

At the same time, the supervision of projects’ implementation has been ineffective, leading to low quality construction works and many other problems.

 

In response to this range of issues, Vietnam’s National Assembly has requested that the government come up with a PPP law that removes such difficulties and legal restrictions in order to promote this form of investment.

 

3 things a successful PPP law should include

 

  1. A clear risk-sharing mechanism

 

Authorities have yet to clarify a risk-sharing mechanism in which the government guarantees a certain minimum revenue flow for the developer, agreeing to top it off if it isn’t met. This is especially important in the case of infrastructure, where projects can often carry significant risk. Some regulatory clarity would help investor confidence.

 

The current model transfers most of the risk on to the private sector. To attract private sector investors and operators, a transparent policy framework and fair allocation of risk are key. Similarly, attractive deal structures with a clearly defined project scope and adequate guarantees on the expected financial return will help to encourage participation in PPP deals.

 

  1. Exchange rate guarantees

 

Vietnam’s infrastructure projects will sell their output in the local currency, the Vietnamese dong, while long-term financing will be provided in a foreign currency. This has a negative impact on the bankability of such projects. A new and successful PPP law would need to improve on this point by including a mechanism for government guarantees of convertibility, so investors can be sure of the same exchange rate over the course of a long-term construction project.

 

Limitations on the remittance of foreign currencies overseas will also need to be scaled back.

These obstacles, and the risk of currency fluctuations, have a big impact on investor confidence. Their removal would go a long way in attracting the kind of projects needed to keep the country moving.

 

  1. Financial incentives

 

As a typically long-term investment, infrastructure projects will need added incentives and guarantees on return in order for investors to make the 20-30 year commitments required for big constructions.

 

To offset the risk, the government could look to rewarding investors with part of the spillover effect of development. Incentives could help to reduce the uncertainty inherent in infrastructure development, where revenues can depend on traffic flows and unpredictable circumstances in the future.

 

In short, to attract willing investors, Vietnam needs a framework that ensures transparency, fairness and predictability, including reliable policies and regulations as well as specialised PPP branches of government that investors can trust.

 

Other factors, like life cycle cost, safety, resilience and environmental impact also need to be taken into account.

 

The demand for infrastructure development in Vietnam is robust, but the legislative environment is not currently conducive to the signing of PPP projects that are viable or bankable. Clarification in the form of a PPP law that covers the above points would improve the situation by increasing transparency and reducing risks for enterprises eyeing the country.

 

For more information about investment in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam’s Special Economic Zones – sorting fact from fiction

A significant amount of recent media coverage has been devoted to the subject of special economic zones (SEZs) and controversies surrounding their establishment in Vietnam. Faced with mounting public anger, Vietnam had delayed a final decision on the establishment of three new SEZs.

 

Economic zones are not a new phenomenon, with 18 coastal economic zones and 27 border economic zones already present in Vietnam. The establishment of these areas was part of the country’s early economic reforms and they were designed to offer a range of incentives to investors, including free tariffs on selected items, lower personal income tax and reduced rent and fees. There are a further 325 state-supported industrial parks, which offer a more limited range of incentives.

 

What is an SEZ?

 

An SEZ is a designated area in a country that is subject to unique economic regulations that differ from other areas in the same country. Such areas are used to convey financial and legal advantages on businesses and encourage them to invest. SEZs are one of the most widely used methods to attract foreign direct investment (FDI), and have been deployed successfully around the world.

 

The Vietnamese government has shown a strong desire to develop SEZs, where it hopes relaxed regulations will in turn spearhead regional and national growth. This issue has been high on the agenda, especially at a point where the country needs breakthrough institutional reforms to maintain its growth momentum.

 

To ensure the success of SEZs in Vietnam, the Ministry of Planning and Investment studied experiences from 13 other countries around the world with both successful and failed SEZ development models. Based on that research, a model for SEZ development suitable for Vietnam’s economic conditions was drawn up in the new Law on Special Administrative-Economic Zones.

 

At a cost of VND1.5 trillion (US$66 billion), three new SEZs were proposed for the provinces of Quang Ninh and Khanh Hoa, as well as on the southern resort island of Phu Quoc. As per the plan, investors were to be offered greater incentives and fewer restrictions than available in other parts of the country, kickstarting investment. The freedom from local regulations is expected to make them competitive internationally and foreigners were to be lured with tax breaks and streamlined routes to permanent residency.

 

Notably, based on the specific geographic advantages of the three SEZs, the MPI proposed several preferential industries to focus on and develop for each zone, including high-tech sectors, tourism and trade.

 

The development of Phu Quoc in particular is high on the agenda, as the government has highlighted its potential as a commercial, service and trade hub which adheres to international standards. Indeed, land prices shot up on Vietnam’s largest island following news that it was slated to become an SEZ and authorities stepped in to suspend land use conversions and land transfers in the zones until a new SEZ law is passed.

 

Among infrastructure projects planned for Van Don, in the northern province of Quang Ninh, is an international airport which would connect the area with other Asian cities such as Shenzhen, Shanghai and Hong Kong. This is in line with the government’s plans to establish Van Don as a tourist hub.

 

Courting controversy

 

The draft legislation on the new SEZs submitted to the National Assembly earlier this year sparked concern over an article allowing land in the three special zones to be leased by foreign investors for up to 99 years.

 

Critics of the bills say allowing foreigners to own land for nearly a century could pose serious threats to the country’s national security, with simmering tensions over the South China Sea an ominous backdrop to the proposals.

 

Attempting to allay concerns, the Prime Minister announced that the 99-year term would be reconsidered. Even so, approval of the plan has been pushed back until the next session of the National Assembly so that kinks can be ironed out.

 

Unfortunately, reducing such terms could limit the ability of SEZs to attract foreign investment. Experts have argued that such provisions are essential to incentivise and stabilise long-term investment projects. Extended timeframes for land allocation are crucial to attract the big investors required to ensure success of the zones. In comparison, legislation in other countries allows significant extensions when investing in an SEZ.

 

Other issues raised include the generous tax incentives, which could breed unhealthy competition, and a lack of consideration for environmental issues.

 

Investing in three SEZs at the same time is a risky gamble for Vietnam and requires careful management and resource distribution to ensure their success. Quibbles over the details risk unsettling investors, and watering down attractive land use and tax policies could doom the endeavour before it’s begun.

 

The development of SEZs should be considered a framework for testing economic reforms for the economy as a whole, creating spillover effects and building experience to perfect institutions.

 

A reform-oriented mindset and willingness to experiment with incentive models will be crucial in bringing the SEZs to life. More thought will be needed to address the concerns of voters, but lawmakers shouldn’t lose sight of the need to incentivise investors with radical ideas.

 

For more information about investment in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam’s New Cyber-Security Law a Headache in the Making

Vietnam’s National Assembly yesterday overwhelmingly approved a heavily-debated Cyber-Security Law that could have significant impact on all online service providers with clients or customers in Vietnam.  While the stated aim of the new Law is to “protect national defense and ensure social order”, it imposes obligations on digital businesses that could have far-reaching and unintended effects without necessarily advancing the Law’s primary objective.  Key among such obligations are data localization and mandatory commercial presence rules that should worry not only tech giants but any company providing online services to customers in Vietnam.

While much of the commentary has focused on social network providers (e.g. – Facebook, Youtube) or ‘pure tech’ behemoths (e.g. – Google), the language of the Law is broad and potentially captures a wide range of business activities and models.  First and foremost, the Law appears to cover all enterprises (whether based onshore or offshore) that “provide services on the telecommunication network, internet, and other value-added services on the internet in Vietnam.”  In the digital age, this wide language covers a vast array of activity and is clearly not limited to social media services.  Take banks as an example.  If a foreign bank provides an online service to a client in Vietnam (including a non-Vietnamese citizen resident in Vietnam), will it be covered by this Law?  The answer is clearly yes according to the wording of the Law.  Another example would be an online booking services company like AirBnB which is accessible to, and used by, residents of Vietnam.  Again, such service activity is clearly covered by the wording of the Law, whether or not that is the true intent.

Once a company is covered by the Law, other requirements may apply.  For example, the Law requires companies to “authenticate upon registration” and “keep confidential” users’ information.  Critically, companies (wherever located) must also cooperate with the authorities to provide information of their users when such users are investigated or deemed to breach laws on cybersecurity.  Companies also need to grant the authorities access to their information system when there is “a serious breach of law or action causing serious loss to the public order and safety.”  Unclear as ever, these regulations will require further elaboration in implementing Decree(s), as well as implementation in practice, before the true implications can be known.

Another significant requirement is data localization.  Compared with earlier drafts, the version approved by the National Assembly appears to narrow down the kinds of companies which must perform data localization.  Nevertheless, the potential scope is broad: companies which “collect, exploit, analyze, or process” personal information, information created by users in Vietnam and data on the relationship of the users must store data locally for a period of time.  However, the language of the Law on this is still very vague and, absent further guidance, open to discretion of the authorities to interpret.  To take previous examples, a bank could be deemed as “collecting, exploiting, analyzing, processing” personal information of users in Vietnam when it establishes or provides online banking services for such clients.  A booking reservation company, or an online film provider (e.g. Netflix) does the same.  Read literally, all such companies will need to ensure data localization within Vietnam.

Not only that, such companies will also be required to establish commercial presences in Vietnam (either a branch or a representative office).  Oddly enough, it is unclear whether establishment of a fully-fledged subsidiary in Vietnam would be sufficient under the Law.  Many companies supply services to their customers in Vietnam via the internet without having a commercial presence in Vietnam.  This kind of blunt instrument will cause uproar and, one presumes, flagrant violations will abound which, for the most part, authorities in Vietnam will be unable to pursue on any practical level (though the desire and ability to shut off access to individual websites may grow over time).  The Law gives some wriggle rooms on this point by assigning the Government to elaborate the commercial presence requirement further and we may find that the scope will be narrowed down.

Many tech and non-tech companies voiced their concerns in the lead up to this Law. However, the National Assembly justifies its approval based on the need to ensure national defense and security.  A National Assembly spokesperson has stated that the regulations are feasible and not contrary to free trade agreements that Vietnam is a party to.  The jury however remains out on both these points.

The Law will take effect on 1 January 2019.  Implementing Decree(s) are expected to elaborate further prior to then though no drafts are available for review at present.

By Giles Cooper and Le Nguyen Duy Hau.  For more information about the new cyber-security regulations in Vietnam, please contact Giles at GTCooper@duanemorris.com, Hau at HNLe@duanemorris.com or any of the lawyers in our office listing.  Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

What can be done to help Vietnam’s SMEs?

Small- and medium-sized enterprises (SMEs) are central to Vietnam’s economic growth, providing significant contributions to job creation, export promotion and poverty reduction.

 

However, despite accounting for some 98 percent of the country’s enterprises, 40 percent of GDP and 50 percent of employment, the performance of SMEs is still constrained by many factors, both internal and external, such as shortage of qualified human resources and limited access to technology, as well as administrative hurdles.

 

Despite the obstacles, the number of SMEs continues to grow, adding around 100,000 in 2016, thanks to government reforms. For this trend to continue, and to meet the goal of one million enterprises by 2020, changes are needed to smooth the entry of firms to the market and help startups to grow. Here are three steps to ensure the sustainable development of smaller firms in Vietnam:

 

  1. Improve access to credit

 

Among the detrimental external factors, lack of access to credit is considered the primary obstacle preventing the growth of SMEs. Up until now, banks providing commercial loans have allocated their resources to larger firms rather than smaller enterprises, citing higher default risks, lack of financial transparency and lack of assets as factors in the decision.

 

Complex banking procedures and a shortage of appropriate loan packages for SMEs compound the problem.

 

According to the World Bank’s ‘Doing Business 2018’ report, Vietnam ranked 68 out of 190 economies – jumping 14 places against the previous year. The country ranked 29 out of 190 economies in terms of their access to credit. In terms of both score and ranking, Vietnam measured well above the average for OECD (Organisation for Economic Cooperation and Development) members and East Asia-Pacific countries.

 

The World Bank attributed the country’s position to its legal framework regarding the expansion of collateral assets and the completion of the credit information system from 2008 to 2017. Specifically, the Civil Law 2015, which came into effect on January 1, 2017, has expanded the scope of assets to be used as mortgages, which helps improve access to credit and puts businesses and investors in a better position.

 

Despite the positive figures, a large number of enterprises still find it cumbersome to access bank credit and are often denied.

 

Therefore, one of the most important measures to support SMEs is to improve their access to loans. Diversified capital raising channels and a credit market for SMEs, with appropriate lending packages based on demand, could help to decrease the dependency on banks. In return, small firms should work on improving transparency to reduce risks.

 

  1. Link up to global supply chains

 

As of 2017, only 21 percent of Vietnamese SMEs were participating in global supply chains, much lower than neighbours like Thailand and Malaysia, sitting at 30 percent and 46 percent, respectively. Integrating further with global supply chains in terms of procurement, operations and sales will allow firms to manage competition, reduce risks and cut costs.

 

Slow progress in dismantling state-owned enterprises, sluggish productivity and an uncompetitive private sector result in a shortage of private medium-sized enterprises. This ‘middle segment’ needs to link up with well-managed supply chains to dominate markets, gain trust from customers and expand business strategies. Vietnamese firms have struggled to join big markets and are left out of crucial supply chains.

 

This situation can change. As a member of APEC, ASEAN and the WTO, Vietnam holds a critical position politically and geographically. Vietnam’s proximity to southern China, home to many production networks, also gives it a competitive edge. Taking advantage of these trade opportunities, as well as coming digital and e-commerce trends, would help to streamline the country’s supply chains and build a more dynamic private sector.

 

  1. Cut red tape

 

A survey released last year by the Vietnam Private Sector Forum showed that 44 percent of enterprises said they had missed market opportunities because of legal barriers and restrictions.

 

In an effort to simplify and remove barriers to businesses, Vietnam’s Ministry of Industry and Trade (MoIT) has moved to cut business and investment red tape in half. Such a move is designed to make administrative procedures easier for the private sector, and especially small and medium enterprises. The country’s business environment has been gradually changing as the government moves to develop the private sector.

 

This is a step in the right direction, however, the results are neither meeting the expectations of enterprises, nor government targets. Vietnam’s administrative environment has long been criticised for being too complicated and creating unnecessary barriers for businesses. Analysts often complain that the many conditions and regulations in the country do not meet international standards, such as requirements on minimum or legal capital or human resources rules.

 

The World Bank suggested that the country needs to do better at supporting early-stage businesses, particularly in dealing with construction permits, registering property and enforcing contracts.

 

These are just some of the obstacles standing in the way of Vietnam’s smaller businesses. With the Law on Support for Small- and Medium-sized Enterprises (SME Law, 04/2017/QH14) coming into force at the start of 2018, it is hoped that the challenges detailed above will be addressed. A dynamic, competitive and innovative private sector, in which SMEs play a leading role, is a solid guarantee of Vietnam’s future prosperity and growth. The government has shown a desire to help the country’s fledgling firms, now is the time to put words into action.

 

For more information about Vietnam’s investment climate, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

3 reasons smart investors are banking on Vietnam

Vietnam’s Gross Domestic Product (GDP) expanded by 6.81 per cent last year, marking its highest growth rate in a decade. The country continues to impress, with the economy growing by 7.38 percent in the first quarter of 2018 – one of the fastest rates in Asia – and total growth is expected to be in the region of 6.7-6.8 percent for the year. It could even hit 7.1 percent, according to the Asian Development Bank.

 

Looking ahead, the Vietnamese Government is seeking to maintain the country’s good growth until at least 2020, with the Prime Minister encouraging private companies – currently accounting for 43 per cent of GDP – to grow and increasing investment into rural areas.

 

There’s much to celebrate about Vietnam’s growth over the last few years, and many investors have already taken note and got in on the action. For those still on the fence, here’s just three reasons why a bet on the country’s economy may pay off handsomely.

 

Switched on to electronics

 

Other countries in the region tend to export raw materials or components to China, where they are assembled into other products. Vietnam exports mainly finished goods.

 

One such producer, the Samsung Electronics factory in Thai Nguyen, in northern Vietnam, employs more than 60,000 people and produces more mobile phones than any other facility in the world. Samsung Electronics’ combined factories in Vietnam produce almost a third of the firm’s global output. So far, the company has invested a cumulative US$17 billion in the country.

 

The relationship has been mutually beneficial, helping to make Vietnam the second-biggest exporter of smartphones in the world, after China. Samsung alone accounted for almost a quarter of Vietnam’s total exports of US$214 billion last year.

 

The company’s presence in Vietnam will not stop there, with co-CEO, Koh Dong-jin, recently informing the Prime Minister of plans to expand production and open further plants.

 

Samsung isn’t alone in Vietnam’s exciting electronics landscape. The export turnover of electronics and household electrical appliances accounted for 28.9 percent of total export turnover. Mobile phones & components, cameras and other machinery brought in revenue of US$61.8 billion, an increase of US$14.45 billion compared to the year before.

 

An international mindset

 

Vietnam received FDI worth 8 percent of GDP last year — more than double the rate of comparable economies in the region. Foreign-owned firms now account for nearly 20 percent of the country’s output. They have grown more than twice as fast as state-owned enterprises over the past decade, despite the country’s nominally communist government.

 

In contrast to China, a large rival in the cheap manufacturing stakes, Vietnam is liberalising its economy to welcome foreign industry. In 2015 the government opened 50 industries to foreign competition and cut regulations in hundreds more. It sold a majority stake in the biggest state-owned brewer, Sabeco, to a foreign firm last year. Similar sales are expected in the coming months.

 

Vietnam’s enthusiasm for free-trade deals has made it especially alluring to foreign investors. It is a founding member of the Trans Pacific Partnership, a multilateral trade agreement that includes Australia, Canada and Japan, among others. Although the agreement fell apart without US support, it was quickly repurposed and renamed. A significant trade pact with the European Union is also on the horizon. The deal signed with South Korea a few years ago has made it South Korea’s fourth-biggest trading partner.

 

Fertile ground for start-ups

 

The government has put forward a number of regulations and programmes to support start-ups, especially innovative ones, including Decree 38/2018/ND-CP (Decree 38) on innovative start-up investment. Decree 38 identifies and recognises innovative start-up investment activities as a business, and cements the legal status of innovative start-up companies and funds.

 

The decree is expected to provide a legal basis for private investors when jointly contributing capital to establish a creative start-up fund and streamline capital flows for creative start-up activities.

 

According to the Vietnam Chamber of Commerce and Industry (VCCI), the country boasts a strong entrepreneurial drive and ranks among the 20 economies with leading entrepreneurial spirit.

 

Up to US$291 million was poured into Vietnamese start-ups last year, a year-on-year increase of 42 percent. However, this figure lags behind the region as whole, which saw investment of US$7.86 billion. The number of M&A deals remains small and no startup has yet made an IPO. Clearly, there is still a lot of room for growth in this sector.

 

The great potential hasn’t gone unnoticed and the government has recognised the tremendous importance that the start-up movement has to the economy and accelerated its development.

 

As well as a young, cheap and plentiful supply of workers, the Vietnamese economy possesses a dynamism unlike others in the region. Nurturing such domestic entrepreneurship is the key to sustainable growth. The Vietnamese government has already set out ambitions of creating a vibrant ‘start-up nation’, with a million new enterprises being born by 2020.

 

These are just a few of the reasons why smart investors should be seriously considering Vietnam as their next investment destination. In addition to the above, economic growth will be driven by manufacturing and export expansion, rising domestic consumption, strong investment fueled by foreign investors and domestic firms, and an improving agriculture sector. These is an abundance of optimism over the country’s future, and the signs are that this year Vietnam will be one of the strongest performers in the region.

 

For more information about investing in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.