Category Archives: Investment in Vietnam

Vietnam plays a calculated game of risk with new solar PPA

Vietnam appears to be betting on gung ho enthusiasm to kick start solar power development rather than taking bold steps to deliver a stable backbone to the industry.  It’s a gamble that may pay off in the short term but might also saddle the country with poorly-conceived and under-performing projects in the long term.

 

To much fanfare, Vietnam’s Ministry of Industry and Trade (MoIT) released Circular 16 in including final template power purchase agreements (PPA) for the solar energy sector. The circular and PPA templates follow a draft issued back in April this year, and are stated to be mandatory templates for utility-scale and rooftop solar projects.

 

The original draft PPA for utility scale grid projects was met with criticism, and declared non-bankable by most experts and commentators (despite hewing closely to the previously-issued standard PPA for wind projects). Unfortunately, little has changed with the final version of the PPA.  Would-be investors raised serious concerns over the amount and type of risk the PPA sought to shift to investors, and the message delivered was that unless the government was willing to address some of the most glaring problems, few reputable foreign solar players and, just as importantly, few reputable financiers would be likely to sign up.

 

Having largely ignored recommendations provided, the final text does little to inspire confidence. The final PPA does not improve upon the main critical issues highlighted in April.  Issues include a lack of measures to compensate producers for interruption in the ability to receive power, force majeure conditions, contract suspension, and settlement of disputes.

 

Tariff trouble

 

With the FiT rate of US$0.0935/kWh for grid-connected solar power projects confirmed, Circular 16 goes on to outline that the FiT is available for 20 years to projects, or parts of projects, that reach commercial operation before 30 June 2019.

 

As with the draft from April, the final PPA does not include any indexation of the FiT to the Consumer Price Index (CPI) to address inflation risks. In response to concerns over fluctuating exchange rates, the circular does state that “the FiT for the following year shall be adjusted according to the central exchange rates of the Vietnamese dong against the US dollar announced by the State Bank of Vietnam on the last working day of the preceding year.”  Annual adjustment is better than none but it wouldn’t have been difficult to spread adjustments throughout the year.

 

As a way to offset the relatively low tariff, and inflation risks, investors may be able to benefit from tax exemptions on raw materials and supplies imported for their projects, corporate income tax relief, and an exemption from land rental fees within the first three years of commencing commercial operation.

 

A risk too far?

 

Under Decision 11 (which also set the FiT) and the final version of the PPA appended to Circular 16, Electricity of Vietnam (EVN) is responsible for purchasing the entire power output from grid-connected projects at the stated FiT.

 

However, the PPA relieves EVN from payment obligations in cases where it is unable to take power due to a breakdown of the transmission or distribution grid. With many solar projects currently focused on few central locations, the capacity of existing facilities to absorb power must be a cause of some concern given the PPA’s transfer of such risk to power producers.

 

Worryingly, the PPA lacks any mechanism to compensate power producers should interruptions happen outside of their control. Not only does the PPA not provide for extension of time in case of force majeure, but if force majeure were to prevent a power producer from meeting its obligations for a year then EVN could unilaterally terminate the PPA with no compensation payable.  In such circumstances, the power producer is left alone in the dark.

 

Such arrangements might be acceptable to projects that manage to negotiate clear ‘take or pay’ terms and/or government guarantees, but it is highly questionable whether and to what extent either of these will be possible in the current climate.  As a direct consequence, it is equally questionable to what extent private finance will be prepared to bear the risk, a fact that will prompt capital to seek more favourable conditions in other markets.

 

Playing by house rules

 

If the above portends of problems in the relationship with EVN, investors may be further discouraged by the lack of specifics in terms of dispute resolution. The PPA is governed by Vietnamese law and does not itself expressly include the right to agree on international arbitration to resolve disputes, a condition that would typically be considered an important requirement.

 

As it stands, disputes can be submitted to the Electricity Renewable Energy Department (formerly the General Directorate of Energy) for mediation. If that doesn’t work, there is the option of escalating the issue to the Electricity Regulatory Authority of Vietnam (ERAV) or pursuing litigation in Vietnam’s courts.

 

The PPA does allow for “another dispute resolution body to be agreed by the parties”, which potentially opens the door for sellers to negotiate with EVN on dispute resolution, including offshore or even domestic arbitration.  But it is not clear if EVN will agree to directly amend PPAs to allow for express prior agreement on offshore arbitration or simply open the door for such a discussion at the time of a dispute.  Clearly in the latter case the deck is firmly stacked in EVN’s favour.

 

One step forward… wait and see

 

The MoIT is well aware of the deficiencies in the PPA and knows that, in its current form, it will not attract the kind of investment Vietnam needs if it is to meet both its energy demands and renewable targets. They know that investors were hoping for some of the shortfalls to have been addressed, and as such the agreement remains – for all intents and purposes – largely unbankable.

 

On the other hand however, the MoIT is also acutely aware of the significant interest in Vietnam’s solar sector. The vast potential of solar power is there for the taking, with abundant land available for the development of solar farms for first movers. With this in mind, the PPA can be considered an attempt to test the waters – asking how much risk investors are willing to bear in return for a piece of the action.

 

The MoIT is confident that smaller, nimble players will be attracted to Vietnam and make investments, regardless of the bankability of the PPA on paper. The question truly posed by Circular 16 is: exactly how much risk are investors willing to accept?  What better way to test it than in open market conditions?  If risk allocation adjustment need to be made in future, the Prime Minister, MoIT and EVN can make them relatively easily.

 

Ultimately, although the PPA is “final” on paper, the real trick is for investors to work hard and smart to agree adjustments on a project-to-project basis that re-align specific risks in acceptable ways.  Each project is a sum of many different elements and successful investors in the early days at least will be the ones that focus their energies on key issues for their projects where they can make meaningful progress.  Opportunity vs. risk: Vietnam is playing a calculated game at the dawn of the solar energy sector.  Where the chips fall remains to be seen.

 

For more information about Vietnam’s 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.

Vietnam’s proposed wind power price hike – is it enough?

One of the main criticisms levelled at Vietnam’s wind power sector is the relatively low feed-in tariff (FiT) introduced by the government in 2011. With the country’s rapid growth, energy demand is expected to soar over the coming years. Coupled with international pressure to keep to its greenhouse gas commitments, Vietnam is in desperate need of large-scale and long-term investment in its renewable energy sector.

 

The buying price of VND1,614/kWh (US$0.078) was set for all land-based projects in the country, with 6.8 cents paid by State-run power monopoly Vietnam Electricity (EVN), and the rest coming from the country’s Environment Protection Fund.

 

However, the rate, intended to encourage the development of wind power projects, was considered insufficient for investors to recover their investment capital. The tariff is also much lower than in neighbouring Indonesia (US$0.11), Malaysia (US$0.1476) and Thailand (US$0.19).

 

Change of direction

 

Vietnam’s Ministry of Industry and Trade (MoIT) has recently proposed an adjustment to the rate, asking the government to raise the buying price for wind power in an effort to help investors cover high input costs. It is hoped that such a move would push foreign firms to develop new wind power projects or expand their existing farms. Accelerated development in this sector is vital if Vietnam is to meet the energy targets it has set for itself, as well as wean the country off dirty and expensive imports of coal.

 

The ministry has suggested the price be lifted to US$0.087 per kilowatt-hour (kWh) for wind energy projects on land and US$0.0995 cents per kWh for offshore farms. Such a rate would still lag behind regional competitors and the global average of US$0.196 per kWh as reported by the World Energy Commission, but may present a more feasible option to investors.

 

On top of the off-putting FiT, the number of wind power projects in Vietnam remains low as only wind turbine towers, accounting for 20 percent of production costs, can be produced locally, while investors have to import the remaining components.

 

Not winding down yet

 

There’s little doubt about the country’s potential for wind exploitation ­– according to a World Bank report, 8.6 percent of Vietnam’s land mass is suitable for the construction of wind farms, which would produce sufficient electricity to meet a lot of current and future power needs.

 

Some of the country’s currently operating wind farms, specifically in the province of Binh Thuan, work with the previously promulgated FiT of US$0.078 per kWh, and the Bac Lieu wind farm enjoys US$0.098 per kWh due to its offshore location.

 

The MoIT has highlighted these projects as part of the reasoning behind the rate hike. Concerns have been raised by the investors behind the projects over the time it would take to recover their investment capital. In fact, the investors in question had previously requested authorities raise the regulated FiT to $0.095 per kWh, but were unsuccessful.

 

According to the investor of the Phu Lac wind farm, the first phase of the project, which came into operation in November 2016, has total investment capital of VND1.1 trillion (US$48.4 million). With the existing FiT, it would take around 14 years to recover the investment of just the first phase. Considering the average lifespan of a wind farm is just 20 to 25 years, it’s no wonder that developers are hesitant about breaking ground on new projects.

 

As of now, there are 48 registered wind power projects with total capacity of 5,000MW in Vietnam, 23 of which have had their pre-feasibility reports approved by the MoIT and are patiently waiting for an increase in the FiT. It remains to be seen whether the suggested increase is enough for the projects to move ahead.

 

Incremental improvement

 

The proposal by the MoIT demonstrates an acceptance that despite a range of tax benefits offered to foreign investors including exemptions from customs duties, a preferential corporate tax rate of 10% and income tax and land use fee exemptions, the government’s initial energy strategy proved unappealing to investors. To offset any complaints, the trade ministry has calculated that the price adjustment they are proposing would raise EVN’s production costs by a slight VND0.08 per kWh this year and VND0.23 per kWh in 2019.

 

Even a light increase in the FiT, as put forward by the MoIT, could stoke some growth in the sector. The attraction of foreign investors capable of producing complicated parts could mean that the localisation ratio is bumped to more than 40 percent. For example, China has reached a localisation ratio of almost 100 percent for their wind power projects, but the selling price of the energy stands at around US$0.08 per kWh.

 

In summary, the proposed hike seems insufficient to really improve Vietnam’s position as a renewable energy leader in Southeast Asia. The sector remains riddled with problems of transparency and the perpetual presence of giants like EVN is an obstacle for smaller private players looking to enter the market. A meagre FiT does little to neutralise the risks faced by investors and power producers, especially with more promising offers in the region. The silver lining, however, is that authorities are open to change. The MoIT is echoing the concerns of the renewable energy sector, from both established and potential projects, and looking at ways to develop a more favourable climate going forward. Even if they’re not yet blown away by the increase, investors would do well to watch this space.

 

For more information about Vietnam’s 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.

Hope and hesitation at M&A forum

Discussion at this year’s Vietnam M&A Forum, which took place earlier this month in Ho Chi Minh City, revolved around the challenges facing Vietnam’s M&A market and the need for a big push to maintain the momentum of previous years.

 

As of this month, deals have fallen short of the record levels in 2016, and surpassing the US$5.8 billion total looks like a tall order. Although impressive, last year’s figure represented just 5% of Southeast Asia’s total M&A activity, with Singapore alone claiming over 50%. Additionally, 64% of the deals in Vietnam were valued at less than US$20 million. While 77% of the deals were domestic, Thai firms were the biggest foreign buyers in terms of value, enacting aggressive takeovers of major Vietnamese firms in retail and consumer goods. In terms of quantity most deals came from Singapore and Japan.

 

With advantages of proximity in terms of geography, culture, and climate, Thai firms have sought to penetrate the growing Vietnamese market quickly. Alongside other neighbouring nations who have struggled as their home markets mature, they have increasingly sought high-growth or low-production-cost economies for expansion elsewhere.

 

There is a lot to celebrate, but the total value of M&A activity reached just US$1.1 billion in the first quarter of 2017, a drop of 24.4 percent year-on-year. A slowdown in the State’s equitisation process is partially to blame for the drop, and many of the speakers at the M&A Forum expressed the need for a big push in the second half of the year.

 

Trains, planes and automobiles

 

To continue the high rate of economic growth achieved over the past few years, the Ministry of Planning and Investment (MPI) concluded that Vietnam is in dire need of M&A investment in the infrastructure sector. Deals need to come in thick and fast across many branches of the economy, with roads, railways, airports and seaports needing upgrades to meet international standards, in addition to the continued expansion of the country’s real estate and retail conglomerates.

 

As well as the increased divestments of State-owned enterprises, Vietnam’s administrative policy framework will need to be improved to attract and accommodate foreign investors.

 

Banking on big deals

 

Besides recent prime ministerial decisions regarding the SOE equitisation process, the government has made a priority of dealing with non-performing loans. This in particular could mean big news for M&A activity in the banking sector.

 

A resolution was recently adopted by the country’s National Assembly, with the State Bank of Vietnam (SBV) aiming to reduce the ratio of non-performing loans (NPLs) to below 3 percent by 2020. As part of the resolution, credit institutions, foreign entities and bad debt trading institutions will be able to buy and sell bad debts in an open and transparent way.

 

The move has had a positive impact on banking shares, and recent reports suggest that South Korea’s Shinhan Bank is poised to acquire a financial institution in Vietnam, following its takeover of ANZ Vietnam’s retail business. Two Japanese investors are also negotiating the purchase of stakes in two different Vietnamese financial institutions.

 

Moves like these show that foreign firms appreciate the potential of Vietnamese consumer finance, especially with attempts to unburden the system of its bad debt. StoxPlus, a leading financial and business information corporation in Vietnam, valued the market in 2016 at US$26.55 billion, with an annual growth rate of 30-40%.

 

Japan’s interest is good news for Vietnam’s budding financial sector, which could do with an injection of experience from more established players.

 

So, there is reason to be optimistic. However, participants at the M&A Forum stressed that foreign-ownership limits and the lack of clear regulations in areas attractive to big investors are still obstacles to fulfilling the country’s potential.

 

Dearth of details

 

Foreign investors often bring up the subject of transparency, which remains a big issue. The opaque investment environment can complicate negotiations in Vietnam, and this is particularly true when dealing with equitised state-owned enterprises. Investors are required to make substantial upfront commitments in terms of time and money at the early stages of the bidding process, shouldering significant risks to enter the market.

 

Used to dealing with more sophisticated operations, the financial statements of Vietnamese companies can also fall short of investors’ expectations. There is certainly a need for advisors and consultants, who can help with valuations and due diligence, offsetting some of the risk involved.

 

Until Vietnamese firms grow large enough to regularly participate in substantial cross-border M&A deals, foreign partners will need to make sufficient preparations when it comes to tax and legal requirements. Over time, Vietnamese companies will become more aware of the requirements set forward by investors in M&A transactions, which will generate more deal flow as well as shorten the transaction process.

 

Cause for cautious optimism

 

These complaints aside, the overall impression at the M&A Forum was positive, with some predicting that M&A activities in Vietnam would double or triple over the next five to ten years. With some adjustments it’s certainly possible to surpass 2016’s deal value in the short term, especially if the growth of the consumer retail sector continues to attract the attention of Korean investors. Raising the foreign-ownership limits in Vietnamese banks could also prove to be a tipping point for some big transactions.

 

To maintain momentum over the long term, however, more significant adjustments will be needed. The issues of equitising SOEs, state divestment and the foreign ownership cap will become more urgent as time goes on. The government will need to respond to suggestions and support legal reforms if the country is to attract more M&A capital. Crucially, the efficiency and transparency of the M&A market will need to be improved for foreign investors. Policymakers have promised that further legal reforms are underway and the government is pushing forward with state divestment. Let’s hope they keep to their commitments.

 

For more information about M&A 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.

Plenty of life in Vietnam’s M&A market despite bumps

Globally, 2017 has been an unpredictable year for the mergers and acquisitions (M&A) market, with the hangover of political and economic instability from 2016 inspiring caution among investors.

 

Foreign investment has been put on the back foot due to rising protectionism and the failure of promising free trade deals like the TPP (Trans-Pacific Partnership). Vietnam in particular has suffered and will need some big breakthroughs to regain lost momentum.

 

Although the TPP would have brought some big benefits to Vietnam, it is expected that other trade deals on the horizon will make up most of the shortfall. The nation has joined six regional FTAs as an ASEAN member, including the ASEAN Free Trade Area (AFTA) and the five FTAs between ASEAN and China, Japan, South Korea, India, Australia and New Zealand, as well as four bilateral FTAs with Chile, Japan, South Korea and the Eurasia Economic Union (EAEU). Negotiations over an FTA with the European Union (EU) have also been concluded.

 Sluggish start

 

Whereas 2016 was an exciting year for M&A in Vietnam, 2017 has gotten off to a slower start. According to a report released in advance of the M&A Forum (August 10, HCMC), deals in Vietnam hit an all-time record of US$5.8 billion in 2016, a growth of 11.92 percent compared to 2015. However, the market has slumped since the latter half of last year with fewer headline signings. The total value of M&A activity reached just US$1.1 billion in the first quarter, a drop of 24.4 percent year-on-year.

Continue reading Plenty of life in Vietnam’s M&A market despite bumps

Vietnam looks for greener growth

As Vietnam’s big cities grow, clusters of new buildings sprout up around their peripheries. Rapid urbanisation is transforming cities like Hanoi, and the quiet streets of a few decades ago are today unrecognisable. The question remains – how green is Vietnam’s sprawl?

 

Buildings account for around 36 per cent of the country’s total energy consumption and 25 per cent of emissions, including a third of carbon dioxide emissions – the main cause of global climate change.

 

The concept of green construction was introduced for the first time in the country in 2007. Ten years later Vietnam has just 61 constructions with sustainable green certificates. This number is far too modest in a rapidly-developing country where new urban areas are booming. Neighbours like Malaysia, Thailand and Indonesia are doing much better, and Singapore alone boasts more than 2,100 green buildings with a Green Mark certification.

 

As the country shifts from a rural-agrarian society to an urban-industrial, services-based economy, Vietnam is seeing a significant increase in urbanisation, which stands at approximately 30 per cent today and is expected to increase to 45 per cent by 2020.

  Continue reading Vietnam looks for greener growth

Wind energy in Vietnam – Blowing in the right direction?

Alongside solar power, Vietnam has significant potential in wind energy and it’s hoped that wind will play a large role in turning the country away from coal and gas.

 

To encourage the development of wind power projects the government introduced a feed-in tariff (FiT) scheme way back in 2011. The FiT rate of VND1,614/kWh (excluding VAT, equivalent to US$0.078) was seen at the time as an important step towards realising the country’s renewable ambitions.

 

The low rate, however, has proved unappealing to investors. Despite a range of tax benefits offered to developers, including exemptions from customs duties, a preferential corporate tax rate of 10% and income tax and land use fee exemptions, Vietnam has just four operational wind farms. The original plan to have 1 GW of wind power capacity by 2020 was fanciful, with current projects generating just 138 MW. In fact, three of the four farms are only in existence because they were able to negotiate power purchase agreements (PPA) at better rates than the FiT.

 

The poor take up led to an inevitable rethink, with the revised Power Development Plan 7 (PDP 7) targeting a 6.5% share of electricity generated from renewables by 2020 and 10.7% by 2030. On wind specifically, installed wind power capacity was forecast downwards to 800 MW by 2020, 2000 MW by 2025 and 6000 MW by 2030. These figures would account for 0.8% of total electricity production in 2020, 1% in 2025 and 2.1% in 2030.

Continue reading Wind energy in Vietnam – Blowing in the right direction?

The price of power in Vietnam: not all dollars and cents

It’s clear that meeting Vietnam’s substantial energy demands over the coming years is a tall order even in the best of circumstances. It is hoped that renewable energy sources will play a large part in the country’s energy generation landscape, however, the dominance of large SOEs is blocking the entry of more efficient private operations and slowing down the pace of change.

 

Looking at recent trends in Vietnam’s energy sector, it seems that these state owned projects, backed by overseas development assistance, provide a costly and sluggish source of electricity.

 

Such projects can be up to 40% more expensive to build and take 5 years longer to power up than privately-developed plants. With demand surging, these kind of timescales will prove problematic if supply is to keep abreast of demand.

Continue reading The price of power in Vietnam: not all dollars and cents

Solar deals despite doubts: bankable or not, investors dive in

Foreign interest in Vietnam’s solar sector had surged after the Ministry of Industry and Trade (MoIT) announced a solar feed-in tariff (FiT) and a draft solar PPA earlier this year.  Concerns over the bankability of the proposed agreement have done little to dampen enthusiasm, with a number of players eager to get a slice of a Southeast Asian success story.

Continue reading Solar deals despite doubts: bankable or not, investors dive in

Sales of Goods vs. Processing Contracts in Vietnam. When is a goods sale contract actually a service contract and why does it matter?

Vietnam offers many opportunities for foreign companies in need of manufacturing due to the combination of low labour costs and a large labour force. However, foreign companies concerned with finding a local manufacturer often overlook the seemingly benign step of having a proper contract in place, and in some cases even leave it in the hands of the manufacturer. Both options would be grave missteps on the part of the foreign company—working in an emerging market such as Vietnam often involves dealing with complex and evolving laws, as such expending more energy initially in drafting a contract that meets the needs of the company will save the company from the potential for significant hardship down the road. Furthermore, taking the time to draft a proper contract provides the foreign company with two critical things: it will give them familiarity with the Vietnamese legal system and it will allow it to dictate the terms of the contract, as opposed to leaving the drafting in the hands of a local manufacturer who may have equally limited understanding of the laws.

Given that Vietnam has become a nexus for manufactured goods for foreign companies it is important to note the regulatory distinctions in contract drafting that can save a foreign company a lot trouble in the event that they run into a dispute with a domestic manufacturer. Most notably the nature of the goods being purchased distinguishes what sort of contract needs to be established, if a foreign company is simply seeking to buy the goods that a domestic company manufactures in their normal course of business this would be governed by the articles for a sale of property (goods) contract (see Civil Code Law no. 91/2015/QH13 Articles 430-454); however, if the foreign (or domestic) company contracts with a domestic company to manufacture contracts for a specific purpose the contract itself is governed by entirely different set of rules, and is actually a processing contract where the manufacturer is actually paid for the service of making the good, not for the good itself (see Articles 542-553). This can come as a surprise to many foreign companies because in the United States for example both would be considered Sales of Goods contracts, and the latter would simply have enhanced protections as a custom-made good. Continue reading Sales of Goods vs. Processing Contracts in Vietnam. When is a goods sale contract actually a service contract and why does it matter?

Current and Proposed Solar Projects in Vietnam

Depending on the MW size, solar energy projects in Vietnam must be included in either the National Energy Masterplan or the relevant Provincial Energy Masterplan.  This is a notoriously opaque process and it is all but impossible to know for certain the status of discussions to include or not a given project.  Investors need to be extremely pro-active and do their homework to make sure they are working on the right levers.      The table in the link below indicates the status of current known existing and proposed solar energy projects based on public information.  It pays to be aware however that there’s plenty of discussions going on behind the scenes.  The message: don’t sit and wait!

Solar Energy Projects in Vietnam_July 2017

For questions please contact Giles at GTCooper@duanemorris.com or any of the attorneys in the Vietnam office listings.