Category Archives: Vietnam – Banking and Finance

Vietnam’s draft new solar tariffs – more sun, less cents, more sense

A new proposed tariff structure for solar energy projects in Vietnam sets out different rates for different irradiation regions and gives long-awaited indication of direction for the market after 30 June 2019.  On 29 January 2019, the Ministry of Industry and Trade (“MOIT“) released parts of a draft decision to update the country’s current feed in tariff (FiT) structure which is only valid until 30 June 2019 (the “Draft”).

The Draft is of course still just that, a draft, but forecasts a clear change in strategy with respect to FiTs.

Under the current FiT policy (regulated by Decision 11 and Decision 16) there is only one FiT for all projects regardless of location.  That is an internationally respectable FiT of 9.35 US cents per kWh for all on-grid solar power projects that achieve commercial operation date (“COD”) prior to 30 June 2019 (with the exception of some projects in Ninh Thuan province which have a later COD timeline).

The Draft however sets out a wide range of differing FiTs that vary based on: (i) when COD happens, (ii) location (3 regions are identified based on solar irradiation data), and (iii) the type of solar projects (i.e., floating, ground-mounted, integrated storage system or rooftop solar).

The table below shows what the Draft contemplates:

Projects with COD from 1 July 2019 to 30 June 2020

 

Solar power types Region 1 (see regions below)

(28 northern provinces with annual solar irradiation of up to 1,432.8 kWh/m2/year)

Region 2

(6 central provinces of Vietnam with annual solar irradiation of up to 1,676.1 kWh/m2/year)

Region3

(29 central highlands and southern provinces of Vietnam with annual solar irradiation of up to 1,910.3 kWh/m2/year)

VND / kWh US cent equivalent VND / kWh US cent equivalent VND / kWh US cent equivalent
Floating solar power projects 2,135 9.35 1,838 8.05 1,612 7.06
Ground-mounted solar power projects 2,095 9.18 1,802 7.89 1,583 6.94
Solar power projects with integrated storage system N/A N/A N/A N/A 2,052 8.99
Rooftop solar power projects 2,448 9.85 1,933 8.47 1,697 7.43
Projects with COD from 1 July 2020 to 30 June 2021

 

Floating solar power projects 2,028 8.88 1,746 7.65 1,531 6.71
Ground-mounted solar power projects 1,990 8.72 1,712 7.50 1,504 6.59
Solar power projects with integrated storage system N/A N/A N/A N/A 1,949 8.54
Rooftop solar power projects 2,023 8.86 1,740 7.62 1,527 6.69

 

While no changes will please everyone, especially the many developers who have committed considerable resources based on assumptions of the current FiT rate, the changes still indicate strong support for solar power projects generally and a rational approach to reflect the markedly different irradiation levels across the country.  Such an approach should take some pressure of heavily-stretched Southern hotspots (stretched from both power infrastructure and bureaucratic bottleneck perspectives).

We will continue to monitor this and update further as possible.  Meanwhile, we’d be delighted to hear views from developers and financiers about the change of strategic policy direction and FiTs forecast by the Draft.  Get in touch and tell us what you think.

Region 1: comprising 28 northern provinces of Vietnam with annual solar irradiation of 1,225.6 – 1,432.8 kWh/m2/year or daily solar irradiation of 3.36 – 3.92 kWh/m2/day. Including: Ha Giang, Bac Kan, Cao Bang, Tuyen Quang, Thai Nguyen, Lao Cai, Yen Bai, Lang Son, Quang Ninh, Phu Tho, Vinh Phuc, Bac Giang, Hai Duong, Hoa Binh, Hanoi, Ha Nam, Bac Ninh, Hung Yen, Hai Phong, Ninh Binh, Thai Binh, Ha Tinh, Nam Dinh, Quang Binh, Thanh Hoa, Lai Chau, Nghe An and Son La.

Region 2: comprising 6 central provinces of Vietnam with annual solar irradiation of 1,456 – 1,676.1 kWh/m2/year or daily solar irradiation of 3.99 – 4.59 kWh/m2/day. Including: Quang Tri, Dien Bien, Thua Thien Hue, Quang Nam, Da Nang and Quang Ngai.

Region 3: comprising 29 central highlands and southern provinces of Vietnam with annual solar irradiation of 1,703.9 – 1,910.3 kWh/m2/year or daily solar irradiation of 4.67 – 5.23 kWh/m2/day. Including: Kon Tum, Ca Mau, Hau Giang, Binh Dinh, Phu Yen, Bac Lieu, Kien Giang, Soc Trang, Gia Lai, Can Tho, Vinh Long, Tra Vinh, Dak Lak, Khanh Hoa, Lam Dong, Ben Tre, Tien Giang, An Giang, Dak Nong, Ho Chi Minh City, Dong Nai, Dong Thap, Ba Ria – Vung Tau, Long An, Binh Duong, Binh Phuoc, Tay Ninh, Ninh Thuan and Binh Thuan.

For more information about Vietnam’s solar and renewable energy sectors, please contact Giles at GTCooper@duanemorris.com, Tran Thanh at MTTran@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.

ICO/STO: Is It Legal For Vietnamese To Participate?

The short answer is that ICO/STOs themselves are not regulated yet in Vietnam (as in most other countries). That doesn’t mean that every initial coin offering (ICO), security token offering (STO), private sale, presale, crowdsale, token generating event, airdrop or whatnot and underlying blockchain token is legal. Many laws and regulations could apply and render participating legally impossible in practice.

On the other hand, the question in Vietnam is always whether the laws are implemented and enforced. If they are enforced, what are the potential sanctions and other risks?

Illegal payment method

“Issuing, providing, and using” bitcoin or other cryptocurrencies as non-cash payment method is illegal in Vietnam. That’s the only thing that is relatively clear under the law (Decree 101/2012/ND-CP and the Criminal Code). The State Bank of Vietnam (SBV), which is the monetary authority here, has published an opinion on 30 October 2017 supporting this view. The administrative fines can be up to VND 500,000,000 (about USD 22,000) for unlicensed operation.

By implication:

  • Issuing a payment token is illegal – Are you generating a utility token that can be used to pay for accessing the system?
  • Providing payment tokens is illegal – Airdrop anyone? Or are you selling cryptos?
  • Paying with cryptocurrency is illegal
    • Are you paying for ICO tokens with ether, bitcoin, or Vietnam dong?
    • Will the platform reward users who have contributed to the ecosystem with tokens?
    • Are you paying with cryptos to receive fiat currency or other cryptos (i.e., exchange or trading)?

While the above could be narrowly interpreted to apply only to cryptocurrencies as payment method, what about other characteristics and functionalities of blockchain tokens? Vietnam has no guidance yet on how to differentiate what a token represents or is used for. This might change soon.

What is a blockchain token under the law?

Reportedly, the Ministry of Justice has submitted a proposal for crypto-assets to the Prime Minister of Vietnam for approval. The details are not public yet. The plan is to recognize crypto-assets as “property” (or “asset” as the Vietnamese term “tài sản” is sometimes translated) under the Civil Code. What kind of property? Either securities or non-securities.

If the proposal is approved, the implications of being recognized as property under the law could be vast. Potentially, non-security crypto-assets would be tradeable as commodities on exchanges. Security tokens would have to comply with Vietnam’s Securities Law, which is currently being revised. Compliant ICO/STO could become reality.

From a government perspective, the main issues are how to protect investors and prevent uncontrolled capital outflows. Recognizing crypto-assets as property under the law will strengthen the legal basis to go after fraudulent ICOs and tax evaders.

Cross-border issues

The legal framework for outbound investments from Vietnam is extremely restrictive. Investing in tokens from an ICO/STO launched outside of Vietnam could be subject to capital controls, foreign exchange regulations, and offshore investment regulations. Vietnamese individuals and organizations must first apply to register their offshore investment with the authorities in Vietnam. Not many receive the necessary offshore investment registration certificate. The legality of providing tokens cross-border from outside Vietnam to Vietnam is questionable as well.

If the token is deemed a security, most individuals in Vietnam would be precluded from purchasing them legally. Individuals are generally not allowed to invest in securities outside of Vietnam. The only exception: employees of foreign companies may participate in bonuses share schemes (e.g., employee stock options). Securities companies, insurance companies, banks and a few other organizations may invest in foreign securities, but only in those securities approved by the SBV.

In addition, all profits derived from offshore investment activities must be repatriated within 6 month of tax finalization, unless they are used to expand the offshore investment (which requires another registration procedure in Vietnam).

Outlook

A legal way for conducting an ICO/STO could be a boon for Vietnamese start-ups and small and medium-sized enterprises who have difficulties in accessing traditional funding channels. If capital cannot be raised in Vietnam in a legal way, such activities will stay underground. Entrepreneurs will seek other venues. However, with overwhelming enthusiasm in Vietnam for blockchain technology and cryptos, hopes are high that the country will adopt a workable legal framework that will promote compliant ICOs and STOs.

For more information, please contact Manfred Otto at MOtto@duanemorris.com or any other lawyer at Duane Morris.

The firm’s disclaimer applies to this post.

 

Vietnam Blockchain Law – Dawn of a New Era (13 Sep 2018)

Vietnam is in the process of preparing a regulatory framework for bitcoin and other cryptocurrencies. Rumor has it that the first draft will be released shortly, possibly this weekend. Major players are positioning themselves to enter one of the biggest markets for cryptos in Asia. Let’s take a look at the current situation and at what could potentially be – the dawn of a new era.

Plan to regulate

Last year in August the Prime Minister of Vietnam issued a decision to create a legal framework for virtual assets. The country’s Ministry of Justice is in charge of coordinating with other relevant authorities. I have met with the Minister to comment on international experiences. The plan is to have a cryptocurrency bill by the end of the year. Not much time, but they have a dedicated team working on this.

Regulatory sandbox

An official of the State Bank of Vietnam (SBV) recently announced that it will likely have a regulatory sandbox for fintech, also within 2018. Together with one of our blockchain clients, we had advocated for a blockchain sandbox as a first step for a year and a half. So, the outlook is generally positive. Although, we don’t know the details of the planned regulations yet, and delays are common in Vietnam.

Current obstacles

As it currently stands, Vietnam’s laws are hostile to cryptocurrencies. Issuing, providing and using bitcoin or other virtual currencies as payment method is prohibited in Vietnam, because cryptocurrencies are not listed in an SBV decree as one of the permitted non-cash payment methods. Vietnam also has strict capital controls and foreign exchange regulations. Offshore investments by Vietnam residents require licensing in Vietnam.

ICOs and STOs are not regulated, although, the State Securities Commission notified securities companies, broker-dealers etc. to not get involved, pending new regulations. Significant fraud is being reported in connection with fake ICOs. Likewise, the SBV has directed financial institutions and intermediaries under its purview not to deal with any virtual currencies and related companies.

Data protection

Data privacy and other issues are not yet in the mainstream, but Vietnam has passed a new Cybersecurity Law that will come into effect in January 2019. It requires server localization and commercial presences for IT services provided in Vietnam.

The upside: R&D hub

Despite the difficult legal landscape, many in the industry say that Vietnam is great for blockchain technology R&D. Vietnam has many talented engineers eager to learn and strong tax incentives for high-tech companies. Intel, Samsung and others have major production hubs here.

Outlook

Vietnam has the potential to become the next blockchain hub. A number of larger blockchain R&D companies and projects have already sprung up here. The State is welcoming high-tech and is eager to be prepared for the Fourth Industrial Revolution. Telegram groups on blockchain topics are active, and international projects are visiting to pitch on a daily basis. A conducive, practical legal framework for crypto- assets could further ignite the boom.

Get involved

Vietnam’s ministries and other law-drafting bodies are often soliciting opinions from business and other stakeholders on new draft legislation. This is a great way to be involved in shaping upcoming laws. We expect that this will be true for the draft crypto-asset regulations as well, but time is very limited. Stakeholders should get ready to submit their comments on short notice – possibly within a few days.

We can help you understand the implications of upcoming regulations. We would be happy to collaborate and prepare comments to be submitted to the relevant authorities. We can assist in Vietnamese, English, Japanese, French and other languages.

For more information, please contact Manfred Otto at MOtto@duanemorris.com or any other lawyer at Duane Morris.

The firm’s disclaimer applies to this post.

 

Vietnam – Regulatory Framework for Fintech and Blockchain Applications Announced

In its 5th session that closed on 15 June 2018, Vietnam’s 14th National Assembly passed 7 bills, including the controversial Cybersecurity Law. When the laws are revised, it is game on for law firms, but crucial is  action before the laws are passed.

Vietnam’s bureaucrats who draft the laws are open to exchanging information with experts from the business community. Last week, I talked with the Minster of Justice and other officials in preparation for the coming legal framework for fintech, blockchain, cryptocurrencies, and ICOs. Ministry of Justice officials announced that new legislation on virtual assets is planned within the year. Likewise, the State Bank of Vietnam is preparing a fintech “regulatory sandbox” – an environment where generally strict banking laws and other compliance requirements are eased for start-ups and new R&D projects to conduct proof-of-concept work. The Ministry of Science and Technology and other authorities are also working hard on related regulations in their respective fields.

Vietnam is beyond the point of “if” and “when” to regulate blockchain technology and applications – it has entered the “how” phase. Balancing the Cybersecurity Law and other national security measures with the opportunity to become a leading hub of the 4th Industrial Revolution might not be easy, but while legislation is pending, businesses can play a part in shaping Vietnam’s blockchain law.

For more information, please contact Manfred Otto at  MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

 

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.

Are green bonds the answer to Vietnam’s infrastructure dilemma?

For many countries across Southeast Asia, including Vietnam, the rapid pace of growth has meant that finding stable sources of funding can be a struggle.

 

This is particularly true in the case of infrastructure. According to a report by the Asian Development Bank the region will need up to US$2.8 trillion worth of roads, bridges and railways by 2030 to keep up with economic growth.

 

Faced with an increasingly unstable political climate, Southeast Asian nations are looking at safer options to fund their infrastructure developments over the coming years. Over-reliance on China, which has already backed nearly US$1 trillion worth of projects under its ‘Belt and Road’ initiative, will likely be scaled back as economies turn to domestic solutions. Fears of China’s plan overstepping its stated bounds have caused countries around the region to rethink their embrace of the ‘belts and roads’, with instances of financial misuse and failed projects serving as cautionary tales.

 

Political tensions over territorial claims in the South China Sea and increasing international protectionism are also causing countries like Vietnam to seek self-sufficiency in future financing. State budgets across the region are coming under growing strain, so leaders are looking elsewhere to fund much-needed development over the coming years. One proposition is to promote the issuance of ‘green bonds’.

 

What you need to know about ‘green bonds’

 

A green bond is like any other bond, however the funds raised by the issuer are earmarked for ‘green’ projects, or in other words, those that are environmentally-friendly and take climate concerns into account. Particular sectors that stand to benefit most from the issuance of green bonds are renewable energy, infrastructure and construction.

 

Building roads, bridges, tunnels and tracks takes a huge toll on the climate, both locally and nationally, thus projects which seek to lessen their environmental footprint are a top priority.

 

On top of concentrating funding towards environmentally-friendly projects, green bonds also highlight the issuer’s commitment to sustainable development. Additionally, they provide issuers access to a specific set of global investors who invest only in green ventures. With the increasing focus of foreign players towards green investments, it could also help in reducing the cost of capital.

 

What does this mean for Vietnam?

 

According to German development agency GIZ, Vietnam will need roughly $30.7 billion by 2020 to move its current carbon-dependent development onto a more sustainable path, and towards its Intended Nationally Determined Contribution (INC).

 

Some 30 percent of the credit for green growth is expected to come from the state budget, consisting of central and provincial funds as well as official development assistance (ODA), whilst the remainder will be sourced from the private sector.

 

Under the Vietnam Green Growth Strategy (VGGS), approved by the government for the 2011-2020 period, the capital market will be key in achieving the country’s targets. It is here that green bonds will be vital – raising funds specifically for green projects and enterprises, creating a platform for green products’ derivatives trading, as well as tapping into private sector investment for sustainable development.

 

In terms of foreign interest, Vietnam’s issuance of green bonds is hoped to attract international investors with an orientation towards sustainable development, renewable energy and environmentally-friendly growth. Investors around the world are increasingly attuned to the challenges of climate change and the energy transition. More and more of them are clamoring for investment tools that take environmental issues into account, especially in the developing world.

 

Vietnam is not the only country in the region to see the promise of sustainable funding. With the ASEAN Green Bond Standards (AGBS) developed and launched in November 2017, common standards were laid down for the issuance of ASEAN green bonds. The AGBS label is to be used only for issuers and projects in the region and specifically excludes fossil fuel-related projects. Companies in Malaysia, Singapore and Indonesia have already issued bonds labelled as ASEAN Green Bonds.

 

Funds raised from these green bond issuances will be allocated to projects such as renewable energy, waste management, green buildings and infrastructure, which meet sustainability criteria and contribute to the common goals of integration, connectivity and overall ASEAN growth. Primarily, regional leaders are realising that growth cannot come at the expense of future generations. Initiatives like the AGBS will help in the allocation of resources towards climate friendly investments.

 

Stunted green growth

 

One of the milestones to be achieved by 2020 is to expand the green bond market to at least 1 percent of the global bond market, currently about US$90 trillion. For this to happen, sovereign issuers must be completely on board.

 

Asia’s local currency green bond market is still characterised by a lack of liquidity, limited diversification of bond structures, and the absence of a large regular stream of bankable projects.

 

Additionally, consistent demand from socially responsible investors is still limited, hampering the market’s growth potential.

 

There is, however, a lot of potential for growth in the local currency green bond market, as long as sovereign issuers establish an enabling environment and a strong framework is applied. The key constraint will be the number and size of bankable green investments.

 

If Vietnam fully embraces the ‘green bond’ movement, an injection of funds in this manner could prove a panacea – patching up the infrastructure funding gap, laying the foundations for more rapid expansion and ensuring the long-suffering climate gets a breather.

 

For more information about Vietnam’s green bonds, 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.

Navigating Blockchain Law – Presentation at Vietnam Blockchain Week – 8 Mar 2018

7-8 March 2018, Vietnam Blockchain Week organized by Infinity Blockchain Labs — probably the first big, international blockchain event in Vietnam. Reportedly, more than 2,000 registered visitors and 50 speakers.

My speech and slides on “Navigating Blockchain Law” covered multiple jurisdictions and blockchain topics, including cryptocurrencies, exchanges, ICOs, AML/KYC, personal data protection, regulatory sandboxes and innovation space. The message is that  innovators and big investments go to places that have clear and “friendly” regulations for them to thrive.

Unregulated - what does it mean?

Every day is different though, and we constantly receive new statements from regulators and other authorities. Technology moves much faster than the law. The information in my slides is already old by the time they are uploaded. Likewise, the heat map below is very subjective and  represents only a momentary snapshot.

Blockchain Legal Heat Map

For more information, please contact Manfred Otto at MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

Disclaimer: This post has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Each case should be analyzed individually with the support of competent legal counsel. For more information, please see the firm’s full disclaimer.

Vietnam steps up sale of SOEs

Hopes abound that a new Decree will drag the near-moribund process of privatising large State-owned enterprises (SOEs) into a new and more efficient phase.

 

Over the past 30 years, the restructuring of SOEs has been a key component of Vietnam’s economic reforms under Doi Moi (renovation). The process has been undertaken by successive governments and is a central pillar to creating the business-friendly climate desired by the current leadership.

 

Nevertheless, it remains largely a work in progress. According to a report by the Central Institute for Economic Management (CIEM), since 1992, Vietnam has ‘equitised’ over 4,500 enterprises (‘privatized’ being considered an unsuitable term for Vietnam and not always accurate anyway given the propensity for the State to maintain controlling stakes).  The fact is that many of these took place in a short period of time and were smaller production units of large conglomerate-type corporations.  The CIEM report concluded that progress is below expectations. SOEs have struggled to attract strategic investors and sale of shares has not reduced the level of State budget in SOEs’ charter capital, as was hoped.

 

There are multiple reasons for the disappointing progress including restrictions on foreign ownership, and the State’s desire to maintain ultimate management control.  Opaque valuations and concerns over transparency also deter strategic and other investors from getting involved in the process and ultimately slow it down.

 

To continue growing, Vietnam is under increasing pressure to reform the equitisation process for its SOEs, with new efforts being made to accelerate the government’s divestment. Under plans announced earlier this year, the government will equitise a further 137 SOEs in the 2016-2020 period.  Many of those slated are large and some can be considered the cream of the crop.

 

This renewed motivation is driven in large part by the government’s need to mobilise financial resources to deal with a rising fiscal deficit and public debt. The country’s obligations under a number of free trade agreements also provide impetus to break up the big entities.

 

Determining demand

 

Recently, a significant change was announced in a bid to speed up equitisation of SOEs: the law will change to allow book building as a means of determining interest and price for IPOs of SOEs.

 

Up until now, the equitisation of Vietnam’s SOEs has been handled through public auction, direct negotiation and underwriting. Most have adopted the public auction method, but this has proved unattractive to investors, with even big assets like Vinamilk failing to generate the expected interest.

 

Under new Decree 126/2017/ND-CP, the Prime Minister has instructed the Ministry of Finance to prepare detailed guidelines on implementation of book building to facilitate efficient IPOs as part of the equitisation process.

 

This method of price discovery, used widely internationally and now approved for the first time in Vietnam in connection with equitisation purposes, is expected to make the process more efficient and attractive to strategic investors.  Decree 126 also eases restrictions on the profitability of strategic partners (from three to two years), cuts the lock-in period (from five to three years) and provides more detailed guidance on valuations of SOEs generally (notably removing reference to DCF valuation and providing more clarity around valuation of land use rights and goodwill).

 

It is hoped that this move, to take effect from 1 January 2018, will enhance transparency in SOE equitisation and hasten the hitherto slow listing on the country’s stock exchanges. The Decree will have a particular impact on the next wave of SOE IPOs, slated for 2018-19.

 

Energy giants next?

 

An area in dire need of extensive equitisation is the energy sector. In order to ease electricity shortages, attract more investment and boost economic growth the country will need to tackle inefficient State-owned power actors.

 

The issue of power shortages could come to a head in the next four years, with forecasts predicting that annual growth in electricity consumption will start to match, and possibly outpace, the installed capacity growth. If consumption continues to expand at a similar rate to the last decade (an average of 12 percent a year) the country could soon be facing a power crisis.

 

This gloomy scenario is looking increasingly likely, considering that foreign direct investment (FDI) into the manufacturing sector, which accounts for 50 percent of total electricity consumption, has doubled over the past four years to reach US$63.1 billion. Luckily for businesses, the government is keen on keeping this development trend going, and having the electricity to power it.

 

Recent reports in the media state that the government has lined up a series of sizable IPOs of major power corporations, including PV Power, EVN Generation Corporation Number 3 (Genco 3) and Binh Son Refining and Petrochemical Company Limited (BSR). If the above projections on power demand growth are anything to go by, Vietnam’s power sector holds significant potential, and may prove an irresistible offer to foreign firms. This offer, however, is contingent on the government breaking up the energy giants and levelling the playing field for investors. Official approval of the book building method for pricing IPOs is a start.

 

PV Power, the country’s second-largest electricity producer, plans to auction a 20 percent stake through its IPO scheduled for the end of this year, and 28.8 percent of shares will be sold to strategic investors. Meanwhile, the equitisation of Genco 3 is awaiting the government’s go-ahead.

 

The changes above demonstrate a willingness to step up the equitisation of SOEs, with looming budget considerations providing a timely incentive. Beginning next year, the slow process may finally gather some much needed pace and see involvement of foreign players previously put off by the state of play.

 

For more information about Vietnam’s equitisation and IPO processes, 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.

“RegTech in Asia – Opportunities & Challenges” – 23 Nov 2017 Presentation

Slides from my recent presentation in Ho Chi Minh City on “RegTech in Asia – Opportunities & Challenges” on 23 November 2017 organized by QRC HK & Infinity Blockchain Labs:

171123 RegTech in Asia-Otto-EN

Main topics:

  • AML/KYC (anti-money laundering and “know your customer”)
  • Compliance costs in Asia
  • e-Government (e-Customs, e-Courts, e-Tax)

Statutory KYC Requirements in Vietnam

For more information , please contact Manfred Otto at MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

Disclaimer: This post has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Each case should be analyzed individually with the support of competent legal counsel. For more information, please see the firm’s full disclaimer.

Public debt puts the squeeze on government guarantees, stifling project finance projects in Vietnam

Vietnam’s economic success story is evident in the rapid development of its big cities. However, while the country’s growth has outpaced its neighbours, so has its debt; a factor that threatens to de-rail growth.  Not least of all because of the impact on the government’s ability to give guarantees to underpin privately-financed infrastructure.

 

Over recent decades, the government has spent significantly. Priority has been given to roads, export zones and other critical infrastructure. This is evident across the country, where highways, tunnels, factories, airports and metro systems are being expanded, or built from scratch, at an incredible pace.

 

The biggest macroeconomic challenge facing Vietnam today is sustaining that growth. The government needs to be more rigorous about how it spends money, leveraging it better to attract and benefit from private funds rather than prop up State-owned entities.  The looming spectre of public debt will need to be tackled before the country finds itself in a precarious position.

 

Vietnam’s total public debt as of mid-July 2017 reportedly stood at US$94.6 billion, or about US$1,038 per capita. In fuelling the country’s celebrated growth, public debt has increased consistently, from 36% of GDP in 2001 to about 62.4% in 2016. According to an IMF forecast, it will hit 63.3% and 64.3% in 2017 and 2018, respectively, while the self-imposed public debt ceiling is set by the government at 65% of GDP for 2020.

 

Vietnam’s public debt compares unfavourably with the rest of the region, with Thailand coming in at 41 percent of GDP and Malaysia at 56 percent, according to the World Bank.

 

The annual growth of public debt during 2011-15 was 18.4 per cent, triple the annual GDP growth rate, which averaged about 5.9 per cent over the period.

 

A squeeze on guarantees

 

In an effort to tackle the ballooning public debt, the Ministry of Finance (MoF) announced changes to regulations on Government guarantees earlier this year. The adjustment is one of the regulations stated in the Government’s Decree 04/2017/ND-CP (Decree 04), superseding Decree 15/2011/ND-CP (Decree 15), issued on February 16, 2011.

 

Taking effect from March 1, the maximum level of Government guarantees for a programme or project was reduced from the previous level of 80 percent. Decree 04 replaces this with a three-tiered cap on the amount of guaranteed debt as a percentage of the investment capital depending on the size or importance of the project, each lower than the cap established in Decree 15.  In all cases this is far lower than the golden days of Vietnam’s early privately financed infrastructure projects like the Phu My 3 and Phu My 2.2 power projects which both enjoyed near total guarantees.

 

The current highest level of guarantee, set at 70 percent, applies to projects that must be implemented on an urgent basis, and have been approved by the National Assembly or the Prime Minister. Secondly, for projects whose total investment is at least VND2.3 trillion (US$102 million) and have been approved by the Prime Minister, the maximum proportion guaranteed by the Government is 60 percent. A cap of 50 percent will be applied to other projects.

 

In continuing to restructure of the country’s public debt with more stringent monitoring of projects, the decree aims at tightening the provision of Government guarantees and enhancing the management of public debt.

 

However, at a time when Vietnam needs to develop much infrastructure, notably in the energy sector, and requires substantial foreign investment to do so, Decree 04 makes it more difficult for private investors to obtain MoF Guarantees for projects.

 

Ticking debt time bomb

 

Taking the energy sector as an example, questions remain over EVN’s economic health. Tariffs on electricity have long been maintained at below cost levels. The policy of low subsidised tariffs to maintain the competitiveness of domestic industry and keep consumers happy is putting pressure on the government and EVN’s balance sheet.

 

The average retail electricity tariff stood at just above US$0.08/KWh as of 2016, the lowest in Southeast Asia, and only just above EVN’s average generation cost of US$0.075/KWh (excluding transmission and distribution costs). This has depressed sector cash flow and contributed to EVN’s rising debt.

 

This has raised concerns among private sector investors over EVN’s ability to pay for electricity generated as the single buyer, while the current low retail tariffs mean that investors are not confident of negotiating adequate prices for generation projects.

 

With the situation likely to continue, EVN’s financial position will surely deteriorate, leaving it with unsustainable debt and unable to finance capital expenditure. This would force private sector investors to seek increased government guarantees. Unfortunately, as mentioned above, the government is looking to rein in such largesse. As Vietnam’s economy grows, the previously abundant soft loans and ODA are beginning to dry up, meaning that the sources of support for private finance are becoming harder to find.

 

In order to reduce risk, the developers of major infrastructure projects may need to seek out private insurance groups or institutions like the World Bank’s Multilateral Investment Guarantee Agency (MIGA). However, these options obviously don’t come without their own costs. Investors, and ultimately end consumers, will have to take the hit.

 

Much of Vietnam’s current fiscal position can be blamed on poor management. The state-owned giants that have lost their repayment ability on Government-guaranteed loans are passing on the burden to the Government.

 

The sluggish privatisation of State-owned enterprises means that inefficiency will continue. The sooner this process is completed, the better for the economy as a whole. Measures like reducing government guarantees may be prudent, but if Vietnam wants to maintain its economic momentum serious action is needed to first untangle the mess of intra-State bad debt.

 

For more information about project finance matters 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.