Category Archives: Vietnam – Banking and Finance

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.

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.

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.

RENOUVELLEMENT, PROROGATION ET REFINANCEMENT : NOUVELLE REGLEMENTATION DU PRET AU VIETNAM

Il y a quelques années, la Banque d’Etat du Vietnam (« BEV ») a pris l’habitude de célébrer la nouvelle année en tirant une salve de nouvelles règles durant les derniers jours de travail de l’année. Cette année ne fut pas différente, excepté que cette salve s’est prolongée au-delà des vacances du Nouvel An Lunaire. Le 9 Février 2017, la BEV a publié sur son site internet les deux dernières circulaires datées du 30 Décembre 2016. Ces nouvelles règlementations sont très importantes pour le système bancaire du pays et pour l’économie en général, en ce qu’elles ont vocation à refondre le cadre applicable aux activités de prêt des établissements de crédit(*) et des succursales des banques étrangères au Vietnam (désormais, banques). Bien que cela prendra du temps pour les banques et leurs clients de complètement analyser l’impact du nouveau régime des prêts, nous croyons que les trois changements suivants introduits par la première des deux circulaires – la Circulaire 39/2016/TT-NHNN sur les activités de crédit des établissements de crédit et des succursales des banques étrangères (« la Circulaire 39 ») – sont les plus significatives.

I.                   Prêts renouvelables et prorogation des contrats de prêt

Même s’il s’agit de quelque chose d’assez courant dans d’autres marchés, ces deux pratiques bancaires internationales (revolving credit et roll-over of loans) n’ont jamais été formellement permises au Vietnam. La Circulaire 39 va permettre aux emprunteurs ayant des cycles commerciaux n’excédant pas un  (1) mois d’obtenir le renouvellement de leurs facilités de crédit des banques jusqu’à trois (3) mois. Les prorogations vont aussi être possible à condition que l’emprunteur n’ait pas de prêt non-productif et que la durée totale des prêts prorogés n’excède pas 12 mois à partir du premier décaissement et n’excède pas un cycle commercial de l’emprunteur.

II.                Refinancement

Comme pour les prêts renouvelables ou les prorogations de contrats de prêt, le refinancement n’était pas autorisé au Vietnam, dans le passé. Le refinancement de prêts transnationaux a d’abord été autorisé en 2014(**). La Circulaire 39 va, désormais, permettre également le refinancement des prêts domestiques, à condition que les conditions suivantes soient remplies : (i) les prêts refinancés ne sont autorisés que dans le cadre d’activités commerciales (les prêts à la consommation restent ainsi exclus du refinancement) ; (ii) l’échéance du refinancement ne doit pas excéder la durée résiduelle du prêt refinancé ; et (iii) le prêt refinancé ne doit pas avoir été restructuré. Notons qu’il est toujours interdit à une banque d’étendre un nouveau prêt pour refinancer un autre crédit accordé par cette même banque.

III.             Droits renforcés du préteur

La Circulaire 39 fait un effort pour renforcer la protection des banques comme créanciers. Par exemple, les banques ont, maintenant, le droit de recouvrir les crédits impayés même après avoir épuisé toutes les méthodes de recouvrement de créance prévues (e.g. vente d’actifs garantis). Les banque pourront aussi demander l’indemnisation pour les dommages causés par les inexécutions du contrat de prêt, en plus des intérêts moratoires (à condition que le principe d’indemnisation pour inexécution contractuelle entre dans le champ contractuel du contrat de prêt suivant accord des parties). Les banques vont également avoir une plus grande liberté pour accepter de réduire ou de renoncer aux intérêts et frais.

La Circulaire 39 entrera en vigueur dans un mois, le 15 Mars 2017, et remplacera la Décision 1627/2001/QD-NHNN du 31 Décembre 2001 sur le régime des prêts accordés par les établissements de crédit, amendée à de multiples occasions par la BEV durant les 15 années de son exécution. Avec ces changements assez positifs, la BEV espère assurer que le crédit continue de croitre, en dépit d’un environnement global et macro-économique national complexe, pendant que les prêts non productifs sont gardés sous contrôle. Que la Circulaire 39 permette d’atteindre ces objectifs reste à prouver.

 

(*) Le terme « établissement de crédit », au Vietnam, inclut les banques commerciales, les établissements financiers non bancaires (principalement des sociétés financières), des établissements de micro-crédit et des fonds de crédit populaires.

(**) La Circulaire de la BEV 12/2014/TT-NHNN du 31 Mars 2014 sur les conditions applicables aux emprunts étrangers non garantis par le Gouvernement des entreprises.

 

Pour plus d’informations, veuillez-vous adresser au Partner Giles Cooper à gtcooper@duanemorris.com ou au Special Counsel Bach Duong Pham à dbpham@duanemorris.com.