Category Archives: Vietnam – Market Access

Vietnam’s renewable energy industry amid COVID-19: facts, force majeure and (patchy) Government support

Vietnam’s renewable energy development over the past three or so years can variously be described as frenetic, chaotic and heartening. Look past all the noise about non-bankable agreements, insufficient transmission infrastructure and bureaucratic black holes, and it’s clear the market has spoken. Vietnam currently has the largest installed solar capacity in Southeast Asia and is taking strides on wind too. Between May and July 2019, an incredible 82 ground mounted solar plants were connected to the national grid (total of 4,464 MW), more than 400% the target that had been set for 2020. The Ministry of Industry and Trade recently announced that the country is aiming to boost power output produced by renewable energy to about 23% by 2030.

The sector as a whole is also poised on the brink of a new phase. Feed in tariffs are coming to an end, low hanging fruit projects have been developed and local banks’ capacity to continue to finance development is stressed. Meanwhile, energy demand rises steadily and right-minded global citizens are clamoring for an end to coal and a rapid transition to renewable energy sources.

Into this heady mix arrived a novel corona virus and the disease known as COVID-19.

For all the momentum, the clean-energy sectors – solar, wind, energy storage, and companies transforming the power grid – will not escape the COVID-19 impact. They face serious questions across the board: from supply chain issues to workforce shortages, to more macro questions about the economy, energy demand and availability of finance.

New FiT announcement for solar does little to calm waters

Which is why the Prime Minister’s Decision 13 on 6 April 2020 announcing the new solar power feed in tariffs was both a blessing and a curse. On the one hand, the market finally has long-awaited certainty over revenue stream. On the other hand, the COD deadline to qualify for the new tariffs – 31 December 2020 – is like a bad joke. See more about this here: https://blogs.duanemorris.com/vietnam/2020/04/07/solar-fit-2-finally-announced-in-vietnam-but-strict-timeline-remains/

In fairness, the 31 December 2020 deadline had been flagged for some time, but the long delay in making it formal, only to finally issue the Decision in a period of unprecedented global chaos and lockdown, with a deadline just 8 months away, almost seems cruel.

Module production facilities in Vietnam usually carry one or two months of supplementary materials inventory on-site. If production interruptions lasts longer than one month, factories in Vietnam will start to see supply shortages that will reduce their production output. Developers waiting for module delivery from mainland China in the second quarter of 2020 will very likely not see the orders delivered on time. Late module delivery will affect project construction schedules around the world, and projects with Q3 and Q4 2020 targets are likely to be hit particularly hard.

In other words, if you are a ground-mounted solar developer in Vietnam today and had been waiting for certainty of revenue stream before pulling the trigger on procurement (let alone land clearance costs), good luck.

Wind makes out better

Similar to the solar industry, COVID-19 has already interrupted the supply chain for wind power plants, which will lead to commissioning delays. Leading turbines suppliers have already announced delays in delivery dates for turbines and other essential equipment citing force majeure clauses in supply contracts.

Looking past supply, the longer strict public health measures stay in place, the more likely it is that equipment prices will be impacted as well.

At least for wind power projects, Vietnam’s Government seems to be listening. As a result of the COVID-19 situation and pleas from investors, on 9 April 2020, the Ministry of Industry and Trade proposed to the Prime Minister a FiT extension for wind projects until 31 December 2023 (a substantial 2+ years extension on the current deadline of 1 November 2021). The MOIT proposes in Official Letter 2491 that a new FiT should apply from1 November 2021 to 31 December 2023 and thereafter wind power tariffs should be subject to auction.

It remains to be seen if the MOIT proposal will be accepted and if prompt action is not taken, foreign clean energy development companies may withdraw from the wind and solar power market because of the possible negative impacts of COVID-19 on their global operations. Vietnam may lose investment disproportionately because it is considered a high-risk market. The virus could also make it harder to keep wind and solar farms up and running, due to travel bans and maintenance delays.

COVID-19 re-writes force majeure clauses

Where coronavirus causes business disruption, from fulfillment of deliveries to cancellation of events, a common question is whether commercial parties can rely on force majeure clauses in their contracts.

Vietnamese law defines force majeure in Article 56 of the Civil Code: “An event of force majeure is an event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all possible necessary and admissible measures being taken”.

For contracts that have been entered into prior to the COVID-19 pandemic, project developers will have to prove that the pandemic satisfies all three components of a force majeure event in order to rely on this statutory right. The first two can be easily met – the corona virus is an objective event that cannot be foreseen. However the trickiest part for developers would be the last component – whether the developer has taken all reasonable measures to prevent the effect of the pandemic on their project. This is a subjective test, and will need to be analyzed on a case-to-case basis taking actual facts into account.

Internationally, we see plenty of new drafting around force majeure terms expressly referencing COVID-19. An example is:

“Force Majeure Event means an event that wholly or partly prevents or delays the performance of obligations and/or the adherence to deadlines or time periods arising under this Agreement and shall include, without limitation, an act of God, explosion, accident, fire, lighting, earthquake, storms, flood or similar cataclysmic occurrence; an act of war, blockade, insurrection, riot, civil disturbance, sabotage, strikes, lockouts, or other labor difficulties; restrictions or restraints imposed by law or by rule, regulation or order of any federal, state or local government, governmental agency or quasi-governmental agency; a pandemic; COVID-19 (Coronavirus)-related events, including, by way of example but not limitation, quarantines, third party vendor shut downs, business shut downs, and travel restrictions; action or failure to act of any federal, state or local government, governmental agency or quasi-governmental agency; and interruption or other loss of utilities due to causes beyond the reasonable control of the Purchaser.”

Even though the force majeure clauses in standard wind and solar PPA do cover epidemic, they do not refer to epidemic-related events caused by third parties or those within the control of the government (government FM events). Since the power purchaser in Vietnam (EVN) is a State-owned enterprise, this raises the concern of EVN relying on government FM events to exempt itself from obligation. The lack of distinction emphasized between natural FM events and government FM events in the standard clauses, and the lack of expansion on the general reference to “epidemic”, puts power developers in a fragile spot amid this novel virus situation. As a result, it is advised that developers should always try to negotiate their PPAs to reflect international standards. This is of course easier said than done, but doesn’t mean efforts should be ignored.

On the developer’s side, it remains to be seen whether the standard PPA terms on force majeure might operate to allow extensions to COD deadlines, especially considering the deadlines are mandated in legislation. This is a topic that would bear much more scrutiny on a case-to-case basis.

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 Chairman of Duane Morris Vietnam LLC, branch director of Duane Morris’ HCMC office and Asia lead for Duane Morris’ Energy Industry Group.

3 Things About Vietnam’s Updated Legal Framework for Biomass Power Projects

Despite abundantly available biomass feedstock of agricultural origin, ranging from sugar bagasse, wood chip to rice husks and stalks, biomass as a source of renewable energy does not seem to have received the same amount of attention from the government of Vietnam as solar or wind power. It took the government more than six years to acknowledge the modest results of the current incentives package and adopt measures to give a new push to the development of biomass power plants. This was done on 5 March 2020 when the Prime Minister issued Decision No. 08/2020/QD-TTg (“Decision 08“) amending Decision No. 24/2014/QD-TTg dated 24 March 2014 (“Decision 24“) on support mechanisms for the development of biomass power projects in Vietnam. Decision 08 introduces a number of important changes which will take effect on 25 April 2020.

Increase of the Feed-in-Tariffs (“FiT”)

The FiT for electricity produced by combined heat and power (“CHP”) biomass power plants will increase from USD 5.8 cents per kWh to USD 7.03 cents (VND 1,634) per kWh.

The government has also abandoned the use of avoided cost schedules (calculated based on the cost of electricity produced by coal-fired power plants) published annually for determination of the electricity purchase price from non-CHP biomass electricity producers. The FiT for these projects is set at USD 8.47 cents (VND 1,968).

The FiTs are exclusive of value-added tax and are adjusted according to USD/VND exchange rate. The new FiTs will be also benefit the biomass power projects which have started operating before 5 March 2020 for the remaining terms of their power purchase agreements (“PPAs”).

Technical standards for electricity generation equipment

Decision 08 introduces a new requirement to comply with technical standards applicable to biomass electricity generation equipment and quality norms applicable to electricity produced by biomass power plants. Similar requirements already exist in recent regulations applicable to solar and wind power projects. The technical standards and norms will be elaborated by the Ministry of Industry and Trade (“MOIT”) which is also responsible for the issuance of a new model PPA for biomass projects.

Possibility of alternative off-takers

Under Decision 08 Electricity of Vietnam (“EVN”) (directly or through its authorised group entities) remains the sole off-taker of the electricity generated using biomass. However, the new decision also opens the door to “organisations assuming the rights and obligations” of EVN (or its relevant group entities) to become biomass electricity off-takers. This new development is in line with the government’s road-map for the liberalisation of Vietnam’s electricity markets (wholesale and then retail) by 2025. It is not clear whether this would improve the bankability of biomass PPAs, since EVN, as a State-owned enterprise, still enjoys strong government support while such backing may not be available to other off-takers in the future.

The possibility of selling electricity produced by biomass power plants directly to end users is not contemplated by the government at this stage. A recently published draft regulation on pilot Direct PPAs does not seem to include biomass power projects.

The hope is that above changes will make biomass power projects more attractive for investors. Whether the government’s target to increase the share of electricity produced from biomass to 2.1 percent of the total generated electricity by 2030 set out in the Revised Power Development Master Plan VII is achievable still depends a great deal on the new biomass PPA and technical requirements for biomass power projects to be issued by the MOIT in the coming months.

 

 

 

 

 

 

Solar FIT 2 finally announced in Vietnam but strict timeline remains

Vietnam’s Prime Minister has finally issued a decision on new FITs for solar power projects. The Decision formalizes amounts many had been expecting based on previously circulated draft information but comes nearly a year after the previous FIT rate expired (June 2019) and will leave many wondering why the decision couldn’t have been made much sooner.

Decision 13/2020/QD-TTg dated 6 April 2020 confirms that the new FITs will only be available – for now at least – for projects that COD prior to 31 December 2020.   This is a ridiculously short time line considering the long lead in time for delivery of inverters and, for many projects, completing land acquisition procedures.

The new FITs are:

  • For floating solar energy projects: 7.69 US cents/ kWh
  • For ground mounted solar energy projects: 7.09 US cents/ kWh
  • For rooftop energy solar energy projects: 8.38 US cents/ kWh

While providing welcome certainty, the long delay has seriously stressed many approved and licensed solar projects.   Investors and developers had been left in the dark about what revenue they would receive while simultaneously under pressure to meet construction deadlines stated in investment approvals and PPAs.

On the positive side, the Decision confirms that projects that are eligible for the new FITs are those that obtained Decisions on investment policy prior to 23 November 2019. This throws a wider net than previously-floated criteria that projects would have to have already started construction by that date. Practically speaking however, given the tight COD deadline, it will not dramatically affect the number of projects that have a realistic shot at securing the new FIT. Project owners need to make a very calculated decision now about how hard and fast to push ahead for COD by end of the year. Among myriad factors that could threaten such a target – including COVID-19 supply chain issues – must be EVN’s capacity to integrate and connect a potential flood of projects before the deadline.

The alternative, according to the new Decision, is that project owners will need to participate in competitive auctions. Though, also coming into view now, is a new corporate direct power purchase pilot program that will be an attractive option for many developers, albeit initially limited in scope. Read some more about that scheme here.

Notably, the new Decision does not suggest that any improvements will be made to the template solar power PPA, a form widely considered unbankable for international banks. Surely however the days must be numbered for this form if the Government wants to see sound future development of solar power, not to mention lower prices, in future.

With respect to rooftop solar projects, the Decision does not – as many had hoped – increase the existing 1 MW limit (which is not a true limit per se but rather a threshold for dramatically simpler licensing). Many had advocated to increase this to 3MW but not to be.

The Decision does however expressly recognize the concept of private rooftop power sales, something previously not clearly regulated. On that point, the Decision provinces that if EVN is not the power buyer, the parties can agree on their own PPA terms, provided they are consistent with existing regulations. This will be welcome news for rooftop developers who have been currently operating in something of a grey area, often using unconventional contractual arrangements. Further detailed regulation may come from the MOIT to further elaborate this.

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 Chairman of Duane Morris Vietnam LLC, branch director of Duane Morris’ HCMC office and Asia lead for Duane Morris’ Energy Industry Group.

Crunch time for PM’s decision on solar FIT2

In a 6 Feb 2020 report to the PM, the MOIT shares views received from the Ministry of Justice and Ministry of Finance on the long-awaited new FIT regime for solar projects. Interestingly, a new option has emerged: that FIT 2 could apply to all projects approved in principle prior to 23 November 2019 and that reach COD by 31 December 2020. While December 2020 is still very close and thus a practical limit, this option is still markedly broader than the MOIT’s earlier proposal that only projects that had commenced construction (with very narrow criteria of what that means) prior to 23 November 2019 (and reach COD by 31 December 2020) should be entitled to FIT 2.

If the PM accepts this new option it would significantly increase the number of already-approved solar projects potentially eligible for FIT 2. that would be welcome news for approx. 40 projects currently in FIT limbo.

With this document, it appears that all involved ministries and other stakeholders such as EVN have been formally consulted and their opinions formally shared with the PM. The ball is firmly in the PM’s court now.

See the original text of the 6 Feb report here: FIT 2

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 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.

Draft Decree to implement Cybersecurity Law doesn’t dampen concerns

A draft Decree to implement Vietnam’s controversial Cybersecurity Law does little to assuage fears that all online commercial activity will be within its scope, mandating physical presence in Vietnam, expensive, cumbersome data localization and even a new permit.

 

Last June, Vietnam’s National Assembly overwhelmingly passed the Cybersecurity Law and it will take effect on 1 January 2019.  Despite assurances from the Ministry of Public Security (MPS) – author of the Law – that the Law is aimed at ensuring online security and protecting critical information infrastructure, its wide and unclear language caused concern for online commercial service providers whose activities are captured by its scope and worried about the cost and other implications of compliance, particularly with respect to commercial presence and data localization obligations.

 

Since the Law’s approval, many have been waiting to see the government Decree that will effectively interpret and implement the Law.  The Decree will determine whether and how the Law will truly impact online commercial activity.  Will it be business as usual for online commerce, as promised by a government that publicly embraces Industry 4.0, or will data hosting services and compliance officers be working overtime?

 

During the first half of October, two different versions of the draft Decree came into the public sphere. The latest draft, dated 11 October 2018, contains 66 clauses, touching on almost every single issue and clause of the Law itself.  While draft Decrees can and do change, the signs are that restrictions and headaches will remain for companies with online business activities.

 

Take, for example, the question of who will need to establish a commercial presence in Vietnam.  Under the Law, companies providing any kind of services related to or via telecommunication networks or the Internet, and which collect, process, analyze, or exploit the personal data of users in Vietnam (regardless of nationality) will need to establish a representative office or a branch in Vietnam (Article 26.3).  Many wondered whether this was intended to apply to every single company falling within the very broad criteria.  For example, would a bank in Ireland offering online banking services used by a handful of Vietnam-based users be subject to this requirement?  It would seem unnecessary and wholly impractical to say so.  The draft Decree however seems to support such a view.  According to Article 60 of the draft Decree, all companies providing “services through the Internet” will be subject to the requirement to establish a commercial presence in Vietnam (in the form of a branch, a representative office or other type of “establishment”).  “Services through the Internet” is understood very broadly by the draft Decree to include anyone providing: (1) internet connection services, (2) internet access services, (3) data storage, (4) social network, (5) over the top services (think, Netflix), (6) e-commerce, (7) banking and finance, (8) messaging and teleconference services, (9) live chat services, (10) search engines, (11) games, films, music.

 

While this clarifies and elaborates the Law’s general drafting, the long list is troubling as it clearly covers not only tech giants such as Facebook, Twitter, and Google, but also companies simply having auxiliary Internet-based services or the Irish bank in our example.

 

In a similar vein, the draft Decree sheds more light on the data localization rules but does little to assuage fears that the regulations are for the sake of regulation rather than based on risk analysis and purpose-driven policy.  According to Article 61 of the draft Decree, certain personal data will need to be stored in Vietnam by companies for the lifetime of the business, while certain other personal data need only be stored for three years from the date of creation. At any time, the MPS may request companies to provide copies of such data.  On the plus side, there is no indication that companies cannot transfer data abroad, provided they also maintain it in Vietnam. The list of personal data that companies need to store in Vietnam is extensive, including typical information such names, addresses and photos but also extending widely to include biometrics, financial records, health records, political views, and philosophical beliefs (items that need to be stored for the lifetime of the business).  Further information looks worrisome from a civil liberties perspective, including chat logs, and search histories, which will need to be stored for at least three years from creation.

 

Aside from the regulatory compliance burden, these requirements may put companies into difficult positions if they face conflict complying with their own local regulations prohibiting the transfer of data to foreign governments (take, for example, the US CLOUD Act).

 

A brand new element introduced by the draft Decree is an obligation on companies subject to the Law to obtain a special permit from the MPS prior to providing services in Vietnam.  No such requirement is included in the Law itself and this calls into question the legality of the MPS ‘creating’ this new permit obligation.  It’s cause for serious concern if this remains in the final Decree, not least of all because there is no guidance or explanation on procedures, information or timeline required to obtain such a permit.  It is also entirely unclear if this new permit obligation will apply retrospectively to companies already doing business in Vietnam over the Internet.  Any way you look at it, this is harmful for the business environment in Vietnam and contrary to the message delivered by the MPS and government in consultations and meetings about the Law.

 

The only good news in the draft Decree seems to be the decision that companies will have a full year to comply with the Law, meaning, in effect, that even though the Law takes effect on 1 January 2019, companies won’t need to be compliance until January 2020.

 

Time will tell what ultimately stays in and out of the Decree.  The draft is expected to be finalized and formally adopted by the government in the next weeks.

 

For more information about the Cybersecurity Law in Vietnam, please contact Giles at GTCooper@duanemorris.com, Le Hau at HNLe@duanemorris.com. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

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

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

 

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

 

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

 

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

 

Get in on industry

 

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

 

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

 

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

 

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

 

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

 

A well-connected hub

 

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

 

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

 

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

 

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

 

The fruits of free trade

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

Here are five spots currently generating some real excitement:

 

  1. Soc Trang

 

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

 

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

 

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

 

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

 

  1. Ninh Thuan

 

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

 

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

 

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

 

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

 

  1. Ho Chi Minh City

 

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

 

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

 

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

 

  1. Coastal hot spots

 

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

 

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

 

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

 

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

 

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

 

  1. Quang Binh

 

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

 

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

 

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

 

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

Cometh the EU-Vietnam Free Trade Agreement

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

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

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

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

What can investors expect to change with the new deal?

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

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

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

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

Sink or swim

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

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

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

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

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

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

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

Short term pain, long term gain?

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

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

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

Vietnam’s Special Economic Zones – sorting fact from fiction

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

 

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

 

What is an SEZ?

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Courting controversy

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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