Legal Update – Vietnam’s New Law on Enterprises 2020

The National Assembly of Vietnam recently approved a new Law on Enterprises 2020 (59/2020/QH14), superseding the Law on Enterprises 2014 (68/2014/QH13). As with previous versions, the Enterprise Law continues to regulate the establishment, operation, and governance of corporate entities, and exists as the primary legislative instrument in the area of Vietnamese corporate law. The new law will come into effect on 1 January 2021. Directors, shareholders, and prospective investors are encouraged to consider the key amendments discussed below.  Critically, companies should also ensure that their charters and internal processes are amended and adapted as necessary to ensure consistency and compliance with the terms of the new law as of 1 January 2021.  If not, they run the risk of taking unlawful corporate actions which could jeopardise validity of transactions and/or give rise to potential disputes and liabilities.

One Member Limited Liability Company – Corporate Owner

Where a one-member limited liability company is owned by a corporate member, there is now no longer a requirement to appoint official controllers (sometimes called inspectors). Rather, the incoming law provides for the following possible two organisational structures: i) Chairman and Director/General Director; or ii) Council of Members and Director/General Director.[1] Importantly, the company must appoint at least one legal representative who must also simultaneously hold the position of Company Chairman, Chairman of the Members’ Council, or Director/General Director.[2]

 Capital Transfers by Foreign Investors

The Enterprise Law 2014 provided an express blanket obligation that all foreign capital contributions (as well as dividend repatriations, and the purchase, sale, and transfer of shares) must be routed via an authorised capital account with a Vietnamese bank, except where such transfers were made in the form of assets.[3]

The phrasing under the 2020 law remains unchanged, merely re-stating that all foreign capital transfers must be routed via a capital account, except for transfers in the form of non-cash assets.[4]

In potential conflict with the above position, State Bank of Vietnam regulations under Circular 06/2019/TT-NHNN provides that transfers between two non-resident investors need not be routed via a capital account, irrespective of whether or not the transfer was in the form of cash or non-cash assets. [5]

Issues around Vietnamese foreign exchange control laws and the use capital accounts remain highly complex and uncertain, and we intend to produce further publications on such matters in due course. Whilst the 2020 law does touch on the issue, it is still silent as to when foreign investments are categorically deemed to be direct or indirect for the purposes of routing contributions via a formal capital account. It is strongly recommended to seek further legal advice prior to the making of any foreign capital contributions, as non-compliance may result in material transaction delays and prohibitions on the repatriation of future profits.

Bond Offerings

It has been widely reported that the Vietnamese domestic bond market has recently experienced significant overheating, largely as an indirect consequence of the State Bank of Vietnam imposing credit restrictions, particularly on real estate ventures.

The new law plays a part to address such concerns via the introduction of additional statutory obligations on corporate bond issuers and investors. The new law continues to allow for the issuance of bonds by private joint stock companies, however placement requires satisfaction of numerous complex transparency obligations, including in relation to audit procedures, shareholder approval, stock exchange notification, prudential and debt ratios, amongst others.[6] Such requirements on issuance also overlap with existing stipulations under the Securities Law 2019 and various guiding decrees, and it is therefore strongly advised to seek legal counsel on such matters prior to considering a private placement. Under the 2014 regime, the placement of private bonds only required the board of management to report on the issuance to shareholders in the next general meeting, including details of bond value, timing, class, and an explanation of the board’s resolution.[7]

The new law also allows for multiple member limited liability companies to issue bonds, [8] which was previously restricted to that of only joint stock companies under the 2014 law.

Additional Protections for Minority Shareholders

The new law allows a group of shareholders (5% or more) of a joint stock company to access important corporate information, including financial statements, resolutions, minutes, and inspection committee reports, amongst others. [9] This is a lowering of the threshold from 10% under the 2014 law.[10]

The group may also seek to convene a shareholders’ meeting in specific circumstances (i.e. serious breach of shareholder rights by the board of management). [11] Ordinary shareholders are now no longer required to hold their shares for a minimum ownership period (i.e. 6 months as under the 2014 law [12]) before being able to exercise general shareholder rights.[13]

Additionally, a group of shareholders (10% or more) now need not wait for 6 months post-investment before being able to exercise their right to nominate a specific director to the board of management. [14] This amendment is crucial, as in practice it had been commonplace for such delay to restrain incoming investors from nominating a preferred director at the time of investment completion.

Of note, the amendment comes on the back of a 2018 controversy, whereby incoming majority shareholder, ThaiBev, was denied the ability to nominate members to the board of management of Sabeco, Vietnam’s largest domestic brewer. This occurred due to the fact that ThaiBev had not held their shares for at least 6 months prior to the holding of Sabeco’s extraordinary general meeting, which was principally held for the purposes of nominating board of management members post-investment completion.

Rights of Preference Shareholders

Preference shares are a form of non-voting shares under current Vietnamese law. Significantly, the new law allows for shareholders holding preferred dividends and redeemable preferred shares to have limited participation rights. Such shareholders will be allowed to attend and vote in shareholder meetings where proposed resolutions adversely impact their rights and obligations.[15]  In such cases, a resolution will only pass where it is approved by at least 75% of shareholders who hold that specific class of shares.[16] It is important to note that the incoming provision does not provide an express definition of “adverse” should a shareholder dispute scenario arise.

This is a crucial amendment, providing much needed statutory protection to the rights of preference shareholders. In principle, Vietnamese law currently allows ordinary shareholders to alter the substantive terms of a class of preference shares via the passing of a general shareholders’ resolution. The above incoming 75% threshold seemingly serves to restrain such adverse action. Of course, the minority 25% shareholding group will nevertheless still be potentially subject to adverse alteration, and it is strongly recommended that appropriate consent rights are negotiated and drafted into the shareholders’ agreement at the time of investment.

 Pre-emptive Rights

Where a private joint stock company seeks to issue new shares by way of private placement, the amended law provides that existing shareholders are to be given pre-emptive rights over the subscription of such shares, except in a situation of merger or consolidation. [17]

Accordingly, in practice, a private joint stock company should obtain a formal waiver of pre-emptive rights from existing shareholders prior to undertaking a private placement of new shares. It may also be necessary for a general resolution to pass where such shares are offered on more favourable terms than those currently in existence. [18]

While this amendment will be welcome to some, it will serve as a potential constraint and unwelcome development for others. This sort of change in the 2020 law also highlights a significant point that has not been addressed: the role and scope of shareholder agreements in which shareholders may reach agreement on points that run contrary to otherwise mandatory terms of the Enterprise Law (e.g. – agreement to be issued new shares in priority to other shareholders). Despite the common use of shareholder agreements in Vietnam, there remains significant question marks over their validity and enforcement in practice. Nothing in the 2020 law suggests a change to this status quo.

Legal Representative Liability

A joint stock company or limited liability company may now appoint multiple official legal representatives. The specific rights and duties of each appointed representative must be recorded in the charter of the company. [19]

Should the charter be silent as to such allocation of duties, each individual legal representative stands to represent the company before third parties.[20] Under the new law, legal representatives are also now jointly liable for any loss or damage related to the company.[21] There continues to be no express indication that companies can agree to insure or indemnify legal representatives against such liabilities.

 Shareholder Confidentiality Obligations

Shareholders of joint stock companies are now under an obligation to keep corporate information confidential and refrain from distribution to third parties (presumably most relevant to substantive financial reports, strategic planning etc). [22]

The provision does not precisely identify the forms of relevant information nor circumstances where distribution would otherwise be permitted. It is also unclear whether such obligations would materially prevent a shareholder from providing corporate information to a prospective purchaser of shares.

 State Owned Enterprises – Lower Threshold

The new law amends the 2014 position, providing that State-owned enterprises (SOEs) are now to be defined as enterprises comprising of a State shareholding of more than 50% charter capital or voting rights. [23] The 2014 law previously defined SOEs as those enterprises with 100% State owned charter capital. [24]

This will have the effect of increasing the number of SOEs significantly. While this may serve a policy position of enhancing State control over use of State capital, it may have an adverse impact, especially when considering the drive to speed up the equitization process in general. SOEs are, in general, subject to stringent rules on audit, fund raising, and procurement, and such rules may serve to dampen the interest of potential strategic minority investors.

Digital Signatures

Enterprises are now free to utilise both physical seals and digital signatures when executing company documentation. Consistent with the current Law on Electronic Transactions,[25] digital signatures will be given the same legal weight with that of traditional physical seals. This is particularly relevant due to the current Covid-19 situation, introducing timely flexibility and practicality into corporate administrative practice. [26]

Board of Management – Rights and Obligations

The rights, duties, and liabilities of members of the board of management of joint stock companies remain largely unchanged under the new law, albeit with the following technical amendments.

Firstly, a shareholder holding as little as 1% has standing to commence legal proceedings against a director or member of a board of management who is in breach of their duties, regardless of how long the shareholder has held their shares (previously minimum 6 month holding requirement under the 2014 law).[27]

Secondly, where the board of management passes a resolution contrary to law or the charter of the company, a single shareholder now has the right to commence legal proceedings and request that the resolution be suspended or rescinded,[28] again with no minimum holding requirement (previously 1 year under the 2014 law). [29] This will importantly empower incoming shareholders who would otherwise have limited formal legal recourse against unlawful board action.

Thirdly, a board appointed independent director can now only serve for two consecutive terms. [30] There was previously no limit under the 2014 law. [31] This amendment will ensure that appointed independent directors are better able to meet their corporate governance objectives, bringing greater transparency and impartial oversight to the management of joint stock companies in Vietnam.

Finally, a board member of a joint stock company which is also a State-owned enterprise (i.e. State shareholding / charter capital of more than 50%), must not have a family relationship with a manger of the company, or with a manager of the parent company.[32] Again, such amendment brings greater transparency and governance standards, better protecting shareholders against improper corporate conduct.

Transitional Requirements

It is highly recommended that all enterprises undertake a thorough review of their existing company charters and proactively identify and amend any clauses which are inconsistent with the incoming law prior to 1 January 2021.

Where a company charter is inconsistent with the new law, board actions based on such outdated clauses (e.g. prohibiting a new shareholder from nominating a specific director until at least 6 months of shareholding has passed) may be legally challenged and potentially deemed invalid at law.

 Conclusion

In conclusion, Vietnamese corporate law continues to positively evolve with the approval of the amended Enterprise Law 2020.

Significantly, the new law enhances protections for minority and preference shareholders, whilst consolidating pre-emptive rights. Importantly, the law also simplifies organisational structures for one-member limited liability companies, and allows for the use of digital signatures in the execution of corporate documentation.

Finally, the new law seeks to address recent concerns around overheating and transparency in the Vietnamese domestic bond market, introducing greater statutory obligations on private issuers and investors alike.

***

For more information, please contact Giles at GTCooper@duanemorris.com or Daniel Haberfield at DHaberfield@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office. Daniel is an associate in Duane Morris’ HCMC office.

[1] Art 79(1), LoE 2020.

[2] Art 79(3), LoE 2020.

[3] Art 36(3), LoE 2014.

[4] Art 35(5), LoE 2020.

[5] Art 10(1), Circular 06/2019/TT-NHNN.

[6] Art 128(3), LoE 2020.

[7] Art 127(4), LoE 2014.

[8] Art 46(4), LoE 2020.

[9] Art 115(2)(a), LoE 2020.

[10] Art 114(2), LoE 2014.

[11] Art 115(3), LoE 2020.

[12] Art 114(2), LoE 2014.

[13] Art 115(2)(a), LoE 2020.

[14] Art 115(5), LoE 2020.

[15] Art 148(6), LoE 2020.

[16] Art 148(6), LoE 2020.

[17] Art 125(2)(b), LoE 2020.

[18] Art 125(2)(c), LoE 2020.

[19] Art 12(2), LoE 2020.

[20] Art 12(2), LoE 2020.

[21] Art 12(2), LoE 2020.

[22] Art 119(5), LoE 2020.

[23] Art 88(1), LoE 2020.

[24] Art 4(8), LoE 2014.

[25] Law on Electronic Transactions 51/2005/QH11.

[26] Art 43(1), LoE 2020.

[27] Art 166(1), LoE 2020; Art 161(1), LoE 2014.

[28] Art 153(4), LoE 2020.

[29] Art 149(4), LoE 2014.

[30] Art 154(2), LoE 2020.

[31] Art 150(2), LoE 2014.

[32] Art 155(1)(d), LoE 2020.

The Good, The Bad, and The Ugly – Vietnam’s New Public-Private Partnership Law 2020

Vietnam’s first Public-Private Partnership Law 2020 (the “PPP Law”) was passed by the National Assembly of Vietnam on 18 June 2020 and will come into effect from 1 January 2021. It is anticipated that further guiding decrees and circulars will soon be introduced to assist in the implementation of the PPP Law.  Here we take a look at the good, the bad, and the ugly.

The Good

The current Vietnamese PPP legal framework consists of numerous outdated circulars, decrees, and decisions. The incoming PPP Law serves to unify the current patchwork of laws into a stand-alone legislative instrument, thereby attempting to govern the full life cycle of inbound PPP activity, providing greater legal clarity and comfort to prospective foreign investors. The availability for the first time of codified minimum revenue guarantee and viability gap mechanisms will pique the interest of international investors and financiers. Likewise, the ability to select third country international arbitration provides increased comfort should a dispute scenario arise. Finally, the inclusion of competitive bidding processes enhances transparency and is welcomed.

The Bad

Concerns exist with respect to rigid project development timelines, restrictions on the assignment of rights, limitations in the scope of eligible investment sectors, and high minimum investment thresholds. Mandatory contract performance security and potentially mandatory use of template project documents are also areas of potential concern for investors and financiers alike.

The Ugly

From a project finance perspective, broad rights in favor of the procuring entity to terminate “in the interests of the nation”, rigidity with regards to the timing of financial close, and limitations in the choice of contractual governing law are all notable concerns, resulting in unfavorable risk allocation for investors. Further, the lack of express change in law provisions, step-in rights for lenders, and the inability of international financiers to take direct security over land in Vietnam will likely further negatively impact forthcoming project bankability assessments.

The table below provides an analysis of the key features of the new law, with comparative commentary from the perspective of primary PPP participants – namely, the government, developers, and lenders:

Key Legislative Features The PPP Law 2020 Government  View Investor View – Developers / Lenders
Permitted PPP Investment Sectors –  Reduces the list of eligible PPP investment sectors to the following only: Transport; Power Grids and Plants; Irrigation, Water, and Waste; Healthcare and Education; IT Infrastructure.

 

– Current Vietnamese law under Decree 63 recognizes a broader list of PPP investment sectors, which in addition to the above, also includes public lighting systems, agricultural developments, social housing, commercial infrastructure for economic and industrial zones, water drainage systems, waste treatment systems, amongst others.

 

– The reduced list clearly articulates and reinforces Hanoi’s current policy priorities regarding target PPP investment sectors.

 

 

– Limited scope, seemingly excludes important sectors (agriculture, public housing, public lighting systems etc).

 

– Potentially excludes sub-projects connected to the primary project (i.e. terminals, pipelines, transmission lines, storage facilities etc).

 

– Ambiguities surround the statutory scope of “power plant.” Potentially excludes some forms of renewables (i.e. rooftop solar systems).

 

Competitive Bidding – All proposed PPP projects must undergo competitive bidding, except for projects related to security, defence, high technology, and “other special cases as decided by the Prime Minister”.

 

 

 

 

 

– Global best practice.

 

– Attracts top international expertise.

 

– Demonstrates policy commitment to ensure development of quality and transparent public infrastructure works.

 

– Transparent process that encourages the participation of tier-one international expertise. However, implementation in practice must be transparent and efficient to be valuable.

 

– Some investors may however prefer to self-propose projects with the option of direct appointment.

Bid Security / Contract Performance Security – Investors must provide bid security of between 0.5%-1.5% of the total investment value of the project (to be later released).

 

– PPP project companies must provide contract performance security of between 1%-3% of the total investment value of the project (to be later released).

 

 

– Ensures only investors who are genuinely committed to completing the tender process are selected.

 

– Provides the government with some form of compensation should a non-completion scenario arise.

 

– Such requirements are problematic as financing may not yet be complete at this early stage of the PPP investment cycle.

 

– A lower security threshold or more flexible timing may be more appropriate.

 

Minimum Total Investment Threshold

 

– Minimum investment threshold of USD 8.7 million (for projects in the specific permitted investment sectors) reinforces current government policy focus on large-scale PPP ventures.

 

– NB: Minimum investment threshold lowered to USD 4.3 million for projects located in geographical areas with difficult or extremely difficult socio-economic conditions.

 

– Minimum investment threshold does not apply to O&M contracts.

 

– Reinforces Hanoi’s policy preference for large-scale high-impact PPP investments.

 

 

– Small-scale projects of significant social value may still require private sector investment and expertise, and thereby be unnecessarily excluded.

 

– Particularly relevant for smaller projects in health, education, science and technology, and environmental protection.

 

Statutory Definition of “Project Enterprise”

 

 

– The new law narrowly defines “project enterprise” to that of an entity executing and implementing a single PPP project contract. – Unclear policy objective but may be linked with desire to clearly ring fence projects for ease of administration (e.g. – assessing revenues and applying tax incentives). – This would seemingly prevent the enterprise from executing ancillary sub-projects connected to the primary project (e.g. construction of regasification assets connected to proposed gas turbine power plant development).

 

Assignment of Rights

 

 

– Restricts equity investors from assigning their shares/capital contribution/rights in a PPP project company until after the completion of the construction phase.

 

– Ensures only qualified investors are selected and thus genuinely capable of implementing the proposed project agreement.

 

 

 

– Rigidly prohibits assignment. Share ownership group structures should be flexible and allow for supplemental participation, including new and affiliate membership.

 

– The participation of new members can potentially add significant value and expertise to a project.

 

Contractual Governing Law

 

 

– The PPP project agreement must be governed by Vietnamese law.

 

In contrast to the incoming provision, the Vietnamese Civil Code permits parties to a PPP contract to select foreign law where the contract includes a “foreign element.”

– Projects are located in Vietnam and it is standard global PPP practice for the agreement’s governing law to be the same with that of the host government or procuring entity. – Important concepts of commonly used contract laws (e.g. English law) are not recognized under Vietnamese law.  For example, Vietnamese law does not recognize agreement on liquidated damages.

 

– The unpredictability of Vietnamese law will likely discourage foreign lending syndicates from providing debt funding and therefore significantly impact the project’s bankability assessment.

 

Dispute Resolution

 

– Where contractually agreed, parties to a project agreement may opt for international arbitration as a dispute resolution mechanism.

 

– The new law also references international treaties as a means to resolve disputes where applicable, leading to a possible application of formal Investor State Dispute Resolution.

 

– The potential to resolve disputes via international arbitration in a third country (i.e. Singapore International Arbitration Centre) is attractive and provides additional comfort to prospective foreign investors should a dispute scenario arise.

 

 

– Potential application of Investor State Dispute Resolution under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership / EU-Vietnam Free Trade Agreement is welcomed.

 

 

Viability Gap Funding

 

 

– Allocation of public funding designated for the construction phase, site clearance and compensation, and resettlement capped at 50% of the total investment amount. – Provides a tangible incentive for private investors to participate in projects which may otherwise not be economically viable or financially attractive.

 

–  Use of viability gap funding mechanism to attract investment is consistent with other comparative regional PPP markets (e.g. Indonesia, the Philippines, and India) and is welcomed.

 

Minimum Revenue Guarantee – Subject to satisfaction of certain conditions, where revenue reaches less than 75% of the revenue in the project’s financial plan, the government shall share with the investor and the PPP project company 50% of the difference between 75% of the revenue in the financial plan and the actual revenue realized. – Important financial risk allocation mechanism, providing additional encouragement to international financiers to join PPP infrastructure developments. – Availability subject to satisfaction of complex terms and conditions, heavily weighted against the private investor.

 

– Restricts revenue risk sharing to that of a change in plan, policy, or law scenario.

 

– Fixed threshold creates financial feasibility concerns.

 

– Threshold should be flexible and adjusted on a case-by-case basis, dependent upon the specific investment sector.

 

Financial Closing Timeline – Equity and debt financing into the project vehicle must be completed within 12 months (or 18 months for projects whose decisions on investment policy fall within the approval of the National Assembly or the Prime Minister) from the execution of the project contract.

 

– Deadlines ensure funding is provided in a timely manner, injecting the requisite equity and debt amounts into the project vehicle. – Too restrictive and unnecessarily prescriptive and threatens financial feasibility.

 

– Financial closing should be more flexible and account for the different forms of potential funding (i.e. bond solutions may take more time to prepare than bank solutions).

 

Step-in Rights: Lenders – Where a project contract is terminated early, the procuring entity, lender, investor, and project company have the ability to agree to coordinate with the government entity in the selection of an alternative investor.

 

–  This is more restrictive compared to the current position under Decree 63, whereby lenders have the right to step in on their own or to appoint another competent organization to take over all or part of the rights and obligations of investors and project companies if investors or project companies fail to discharge the obligations prescribed in the relevant project contracts or loan agreements.

 

 

 

 

– Allows participants to agree on the selection of an alternate investor should a termination scenario arise.  – Too restrictive and inconsistent with global PPP best practice. In practice, lenders will not lend without pre-agreed step-in rights recorded in Direct Agreements and we do not expect this to change.

 

 

Termination – Government may terminate in the “interests of the nation.” – Provides protection and contractual flexibility should proposed investments become unviable or inconsistent with the public interest. – Reference to national interests creates a very broad termination basis in favor of the government entity and is inconsistent with international best practice.

 

– Parties should be free to directly negotiate and define specific termination events in the project agreement.

 

Foreign Lender Security – The requirement to mortgage in accordance with the Law on Land remains, meaning that security over land use rights and real property is only available to domestic lenders. – The incoming law remains consistent with key Vietnamese concepts in relation to foreign legal interests over real property. – Foreign lenders’ inability to directly take security over land and assets attached to land is a serious impediment to attracting international project finance funding.

– The use of local security agents to hold land-related security remains fraught with uncertainty and practical constraints.

 

Change in Law – No specific stand-alone change in law provision. Government will however allow for amendment of project contract terms where changes in law result in actual project revenue to be 75% less than the anticipated revenue projected in the initial financial plan.

 

– Apparent policy decision to allocate change in law risk to investors though, more likely, in knowledge that terms will be subject to case-to-case negotiation and agreement.

 

 

– The PPP Law or government-issued contractual template should provide specific clauses protecting investors regarding change in law scenarios, as consistent with global PPP best practice.

 

– Particularly important given Vietnam’s evolving legislative landscape.

 

 

For more information, please contact Giles at GTCooper@duanemorris.com or Daniel Haberfield at DHaberfield@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office. Daniel is an associate in Duane Morris’ HCMC office.

Anwalt in Vietnam Dr. Oliver Massmann – Die Nationalversammlung nahm die Empfehlungen von Duane Morris in das erste vietnamesische Gesetz über Investitionen in Form von öffentlich-privaten Partnerschaften (PPP) auf

Am 13. Mai dieses Jahres diskutierte Dr. Oliver Massmann mit Schlüsselpersonen der Nationalversammlung über den Entwurf des PPP-Gesetzes.

Am 8. Juli 2020 wurde das erste vietnamesische Gesetz über Investitionen in Form von öffentlich-privaten Partnerschaften veröffentlicht, das die folgenden von Duane Morris vorgeschlagenen Empfehlungen enthält:

Klärung des Umfangs und der Größenordnung von Energieprojekten, die für PPP-Investitionen in Frage kommen

Artikel 4 des PPP-Gesetzes sieht fünf Sektoren vor, die für PPP-Investitionen in Frage kommen:

a/ Transport;

b/ Stromnetze, Kraftwerke, mit Ausnahme von Wasserkraftwerken und Fälle von Staatsmonopol nach dem Elektrizitätsgesetz;

c/ Bewässerung; Wasserversorgung; Entwässerung und Abwasserbehandlung; Abfallbehandlung;

d/ Gesundheitsversorgung, Bildung, Ausbildungdd/ Infrastruktur für die Anwendung von Informationstechnologie

Das PPP-Gesetz legt auch den Gesamtinvestitionskapitalbedarf für ein PPP-Projekt fest. So müssen beispielsweise Energieprojekte, ausgenommen sind Betriebs-und Wartungsverträge, ein Gesamtinvestitionskapital von mindestens 200 MilliardenVND aufweisen. Bei Projekten in Gebieten mit schwierigen sozioökonomischen Bedingungen ist dieser Wert niedriger (100 Milliarden VND).

2. Die Bedeutung bankfähiger PPP-Verträge

Duane Morris schlug vor, dass die Nationalversammlung erwägen sollte, eine bankfähige Vorlage für PPP-Verträge im Gesetz selbst oder in diesem Leitdekret bzw. Rundschreiben vorzusehen. In Artikel 47 des PPP-Gesetzes wurde ergänzt, dass die Regierung die Ausstellung von Standartverträgen für Projekte mit BOT-,BTO-, BOO-, O&M-, BTL-, BLT-, BT-oder gemischten Verträgen regeln soll.

In Bezug auf das Einstiegsrecht der Kreditgeber legt das PPP-Gesetz fest, dass im Falle einer vorzeitigen Beendigung des PPP-Projektvertrags und der Notwendigkeit, einen Ersatzunternehmer auszuwählen, um den Fortschritt des Projekts sicherzustellen, der Kreditgeber sich mit dem Staat abstimmen muss, um den alternativen Investor auszuwählen.

3. Bestimmen Sie im Detail Investitionsanreize, die Investoren genießen können

Artikel 80 legt fest, dass Investoren Sicherheit in Bezug auf das Landzugangsrecht, das Recht auf Nutzung von Land und anderen öffentlichen Gütern, das Hypothekenrecht, das Recht auf Handel mit dem Projekt und seinem Infrastruktursystem erhalten.

PPP-Projektunternehmen haben auch Vorrang bei der Inanspruchnahme öffentlicher Dienstleistungen für die Durchführung des Projekts, und die zuständigen Behörden müssen die Investoren bei der Durchführung der erforderlichen Verfahren unterstützen, um diese Prioritätzu optimieren.

Weitere nennenswerteBestimmungen im neuen PPP-Gesetz:

1/ Das System zur Sicherung des Fremdwährungsausgleichgewichtsist auf Projekte anwendbar, die der Entscheidung der Nationalversammlung oder des Premierministers über die Investitionspolitik unterliegen. Letzterer beantragte Projekte mit einemGesamtinvestitionskapital von mindesten 5000 Milliarden VND, was darauf hindeutet, dass alle Energieprojekte, die für PPP-Investitionen in Frage kommen, automatisch für dieses Fremdwährungsschema in Frage kommen. Darüber hinaus soll für alle PPP-Projekte eine Obergrenze von 30 % festgelegt werden.

2/ Mechanismus zur Aufteilung des Einnahmerisikos. wenn die tatsächlichen Einnahmen mehr als 125 % der Einnahmen im Finanzplan des PPP-Projektvertrags erreichen, teilt sich der Investor mit dem Staat 50 % der Erhöhung zwischen den tatsächlichen Einnahmen und den vertraglich festgelegten Einnahmen.

Wenn die tatsächlichen Einnahmen weniger als 75 % der Einnahmen im Finanzplan des PPP-Projektvertrags erreichen, muss der Staat mit dem Investor 50 % des Rückgangs zwischen den tatsächlichen Einnahmen und den vertraglich zugesagten Einnahmen teilen.

Dieser Mechanismus zur Teilung der Mindereinnahmen wird angewandt, wenn die folgenden Bedingungen erfüllt sind:

1. Art des Vertrags: BOT, BTO oder BOO;

2. Die Ursache des Verlustes ist die Änderung von Gesetzen und Richtlinien;

3. Maßnahmen zur Anpassung der Preise und Vertragsbedingungen für Produkte und öffentliche Dienstleistungen sind umgesetzt worden, aber die Gesamteinnahmen liegen immer noch unter 75 %; und

4. Die Staatliche Rechnungsprüfung hat die Einnahmeverringerung geprüft.

3/ Auswahl von Auftragnehmern zur Durchführung von PPP-Projekten

PPP-Verträge müssen verbindliche Inhalte enthalten, für die der Auftragnehmer verantwortlich ist, wenn die Qualität des Projekts nicht den vereinbarten Anforderungen entspricht. Für Arbeiten, die von inländischen Auftragnehmern ausgeführt werden können, wird die Inanspruchnahme inländischer Auftragnehmer gefördert.

4/ Geltende Gesetze: Der PPP-Vertrag, seine Anhänge und damit zusammenhängende Dokumente sind in Übereinstimmung mit den vietnamesischen Gesetzen auszulegen und zu interpretieren.
Schlussfolgerung

Es ist uns eine Freude, dass die Nationalversammlung die Ratschläge und Empfehlungen von Duane Morris berücksichtigt hat. Diese Handlungen sind ein Schritt in die richtige Richtung. Es bleibt abzuwarten, ob der politische Wille vorhanden sein wird, PPP-Projekte regelmäßig und in großem Maßstab vollständig umzusetzen.

Bitte zögern Sie nicht, den Autor Dr. Oliver Massmann unter omassmann@duanemorris.com zu kontaktieren. Dr. Oliver Massmann ist der Generaldirektor von Duane Morris Vietnam LLC, Mitglied des Aufsichtsrats von PetroVietnam Insurance JSC und der einzige ausländische Anwalt, der vor den Mitgliedern der Nationalversammlung von Vietnam Vortraege in vietnamesischer Sprache haelt.

Circular 18: New Template PPA and Revised Regulations on Solar Power Developments

Circular No. 18/2020/TT-BCT (“Circular 18”) [1] was recently issued by Vietnam’s Ministry of Industry and Trade, and provides regulations on the development of solar power projects to guide the Prime Minister’s Decision 13 issued in April 2020. Circular 18 is effective from 31 August 2020 and supersedes Circular 16 on the same subject matter.[2]

Circular 18 introduces updated template power purchase agreements (“PPAs”) as well as revised regulations for the development of i) grid-connected solar farms; and ii) rooftop solar power systems.

Despite rapid growth and significant investment potential, the Vietnamese renewable energy market and associated regulatory regime remains highly complex and constantly evolving.

Developers, lenders, and prospective investors are encouraged to consider the key amendments discussed below:

Background – The Second Solar Feed-in-Tariff

As introduced under Decision 13 (extending Decision 11), the second feed-in-tariff regime (“FiT 2”) provides for a preferential feed-in-tariff mechanism for a 20 year contractual term as under an executed PPA with Vietnam Electricity (“EVN”).[3]

This applies to solar power projects (i.e. grid-connected, floating, and rooftop) which achieve a commercial operation date (“COD”) prior to 31 December 2020.[4]

Within this context, developers are racing to complete projects prior to the 2020 deadline in order to enjoy FiT 2.

When Does Circular 18 Apply?

Circular 18 specifically applies to the following solar power projects:

  • 1 July 2019 – 31 August 2020: Where a solar power project (grid-connected or rooftop) achieved COD from 1 July 2019 – 31 August 2020 (i.e. the effective date of Circular 18), the seller and the purchaser must amend any pre-existing executed PPA to ensure that the terms of such agreement are consistent with the terms of the template PPA issued with Circular 18. [5]  This is significant because it means that projects that were financed, built, and commissioned on the basis of a specific executed PPA now face changes to the fundamental underlying contract terms. See further below for some headline comments on the new template PPA.
  • Prior to 1 July 2019: Where a solar power project (grid-connected or rooftop) achieved COD prior to 1 July 2019, such executed PPA shall continue to be valid and need not be amended to reflect the revised template PPA issued with Circular 18. [6]

 New Project Development Regulations

1) Grid-Connected Solar Farms

Circular 18 provides that the total area for construction of a grid-connected solar project (land or water surface area) must not exceed 1.2 hectares per MWp.[7] While this base number is unchanged from the previous regulations, Circular 18 clarifies that this area excludes power transmission lines or road access, but does include the actual power plant and transformer station. [8]

Further, the basic design dossier of the project must include details of the project’s location, solar radiation potential, impact on the electricity systems in the local area, load dispatch information, and design for connection to the SCADA system.[9]

Importantly, from a commercial perspective, Circular 18 overturns the previous minimum 20% equity ownership threshold under Circular 16, [10] thereby enabling developers to secure the bulk of project financing by way of debt funding.

2) Rooftop Solar Systems

Circular 18 provides that where a proposed grid-connected rooftop solar system has a capacity of no more than 1 MW, it is not necessary to obtain a formal power generation license.[11] This is consistent with current regulations, and reaffirms the position under Circular 36 from the Ministry of Industry and Trade.[12]

Rooftop solar developments with a 1 MW capacity or less (AC capacity) or a 1.25 MWp capacity or less (DC capacity) must still nevertheless register their proposed connection with EVN, including details of location for installation, output scale, and proposed connection point.[13]

Additionally, after receiving EVN’s opinion on the project’s transmission capabilities, the developer must then enter into an interconnection agreement (with EVN or the relevant grid owner), obtain approval on the proposed sale of electricity, install metering equipment, and carry out technical testing, amongst other requirements.[14]

The above requirements are all subject to very strict deadlines (often less than 5 working days) and it is highly recommended to seek the formal support of legal counsel to ensure such agreements are negotiated and executed in a timely manner, thereby preventing material transaction delays.

Significantly, the template PPA for rooftop solar projects issued with Circular 18 does not need to be used in cases where the developer sells power to a party other than EVN.  In those cases, the parties are free to agree terms and prices consistent with general Vietnamese contract law.

 New Template PPA

 1) Grid-Connected Solar Farms

  • Mandatory use of template PPA: The use of the template PPA for grid-connected solar farms is mandatory.[15] Parties may negotiate to include additional supplemental clauses which serve to clarify the rights and obligations of the parties, although in practice EVN may be reluctant to do so.[16] Any supplemental terms must remain consistent with the terms of the template PPA, and parties are prohibited from making substantive alterations. [17]

 

  • Force majeure: The previous template PPA excused a defaulting party from broadly performing their obligations should a force majeure event arise. Whilst the new template PPA provides for the same, it specifically limits the ability of a defaulting party to avoid payment of monies owed up to the date of the force majeure event. Such clarification is welcomed and presumably more significant in the context of Covid-19.[18]

 

  •  Change in law: The new template PPA does not provide for a specific change in law clause. This is inconsistent with global best practice, and potentially leaves developers and lenders in a vulnerable position should an adverse change in law circumstance arise. Given Vietnam’s constantly evolving legislative landscape, particularly in relation to renewable energy, the potential protection provided by a change in law clause is significant, and thus would be very attractive to prospective foreign investors.

 

  • Offtake obligation: The new template PPA no longer obliges EVN to contractually agree to purchase the entire yield generated from the solar farm. Legally, this seems inconsistent with the previous obligation on EVN to purchase the entire output generated by the solar farm under Decision 13.[19] Commercially, this creates significant concerns for developers and lenders alike, and may negatively impact forthcoming bankability assessments with regards to anticipated project revenue.

 

  • Curtailment: The new template PPA provides EVN with broad curtailment rights. Specifically, where the solar farm does not conform with relevant power regulations; during times of installation or repair; when EVN is carrying out inspection on portions of the grid which are connected to the farm; when EVN’s gird systems are broken; or when EVN’s power grid requires support to recover following a breakdown. [20] Such broad curtailment rights in favor of the purchaser will again negatively impact on bankability assessments, creating considerable uncertainty for financiers.

 

  • Termination payments: Of particular concern is that where the seller opts to terminate the agreement due to the purchaser’s default, the new template PPA provides that the termination damages amount will be calculated up to the time of termination, rather than based on the remainder of the 20 year contractual term. [21] The previous template PPA under Circular 16 provided no such restriction. The incoming clause will therefore create significant concern for those projects already operating under pre-existing PPAs which now need to conform with the terms of the new template. Furthermore, under Circular 18, the non-defaulting party assumes the burden of proof in establishing loss as a result of the defaulting party’s actions. [22] Such risk allocation greatly favors the purchaser and will again negatively impact forthcoming bankability assessments.

2) Rooftop Solar Systems

The template PPA for rooftop solar system projects is largely the same as the template provided under Circular 5,[23] albeit with the following noteworthy amendments:

  • Mandatory use of template PPA: The use of the template PPA for grid-connected rooftop solar systems is mandatory.[24] Parties may negotiate to include additional supplemental clauses which serve to clarify the rights and obligations of the parties.[25] Any supplemental terms must however remain consistent with the terms of the template PPA. [26] As noted above, the template is not mandatory where the power buyer is not EVN.

 

  • Continued silence: The template PPA still does not provide for specific change in law, termination compensation, grid unavailability, or tariff indexation provisions, thereby continuing to place an unfavorable risk allocation against the developer.

 

  • Dispute resolution: Concerns continue to exist with regards to the transparency and flexibility of the provided dispute resolution process under the template PPA. Where parties are still unable to resolve their differences post-mediation, it appears that the final body responsible for resolving the dispute will be EVN or its parent entity (as the relevant “higher level power unit of the power purchaser”), thereby potentially greatly favoring the purchaser.[27]

 

  • Late payment interest: The new template PPA introduces greater flexibility with regards to late payments. Parties are now free to include a late payment interest clause in an amount as agreed between the parties, in accordance with the Commercial Law 2005.[28] The previous template PPA under Circular 5 limited the calculation of late payment interest to an amount based on the State Bank of Vietnam’s monthly interbank interest rate.

 

  • Metering system malfunction: Where the power metering system malfunctions (e.g. fire, damage), there is now an obligation on the seller to promptly notify the purchaser of such malfunction. The seller and the purchaser must then agree on the output of power during this time of malfunction, measured according to output based on the previous week, month, or year.[29]

Conclusion

Vietnam’s solar power market and associated regulatory regime continues to constantly evolve. The latest piece of regulation, Circular 18, is effective from 31 August 2020 and introduces updated project development requirements as well as a revised mandatory template PPA.

Significantly, those solar power projects which achieve a commercial operation date of between 1 July 2019 – 31 August 2020 will need to revise their pre-existing PPAs to ensure conformity with the updated regulations under Circular 18.

Please do not hesitate to contact us should you have any further queries or wish to discuss how the incoming Circular 18 may impact your current or proposed solar power development.

***

For more information, please contact Giles at GTCooper@duanemorris.com or Daniel Haberfield at DHaberfield@duanemorris.com.  Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office. Daniel is an Australian qualified lawyer and associate in Duane Morris’ HCMC office.

 

Giles Cooper, Partner
+84 24 3946 2210
gtcooper@duanemorris.com
Daniel Haberfield
Daniel Haberfield, Associate
+84 28 3824 0240
dhaberfield@duanemorris.com

[1] Circular No. 18/2020/TT-BCT, dated 17 July 2020, Ministry of Industry and Trade (“Circular 18”).

[2] Circular No. 16/2017/TT-BCT, dated 12 September 2017, Ministry of Industry and Trade (“Circular 16”).

[3] Decision No. 13/2020/QD-TTg, dated 6 April 2020, Prime Minister of Vietnam (“Decision 13”).

[4] Ibid.

[5] Articles 6(1)-(3) and 9(2), Circular 18.

[6] Article 9(1), Circular 18.

[7] Article 4(3), Circular 18.

[8] Article 3(2), Circular 18.

[9] Article 4(2), Circular 18.

[10] Article 10(3), Circular No. 16/2017/TT-BCT, dated 12 September 2017, Ministry of Industry and Trade.

[11] Article 5(4), Circular 18.

[12] Article 3(2), Circular No. 36/2018/TT-BCT, dated 16 October 2018, Ministry of Industry and Trade (“Circular 36”).

[13] Article 5(2), Circular 18.

[14] Article 5(2), Circular 18.

[15] Article 1, Circular 18.

[16] Article 6(3), Circular 18.

[17] Article 6(1)-(3), Circular 18.

[18] Article 5(3), Model Grid Connected Solar Farm PPA, Circular 18.

[19] Article 4(1), Decision No. 13/2020/QD-TTg, dated 6 April 2020, Prime Minister of Vietnam.

[20] Article 7, Model Grid Connected Solar Farm PPA, Circular 18.

[21] Article 7(5), Model Grid Connected Solar Farm PPA, Circular 18.

[22] Article 7(4)(b), Model Grid Connected Solar Farm PPA, Circular 18.

[23] Circular No. 5/2019/TT-BCT, dated 11 March 2019, Ministry of Industry and Trade (“Circular 5”).

[24] Article 1, Circular 18.

[25] Article 6(3), Circular 18.

[26] Article 6(1)-(3), Circular 18.

[27] Article 6(2), Model Rooftop Solar System PPA, Circular 18.

[28] Article 4(3)(b), Model Rooftop Solar System PPA, Circular 18.

[29] Article 3(2)(c), Model Rooftop Solar System PPA, Circular 18.

VIETNAM – NEW LAW ON INVESTMENT PROVES THE GOVERNMENT’S EFFORT TO ATTRACT FOREIGN DIRECT INVESTMENT

The new Law on Investment will take effect on 1 January 2021 (“the Law”) and replace the current Law on Investment 2014. The Law is praised to play an important role in attracting the foreign capital quickly flowing out of China due to increased political instability and the country’s poor response to the novel corona virus. The Law is also seen as another respectable effort of the Vietnamese Government to increase FDI alongside the ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), EU-Vietnam Free Trade Agreement (EVFTA) and Law on Investment in the form of Public-Private Partnership (PPP Law).

Under the new Law on Investment, a business organization is deemed as a foreign investor if foreign investors hold 50% or more charter capital (the current law stipulates 51%). In case the business organization is a partnership, then the majority of the general partners/members must be foreigners.
Before foreign investors can establish a business organization, they must have identified an investment project and obtain Investment Registration Certificate for that project. The latter is not required for investors engaging in the establishment of a small and medium-sized creative start up or fund for such start up.

How the new Law on Investment encourages Foreign Direct Investment?

1. Market access conditions for foreign investors are the same for domestic investors, except for industries and trades that don’t allow for such market access or those that come with conditions on foreign investors. The Government, before 1 January 2021 expectedly, will announce a list of the abovementioned industries and trades. The list will cover topics such as ownership of charter capital, investment form, scope of investment activities, evaluation of investors’ capacity and partners participating in the investment activity.

2. Foreign investors can reap the benefits of various business guarantees, including guarantee on investment in case of change in laws, guarantee of property ownership, guarantee on investment activities and guarantee on the right to transfer assets abroad.

For example, under the guarantee on investment activities, investors are not required to prioritize the purchase and usage of goods or services produced by a domestic manufacturers or service provider; investors are not compelled to self-balance foreign currency from export sources to meet import demand; it is also not an obligation to achieve a certain localization rate for domestically-produced goods.

Additionally, after fulfilling all financial obligations under Vietnamese laws, foreign investors can transfer abroad investment capital/liquidation, income from investment activities, money and other assets legally owned by investors.

3. Dispute between foreign investors and the State can be taken to international arbitration given that the contract between the parties includes such clause or international treaties in which Vietnam is a signatory allows for international arbitration. Dispute between investors, of which at least one party is a foreign investor as defined by the Law, can be taken to foreign or international arbitration with no attached conditions.

4. The Government has added more types of investment incentives, such as: Exemption from import tax on goods imported to create fixed assets; Exemption or reduction of land use levy, land rent, land use tax; Quick depreciation, increase deductible expenses when calculating taxable income.

5. The Government has added more business lines eligible for investment incentives, covering preservation of drugs, manufacture of medical equipment, university education , and manufacture of products on the list of industries prioritized for development such as new materials, new energy, clean energy, renewable energy, products with 30% or more added value, energy-saving products, waste collection, waste treatment, waste recycling and waste reuse.

Some other notable provisions of the new Law on Investment:

– Organizations and individuals are banned from providing debt collection service.
– In case of overlapping between the new Law and other laws, this Law does not apply when the project involves public investment capital, business investment and operation on the securities market, the project is carried out in public-private partnership mode. The legal framework prescribing PPP projects will be set out in the PPP Law, rather than in the Law on Investment as previously.
– 26 business lines are removed from the list of conditional business activities, including services of commercial arbitration organizations, debt trading services, franchising and logistics services to name a few. Conditional business activities must satisfy all conditions related to national defense and security, social order and safety, social ethics and community health. The removal of 26 conditional business lines under the new Law will increase market access for foreign investors.
– The Provincial People’s Committee now has the authority to approve Decision on Investment Policy related to (i) Projects request for permission to convert land use purpose (ii) Specific projects for construction of residential housing and urban zones (iii) Projects for construction and commercial operation of golf course (iv) Projects in areas affecting national defense and security. Under the current law, investors would have to request for the above-mentioned project approval from the Prime Minister and the process for that is very time-consuming.

Compared to the current Law on Investment 2014, the new Law taking effect on 1 January 2021 enhances legal certainty with regards to the rights and obligations of investors, reduces administrative burden and sets forth more investment benefits for foreign investors, showing the State’s effort to boost capital inflow from abroad. The ratification of the new Law on Investment is another inherent proof that the Government undertakes to recover the national economy post Covid-19 outbreak, promote citizens’ living standards while observing its international commitments.

For more information on the above, please do not hesitate to contact the author Dr. Oliver Massmann under omassmann@duanemorris.com. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC, Member to the Supervisory Board of PetroVietnam Insurance JSC and the only foreign lawyer presenting in Vietnamese language to members of the NATIONAL ASSEMBLY OF VIETNAM.

VIETNAM – THE EU-VIETNAM FREE TRADE AGREEMENT TAKING EFFECT FROM 1 AUGUST 2020

The date has been set for the landmark EU-Vietnam Free Trade Agreement (“EVFTA” or “Agreement”) to take effect on 1 August 2020. The Agreement is anticipated to bring significant advantages for enterprises, employees and consumers in both the European Union (“EU”) and Vietnam. According to analysis carried out by the Government as well as the World Bank, Vietnam expects an increase in the country’s GDP to be 2,18 – 3,25% (years 2020 – 2023); 4,57 – 5,30% (years 2024 – 2028) and 7,07 – 7,72% (years 2029 – 2033). Concurrently, exports from Vietnam to EU are to rise 20% in 2020, the figure is to double in 2025. In addition, with the possibility of skilled laborers’ wage to rise by up to 12%, with salaries of common workers increasing by 13%, the Agreement can help lift around 800,000 people out of poverty by 2030.

The EVFTA is the most comprehensive and ambitious trade and investment agreement that the EU has ever concluded with a developing country in Asia. It is the second free trade agreement in the ASEAN region with EU, after Singapore, and it will intensify bilateral relations between Vietnam and the EU. Coupled with the trend of investors continuously withdrawing capital and production out of China in recent months, the EVFTA is contributing to turn Vietnam into the manufacturing hub of Asia.

Under the EVFTA, Vietnam has not only opened additional sub-sectors for EU service providers, but also made commitments deeper than those outlined in the WTO, offering the EU the best possible access to Vietnam’s market. Sub-sectors that Vietnam commits to under the EVFTA (but not WTO) include: Interdisciplinary Research & Development (R&D) services; nursing services, physiotherapists and para-medical personnel; packaging services; trade fairs and exhibitions services and building-cleaning services.

Some notable provisions of the EVFTA:

Tax

Vietnam commits to eliminate import duties on 48.5% of tariff lines, equivalent to 64.5% of EU exports immediately after the Agreement comes into effect.
After 7 years, import taxes on 91.8% of tariff lines (equivalent to 97.1% of EU exports) will be removed by Vietnam. After 10 years, the elimination rate will be 98.3% of the total tariff lines, equal to 99.8% of the EU’s exports respectively.

Similarly, nearly 100% of Vietnam’s exports to the EU will be eliminated import tax after 10 years. So far, this is the highest level of commitment a partner has given Vietnam in a trade agreement. This is especially meaningful when the EU has been one of the two largest export markets of the country.

Market access

For the sectors listed in each party’s Specific Schedule of Commitments, except where there is a specific reservation, the two parties undertake to not apply restrictions related to: (i) the number of businesses allowed to participate in the market, (ii) the transaction value, (iii) the number of activities, (iv) foreign capital contribution, (v) the form of legal entities, and (vi) the number of natural persons recruitment.

Public procurement packages

Under the EVFTA, Vietnam commits to allow EU contractors to participate in bidding packages that simultaneously meet the three conditions regarding Value of bidding package; Procurement agency; Goods and services require procurement.

Vietnam’s commitments on Government procurement mainly deal with the obligation to treat EU bidders, or domestic bidders with EU investment capital, equally with Vietnamese bidders when the Government purchases goods or requests a service worth over the specified threshold. Vietnam undertakes to follow the general principles of National Treatment and Non-discrimination. The EVFTA also requires its parties to assess bids based on fair and objective principles, evaluate and award bids only based on criteria set out in notices and tender documentation and create an effective regime for complaints and settling disputes. These rules require parties to ensure that their bidding procedures match the commitments and protect their own interests, thus helping Vietnam to solve its problem of bids being won by cheap but low-quality service providers.

It should be noted that Vietnam reserves the right to retain a certain proportion of the value of bidding packages for domestic contractors, goods, services and labor.

Distribution service

Vietnam has agreed to abolish the requirement of economic needs test five years after the date of entry into force of the Agreement, but Vietnam reserves the right to implement the distribution system planning on a non-discriminatory basis. Vietnam also agrees not to discriminate in the production, import and distribution of alcohol, allowing EU businesses to reserve their operating conditions under current licenses and only need one license to carry out import, distribution, wholesale and retail activities.

It should be noted that the EVFTA contains a Memorandum of Understanding concerning Bank Equity, in which Vietnam pleads to favorably consider allowing EU credit institutions to raise foreign ownership to 49% of charter capital in two Vietnamese joint stock commercial banks. This commitment, if enacted, will be valid for 5 years only (after the expiry of 5 years Vietnam will not be bound by this commitment) and is not applicable to 4 banks where the State is holding majority shares (i.e. BIDV, Vietinbank, Vietcombank and Agribank).

Vietnam will benefit more from the EVFTA compared with other such agreements, since Vietnam and the EU are considered to be two supporting and complementary markets. In other words, Vietnam exports goods that the EU cannot or does not produce itself (i.e. fishery products, tropical fruits, etc.) while the products imported from the EU are also those Vietnam does not produce domestically, including machinery, aircraft and high-quality pharmaceutical products.

Vietnam has been making visible efforts and progress to meet the high standards set out in the EVFTA. From 1 August 2020, the Agreement will create sustainable growth, mutual benefits in various sectors and be an effective tool to balance trade relations between the EU and Vietnam.

***
Please do not hesitate to contact the author Dr. Oliver Massmann via email under omassmann@duanemorris.com. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC, Member to the Supervisory Board of PetroVietnam Insurance JSC and the only foreign lawyer presenting in Vietnamese language to members of the NATIONAL ASSEMBLY OF VIETNAM.

Vietnam’s NEW Labor Code – 15 notable changes coming your way effective January 2021

The New Labor Code 2019 will soon come into effect on 1 January 2021 and entirely replace the current labor regime (‘Labor Code 2012’). The below fundamental amendments should be taken into account with a view to best protecting an employers’ legitimate rights and entitlements under Vietnamese labor law.

1.         The definition of ‘employment relationship’ has been broadened

Pursuant to the Labor Code 2019, a legally valid employment relationship is deemed to exist even where two parties agree to a document by a different name rather than ‘a labor contract’, as long as the document includes a description of the job, salary, management, and supervision conditions. In other words, a contractual document with a different name is still considered to be a labor contract assuming the above general terms are included.

The new Labor Code 2019 creates the possibility that where a contract with an “independent contractor”, “service provider”, “freelancer”, or other informal agreement between two or more parties contains employment-like terms may specifically be recognized as a formal Vietnam-law labor contract.

From a practical perspective, this serves to prevent employers from misusing service contracts as an alternative mechanism for hiring individuals (as opposed to traditional labor contracts). The use of service contracts typically enables employers to more easily undertake termination without statutory restrictions, as well as avoid mandatory social insurance contributions, as would otherwise ordinarily be required under a formal employment contract.

It is thus necessary for an employer who genuinely wishes to engage an individual contractor for a specific service to prepare a specific service contract in order to avoid the potential risk that the relationship be characterized as one of employment and not of service.

  1. E-contracts are formally recognized

    Labor contracts made by electronic means in data message form are now formally accepted and recognized under the Labor Code 2019. Specifically, labor contracts concluded via electronic devices in data message form have the same validity as those concluded in written form.

Additionally, a verbal labor contract can be concluded if the contractual term is for less than one (1) month.

  1. Seasonal labor contracts have been removed

    From 1 January 2021, labor contracts can take either one of the following forms: (i) indefinite-term labor contracts, and (ii) definite-term labor contracts of maximum 36 months.

    That is to say, compared to the current regulations of the Labor Code 2012, seasonal or work-specific labor contracts will no longer exist.

 

  1. Labor contract extension is no longer allowable

 Under the Labor Code 2012, an annex to a labor contract serves to elaborate on specific provisions or to amend or supplement the primary labor contract. Specifically, the duration of a labor contract shall be amended only once by annex and type of the signed contract shall not be changed as the result.

Under current law, in practice, the employer is entitled to conduct one extension for each definite-term labor contract via an annex as an integral part of such labor contract. On this basis, by way of two definite-term labor contracts plus two extensions, an employer is potentially eligible to extend three times before the labor contract term is deemed indefinite by law.

Conversely, the employer can no longer do that under the Labor Code 2019. The reason is that, an annex to a labor contract fundamentally serves to elaborate, amend or supplement specific provisions of the labor contract, but must not change the duration of the labor contract.

  1. Multiple definite-term labor contracts are now allowed in certain cases

In principle, in case the two parties enter into a new labor contract with a definite-term, only one additional definite-term labor contract may be executed. After that, if the employee continues working, an indefinite-term contract shall be constituted.

Nevertheless, the Labor Code 2019 has addressed exceptions for this aforesaid principle whereby parties may sign multiple definite-term labor contracts under special circumstances, comprising: (i) elderly employees (i.e. employee working after reaching his/her retirement age); (ii) expat employees; (iii) members of executive boards of organizations representing the labor collective (including trade unions); and (iv) directors of state-owned enterprises.

  1. New regime for probationary periods

 Probationary periods can last up to 180 days for managerial positions (as defined under the Law on Enterprises or Law on Management and use of State Investment in Enterprises, which greatly favor an employer from a recruitment perspective, effectively enabling an extended trial period, though only for a narrow list of personnel that meet the managerial positions definition.

It is also worth noting that probation is not allowed if the employee works under a labor contract with a duration of less than one (1) month.

  1. Unilateral termination by employer 

Since 1 Jan 2021, an employer shall have additional legal grounds to unilaterally terminate a labor contract, once:

 (i)         An employee has reached his/her retirement age, noting that under the Labor Code 2012 an employer CANNOT unilaterally terminate an employee who has not yet contributed to the social insurance regime in full for the purposes of pension entitlement, even though he/she has reached his/her retirement age;

(ii)        An employee is absent from work without a legitimate reason for five (5) consecutive working days or more; or

(iii)       The employee has provided false information that affects the recruitment of the employee.

Additionally, the Labor Code 2019 has granted extra protection for an employer to unilaterally terminate a labor contract without prior notice once:

(i)         An employee fails to return to work after 15 days from the expiry of the suspension period of a labor contract; or

(ii)        An employee is absent from work without a legitimate reason for five (5) consecutive working days or more.

  1. Unilateral termination by employee

 From an employee perspective, under the Labor Code 2019, an employee has the right to unilaterally terminate a labor contract without any reason as long as they provide proper notice in advance (i.e. at least 45 days in case of indefinite-term labor contract; at least 30 days in case of definite-term labor contract of 12 to 36 months or at least 3 working days in case of definite-term labor contract of less than 12 months).

In addition to the above, an employee also has the right to unilaterally terminate the labor contract without prior notice should he/she:

  • be not assigned to the contractual position or workplace;
  • be not provided with the agreed working conditions;
  • be not paid, in full or on time, the salary due as agreed in the labor contract;
  • be mistreated or humiliated by the employer;
  • be sexually harassed in the workplace;
  • be pregnant and the continued employment would adversely affect the fetus;
  • reach retirement age; or
  • be provided with false information by the employer that affects the performance of the labor contract.
  1. New regulations on salary payment

 Employers are now no longer required to register a salary table, salary scale, or salary norms with the labor authorities.

In case of salary paid via bank transfer, employers shall pay the cost of account opening and money transfer. An employer may also pay the salary to the employee’s authorized person.

When taking annual leave, an employee may request the employer to pay advance payments equal to the salary for the entitled days of leave of such month. Should the employer agree, it can deduct the advance payments at the time of salary payment for the employee in question.

  1. Changes applicable to expat employees

 The maximum term of a work permit for a foreign employee is two (2) years and may only be extended once for an additional maximum term of two (2) years. That is to say, new application in full for a new work permit should be prepared every four (4) years for those working in Vietnam for a long way. Under the current law, the maximum duration of a work permit is also two (2) years and can be renewed on an unlimited basis.

Employers and foreign employees may enter into multiple definite-term labor contracts. This regulation is to guarantee that the term of the expat employee’s labor contract shall be consistent with that of his/her obtained work permit and should close a long-standing conflict in the law concerning the mandatory use of indefinite-term contracts after two consecutive definite-term contracts.

In addition, expats married to Vietnamese citizens and living in Vietnam shall be exempt from work permit obligations (noting that work permit exemption certificate is still required though).  This is a major new additional ground for work permit exemption.  It remains to be seen whether there will be any limits to the types or positions that such spouses may hold without work permits.

  1. Labor discipline

 The internal labor regulations may be registered at the district-level labor authority.  We are of the  presumption and view that the provincial labor authority may authorize a district-level labor authority to process an application for the registration of internal labor regulations.

Importantly, employers may impose disciplinary measures for violations stipulated not only in the internal labor regulations but also in the labor contract or labor laws. This is the case for an employer with less than 10 employees where internal labor regulation preparation and registration is not mandatory.

As a separate note, similar to current law, the procedure to impose labor discipline would strictly require the involvement of a representative organization of employees at grass-root level. However, it is also worth noting that, under new Labor Code 2019, representative organization of employees could be other internal employee organizations within the employer, in addition to the current regime of internal trade union which is purely under the sole management of Vietnam Labor Federation.

  1. Retirement ages have been increased

 The age of retirement for employees working in normal conditions will follow a roadmap until the age of 62 years for men and 60 years for women. Specifically, the retirement age will be gradually increased to 62 years by 2028 for men, and 60 years by 2035 for women.

From 2021, the retirement ages of employees in normal working conditions shall be 60 years and 3 months for men, and 55 years and 4 months for women, and shall increase by 3 months for men and 4 months for women for each consecutive year.

  1. The number of public holidays has been increased by one day

National Day public holiday will now consist of two (2) days, namely (i) the second day of September; and (ii) the previous or next day (presumably at employer’s discretion to identify the specific one).

  1. Overtime policy

 The monthly overtime cap has been increased from 30 hours to 40 hours.

Additionally, the Labor Code 2019 has supplemented the circumstances where organizing overtime work of up to 300 hours in a year is permissible, comprising the manufacturing and processing of textiles, garments, footwear as well as electric and electronic products; and the processing of agricultural, forestry, aquaculture, and salt products.

  1. Concept of ‘sexual harassment’ has been introduced for the first time

‘Sexual harassment’ at the work place is expressly defined in the Labor Code 2019.

Procedures and policies on the prevention and handling of sexual harassment at the workplace must be included in the internal labor regulations, whereby ‘sexual harassment’ is now defined as a legal ground for dismissal.

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For more information, please contact Giles at GTCooper@duanemorris.com or Le Nhan at NTLe@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

VIETNAM – EVALUATION OF THE IMPLEMENTATION OF THE EU-VIETNAM FREE TRADE AGREEMENT AND THE COMPREHENSIVE AND PROGRESSIVE AGREEMENT FOR TRANS-PACIFIC PARTNERSHIP

Globalization, global economic integration and trade liberalization have now become prominent in the world economy. Following such trend, Vietnam has been taking better steps to integrate into the world economy. Looking back at the nearly 30-year journey since Vietnam was a closed economy and started to implement the Doi Moi (Renovation) policy from the Party’s sixth national congress when the international economic integration was simply referred to as an open economy, up to now, Vietnam’s international integration policy has become much more detailed and complete. The first significant milestone in when Vietnam officially became the 150th member of the World Trade Organization (WTO) on 11 January 2007, after 11 years of accession negotiations. From then, a new period began: Vietnam’s economy has integrated more deeply and comprehensively into the world economy.

Vietnam has participated in integration at both regional and international levels and has established meaningful relationships with major partners. Especially in recent years, Vietnam has actively participated in negotiations and signed the Free Trade Agreements (FTAs), which is complementary to the goal of multilateral trade and investment liberalization when such cooperation has been facing many hurdles. Among 13 Free Trade Agreements that Vienam has signed, the FTA with the European Union (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) must be highlighted. These two agreements are considered new-generation free trade agreements because they contain unprecedented commitments under the previous FTAs signed by Vietnam. They have encouraged and accelerated institutional reform in order to improve the legal environment in compliance with Vietnam’s commitments. As a result, they help Vietnam to become a competitive economy, attract foreign investment, advanced technology and other important resources for development.

However, in order to take advantage of the incentives under these Agreements to attract foreign investment, in this article, I would like to evaluate the outstanding advantages of EVFTA and CPTPP as well as the implementation of these two Agreements from the perspective of a foreign investor with regard to: (1) market access; (2) government procurement; and (3) dispute resolution.

I. ADVANTAGES
1. Market Access
a. EVFTA
Market Access for Goods
Vietnam commits to eliminate import duties on 48.5% of tariff lines, equivalent to 64.5% of EU exports immediately after the EVFTA comes into effect on 1 August 2020. After 10 years, the elimination rate will be 99% of the total tariff lines, equal to 99.8% of the EU’s exports respectively. For some products such as motorcycles over 1,500cc, automobile parts and about half of EU exported medicine products, the tax reduction mechanism will apply after 7 years from the effective date. For the remaining tariff lines, Vietnam will have a roadmap of over 10 years or give preferential treatment to the EU on the basis of tariff quotas. This is considered an unprecedented commitment to deep tax cuts for a developing country like Vietnam, which has demonstrated the ambition for deep integration and strengthened trade relations with the EU.

Market Access for Services
Although Vietnam’s commitments under the WTO are used as a basis for negotiating its commitments under the EVFTA, Vietnam has not only opened additional sectors/sub-sectors for EU service providers but also made higher commitments than those outlined in the WTO resulting in EU investors being given best access to Vietnam’s market. Sectors/sub-sectors that Vietnam is not committed to under the WTO, but are open for EU investors include, but not limited to: interdisciplinary Research & Development (R&D) services; nursing services, physiotherapists and para-medical personnel; packaging services; trade fairs and exhibitions services and building-cleaning services. It is worth noting that the EVFTA includes the most-favored-nation (MFN) treatment provisions that allow a party to give the other party the highest level of treatment it is negotiating with any third party in other agreement.

b. CPTPP
Market Access for Goods
Vietnam commits to eliminate nearly 100% of tariff lines, in which: (i) 65.8% of tariff lines have 0% tax rate after the CPTPP takes effect from 14 January 2019; (ii) 86.5% of tariff lines have a 0% tax rate in the fourth year after the CPTPP takes effect; (iii) 97.8% of tariff lines have 0% tax rate in the 11th year after the CPTPP takes effect; (iv) import tax on remaining items shall be abolished in the 16th year or in accordance with tariff quotas. The CPTPP also covers issues that have never been addressed in the WTO including import duties, export duties for re-manufactured goods, re-furbished goods, market access for re-furbished goods, monopolies and goods in transit.

Market Access for Services and Investment
All 11 member-states give consent to a liberalized trade in this area. More sectors are opened under the CPTPP compared with the WTO, such as telecommunications, distribution and manufacturing sectors.
In addition, besides incorporating basic WTO principles (national treatment (NT), most-favored nation treatment (MFN), market access, and local presence), the CPTPP takes a negative approach, meaning that their markets are fully open to service suppliers from other CPTPP Parties, except otherwise indicated in their commitments (i.e, non-conforming measures). In order to make such reservations, the member state must prove the necessity of such preservation and negotiate with other member states. If approved, non-conforming measures must only be limited to such list, except for measures in certain sensitive sectors that are included in a separate list. Member states are only allowed to adopt policies that are better than what they commit (ratchet principle). The CPTPP also includes obligations on removal of performance requirements (i.e., no conditions on local content requirements, export conditions, use of certain technology, location of the investment project, etc.) and reasonable requirements on senior management and board of directors. Notably, the CPTPP Chapter on Investment for the first time successfully clarified the MFN principle- countries operating in multi-state regime must give foreign investors the best investment conditions in all states, regardless of the location of the state where the investment takes place. Investors are also allowed to petition against the Government from the investment registration stage.

2. Government Procurement
Vietnam has one of the highest ratios of public investment-to-GDP in the world (39% annually from 1995). However, until now, Vietnam has not agreed to its government procurement being covered by the Government Procurement Agreement (GPA) of the WTO. Now, for the first time, Vietnam has undertaken to do so in the EVFTA and CPTPP. Investors of member states will surely get access to large government procurement market with many incentives and advantages.

a. EVFTA
The Government Procurement Chapter mainly deals with the requirement to treat EU bidders, or domestic bidders with EU investment capital, equally with Vietnamese bidders when a Government purchases goods or requests a service worth over the specified threshold. Vietnam undertakes to publish information on tender in a timely manner, allow sufficient time for bidders to prepare for and submit bids and maintain the confidentiality of tenders. The EVFTA also requires its Parties to assess bids based on fair and objective principles, evaluate and award bids only based on criteria set out in notices and tender documents and create an effective regime for complaints and settling disputes, and so on. These rules require Parties to ensure that their bidding procedures match the commitments and protect their own interests, thus helping Vietnam to solve its problem of bids being won by cheap but low-quality service providers.

We also believe that these changes in procedures and laws related to government procurement will allow EU exporters to access previously closed markets and compete more effectively.

b. CPTPP
The CPTPP makes a list of government entities and agencies whose procurement of particular goods and services at a particular amount must be subject to public tender. In other words, a bidding package is only subject to CPTPP if it satisfies all 3 criteria on the subject matter of procurement, type of goods and services, and procurement threshold. Any negotiation to expand coverage of the Government Procurement chapter, particularly in relation to state government and local government contracts, will be delayed. Parties will only initiate talks on this issue at least five years after the date of entry into force of the CPTPP.
This chapter includes NT and MFN principles, removes tender conditions favoring local tenders such as using local goods or local suppliers, conditions on technology transfer or two-way trade and investment, etc. These rules require all parties, to reform their bidding procedures and protect their own interests by disqualifying tenders with poor performance and low capacity.

3. Dispute resolution
a. EVFTA
For any investment-related dispute (i.e. expropriation without compensation, investment discrimination), an investor is allowed to bring such dispute to the Investment Court for settlement (Investor-state dispute settlement mechanism- ISDS). The final arbitration award is binding and enforceable without the local courts’ review of its validity. This is an advantage for European investors as the fact shows that the percentage of applications for enforcement of foreign arbitral awards being rejected by the Vietnamese courts is notably high for various reasons.

b. CPTPP
The CPTPP aims at protecting investors and their investment in the host country by introducing requirements on non-discrimination; fair and equitable treatment; full protection and security; the prohibition of expropriation that is not for public purpose, without due process, or without compensation; the free transfer of funds related to investments; and the freedom to appoint senior management positions regardless of nationality.
For the first time investors of a party may sue the Government of the other party for its violation of investment-related commitments when the investors make investment in that party. However, please note that under the CPTPP, investors will not be able to sue the Government using ISDS clauses if there is any dispute in connection with an investment agreement. An investment agreement is a written agreement that is concluded and takes effect after the date of entry into force of the CPTPP, between an authority at the central level of government of a Party and a covered investment or an investor of another Party, that creates an exchange of rights and obligations, binding on both parties under the applicable law. Investment agreement refers to an agreement in writing, negotiated and executed by both parties, whether in the form of single or multiple instruments. A unilateral act of an administrative or judicial authority, such as a permit, license, authorization, certificate, approval, etc. and an administrative or judicial consent decree or order will not be considered a written agreement.
The CPTPP also includes procedures for arbitration as means of settling disputes between investors and the host state. It covers new provisions compared with existing agreements such as transparency in arbitral proceedings, disclosure of filings and arbitral awards, and participation of interested non-disputing parties to make amicus curiae submissions to a tribunal. Arbitral awards are final, binding and fully enforceable in CPTPP countries.

II. DIFFICULTIES
1. Market Access
a. Market Access for Goods
As mentioned above, both the EVFTA and CPTPP contain commitments to broad tariff cuts. However, how enterprises can make full use of these commitments is somewhat closely related to the rules of origin of goods.
Vietnam’s manufacture sector currently depends on raw materials imported from non-EU member countries as the value-added amount generated from abroad is higher than in the country. If this situation does not improve, it will be difficult for Vietnamese goods to meet strict rules of origin in these two agreements. Therefore, the Government should issue policies to encourage enterprises to participate in the global value chain, reduction of trade costs, simplification of customs procedures, and transparency in non-tariff policies.
Besides, regarding the mechanism of certification of origin, when as the EVFTA and Vietnamese law stipulate that the competent authorities to issue certificates of origin, the CPTPP requires applying a self-certification of origin mechanism- importers, exporters and manufacturers can make self-certification of origin. This creates an obstacle for Vietnam because Vietnam only allows a few pilot cases of self-certification of origin in ASEAN. Furthermore, enterprises themselves are not flexible and proactive in determining the origin of goods, possibly leading to a delay in tariff preferences under the CPTPP. Because there are projects where the cost and time spent working with authorities issuing a certification of origin is in excess of the preferential tariffs granted, some enterprises are hesitant to apply for the certification of origin under the agreements. As a result, tariff preferences for goods originating from member states are not used.
Although the CPTPP does not require Vietnam to immediately implement this self-certification mechanism, some importing countries may have/will apply this mechanism after the CPTPP takes effect. Therefore, the Vietnamese government should issue regulations on self-certification of origin as soon as possible and consult with the business community on how to structure enterprises and maximize the benefits of the CPTPP.

b. Market Access for Services
The CPTPP and EVFTA are considered to have created more services sectors than the WTO. However, in reality, enterprises still meet difficulties when carrying out investment in Vietnam, specifically as follows:
• Enterprise registration: Although the investor has submitted the application for enterprise registration online, the information technology system of the enterprise registration agency is somewhat outdated, leading to disruptions and delays in the process. Post-licensing procedures such as social insurance registration, seal registration, bank account opening, payment of licensing costs, etc. …are cumbersome and time-consuming for enterprises. The Government should consider reducing unnecessary steps, or create conditions for enterprises to carry out post-licensing procedures through a portal.
• Infrastructure for electricity, transport and logistics: Weak infrastructure is a barrier to the development of Vietnam’s economy. The shortage of power occurs frequently in industrial parks. Deep-sea ports currently do not meet the high demand for maritime transportation. The Government should consider development of transportation infrastructure, ensuring that seaports and airports are accessible to people but not too close to residential areas to avoid congestion.
• High cost of legal compliance: Many overlapping and conflicting documents make it difficult for enterprises to implement compliance. In particular, in many areas such as taxation, insurance, enterprises must comply with too many regulations, and many new regulations are regularly introduced which affect the stable and predictable operation of enterprises. Therefore, the Government should ensure the stability of policies, especially tax policies to attract more foreign investments.
• Corruption: Action by the Government has reduced corruption rate in recent years, however, enterprises still face with petty corruption when they carry out administrative procedures. In order to prevent this situation, the Government should apply information technology in carrying out administrative procedures (such as online filing, cameras installation to monitor administrative officers at check-in counters, etc.) as well as conduct unplanned inspections more often to control any negative issues.
• Land registration and management: It is difficult for investors to access Vietnam’s land database. Public and transparent information on real estate is limited. Therefore, investors face with many difficulties when developing projects, especially projects that need to consume large land area. In order not to hinder foreign investment in the development of high quality projects, it is necessary to create favorable conditions for investors to access land information, which can be charged if necessary.

In addition, a preliminary review indicates that although Vietnam has opened more service sectors under the EVFTA and CPTPP, domestic laws still set out restrictions that should be removed soon by the Government to comply with Vietnam’s commitments:
• Accounting, auditing and bookkeeping services (CPC 862): Vietnam economy is fully integrated under the CPTPP and EVFTA, but Vietnam laws do not allow the establishment of wholly foreign-owned enterprises operating in accounting and auditing sectors.
• Architectural services (CPC 8671): Vietnam opens this sector under the CPTPP and EVFTA but Vietnam laws require investment in this area in the form of a joint venture or foreign investors must use Vietnamese subcontractors.
• Basic telecommunications services: Vietnam law complies with the commitments under the CPTPP but it is not compatible with the level of accession required under the EVFTA.
• Regarding the list of goods that foreign investors are not permitted to distribute: CPTPP makes a longer list than that set out in Vietnam laws.
• Higher education services (CPC 923), adult education (CPC 924), and other education services (CPC 929 including foreign language training): Vietnam is committed to fully open these under the CPTPP and EVFTA (except requirements on foreign teachers’ experience and qualifications). However, Vietnam law sets out conditions for foreign investors such as conditions on facilities, number of lecturers, etc.
• Customs clearance/customs brokerage services: Vietnam is committed to fully open these services under the CPTPP and EVFTA, but Vietnam law provides restrictions.
• Container handling services (CPC 741): Vietnam is committed to fully open these sectors under the CPTPP, but domestic laws provide restrictions.

2. Government Procurement
Both the CPTPP and EVFTA require the disclosure of bidding information and transparency in the selection of contractors, however, in fact the bidding period is prolonged, openness and transparency in the bidding information is limited, many bidding packages are invited only for formality, evaluation of bid documents are not based on criteria of tender documents. If this situation continues, foreign investors will hesitate to participate in bidding in Vietnam.
To solve this problem, the Ministry of Planning and Investment has vigorously promoted online bidding. Online bidding has contributed to the end of “blue army, red army” situation (“quân xanh, quân đỏ”), which limited transparency in bidding. In addition, template dossiers used for goods procurement, construction and consultancy are posted on the system, helping investors to fill in information for each step and each stage. After completion, information will be processed by the system to provide bidding price based on the bidding unit price and the quantity of goods/services of the bidding package to make the bidding process take place more quickly and conveniently.
Despite many advantages, the online bidding rate is not high. This is because the bidding network system is weak, is not regularly upgraded and its interface is not friendly with users. Furthermore, the awareness of enterprises about the advantages of online bidding is limited, so they are not willing to participate in electronic bidding packages. In order for online bidding to become popular and further enhance transparency, the Department of Public Procurement should propagate and train enterprises on online bidding so that they are willing to participate in more electronic bidding packages in the system.

3. Dispute Resolution
Under the Civil Procedure Code, any judgment or decision (civil) of a foreign jurisdiction is effective in Vietnam if the competent court of Vietnam recognizes it. The Vietnamese court will recognize any judgments or decisions issued by the courts of the country with which Vietnam has signed a mutual legal assistance agreement. In addition, recognition can also be considered on a reciprocal basis without any mutual legal assistance agreement.
However, under the CPTPP and EVIPA, the arbitral award will be final and binding on the parties and can be enforced directly without recognition and enforcement mechanism of foreign arbitral awards in Vietnam. Although Vietnam has reserved the right to fulfill this commitment for 5 years, the Government should study and revise the domestic laws in this regard right now to ensure they comply with the commitments under CPTPP and EVIPA. Any amendments of domestic regulations made on timely basis will make foreign investors feel safe and secured in their investments in case any dispute occurs.

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Please do not hesitate to contact the author Dr. Oliver Massmann under omassmann@duanemorris.com. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC, Member to the Supervisory Board of PetroVietnam Insurance JSC and the only foreign lawyer presenting in Vietnamese language to members of the NATIONAL ASSEMBLY OF VIETNAM.

VIETNAM – THE NEW LAW ON PUBLIC PRIVATE PARTNERSHIPS – MAIN IMPROVEMENTS OVER THE OLD LEGAL FRAMEWORK:

1. Main improvements of the new PPP law over the old legal framework:

-Investment sector reduction: Article 04.01 of the new law sets out 05 investment sectors. Compared to Article 04.01 of Decree No. 63/2018/ND-CP, the scope of investment sectors in the new law has been narrowed down to 5 sectors: transportation, healthcare, education, transmission grid, water. This list implies the intention of the Government in promoting primary and sustainable economic sectors. If investors engage in projects related to these sectors, they will benefit from investment incentives (Article 79 & 80), especially those set forth in the new Law on Investment 2020 such as preferred enterprise income tax, exemption or reduction of land lease fee, credit support to name a few.
The PPP law also stipulates the total investment capital requirement for a PPP project. For instance, excluding Operation & Maintenance Contracts, power projects must have the minimum total invested capital of VND 200 billions. The figure is lower (VND 100 billions) for projects in areas with difficult socio-economic conditions.
-Open bidding commitment: While Decree No. 63/2018/ND-CP does not prescribe the open bidding process, the new law of PPP treats it as a prerequisite. In specific, Article 37 of the new law requires that all PPP projects must apply the open bidding process for selection of preferred investors, except for cases provided in Article 38; 39; 40 (e.g. there are less than 3 qualified investors, the project applies technologies that are prioritized for development, there’s a need to protect national security…). The open bidding process entitles investors to compete in good faith for the PPP projects. Hence, foreign investors should make use of this process, also with their advantages of substantial investment capital, to win the bids of major projects.

2. Do you think the new law is likely to make PPPs in Vietnam more attractive to foreign investors specifically? Our understanding has been that at least in the water sector, foreign investors have felt reluctant towards PPPs due to the previous lack of guarantees.

Absolutely. The main goal of the new law is to attract investors, especially foreign investors, to execute PPP projects. Types of guarantees under the new PPP law include:
– Guarantee of access to land, exercise of land use right and other public goods.
– Guarantee of provision of civil service.
– Guarantee of right to mortgage of property, right to operate project and infrastructure.
– Guarantee of revenue risk sharing.
-Guarantee of foreign-currency balance-ensuring scheme.
Vietnam commits to provide guarantees for private and foreign investors. The issue, however, lies on the enforcement ability of officials. Thus, in case investors are deprived of above guarantees, investors shall assert claim against authorities before Vietnamese courts or arbitration bodies to be granted award (article 97 of the new law).

3. In your opinion, are there any sectors where the appetite for PPPs will be larger than in other sectors? Does this reflect the current attitudes towards PPPs in different sectors, or is it something that could change with the new law?

The new law reflects market demand: the 5 eligible sectors under PPP law are also the sectors that have been, are and will in the long run require funding from foreign investors. This is due to the increasing demand in those sectors not corresponding with the limited State budget.

4. In the water sector, while we haven’t seen much large-scale activity under the previous PPP decrees, we have seen privately financed projects proceed under the Direct Investment Law – could this have a negative impacts on PPPs under the PPP law in the sense that such projects are ‘competing’ with the PPP law?

A reason why projects may have chosen to follow the route set out in the Law on Investment is because the framework for investment procedures under it is less complex and less time-consuming than the one set out for PPP projects. However, for large-scale projects, it is recommended that investors follow the latter form since PPP projects come with certain guarantees and commitment from the Vietnamese government, which can help investors to avoid substantial risks if risks cannot be managed well.

5. Obstacles which the new law does not address might bother potential investors:

– The difficulty in disbursement of state budget: The overlapping regulations in legal documents such as Law on State Budget and Law on Public Investment deters special purpose entities from receiving investment capital from state budget.
– Legal uncertainty in the judgment of Vietnamese courts: Indeed, for most foreign investors, international arbitration centers are the preferred choice, rather than Vietnamese courts, whose judgments maybe biased. Investors may struggle for dispute settlement if trial clarity does not improve.
– Burden of administrative procedures: In 2018, the Vietnamese government issued Resolution No. 19/2018/NQ-CP on implementation of major duties and measures to improve business environment. The Resolution featured determination of central authorities in reducing and reforming administrative procedures. Investors, however, still have to fulfill lengthy and unclear administrative procedures before operation of business and investment.

6. Opinions on how likely it is that there will be political will in favor of PPPs:

In the 1980s, Vietnam, with a central-planning economy, put an unfriendly attitude towards private sector and foreign investment. The accession to WTO and a variety of FTAs, however, has changed the attitude of Vietnamese authorities as to these economic sectors. Indeed, respectively in 2017 and 2019, the Central Committee and the Politburo of the Communist Party of Vietnam (CPV) issued two resolutions on private sector and foreign investment, particularly the Resolution No. 10/NQ-TW on developing the private economy sector into an important motivation of the socialist-oriented market economy and the Resolution No. 50/NQ-TW on orientations to perfect mechanisms, policies, raise quality and efficiency of foreign investment by 2030. These resolutions significantly emphasized the promotion and variation of PPP projects to which private and foreign investors are parties. Therefore, Vietnamese government and other authorities, in accordance with the CPV’s directions, will certainly assist investors in implementing PPP projects, especially large-scale ones.

Please do not hesitate to contact the author Dr. Oliver Massmann under omassmann@duanemorris.com. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC, Member to the Supervisory Board of PetroVietnam Insurance JSC and the only foreign lawyer presenting in Vietnamese language to members of the NATIONAL ASSEMBLY OF VIETNAM.

VIETNAM – BIOMASS POWER PROJECTS – NEW LAWS AND HOW TO GET HIGHEST LEVELS OF LEGAL CERTAINTY AND BANKABILITY UNDER EU-VN INVESTMENT PROTECTION AGREEMENT (“EVIPA”) AND COMPREHENSIVE AND PROGRESSIVE TRANS-PACIFIC PARTNERSHIP (“CPTPP”)

On 07 July 2020, the Ministry of Industry and Trade (“MOIT”) issued Circular No. 16/2020/TT-BCT to amend and supplement certain provisions of Circular No. 44/2-15/TT-BCT dated 09 December 2015 of the MOIT Minister on project development, avoided cost tariff and standardized power purchase agreement for biomass power projects.

In particular, this new Circular provides that investors be only allowed to build on-grid biomass power investment projects, which have been included in the approved Power Development Plan or Provincial Power Development Plan.

In addition, feed-in-tariff for on-grid biomass power projects will follow Decision No. 08/2020/QD-TTg dated 05 march 2020, which increases the feed-in tariff for biomass co-generation heat power to 7.03 US cents per kilowatt hour (up from 5.8 US cents), and for other types of biomass projects to 8.47 US cents per kWh (up from 7.3 to 7.5 US cents depending on location).

Investors whose projects operated before 25 April 2020 will sign a new Power Purchase Agreement (“PPA”) with the buyer in order to be entitled with the abovementioned feed-in-tariff from 25 April 2020 until the expiry of the signed PPA.

How to get highest levels of legal certainty and bankability under the EU-Vietnam Investment Protection Agreement and the CPTPP

The recent EVIPA and CPTPP further open the market to foreign investors. The investors now can bring their technology and know-how, especially those from countries with high level of development in renewable sectors to Vietnam with less market access barriers and being more secured. In particular, the CPTPP and the EVIPA make it possible that foreign investors could sue Vietnam’s Government for its investment related decisions according to the dispute settlement by arbitration rules. The final arbitral award is binding and enforceable without any question from the local courts regarding its validity. This is an advantage for investors considering the fact that the percentage of annulled foreign arbitral awards in Vietnam remains relatively high for different reasons.

Although the transition period for the aforementioned Investor-State Dispute Settlement (ISDS) mechanism is 5 years from the effective date of the EVIPA, Duane Morris Vietnam has the legal and technical tools to make such provisions work in favor of investors from now.

For more information on the above, please do not hesitate to contact the author Dr. Oliver Massmann under omassmann@duanemorris.com. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC, Member to the Supervisory Board of PetroVietnam Insurance JSC and the only foreign lawyer presenting in Vietnamese language to members of the NATIONAL ASSEMBLY OF VIETNAM.