VIETNAM – LOCAL REGULATION COULD LEAD TO EU-VIETNAM TRADE HINDRANCE

Under Circular No.28/2012/TT-BKHCN dated 12/12/2012, before the products are circulated on the market, the manufacturer must declare the products’ standard conformity (Declaration of Standard Conformity). A component of the application dossier for the Declaration is the assessment result of standard conformity (“Assessment”). Under Circular 28, this Assessment can be carried out either by the manufacturer themselves or a third party registered certifying organization.

On 31 December 2019, the Ministry of Science and Technology issued Document No. QCVN 19:2019/NKHCN on National Technical Regulation on LED lighting products (Document 19). Article 3.4 of Document 19, the Declaration of Standard Conformity must be based on the assessment results issued by a certification body that has registered its field of operation as prescribed in local regulations.

It has been brought to our attention that these certification bodies charge around USD 700 for each model testing. From 2022, under Decision No. 1383/QD-BKHCN dated 22/05/2020, there will be two additional tests required for the Assessment, thus it is expected that the price payable by manufacturers/distributors will increase to USD 1500 for each model of product.

Importers of LED lamps have been furious with the new Regulation, as they believe local certifying organizations do not have the capacity to assess EU-imported products, assuming that such products have not yet been certified in accordance with EU standards. Importers also feel that the Regulation has resulted in importers have to incur unreasonable additional fees. We examine this instance in light of the EU-Vietnam Free Trade Agreement (EVFTA) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

EU-Vietnam Free Trade Agreement

Under Article 5.3.2 of the EVFTA, Vietnam has the right to prepare, adopt and apply standards, technical regulations and conformity assessment procedures in accordance with the EVFTA and the TBT Agreement.

Article 5.5 (Standards) reads that With a view to harmonizing standards on as wide a basis as possible, the Parties shall encourage their standardizing bodies as well as the regional standardizing bodies of which they or their standardizing bodies are members to avoid duplication of, or overlap with, the work of international standardizing bodies. Some exported products may already undergo Assessment of standard conformity in their origin country. As a result, requiring imported products to undergo another local one may be considered as repeating the work.

In addition, under the EVFTA, Vietnam also affirmed its obligation that fees imposed for mandatory conformity assessment of imported products shall be equitable in relation to any fees chargeable for assessing the conformity of like products of domestic origin or originating in any other country, considering communication, transportation and other costs arising from differences between location of facilities of the applicant and the conformity assessment body. Importers of LED lamps could make a case if it could be established that the charges applicable to imported products are higher than those manufactured locally.

In general, it could be said that Document No. QCVN 19:2019/NKHCN on National Technical Regulation on LED lighting products does not comply with provisions under the EVFTA in the sense that it constituted a Technical Barrier to Trade upon Vietnamese importers. Consequently, it would hinder LED lighting products export from EU countries.

Comprehensive and Progressive Agreement for Trans-Pacific Partnership

Under the CPTPP, Vietnam has the right to apply the same or equivalent procedures, criteria, and other conditions to accredit, approve, license, or otherwise recognize conformity assessment bodies located in the territory of another CPTPP Party that it might apply to conformity assessment bodies in its own territory. Moreover, the CPTPP also explicitly does not preclude Vietnam from verifying the result of conformity assessment procedures undertaken by bodies located outside its territory.
As a result, it could be said that under the CPTPP, the provisions applicable to LED lighting importers allow for local regulations like Document 19.

Both the EVFTA and the CPTPP require Vietnam and other parties to the agreements to establish local Contact Points for matters arising under their chapters. It is recommended that importers or traders that are negatively affected by Document 19 should voice their concern to such Contact Points, who have the responsibility to handle your matter by working with the relevant governments in light of the EVFTA and the CPTPP.

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.

EU-VIETNAM FREE TRADE AGREEMENT AND INVESTMENT PROTECTION AGREEMENT – UNMATCHED LEVELS OF MARKET ACCESS AND LEGAL CERTAINTY – WHAT YOU MUST KNOW

On 8 June 2020, Vietnam’s National Assembly ratified the EU-Vietnam Free Trade Agreement (EVFTA) and Investment Protection Agreement (EVIPA) following almost 10 years of negotiations. On 12 February 2020, the European Parliament gave it consent to the ratification of the EVFTA and EVIPA. On 30 March 2020, the Council of Europe ratified the EVFTA . Finally, on 1 August 2020, the landmark agreement entered into force. Regarding the EVIPA, the Vietnamese Government has provided the EU Delegation with a diplomatic note providing notification of the National Assembly’s ratification of the EVIPA, pending endorsement of the Member States’ parliaments.

The implementation of the EVFTA has, to date, shown many positive results. This is particularly meaningful for both Vietnam and the EU in this period when world economies are suffering from the consequences ofCOVID-19. For instance, the total value of Vietnam’s exports to the EU market reached US$ 27,65 billion in December 2020, a dramatic increase of 55.3 per cent compared to December 2019.[1] In addition, the Ministry of Industry and Trade announced that it has granted approximately 24,000 sets of Certificate of Origin with a turnover of nearly US$ 1 billion eligible for EU tariff preferences within less than 3 months of the EVFTA coming into force . As of mid-January 2021, exports to the European Union accounts for USD 12.90 billion for the following products: mobile phones and accessories, computers, electronic products and components, textiles, other machinery, equipment, tools and spare parts, footwear of all types, wood and wooden products, and fishery products.

I. LEGAL ENVIRONMENT

1. General market access for goods and services

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 agreement in the ASEAN region, after Singapore, and it helps to intensify bilateral relations between Vietnam and the EU. Vietnam now has access to a market of around 448 million people and an average GDP of US$13,918 billion (with the exception of 2020 due to Covid-19’s impacts on the economy).[2] Meanwhile, exporters and investors from the EU also have further opportunities to access one of the largest and fastest-growing countries in the region. According to a report released in early 2020 covering 130 cities worldwide,[3] Hanoi and Ho Chi Minh City are ranked among the top-10 most dynamic cities due to their low costs, rapid consumer market expansion, strong population growth, and transition towards activities attracting significant amounts of Foreign Direct Investment (FDI). According to the World Bank, Vietnam has one of the fastest-growing economies in the world — 7.1 per cent GDP growth in 2018, and 7.0 per cent in 2019, 2.91% for 2020.[4] Even though this is the lowest GDP growth level of the country in the last 10 years due to impacts by the novel corona virus, it is still among the world’s highest, especially comparing to neighbouring countries such as Singapore that saw a GDP growth of approximately minus 6.
In addition, Vietnam has the fastest-growing middle class in the region. Vietnam’s middle class accounts for 13 per cent of the total population and this figure is expected to become 26 per cent by 2026.[5] Vietnam’s super-rich population[6] is also growing faster than anywhere else, and there is no doubt that it will continue to rise over the next ten years.

Market access for goods

Nearly all customs duties – over 99 per cent of the tariff lines – will be eliminated in the next 10 years. The small remaining number will be partially liberalised through duty-free quotas. As Vietnam is a developing country, it has liberalised around 65 per cent of the value of EU exports, representing around half of the tariff lines, at entry into force. The remaining duties will be eliminated over the next decade. This is an unprecedented, far-reaching tariff elimination for a country like Vietnam, proving its aspiration for deeper integration and trading relations with the EU.

Meanwhile, the EU agreed to eliminate duties for 84 per cent of the tariff lines and 71 per cent of its trade value for goods imported from Vietnam from 1 August 2020. Within seven years from the effective date of implementation, more than 99 per cent of the tariff lines will have been eliminated for Vietnam. This is a wider reduction compared with the 95 per cent of the tariff lines that the former TPP countries offer to Vietnamese imports. In the ASEAN region, Vietnam is the top country in exporting goods to the EU. However, the market share of Vietnam’s products in the EU is still small. Because of the EVFTA, the sectors that will benefit most are the main export sectors that used to be subject to high tariffs from the EU including textiles, footwear, and agricultural products. The EU is also a good point for Vietnam to reach other further markets.

Vietnam benefits more from the EVFTA compared with other such agreements, since Vietnam and the EU are considered 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.) Meanwhile, the products imported from the EU are also those Vietnam does not produce domestically, including machinery, aircraft, and high-quality pharmaceutical products.

With better market access for goods from the EU, Vietnamese enterprises can source EU materials, technology, and equipment at a better quality and price. This, in turn, improves their own product quality and eases Vietnam’s burden of over-reliance on its other main trading partners.

The EVFTA is considered as a template for the EU to further conclude FTAs with different countries in ASEAN with the ultimate aim of concluding a region-to-region FTA once there is a sufficient critical mass of agreements with individual ASEAN countries.[7] This process could take about 10-15 years. Thus, Vietnam should take advantage of this window of opportunity, before FTAs with others in the region are concluded and take effect, to become a regional hub.

Market access for EU service providers: Although Vietnam’s WTO commitments are used as a basis for the services commitments in 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 are not committed under the WTO, but under which Vietnam has made commitments, 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.
When these reach international standards, Vietnam will have the chance to export high-quality services, resulting in not only an increase in export value but also export efficiency, thus helping to improve the trade balance.

Government procurement

Vietnam has one of the highest ratios of public investment-to-GDP in the world (39 per cent annually from 1995).[8] However, until now, Vietnam has not agreed to its Government procurement being covered by the Government Procurement Agreement (GPA) of the WTO.[9] Now, for the first time, Vietnam has undertaken to do so in the EVFTA.

The FTA commitments on Government Procurement mainly deal with the requirement 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. It will publish information on intended procurement and post-award information in Bao Dau Thau (Public Procurement Newspaper)[10] and information on the procurement system at muasamcong.mpi.gov.vn and the official gazette in a timely manner. It will also allow sufficient time for suppliers to prepare and submit requests for participation in responsive tenders and maintain the confidentiality of bidders The FTA 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.[11] 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.

Government procurement of goods or services, or any combination thereof, that satisfy the following criteria falls within the scope of the EVFTA Government Procurement rules:

Table: Government Procurement Rules under the EVFTA

Table – Government Procurement Rules under the EVFTA


Investment Dispute Settlement

This is now covered in the EVIPA. In disputes regarding investment (for example, expropriation without compensation or discrimination of investment), an investor is allowed to bring the dispute to the Investment Tribunal for settlement. To ensure the fairness and independence of the dispute settlement, a permanent Tribunal will be comprised of nine members: three nationals each appointed from the EU and Vietnam, together with three nationals appointed from third countries. Cases will be heard by a three-member Tribunal selected by the Chairman of the Tribunal in a random manner. This is also to ensure consistent rulings in similar cases, thus making the dispute settlement more predictable. The EVIPA also allows a sole Tribunal member where the claimant is a small or medium-sized enterprise or the compensation of damaged claims is relatively low. This is a flexible approach considering that Vietnam is still a developing country.

In case either of the disputing parties disagrees with the decision of the Tribunal, it can appeal to the Appeal Tribunal. While this is different from the common arbitration proceeding, it is quite similar to the two-level dispute settlement mechanism in the WTO (Panel and Appellate Body). We believe that this mechanism could save time and costs for the whole proceedings.

The final settlement is binding and enforceable from the local courts regarding its validity, except for a five-year period following the entry into force of the EVIPA (please refer to further comments in the Legal Sector Committee’s chapter on Judicial and Arbitral Recourse).

Conclusion

The EVFTA has created sustainable growth and mutual benefits in various sectors and is, by all means, an effective tool to balance trade relations between the EU and Vietnam. Vietnam is making continuous efforts and progress to meet the high standards set out in the EVFTA, and is currently offering greater opportunities for foreign businesses entering Vietnam’s market. It is now time for foreign investors to implement their business and investment plans and grasp these amazing opportunities.

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 – IMPLEMENTATION OF EU-VIETNAM FREE TRADE AGREEMENT (EVFTA) – Dr. Oliver Massmann from Duane Morris named Lead Advisor

Dear all,

We are pleased to inform that the European Commission and the EU Trade Delegation in Vietnam has selected as the lead advisor Dr. Oliver Massmann and his team to advise and assist in a project to support the implementation of the EU – Vietnam Free Trade Agreement (“EVFTA”), one of the most important Free Trade Agreements for Vietnam. 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). 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. After the entry into force of the Agreement on 01 August 2020, and once Government policies and institutional reforms begin to take effect, Vietnam’s business activities will boom.

Sincerely,
Dr. Oliver Massmann

***

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 – BREAKING AMAZING NEWS: EU-VIETNAM FREE TRADE AGREEMENT COMES INTO FORCE ON 1 AUGUST 2020

With the EVFTA coming into effect, Vietnam will eliminate import duties on 91.8% of tariff lines, equivalent to 97.1% of EU exports.

Some notable provisions of the EVFTA are as follows:

Tax:
Vietnam commits to eliminate import duties on 48.5% of tariff lines, equivalent to 64.5% of EU exports immediately after the Agreement came into effect.

After 7 years, import taxes on 91.8% of tariff lines (equivalent to 97.1% of EU exports) will be removed from Vietnam. After 10 years, the abolition rate will be 98.3% of the total tariff lines, equal to 99.8% of the EU’s exports respectively.

Banking:
Vietnam pled 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 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 a large sum of shares (i.e. BIDV, Vietinbank, Vietcombank and Agribank).

Market access:
For the sectors listed in the 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 enterprises are 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, (vi) the number of natural persons recruitment.

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

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.

***
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.

EU-VIETNAM FREE TRADE AGREEMENT AND INVESTMENT PROTECTION AGREEMENT – MOST LIBERALIZED MARKET ACCESS FOR SERVICE SECTORS AND UNMATCHED LEGAL CERTAINTY – LATEST UPDATE – WHAT YOU MUST KNOW:

I. OVERVIEW

On the 2nd of December 2015, after almost three years and 14 rounds of negotiation, President Donald Tusk, President Jean-Claude Juncker and Prime Minister of Vietnam Nguyen Tan Dung announced the conclusion of the negotiations on the EU-Vietnam Free Trade Agreement (EVFTA). The EVFTA is a new-generation free trade agreement between Vietnam and the EU. On the 26th of June 2018, the EVFTA was split into two separate agreements: the Free Trade Agreement (EVFTA) and the Investment Protection Agreement (EVIPA). In August 2018, the EU and Vietnam completed the legal review of the EVFTA and the EVFTA requires ratification by the European Council as well as the consent of the European Parliament, while the EVIPA required additional ratification by parliaments of each individual EU Member State.

On the 30th of June 2019, EU Commissioner for Trade Mrs. Cecilia Malmstrom, together with the Romanian Minister for Business Mr. Stefan-Radu Oprea, representing the EU, signed the EVFTA and EVIPA in Hanoi, together with H.E. Prime Minister Nguyen Xuan Phuc and Vietnamese Government leaders. The Prime Minister expressed his belief that the European Parliament, parliaments of EU Member States, and the Vietnamese National Assembly will soon ratify the EVFTA and EVIPA. Both Trade and Investment agreements were endorsed by the European Parliament on the 12th of February. The EVFTA was approved by the EU Council on 30th of March 2020, thus the implementation of the EVFTA is therefore imminent if the Vietnamese National Assembly gives its approval at its May session, meaning that an entry into force early this summer is possible for the EVFTA. It will take more time for the EVIPA to enter into force because this agreement is subject to the endorsement of the Member States’ parliaments.

Both agreements are expected to bring significant advantages for enterprises, employees, and consumers in both the EU and Vietnam. Vietnam’s GDP is set to increase by 10-15 percent while exports are predicted to rise by 30-40 percent over the next 10 years. Meanwhile, the real wages of skilled labourers could rise by up to 12 percent, with salaries of common workers increasing by 13 percent. Once the EVFTA has entered into force, and once Government policies and institutional reforms begin to take effect, Vietnam’s business activities will boom. However, challenges still remain. In this chapter, EuroCham’s Legal Sector Committee will raise the issues relevant to their particular industries and make specific recommendations in order to address these concerns.

II. MARKET ACCESS FOR GOODS AND SERVICES

1. General market access for goods and services

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 agreement in the ASEAN region, after Singapore, and it will intensify bilateral relations between Vietnam and the EU. Vietnam will have access to a potential market of approximately 446 million people and a total GDP of US$13,918 billion.

Meanwhile, exporters and investors from the EU will have further opportunities to access to one of the largest and fastest-growing countries in the region. According to a report released in early 2017 covering 134 cities worldwide, Hanoi and Ho Chi Minh City are ranked among the top 10 most dynamic cities due to their low costs, rapid consumer market expansion, strong population growth and transition towards activities attracting significant amounts of FDI. According to the World Bank, Vietnam has one of the fastest-growing economies in the world — 7.1% GDP growth in 2018, and 6.7% at the mid-point of 2019. To put that in perspective: Vietnam’s GDP is growing at almost twice the rate of the USA.

In addition, Vietnam has the fastest-growing middle class in the region. It is predicted to almost double in size between 2014 and 2020 (from 12 million to 33 million people). Vietnam’s super-rich population is also growing faster than anywhere else, and there is no doubt that it will continue to rise over the next ten years.

2. Market access for goods

Nearly all customs duties – over 99 percent of the tariff lines – will be eliminated. The small remaining number will be partially liberalised through duty-free quotas. As Vietnam is a developing country, it will liberalise 65 percent of the value of EU exports to Vietnam, representing around half of the tariff lines, at entry into force. The remaining duties will be eliminated over the next ten years. This is an unprecedented, far-reaching tariff elimination for a country like Vietnam, proving its aspiration for deeper integration and trading relations with the EU.

Meanwhile, the EU agreed to eliminate duties for 84 percent of the tariff lines and 71 percent of its trade value for goods imported from Vietnam immediately at the entry into force of the EVFTA. Within 7 years from the effective date of the EVFTA, more than 99 percent of the tariff lines will have been eliminated for Vietnam. This is a wider reduction compared with the 95 percent of the tariff lines that the former TPP countries offered to Vietnamese imports. In the ASEAN region, Vietnam is the top country exporting goods to the EU. However, the market share of Vietnam’s products in the EU is still small. As a result of the EVFTA, the sectors set to benefit most are main export sectors that used to be subject to high tariffs from the EU including textiles, footwear, and agricultural products. The EU is also a good point for Vietnam to reach other further markets.

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.

With better market access for goods from the EU, Vietnamese enterprises could source EU materials, technology, and equipment at a better quality and price. This, in turn, will improve their own product quality and ease Vietnam’s burden of over-reliance on its other main trading partners.

The EVFTA is considered as a template for the EU to further conclude FTAs with other countries in the ASEAN region with the aim of concluding a region-to-region FTA once there is a sufficient critical mass of FTAs with individual ASEAN countries. This process could take about 10-15 years. Thus, Vietnam should take advantage of this window of opportunity before FTAs with others in the region are concluded and take effect to become a regional hub.

3. Market access for EU service providers

Although Vietnam’s WTO commitments are used as a basis for the services commitments in 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 are not committed under the WTO, but under which Vietnam has made commitments under EVFTA, 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.

When these services reach international standards, Vietnam has a chance to export high-quality services, resulting in not only an increase in export value but also export efficiency, thus helping to improve the trade balance.

III. GOVERNMENT PROCUREMENT

Vietnam has one of the highest ratios of public investment to GDP in the world (39 percent 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.

The EVFTA commitments on Government procurement mainly deal with the requirement 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. It will publish information on intended procurement and post-award information in Bao Dau Thau – Public Procurement Newspaper – and information on the procurement system at muasamcong.mpi.gov.vn and the official gazette in a timely manner. It will also allow sufficient time for suppliers to prepare and submit requests for participation and responsive tenders 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 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.

Government procurement of goods or services, or any combination thereof, that satisfy the following criteria falls within the scope of the EVFTA Government Procurement rules:

Criteria – EVFTA

IV. INVESTMENT DISPUTE SETTLEMENT

Investment disputes now could be settled under the EVIPA. In disputes regarding investment (for example, expropriation without compensation or discrimination of investment), an investor is allowed to bring the dispute to the Investment Tribunal for settlement. To ensure the fairness and independence of the dispute settlement, a permanent Tribunal will be comprised of 9 members: 3 nationals each appointed from the EU and Vietnam, together with 3 nationals appointed from third countries. Cases will be heard by a 3-member Tribunal selected by the Chairman of the Tribunal in a random way. This is also to ensure consistent rulings in similar cases, thus making the dispute settlement more predictable. The EVIPA also allows a sole Tribunal member where the claimant is a small or medium-sized enterprise or the compensation of damaged claims is relatively low. This is a flexible approach considering that Vietnam is still a developing country.

In case either of the disputing parties disagrees with the decision of the Tribunal, it can appeal to the Appeal Tribunal. While this is different from the common arbitration proceeding, it is quite similar to the 2-level dispute settlement mechanism in the WTO (Panel and Appellate Body). We believe that this mechanism could save time and cost for the whole proceedings.

The final settlement is binding and enforceable from the local courts regarding its validity, except for a five-year period following the entry into force of the EVIPA (please refer to further comments in the Legal Sector Committee’s chapter on Judicial Recourse).

V. CONCLUSION

The EVFTA and EVIPA, once ratified by Vietnam, will create sustainable growth, mutual benefits in several sectors and be an effective tool to balance trade relations between the EU and Vietnam. Vietnam is making continuous efforts and progress to meet the high standards set out in the two FTAs and is currently offering greater opportunities for foreign businesses in preparation for the FTAs’ finalisation. It is now time for foreign investors to start their business plans and grasp the upcoming clear opportunities.

***
Please do not hesitate to contact the author Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
Thank you!

VIETNAM – CUSTOMS REFORM AND WTO TRADE FACILITATION AGREEMENT (“TFA”) – HOW CPTPP AND EVFTA CAN EFFECT CHANGE

Every day I ride a boat along the Saigon River between Districts 1 and 2 when I am in Ho Chi Minh City. Monday through Friday, it is full of container barges moving containers to and from major distribution points. Saturdays and Sundays, however, are basically void of such traffic. I wondered to myself “why?” With the amount of import/export volume funneling through this major artery to trade, how could the weekends shut-down the volume of traffic this much? After reading the law on customs and the various other regulations and laws concerning Vietnamese customs and procedures, it became clear that a substantial portion of customs clearing and private transportation services did not operate on weekends; and if they did, it was sporadic. It would seem logical to assume that since worldwide shipping did not stop transport vessels in the middle of the sea because it was the weekend that major backlogs would occur on Fridays, Saturdays, and Sundays, hindering efficient clearance of goods. Mondays would be very intensive days for customs services and transportation.

The infrastructure for Vietnamese ports is growing and several large projects are already underway to accommodate the increased volume of shipping that is occurring.[1] Ports in Ho Chi Minh City are the main gateway for the region, accounting for 67 percent of the total throughput of all Vietnamese ports.[2] The enhanced infrastructure to absorb extensive increases to shipping volume is necessary and critical for Vietnam’s economic growth sustainability; however, it is the responsibility of customs to expeditiously accept and clear those goods for shipment to their destinations within Vietnam. Many developing (and, by the way, some developed) nations and economies have struggled with customs efficiencies for this new operational environment, and Vietnam is no different. The WTO TFA (Trade Facilitation Agreement; hereafter referred to as “TFA”) which entered into force 22 February 2017 was partly enabled to assist developing nations in streamlining their customs functions to facilitate a smoother, easier, trade process through a provision of assistance and support for capacity building for implementation of Section I [of the TFA].[3] Section I of the TFA includes Article 7 (Release and Clearance of Goods) and Article 9 (Movement of Goods Intended for Import Under Customs Control). How has Vietnam been addressing the concerns raised by these articles of the TFA and how do the CPTPP (Comprehensive and Progressive Trans Pacific Partnership; 2018) and EVFTA (European Union—Vietnam Free Trade; 2019) agreements add-to, or reduce, these concerns?

Article 7 of TFA

This Article provides standards for different factors that affect the release and clearance of goods such as expedited shipments, perishable goods, electronic payments, and pre-arrival processing. Article 7.3 calls for a separation of release of the imported goods from final determination of customs duties, taxes, fees, and charges. The article states that members shall allow importers to obtain release of their goods, under a guarantee, if required, prior to the final determination and payment of customs duties, taxes, fees and charges where the final determination is not done prior to, upon arrival or as rapidly as possible after arrival.[4] This is a wonderful measure for importers (to have their goods released with a very limited delay) and also for customs-efficiency as customs can receive legal guarantees of importers paying the final determination of any incurred fees at a later date. This can have the effect of rapidly clearing goods from customs intake/staging locations to create inventory space for more goods. Any reduction in delay of release of goods is a good thing, and according to a global trade report, full TFA delivery will help…”save 1.5 days of customs clearance for imported goods, down 47% from the present average and nearly 2 days of customs clearance for exported ones, down 91%.”[5] Vietnam’s logistics’ costs account for 16% to 17% currently [2018] of GDP, with 30-40 percent of that cost associated with custom’s clearances.[6]
In response to this concern—and under Article 7.3 of the TFA—Vietnam turned to CPTPP to address it. Under recently published Decree No. 57/2019/ND-CP (26 June 2019) governing Export/Import preferential tariffs under CPTPP, “…Within 1 year from the date of…export declarations, the customs declarant shall submit all documents proving that the goods satisfy the regulations specified…”[7] This mirrors the intent of TFA Article 7.3 and directly compliments it. Now, member states of CPTPP have increased flexibility in submitting any further documentation requested of Vietnam Customs instead of having those goods held and delayed for clearance until they were obtained. This is a great example of Vietnam aggressively pushing their regulatory changes forward to comply with TFA and CPTPP.

Article 9 of TFA

This article attempts to prevent bottleneck issues from occurring (mainly in developing or under-developed countries) at a customs port of entry by requiring member states to allow a customs-declarant to move goods from a customs port of entry to another customs office within the same customs territory (under customs control), and permit that declarant to clear them at the destination rather than at the port of entry. It is a straight-forward and fairly simple sounding statement; however, in practice, it is riddled with complexities.
Vietnam’s law on customs[8] delineates authority for customs responsibilities between 1) General Department of Customs; 2) Customs Departments of Provinces; and 3) Sub-department of Customs Sub-Departments, Customs control teams and equivalent units. Additionally, under Article 16 (5) of same, “The arrangement of manpower and working time must meet the requirements of import, export, exit, entry and transit activities.” Furthermore, Article 23 (4) requires, “Customs authorities…to carry out formalities for goods on public holidays and weekends and overtime hours in order to ensure timely loading and unloading of imported and exported goods…in conformity with practical conditions of customs operating locations [emphasis added]”. On paper, this would indicate a fully-developed system for expediting customs clearances and/or processes for clearing goods through a port of entry to another custom’s operations area for clearance seven days a week (and the customs law does further state that unless a shipment requires a physical inspection for certain agricultural or health reasons, it should be expedited to a different clearance location).

In application, it can vary greatly by whoever is the customs authority in charge of the inspection location. Decree 08/2015/ND-CP (Ministry of Finance) Article 29 (2) states, “Head of the Customs Authority who is in charge of…inspection [places] shall make a decision on any change to the level or form of physical verification and bear responsibility for their decision.” This gives the customs director of a facility broad authority, but thanks to the last clause of the sentence, “…bear responsibility for their decision”, many customs officials will be hesitant to use that discretion in fear of making a “wrong” decision; therefore, they most likely will physically hold and inspect every shipment coming into their zone of control. One facility operating in that fashion can bottleneck an entire section of the country. Additionally, the provincial customs authority or facility director has broad discretion in determining the “practical conditions” to conform to. In Vietnam, it is doubtful a customs facility director will require personnel to facilitate customs procedures during “Tet” (Vietnamese New Year); therefore, for one week little customs activity occurs at that location.

Indeed, many issues that are problematic to the law on customs were supposedly being addressed by Circulars 38 and 39 (issued in 2018). In fact, on 10 July 2019 a $21.7 million USAID Trade Facilitation Program was granted to support the Government of Vietnam to adopt and implement a risk management approach to customs and specialized inspection agencies, which will strengthen the implementation of the World Trade Organization’s Trade Facilitation Agreement [TFA].[9] The General Department of Vietnam Customs (GDVC) organized six consultative workshops to gather feedback and recommendations on amending Circular 38 and Circular 39 – regulation guidance on Vietnam’s Customs Law. The workshops would help identify the challenges and practical compliance-burdens faced by import-export businesses in relation to implementation of the circulars.[10] It is evident that between the many iterations of decrees, circulars, directives, and laws regarding customs and procedures, every agency and business involved in the process is confused.

Decision 15 (12 May 2017) provides a clear example of the confusion customs officials and businesses encountered[11]; chiefly, that it did not specify what is considered the “entry gate” for carrying out customs procedures? Was it the place that goods were imported to, or the port listed on the bill of lading? Businesses (and officials) were receiving conflicting information and backlogs inevitably ensued.[12] Decision 23, recently issued 27 June 2019, addressed this issue and specifically identifies the proper port of entry for each type of transport.[13] CPTPP and EVFTA also affected Decision 23 in that it amended the type of goods requiring specific inspection procedures to comply with CPTPPs input-materials-for-production provision, and also EVFTAs (and CPTPPs) stricter requirements regarding potentially environmentally-hazardous materials.[14]

With the myriad regulations affecting customs, how can either the CPTPP or EVFTA assist Vietnam in resolving the predicament? Statutorily, the EVFTA already has. It mirrors portions of the TFA (such as creating trade facilitation committees), but also goes one step further in requiring Vietnam to comply with Article 2.12, in which Vietnam “…shall administer in a uniform, impartial and reasonable manner all its laws, regulations, judicial decisions and administrative rulings pertaining to…issues affecting…distribution, transportation…warehousing inspection…or other use of goods for customs purposes.” This section of the EVFTA is forcing Vietnam to take a hard look at their current system, and streamline and consolidate all their varying regulations concerning customs administration for efficiency. A quick solution Vietnam can implement now to help alleviate physical storage problems is EVFTA Article 2.15 which allows foreign pharmaceutical companies to establish their own warehouses inside Vietnam.[15] If Vietnam declares those warehouses as “customs operational locations”, that would free-up other customs warehousing space for other inventory.

Private Sector Must Be Engaged

Outside of the regulatory environment, private businesses have a crucial role in relieving bottlenecks. Even if everything flows smoothly and correctly through the government customs process and goods are cleared, it takes private businesses to physically move those goods out to make room for others. If the trucking company hired to move containers does not “work” on weekends, is short-staffed, can’t find anyone to work, drivers call out sick, etc., those containers do not move—they sit there. Many of the transport barges moving along the Saigon River are private contractors. You can see their entire family lives and works on that barge. If that barge does not want to work that day, it is not going to work. While most of the port terminal operations are conducted by State-owned enterprises (SOEs), they still struggle with general employment issues that affect port operations and add to the bottleneck issue as well.

Government can provide a statutory environment for success, but without private enterprise completing the circle, nothing will be resolved. Perhaps an incentive system for non-traditional work days for private contractors can help the situation; better screening of potential employees; requirements specifically spelled-out; any and all solutions need to be examined. The bottom-line is while regulatory efficiency is needed to allow for the legal and operational environment to flow seamlessly, the private sector must close the loop.

Summary

There is a regulatory quagmire surrounding Vietnam’s customs arena. The TFA is intended to assist developing and under-developed nations (primarily) with their trade processes to better facilitate trade on a global level so that all parties benefit. Vietnam’s growing economy and role as a Southeast-Asian trade hub are requiring substantial changes to current regulations and processes. Only a few examples of the many that could be given show that while Vietnam is making strides with reform, they need to accelerate that change. It cannot be haphazardly done, though. It must be structured, reasonable, and determined with both governmental and private sector collaboration. Vietnam followed that exact process for obtaining CPTPP and EVFTA. Those agreements should be the primary guiding documents for Vietnam to reform their customs legislation to, as they will affect Vietnam’s economic growth exponentially. They can provide the framework for statutory solutions to many of the customs issues Vietnam faces; however, without private-sector buy in, those statutory solutions cannot be efficiently implemented. The entire customs-cycle must be embedded into the mindset and carried out at the individual level for there to be a truly systemic change.

Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com or any other lawyers in our office listing if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

THANK YOU !

VIETNAM – PUBLIC-PRIVATE-PARTNERSHIPS (PPP) AND CPTPP AND EVFTA/IPA DISPUTE SETTLEMENT PROVISIONS AND THE DRAFT PPP LAW

Public-Private-Partnerships (PPP) have long been used as a vehicle for both emerging and developed markets to further enhance their public infrastructure to support growing socio-economic needs. Vietnam, however, has experienced an explosive economic growth over the past decade and is poised for even further expansion with their acceding to the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) and European Union—Vietnam Free Trade (EVFTA) agreements. With these two new growth mechanisms in-force, Vietnam’s infrastructure is struggling to accommodate that growth. The statutory cap on public funds utilization of 65 percent is rapidly approaching and the most viable investment form left for Vietnam is a functional PPP program.

Both CPTPP and EVFTA/IPA (Investment Protection Agreement) lay out very broad frameworks for supporting infrastructure development such as preferring renewable energy over environmentally-damaging alternatives and establishing development committees to determine how best to support that effort.[1] With the core of those agreements addressing elimination of almost all duties and tariffs on goods and services between the parties (over time), it makes the cost of acquiring hardware for energy infrastructure less. Additionally, the restrictions on cross-border trade in services required to construct and maintain technologically advanced platforms are lessened; further reducing the cost of an infrastructure project. Vu Tien Loc (president of Vietnamese Chamber of Commerce and Industry) speaking at an event “EVFTA and EVIPA: Opportunities for Business” held on July 1 by the Ministry of Industry and Trade, stated that EVFTA is the best FTA Vietnam has ever signed.[2] Vietnam is heading towards a foreign direct investment (FDI) generation, with higher quality, more advanced technologies, higher added value and a more eco-friendly environment, so the EVFTA will open the door for EU companies to complete these targets, Loc said.[3]

With these opportunities presented for Vietnam’s economic future, a draft law on PPP was drawn to address some of the concerns foreign investors have had regarding the regulatory environment for PPP in Vietnam. Mainly that there is not an appropriate level of risk allocation (too much on the investor), and there is not enough regulatory stability to support a long-term PPP project (generally 25-30 years). Many of the primary concerns have been discussed in other various articles; however, CPTPP and EVFTA/IPA have two restrictions reserved by Vietnam that can hinder the potential for expansive FDI in energy infrastructure (specifically power distribution)—CPTPP Annex IV and EVIPA Annex 2.1. Conversely, they also include dispute settlement provisions between member countries that can attract PPP investment if incorporated into the draft PPP law.

CPTPP Annex IV and EVIPA Annex 2.1

CPTPP Annex IV states, “[Regarding] all state-owned enterprises[4]…Viet Nam may require or direct the Entity [CPTPP member] to: (b) accord preferential treatment to…enterprises that are investments of Vietnamese investors in the territory of Viet Nam…pursuant to a government measure.” EVIPA Annex 2.1 states, “Viet Nam may adopt or maintain any measure with respect to the operation of a covered investment that is not in conformity with Article 2.3 (National Treatment); (h) …power transmission and/or distribution.” Both annexes allow Vietnam to require a potential member-country investor to use only Vietnamese domestic enterprises (majority-owned by Vietnamese nationals) in accomplishing the PPP project, if Vietnam so chooses. The EVIPA Annex is even broader than CPTPP by allowing “any measure” (regarding power transmission/distribution). It is also interesting to note that in EVFTA Appendix 8-B-1[5] (Specific commitments by Vietnam) Vietnam has agreed to virtually no restrictions on any construction companies or engineering services, including having a 100% member-country-owned commercial presence in Vietnam’s territory. In essence, CPTPP and EVFTA/IPA allow freer, fairer access to goods/services and investments; however, Vietnam can require any investor to utilize strictly Vietnamese resources regarding power or energy production and distribution. Most nations want to maintain national sovereignty and control of specific industries and resources they consider critical in supporting that sovereignty—that is not the issue here. This issue raised is one of regulatory uncertainties for investors.

These competing sections can cause consternation for a potential PPP investor. They may be able to complete the project for far less costs using their own member-country resources, but arbitrarily required at some point to utilize Vietnamese-owned companies that perhaps charge far more for the same good or service. The current draft PPP law is silent on this issue. PPP investors could be reassured, through contractual stability, of the guaranteed resources and services to be provided (and by whom) from the outset of the project. At a minimum, the draft PPP law should include a method for an investor to challenge a regulatory ruling or decision through an impartial, third party. While this issue might not derail a project, it could cause a qualified, reliable investor not to even want to bid a project; therefore, possibly driving the cost up or having a lower quality platform that will cost more in repair and maintenance in the long term. What the draft PPP law needs is to adopt the dispute settlement and resolution provisions of the CPTPP and EVFTA/IPA. In its current form, it does not mirror them.

Dispute Resolution Provision

Under Article 112 of the draft PPP law (dispute resolution) parties must use negotiation and conciliation first. This is the same as both CPTPP Chapter 28 and EVFTA Chapter 15/IPA Chapter 3. Continuing, a dispute involving a foreign investor (and between a State Agency) will be resolved through a Vietnamese arbitration organization or court, “unless otherwise agreed in the contract or unless otherwise stipulated in an international treaty of which Vietnam is a member.” If not stipulated in the contract, this means that if the foreign entity is a CPTPP or EUFTA/IPA member country, those agreements’ dispute chapters apply—maybe. Both agreements state that dispute resolution will be accomplished via mediation and arbitration for disputes generated under those agreements. There is no specific PPP language in the agreements; therefore, it will have to be proven that either of the agreements govern the project. This will add time and costs to the project, the government, the investor, and ultimately, the public.

Many PPP projects do not involve one, single foreign investor. There could be any number of various investor combinations to complete a specific project. A purely domestic, Vietnamese, single investor will be required to use Vietnamese arbitration or courts under Article 112—understandable. Any dispute between investors (state agency not involved) in which there is at least one (1) foreign investor will be resolved: “First, in Vietnamese court(s); then second, Vietnamese arbitrator(s); lastly, Foreign arbitrator(s).” Unless the foreign-investor here is a CPTPP/EVFTA member, or they have an international arbitration clause in their contract, there is no real option for the investor except for Vietnamese arbitration/courts.

The current draft PPP law’s Article 112 is more in line with general business transactions and not the magnitude of most PPP investments. They generally include multiple entities and financial vehicles/lenders, both foreign and domestic, ranging in the hundreds of millions to billions of USD. With the level of involvement regarding PPP projects, the draft PPP law should just state plainly that any dispute shall be resolved through international mediation and/or arbitration (unless stipulated otherwise in the contract). In effect, mirror the CPTPP and EVFTA/IPA Dispute Settlement Chapters. This will provide potential investors with the regulatory certainty they have been looking for. It will also alleviate any concerns around objectivity and neutrality for all parties. UNCITRAL stated in their UN guidelines for PPP in 2000, “…procedures should be established for handling disputes… (This is where arbitration should be a risk concession by the government…allowing international standards of the infrastructure sector to have an equal voice) [Emphasis added].”[6] Changing dispute resolution in the draft law to mirror the current trade agreements and UNCITRAL will help attract FDI for PPP infrastructure projects.

Summary

Vietnam needs to rely on the private sector to take their socio-economic growth to the next level. Government cannot satisfy the country’s requirements without it. Regulatory reform has been one of the biggest hurdles to overcome in satisfying the private sector’s concerns. From a statutory perspective, the CPTPP and EVFTA/IPA are able vehicles that give a wide berth for PPP projects to flourish. Within those landmark agreements, some conflicting areas do remain that can cause investor concern. From an operational perspective, government agencies need to streamline their processes to deliver services effectively under the laws and regulations (another major concern of investors). Eric Sidgwick, ADB country director for Vietnam, stated that Vietnam’s average disbursement rate is much lower than that of other recipients of the Asian Development Bank’s official development assistance (ODA) loans, largely due to cumbersome and time-consuming procedures.[7] While there is never a perfect solution for all parties, compromise is usually the most effective way to ensure buy-in from all involved. A way of alleviating investor’s concern over ambiguous and regulatory stability is to change the dispute resolution Article of the draft PPP law to mirror the already successful agreements of CPTPP and EVFTA/IPA.

Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

THANK YOU!

VIETNAM – CAPITAL MARKETS – HOW THE CPTPP, EVFTA/IPA CAN EFFECT MORGAN STANLEY’s 2020 RATING

One of the significant events Vietnam was hoping to occur this June unfortunately did not transpire—being on the Morgan Stanley Capital International (MSCI) watch list for emerging markets. Instead, Vietnam was not upgraded and remained on the frontier-market listing. It is estimated Vietnam could receive up to US $10 billion worth of foreign capital in frontier market-focused funds, but could receive much more from emerging market-focused funds.[1] The Vietnamese Government considers MSCI’s watch list as a top-priority target as it could lure a huge amount of foreign capital to the Vietnamese economy.[2] According to Nguyễn Thị Bích Nga, deputy director of the State Securities Commission’s International Co-operation Department, [Vietnam] has been making the best efforts to improve the legal framework, introduce new securities products and make the market more professional.[3]

One of those “best efforts” is the amendment of the securities law that would make the market fairer between domestic and foreign investors (draft law to amend law on securities; last revised by Decree 60/2015/ND-CP). That 2015 revision eased restrictions on Foreign Ownership Limits (FOL); however, MSCI wants to see even further progress on relaxing those restrictions. According to the draft version (as a general rule), foreign investors are allowed to own 100 per cent of the shares of a Vietnamese company that operates in a non-critical business sector. This applies to listed firms, equitized state-owned enterprises (SOEs), and private non-listed businesses. Shareholders of each company will decide for themselves the amount of foreign-owned shares eligible.[4] This is different from the current Securities Law, which automatically sets the FOL at listed companies in Vietnam at 49 percent. Some sectors, such as banking or aviation, have a stricter limit at only 30 percent.

Experts believe that with the relaxed rules, Vietnam would be likely to attract at least US $5 billion of new capital from abroad and receive the upgrade that it has been waiting for.[5] With fewer restrictions on foreign ownership, Vietnamese firms would become more attractive to major investment funds who are willing to pour millions of USD into Vietnamese businesses. With more foreign-ownership, companies will have a broader, global, perspective and a level of accountability to help drive transparency and change. Mai Le, analyst at PYN Asia Research, noted that out of all the changes in the Securities Law, the [capital] market is most anxiously waiting the FOL rule to take effect.[6]

MSCI Decision and Criteria

Kuwait was upgraded to the MSCI emerging market watch list (and not Vietnam) specifically because of, “…enhancements [that] removed foreign ownership restrictions on listed banks and simplification of requirements for investor registration.”[7] Not coincidentally, those are the areas that Vietnam has not satisfied under MSCIs criteria.[8] Under MSCIs criteria of “Openness to Foreign Ownership”, Vietnam ranks as improvement needed in FOL level, foreign room level, and equal rights to foreign investors. Many experts felt that Vietnam has met more standards of an emerging market than similar markets such as Pakistan and the Philippines (or Kuwait), but also had the best qualitative indicators among frontier markets.[9] While that may be true, it is apparent that MSCI is more concerned with long-term sustainability, which is why “openness to foreign ownership” is MSCIs top criteria for assessing upgrades.

CPTPP, EVFTA, EVIPA and Their Potential Effects on MSCI 2020

If Vietnam rectifies the discrepancies in their laws regarding investments and securities with the trade agreements of CPTPP (Comprehensive and Progressive Trans Pacific Partnership), EVFTA (European Union—Vietnam Free Trade Agreement), and EVIPA (European Union—Vietnam Investment Protection Agreement), they will have a greater chance at making the MSCI watch list upgrade for 2020. Vietnam will most likely not make the list if they continue to table or endlessly debate these critical, progressive revisions. Streamlining the draft laws on investment and securities with CPTPP, EVFTA, and EVIPA, and implementing them expeditiously will give MSCI hard-data to use in their June 2020 evaluation instead of mere speculation.
Moving in that direction, one of the most significant changes in the draft law on securities is the expansion of the foreign holding cap in public companies. Accordingly, public companies would be subject to no restrictions on foreign holdings, unless otherwise prescribed by “treaties to which Vietnam has acceded or a specialized law.”[10] There is a minor legal distinction between “treaties” and “agreements”; however, in the spirt of the law and especially for cementing these new trading relationships, Vietnam should draw no distinction and apply them as such. Under the CPTPP and EVFTA/EVIPA, Vietnam has expressly restricted FOL in specific, listed industries that are of national significance or security[11]; therefore, the government should aggressively restructure their current drafts to mirror that CPTPP, EVFTA, and EVIPA specific language. The CPTPP does have FOL set to what the current Vietnamese law is (currently 30 percent); however, it only states that it is relative to whatever the “current” law is—so, change the law.

This would mean removing the 30 percent FOL cap in the banking industry that is currently in place (even in the draft law to revise the law on securities).[12] According to Long Ngo, associate director at the Research Department at Viet Capital Securities, investment trends in the banking industry will depend on when the government lifts the FOL.[13] As long as the government keeps FOL at the 30 percent level, Vietnam’s capital markets will not expand and MSCI will not consider Vietnam for the watch list upgrade.[14] By maintaining their current operational paradigm, Vietnam is only hampering its own development and future.

If Vietnam would internalize operating from a global perspective, there should be no distinctions between a foreign investor and a domestic one (other than protected industries of national security). CPTPP, EVFTA, and EVIFA create “National Treatment” of any foreign-investor, which grants (in effect) domestic status.[15] Article 9.1 of CPTPP stipulates all “covered” investments (EVIPA is essentially the same list), including: (a) an enterprise; (b) shares, stock and other forms of equity participation in an enterprise; (c) bonds, debentures, other debt instruments and loans;…(f) intellectual property rights; (g) licences, authorisations, permits and similar rights conferred.[16] If Vietnam would stipulate in their draft laws this position already agreed to in CPTPP, EVFTA and EVIPA, it would virtually eliminate all three of MSCIs concerns that it has with Vietnam currently.

With the guarantee of no distinction between a foreign-investor and a domestic one, entities that have been reluctant to invest millions of USD in Vietnamese businesses will now feel much more comfortable about the investment environment; thus creating a large influx into Vietnamese capital markets. MSCI will notice these changes and most likely add Vietnam to 2020s watch list for emerging markets, creating another large inlay to Vietnam’s markets. If the government would match their investment and securities laws with the current trade agreements of CPTPP, EVFTA, and EVIPA, they would realize their self-stated goal of achieving MSCI watch list for emerging-market status.

Summary

A major goal of Vietnam’s government was not realized in July. Despite strong economic activity and other positive indicators, MSCI did not place them on the highly anticipated watch list for emerging markets. If Vietnam takes a hard look at the criteria that kept them from the upgrade, it is apparent that the solution for most of the roadblocks cited have already been addressed in the CPTPP, EVFTA, and EVIPA. The government merely needs to incorporate the trade agreement language into their existing laws. The tabling until May 2020 of the passage of the draft law to amend the law on investments through Resolution 8 (July 2019) was not a strategically beneficial move for Vietnam in order to make the 2020 MSCI watch list. Several key provisions in that draft (if in-place and operational) would give MSCI concrete data to observe (rather than speculative) and improve Vietnam’s chances of an upgrade. Additionally, changes to the draft law on the law on securities to be in line with the provisions of CPTPP and EVIPA would also be in Vietnam’s favor. Investor’s (and MSCI) minds would be eased if Vietnam will aggressively pursue regulatory reform and potentially add another US $15 billion to their capital markets.

The best indicator that reform is required to the current draft laws on amending the law on securities and investments came from the government itself. “Some items are unclear while others are unreasonable and no longer fit the Vietnamese market’s conditions,” the Government said in a report submitted to the National Assembly’s Economic Committee.[17] Those issues may “befuddle investors, market members and regulators,” adding that “policymakers must adjust the law [emphasis added] so it matches international standards and agreements to which Vietnam is committed.”[18]

If you have any question on the above, please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Thank you very much!
________________________________________
[1] https://vietnamnews.vn/economy/520886/vn-hopes-to-enter-msci-watchlist-this-year-but-experts-are-uncertain.html#3jsO5FxXs7UjKbiz.97
[2] Id. Footnote 1.
[3] Id. Footnote 1.
[4] https://www.vir.com.vn/fol-ambiguities-in-new-securities-law-64118.html
[5] Id. Footnote 4.
[6] Id. Footnote 4.
[7]https://www.msci.com/documents/10199/238444/RESULTS_OF_MSCI_2019_ANNUAL_MARKET_CLASSIFICATION_REVIEW.pdf/f134c97c-73da-71c7-4b3c-d1f637c3eaee
[8]https://www.msci.com/documents/1296102/1330218/MSCI_Market_Accessibility_Review_Country_Comparison_2019.pdf/142b5a29-e385-2922-4f79-8d6f4a04a467
[9] Id. Footnote 4.
[10] http://vietnamlawmagazine.vn/draft-securities-law-proposes-expanding-foreign-holding-cap-6517.html
[11] EVIPA, Chapter 2, Article 2.1.2 ; Annex 2

Lawyer in Vietnam Dr. Oliver Massmann – Public Private Partnerships – Enhancing Functionality – Making use of the Comprehensive and Progressive Trans-Pacific Partnership and the EU – Vietnam Free Trade Agreement for Better Functionality of the New PPP Decree

Decree No. 15/2015/ND-CP on public-private partnership (“PPP”) (“Decree 15”) when introduced in 2015 was highly praised by legal commentators to be well drafted and make the PPP Laws in Vietnam move closer towards bankable projects.

However, in implementation process, there have been conflicting legal issues that deter investors from choosing PPP as an investment method, leading to a humble number of PPP projects thus far. For example, Decree 15 made a progress in other previous PPP regulations in clearly allowing project contracts to be governed by foreign law, namely contracts involving a foreign party and government agency guarantee contracts. The issue only arises when it comes to real-estate related matters, which are not yet finally decided under the Land Law which law will be the governing law.

Moreover, as PPP laws are only at Decree level, regulatory framework for PPP projects mainly includes the Law on Enterprises, Law on Public Investment, Law on Bidding, etc. most of which regulate public investment instead of private one or investment cooperation between the Government and private investors. The investors are also concerned about the stability of PPP regulations, as they are mainly Decrees. While a PPP project could take years to complete, regulations at Decree level may change and cause investors confusion in implementation of the laws. The state agencies also face certain difficulties in managing these PPP projects. According to a real story shared by an officer at VCCI, after the Government signed a PPP contract with an investor, due to changes in policies, the Government amended its determination of the contract value. As a result, the land price increased by 14 times as much as previously agreed, leading to substantial loss for the investor.

According to the Ministry of Planning and Investment, during 2016-2020, it is expected that there will be 598 registered PPP projects with total investment amount of VND 250,000 billion. Given the shortcomings of Decree 15, it would be hard to achieve these numbers without its replacement by another Decree. In that context, Decree No. 63/2018/ND-CP (“Decree 63”) was issued on 04 May 2018 and takes effect from 19 June 2018 to eliminate bottlenecks in PPP implementation.
Decree 63 – What is new?

Capital contribution responsibility

The investor is responsible for contributing and mobilizing capital for the project implementation, in particular, the ratio of the investor’s capital in the owner’s equity is determined as follows:
– For projects with total investment amount of up to VND1,500 billion, the equity capital that the investor must maintain must be at least 20% of the total investment capital;
– For projects with total investment capital of more than VND1,500 billion:
o For investment portion of up to VND1,500 billion: the equity capital that the investor must maintain must be at least 20% of the total investment capital;
o For investment portion that exceeds VND1,500 billion: the equity capital that the investor must maintain must be at least 10% of the total investment capital.

There is no capital contribution requirement from the Government side.

Project approval authority

Decree 63 makes it clear the following authorities will approve PPP projects:
– The National Assembly decides the investment policy of important national projects;
– The Prime Minister decides the investment policy of the following projects:
o Projects Type A using state budget from 30% or above or below 30% but more than VND300 billion of the total investment capital of the project;
o Projects Type A using BT contracts.
– Ministers of relevant ministries decide investment policy of their own projects not falling within the approval authority of the National Assembly and the Prime Minister.
– Provincial People’s Councils decide investment policy of the following projects:
o Projects Type A not falling under the approval authority of the Prime Minister;
o Projects Type B using public investment budget; and
o Projects Type B using BT contracts.
– The provincial People’s Committee decides the investment policy of projects in their provinces not falling within the approval authority of the National Assembly, the Prime Minister and the provincial People’s Council.

Payment methods in BT projects

Practice shows that investors are very interested in well-located land when implementing BT projects. However, when such land fund gradually becomes exhausted, BT projects seem not to attract investors. Decree 63 has added another method in addition to the exchange of land for infrastructure, so that the investors will have more options in receiving payments. Specifically, the investor may also receive payment in the form of the transfer of right to conduct business, exploit works/ services, etc.

How to take advantage of the CPTPP and the EU-Vietnam FTA (EVFTA) in PPP projects to enhance the functionality of PPP projects in Vietnam

Covered government entities and agencies

According to Decree 63, tenders for the selection of PPP investors will follow the Law on Public Procurement. While the Vietnam’s Law on Public Procurement still shows some shortcomings, Vietnam will be bound by its commitments in the Government Procurement chapter in the CPTPP and the EVFTA, including the procedures to conduct a tender and in specific circumstances that the Government must conduct a public tender. The investors now have the opportunity to participate in procurement by Vietnam’s government entities and challenge the Government if it does not grant the investors the opportunity to do so in qualified circumstances.
The CPTPP and the EVFTA both make a list of government entities and agencies whose procurement of particular̉ goods and services at a particular amount must be subject to public tender. While the CPTPP only allows expansion of the list within 5 years upon the entry into force of the agreement, the EVFTA allows a longer period (i.e., 15 years).
Covered procurement

Government procurement of goods or services or any combination thereof that satisfy the following criteria falls within the scope of the EVFTA and CPTPP Government Procurement rules:

Criteria

How to appeal Government tender decision?

The CPTPP and the EVFTA make it possible that foreign investors could sue Vietnam Government for its tender decisions according to the dispute settlement by arbitration rules. The violating party must take all necessary measures to promptly comply with the arbitral decision. In case of non-compliance, as in the WTO, the CPTPP and the EVFTA allow temporary remedies (compensation) at the request of the complaining party.

Enforcement of arbitral awards

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.

Conclusion

It is crucial that foreign investors take advantage of the requirements under the CPTPP and the EVFTA to enhance functionality of their PPP projects in Vietnam. Under these agreements, specific Vietnam Government entities and agencies when procuring goods/ services above certain thresholds must conduct public tender. In case these entities make wrongful tender decisions, foreign investors could take recourse to arbitration proceedings and have the arbitral awards fully enforced in Vietnam.

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Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
THANK YOU !