Tag Archives: EVFTA

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

Direct Corporate Power Purchase Agreement (DPPA) to be piloted in Vietnam in 2019 in Vietnam – Opportunities for producers of renewable energy and foreign firms as buyers – how best to use the CPTPP and the EUVNFTA to make it work

In recent years, Vietnam has enjoyed one of the world’s most rapid economic growth rates i.e., an average of more than 6% p.a. Such growth has transformed the country from one of the poorest in the world into a middle-income country. Vietnam has long recognized the important role of renewable energy in achieving energy security, sustainable development and stable growth rate.

Vietnam has a wide range of primary energy sources such as crude oil, coal, natural gas and hydro power for economic development. However, Vietnam has experienced formidable risks for its economy to be based on fossil fuels. For example, in April 2015, thousands of residents blocked a national highway for more than 30 hours in a protest against pollution by the Vinh Tan 2 coal power plants. It seems most of the hydro resource potential for hydro power plants will be fully exploited soon. Those are just two examples of incidents that could significantly affect the national power security power of Vietnam. Accordingly, Vietnam must reduce its reliance on less “environmentally friendly” primary fossil fuel, and promoting renewable energy promptly.

The revised Power Development Plan for 2011 – 2020, vision to 2030 (revised PDP VII), adopted in 2016, is evidence of a growing appreciation of the role alternative sources of energy, targets a 7% share of electricity generated from renewable energy by 2020 and 10% plus by 2030. The revised PDP VII forecasts the electricity demand using an annual average growth rate at 10% from 2011 to 2030. The demand will increase from 86 TWh in 2010 to 265 – 278 TWh in 2020 and 572-632 TWh in 2030. The estimated installed capacity would be 60 GW in 2020 and 129.5 GW in 2030.

Since early 2017, there has been a surge of solar and wind projects approved by the Government after the promulgation of new feed-in-tariffs (“FITs”) for on-grid solar projects and other reforming policies to attract foreign and local investment on this green industry.

On 12 June 2018, at a seminar on renewable energy, the Electricity Regulatory Authority of Vietnam (“ERAV”) discussed and disclosed information on regulations for implementation of a pilot for Direct Corporate Power Purchase Agreement (“DPPA”) and renewable energy sector. Generally, DPPA is an agreement made between the power generator and a corporate customer in which power output is physically delivered and sold to the corporate customer for its operation. ERAV informed that it is a time consuming process since ERAV and its consultants had to conduct research and collect massive information on fundamental issues, design, details and criteria for DPPAs, especially for similar cases such as Vietnam. It is also challenging for ERAV to cooperate and consult other departments of MOIT on the DPPA pilot.

Currently, ERAV’s consultants have submitted a first preliminary report on international experience regarding basic design, mechanism and operation of DPPA. It is known that ERAV and its consultants also sent questionnaire papers to several industry and sectors, companies and stakeholders aimed at seeking their opinion on consumer market, demand, participants, and other issues.

When such report is available, ERAV will arrange a seminar for introduction of the same and seeking opinion from all stakeholders. At this stage, there is no final decisions on capacity, licensing process, participants, location, wheeling fee, and contractual terms for the piloted DPPA. However, ERAV is considering some models as below:

• Physical DPPA: (a) onsite DPPA where the power plants to be constructed around the consumers, and / or (ii) offshore DPPA where power plants to be constructed anywhere.
• Financial DPPA: this would be formed with competitive market for selling power.

ERAV also shared that the DPPA pilot would be preferably designed for 110 KV or more system (not 220 KV or 22-25 KV) since this system is the most popular, efficient and feasible.

Market access in the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and EU – Vietnam FTA (EVFTA)

Currently, there is no foreign ownership restriction in energy sector in local laws or Vietnam’s international commitments. The foreign investor may choose among permitted investment forms: 100% foreign invested company, joint venture or public private partnership in the form of BOT contract. For your information, Vietnam ties in first place with Singapore in terms of market access liberalization.

The recent conclusion of the EVFTA negotiation and legal review and the signing of the CPTPP further opens 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 such as Germany, to Vietnam with less market access barriers and being more secured. In particular, the CPTPP and the EVFTA 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.

***
Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com or any other lawyer 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.

Cometh the EU-Vietnam Free Trade Agreement

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

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

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

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

What can investors expect to change with the new deal?

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

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

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

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

Sink or swim

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

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

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

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

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

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

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

Short term pain, long term gain?

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

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

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

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.

***
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 !

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 EVFTA CPTPP
Monetary values that determine whether procurement by central government is covered under an agreement 130,000 Special Drawing Rights (SDRs) (US$191,000) from 15 years since the entry into force of the agreement

Initial transitional threshold: 1.5 million SDRs 130,000 Special Drawing Rights (SDRs) (US$191,000) from 25 years since the entry into force of the agreement

Initial transitional threshold: 2 million SDRs
Procurement of construction services by central government entities Initial threshold: 65.2 million SDRs

After 15 years, 8.5 million SDRs Initial threshold: 40 million SDRs

After 15 years, 5 million SDRs
Entities covered 22 central government bodies (added the Ministry of Public Security)

42 other entities: added two state-owned enterprises (Vietnam Electricity and Vietnam Railways) and two universities (Vietnam National University – Hanoi and Vietnam National University – Ho Chi Minh City)

Sub-central government coverage: Adds 2 cities: Hanoi and Ho Chi Minh – expansion of the list within 15 years since the entry into force of the agreement 21 central government bodies

38 other entities

No sub-central government coverage – expansion of the list within 5 years since the entry into force of the agreement
Exclusion of preferences for SMEs Broad exclusion applies only to procurement of goods and services whose value is estimated at 260,000 SDRs or less and may not be applied to SMEs with more than 500 permanent full-time employees.
Application of offsets Based on value of a contract Based on the total value of covered procurement
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.
***
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 – Solar Energy – Action plan for getting deals done with the new Power Purchase Agreement

Interview with Dr. Oliver Massmann\

1. Which significant changes does the new PPA contain for the solar energy sector?

Decision 11 introduces the Feed-in-Tariff (FiT) rate of UScents 9.35 per kWh. The FiT rate is only applicable for on-grid solar power project with efficiency of solar cells greater than 16% or with efficiency of the modules greater than 15%. The FiT rate depends on the currency exchange rate of the Vietnamese Dong and the US-Dollar. The rate remains the same throughout the whole year. It is adjusted by the Vietnamese State Bank on the last working day of the year for being used in the following year.

As a result, the financial planning is easier and it grants certain security for investors such as protection against currency fluctuation.

2. Which aspects in the new PPA have changed compared with the draft PPA from April 2017?

Compared with the draft PPA, the FiT rate is now indicated in the final version and there is reference to the adjustment of the FiT in case of USD/VND exchange rate fluctuation.

The MoIT made no big changes regarding the shortcomings of the draft of the PPA from April 2017.

The investor still has to bear the biggest risk.

3. Is the PPA bankable?

No, in general the PPA is not bankable in its final version.

4. Is there a way to make it bankable?

Yes, it is possible to make the PPA bankable. We have 20 years of experience making PPAs bankable for gas and coal fired power plants and wind energy plants in Vietnam. The investor should use all business channels and experienced negotiators to make the PPA bankable.

It is a matter of negotiation and experience. Decision 11 is granting investors the possibility to negotiate the conditions with EVN. The price remains fixed.

Agreements such as the EU – Vietnam Free Trade Agreement (“EVFTA”) or the Trans-Pacific Partnership (“TPP”), which is now called the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (“CPTPP”), lay a big milestone for making the PPA bankable.

The EVFTA was signed in 2015 and is expected to be ratified by all member countries by 2018. It is probably going to take effect in 2019. It is estimated to generate an increasing GDP and to liberalize the economy of Vietnam. Another aspect is the elimination of almost all custom duties (over 99% of all tariff lines). As a result, there will be a huge impact on trade development and the interest of investors.

Another important agreement is the CPTPP. On 4th February 2016 the TPP was signed between 12 countries. The signing nations made up 28% of the global trade and 40% of the global GDP. However, at the beginning of 2017, the US President Trump decided to withdraw from the TPP. The remaining 11 member states discussed the future of the TPP in APEC event in Da Nang, Vietnam and agreed to push ahead with the TPP but now under the name of CPTPP. Furthermore, the states agreed to work out a new framework agreement, which includes changes to the previous TPP agreement. The largest amendment was made in the field of intellectual property, for example, easing the protection of copyright or the special protection of biologics and pharmaceuticals.

However, the level of market access is still the same as in the first TPP. For some countries, further negotiations have to take place and they need time to adapt their laws to the CPTPP rules. The negotiators have set the goal of signing the revised TPP by the first quarter of 2018. After 6 countries have ratified the partnership, it will come into effect.

With the CPTPP, market access to more sectors will be opened than the WTO such as telecommunication, distribution of goods, manufacturing and fabrication. However, there will remain a few restrictions in the power/energy sector as discussed below.

As a result of the EVFTA and the TPP, Vietnam will get access to a huge part of international markets. This gives Vietnam the possibility to increase the amount of imports and exports (estimated up to 37% higher until 2025) and to improve foreign investments.

Another essential instrument is the Investor-State Dispute Settlement (ISDS)[N1] which is going to be applied under the EVFTA and the TPP. Under that provision, for investment related disputes, the investors have the right to bring claims to the host country by means of international arbitration. The arbitration proceedings shall be made public as a matter of transparency in conflict cases. In relation to the TPP, the scope of the ISDS was reduced by removing references to “investment agreements” and “investment authorization” as result of the discussion about the TPP’s future on the APEC meetings on 10th and 11th November 2017.

As a conclusion, the bankability of the PPA will get enhanced as a consequence of the EVFTA and TPP in the next few years if the legislative framework is being reformed in the right direction. The economy will become more dynamic because of access to other markets and further foreign investments. With the implementation of the ISDS in the TPP, investors will be more secured in relation to dispute resolution and protection against the risks of international trading. As a result, banks will be more willing to finance PPAs.

Our recommendations: For now, the bankability of the PPA is not as it is expected. But you should be aware of the upcoming agreements which will lead to a big impact on the economy growth and the economy itself. If everything is improving in the right direction as it is now, the PPAs will be more bankable in the future and there will be better investment opportunities.

5. How was the bankability issue handled in the past years?

The TPP and the EVFTA are not the only agreements regarding the bankability of the PPA.

Vietnam and the USA signed the Bilateral Trade Agreement (BTA) in 1999 which was implemented in 2001. It was a huge success and very important agreement for the economy of Vietnam. It was the first opening of the Vietnamese market and important for the creation of more business opportunities and new standards for financing projects.

Another important fact was Vietnam’s accession to the WTO in 2007. This has improved trade relations between Vietnam and other countries by removing trade barriers and the commitment to non-discrimination. It was also a political sign to show Vietnam’s will to get integrated in the international trade by accepting international trading rules.

To be able to fulfill the commitments, it is necessary to make legislative adjustments and adopt laws that ensure the viability and efficiency of the projects. In the last years, many important laws have been introduced. They have helped to enhance the bankability of the PPA, for example, the 2014 Investment Law, 2014 Enterprise Law, 2012 Labor Law, etc.

In addition, in 2011, the legal framework for wind power projects was introduced.

Our recommendation: You should use existing international agreements and local laws as the bases for negotiation. Remember to rely on existing precedents and keep in mind that there are some difficulties for project development. But with a well-structured project development, it is still possible to getting a bankable PPA done.

6. What are the main risks of the PPA for investors?

With many solar projects currently focused on a few central locations, the capacity of existing facilities to absorb power must be a cause of some concerns given the PPA’s transfer of such risk to power producers.

EVN holds a monopoly of distribution, repair, maintenance, inspection and examination of the grid.

There is a big risk because of the lack of the government’s guarantee for EVN’s payment obligation in cases energy is provided from the producer but cannot be transmitted due to interruption of EVN’s grid connection. One solution for bridging that guarantee gap can be the use of the MIGA backup from the Worldbank (Multilateral Investment Guarantee Agency) or backup from the Asean Development Bank.

Reasons for the interruption can be, for example: force majeure or termination of contracts. EVN can refuse transmitting the energy in cases of maintenance or repairing.

Circular 16 does not contain any guarantee or compensation for investors in these cases.

Our recommendations for avoiding potential risks: Be aware of veto rights of EVN and Vietnamese authorities. You have to be patient because the decision making process in Vietnam goes through many levels and takes time.

7. There will be conflicts between the investors and EVN because of the shift of risks to the investors. Which means of conflict resolution does the PPA grant to investors?

In general, the PPA is governed by the Vietnamese law.

The PPA does not provide for international arbitration as a means of dispute resolution.

Conflicts can be submitted to the Department of Electricity and Renewable Energy. If this option fails, investors can seek help at the Electricity Regulatory Authority of Vietnam (ERAV) or with application to a Vietnamese court.

The PPA implicitly allows the involvement of domestic and offshore arbitration. However, whether it can be a prior agreement with EVN in the PPA or only until there is an arising dispute simply lies in the hands of EVN.

Our recommendations for successful negotiations with EVN: You have to understand how EVN is working and what their targets are. Be aware of their monopoly position in the energy sector in Vietnam. Don’t try “to reinvent the wheel”!

Do not overexert them with too ambitious intentions related to the development proposal. They might be afraid of so many new things. Rely on workable precedent strategies and make reference to successful projects.

8. Which view does the MoIT hold regarding the shortcomings of the PPA?

The MoIT knows about the shortcomings of the PPA and is aware about the fact that the PPA will not attract investors to meet the power demand or to solve problems regarding the development of renewable energy.

The MoIT also knows that the solar energy sector in Vietnam has a lot of potentials.

Finally, the MoIT expects to attract smaller investment projects where bankability is not really an issue for the investors.

9. Is the view of the MoIT realistic?

In our opinion, the MoIT’s view is not realistic. It may lead to unfeasible projects because of the existing risks of the final version of PPA and without assurance for supportive services from a bank. Furthermore the success of projects depends on the result of the negotiation with EVN.

10. Which advice can you give to future investors regarding their project development?

Be aware! You have to take care of your project on a step-by-step-base and get well prepared for the negotiations with EVN when you decide to invest in an on-grid power project.

***

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. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

 

Thank you!

 

 

 

VIETNAM – MAIN ISSUES RESTRAINING INFRASTRUCTURE DEVELOPMENT AND OUTLOOK ON THE EUROPEAN UNION-VIETNAM FREE TRADE AGREEMENT (EVFTA)

Vietnam’s ability to continue expanding its economy is linked to competitiveness. It is clear that supporting institutional regulatory reform and infrastructure development will ensure economic growth in the country. In practice, this approach is feasible by promoting public-private partnership (PPP). This goal includes a long-term investment in infrastructure that harmonizes PPP investors and Vietnamese Government’s interests.

By way of illustration, State-owned enterprises (SOEs) remain dominated in Vietnam. However, due to budget pressure, the government is committed to reform SOEs. Accelerating the development of foreign investment requires new approach to create a favorable legal framework for PPP. The issuance of a long awaited Decision 58/2016/QD-TTg (Decision 58) on classification of SOEs, is expected to facilitate the process.

Another key aspect to consider is SOE equitization for revenue reasons. In 2016, the State received approximately USD800 million from equitization and allocated some of these funds to reduce budget deficit.[1] Although the equitization process started in 1992, only around 2,600 firms have been equitized in the first 13 years of that program.[2] Meanwhile, the goal during 2014-2015 was to equitize 432 SOEs.[3] According to Decision 58, it is expected to rearrange 103 SOEs and equitize 137 SOEs within 2016-2020 period.

The historic poor performance of SOEs equitization is about to change gradually. Furthermore, there are some questions to address from the investors perspective since the State plans to retain ownership from below 50% (in 106 enterprises), 50%- 65% (in 27 enterprises) and above 65% (in 4 enterprises) by 2020 across different sectors.

Despite the efforts to enhance investments in infrastructure and energy, many issues related to the implementation of current regulations that affect transparency and enterprise value remain unresolved, namely:

Share price

Currently share price as determined by the Government must be market price. There are cases when market price is determined based on the listed price or transaction price in the UpCom market. However, such market price determination is not fair and accurate when the shares are sold to strategic shareholders due to the nature of the participants in the securities markets (i.e., participants are mainly financial institutions and speculators) as well as the minority percentage of listed stock compared with the total shares of the listed companies. Indeed, share price when sold to strategic shareholders must be the lowest successful bid price in an IPO. In addition, share price of joint stock companies listed on UpCom market must not be within the price range of that securities code on the transfer date.

Public-private partnership (PPP)

Implementation of Decree 15 on PPP has shown certain limitations. Opening a new chapter of PPP requires further work in understanding strategic factors that make PPP effective and ensure that key risk minimizing solutions are undertaken properly.

Bankability is a crucial issue during the project structuring phase. The requirements for a project to be bankable differ from sector to sector or by jurisdictions. However, there are common factors that render the project bankability and raise its risk exposure such as restrictions on mortgaging land use rights to foreign lenders, complex investment approvals to investors (e.g., land acquisition process), and payment ability of an SOE off-taker. Therefore, practical preferential policies should be issued to strengthen PPP investment.

In addition, investment in the form of PPP is more complex than public investment. However, in the management of PPP projects, public investment laws and regulations have currently been applied, resulting in lengthy investment procedures. Furthermore, there is a problem regarding the limited resources allocated to authorized state agencies (ASAs). It is expected that Decision 522 on managing and using project development fund raised by Asia Development Bank and Agence française de développement (AFD) will help to support the ASAs in preparing for the project development.

With regard to infrastructure projects, the current legislation allows some flexibility regarding the use of incentives under the Investment Law. Nevertheless, the principle of the PPP framework is to develop highly-efficient projects through loans from private investors such banks or credit institutions and thus releasing the State from financial burdens. If local companies borrow from commercial state banks, this will not meet the PPP principle. In addition, the limited attractiveness of PPP framework also deter local and foreign non-State banks from offering loans.

It is worth considering a risk allocation framework that harmonizes with the general principle that risks should be allocated to parties that are in the best position to manage them or make reasonable determination of that risk.

Power project developments

One issue is project implementation timeline in Circular 43/2016/TT-BCT. Specifically, this legal instrument requires project development commitments from investors and requirements to seek the MOIT’s approval when there are delays in the project implementation. According to Circular 43, if a BOT project falls behind the agreed timeline, the adjustments will only be approved under limited exceptions such as (i) force majeure events; (ii) the misconduct of competent authorities or (iii) the misconduct of a third party. In practice, the schedule agreed between the MOIT and investors is difficult to meet as a result of complex project preparation process as well as involvement of many related parties.

Outlook on the EVFTA

The market access commitment in the EVFTA goes largely beyond both those in the WTO and other FTAs ratified by Vietnam, thereby giving EU enterprises the best possible access to the Vietnamese market. Accordingly, provisions on SOEs are considered the most ambitious disciplines that Vietnam has ever reached. Such rules will put private enterprises on an equal level with enterprises where the Government is the owner. Under the EVFTA, EU companies will be permitted to bid for contracts in infrastructure, power distribution, railway and healthcare projects the same as Vietnamese bidders.

Conclusion

Investment in infrastructure is considered as a strategic measure to reach sustainable development in Vietnam. Indeed, the government has improved the legal framework to support PPP model and privatization of energy and power sectors. However, it needs a much clearer plan in improving the quality of new regulations in order to ensure a fair and transparent process. Furthermore, the equitization progress seems to be disappointing since only 52 SOEs were equitized in 2016. In this context, to ensure the equitization efficiency, it is urgent to address the impact of these remaining issues on project’s viability and aim at the highest level of risk management. Finally, Decision 58 represents a good opportunity for EU companies to engage in large- scale PPP projects. However, investors need to carefully conduct a due diligence before any investment.

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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. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Thank you!

 

 

VIETNAM – Energie et électricité – Perspectives de l’Accord de Libre-Echange UE-Vietnam (EVFTA)

Le Vietnam a exprimé son engagement à se tourner vers l’énergie propre et verte tout en privilégiant l’énergie domestique par rapport aux buts sociaux, économiques et de sécurité énergétique. La hausse de la demande d’énergie pousse le Vietnam à développer des ressources internes qui nécessitent d’attirer l’investissement privé.

Jusqu’à présent, le Vietnam n’était pas autonome pour fournir l’énergie correspondant à la demande intérieure. De plus, pour atteindre l’efficacité énergétique, le Vietnam doit mettre en place une double action : développer le secteur local grâce à l’investissement privé et mettre en place des outils de gestion pour réduire le gaspillage d’électricité par les usagers.

Un rapport rendu par la Commission « Made in Vietnam Energy Plan » parvient à la conclusion que le Vietnam peut continuer à user des ressources énergétiques indigènes (gaz, charbon, eau, pétrole, vent, soleil) jusqu’à ce qu’une future énergie verte soit développée. Comme le secteur du charbon est censé être relancé, le renouveau des centrales à charbon devrait ralentir la détérioration de la qualité de l’air causée par les méga-usines à charbon. D’autres mesures devraient être prises par le Gouvernement.

Encourager le gaz naturel

Le Vietnam est doté de gaz naturel dont l’usage devrait être préféré à celui du charbon. En effet, le gaz naturel est un carburant plus flexible, moins cher et plus propre que le charbon. Selon plusieurs accords internationaux encourageant le développement de l’énergie verte, le Vietnam sera plus apte à trouver un financement pour le secteur de l’énergie renouvelable que pour le secteur du charbon.

L’investissement dans l’exploitation de gaz naturel devrait être fortement encouragé puisqu’il dérive de traités internationaux et représente une opportunité économique et environnementale intéressante. Le Gouvernement devrait donc préparer un cadre politique et règlementaire pour mieux assurer l’investissement étranger et local, le partage des technologies et de l’expérience, et pour développer avec succès les marchés.

De plus le développement de transformateurs de gaz en électricité offshore apparait comme étant une autre alternative favorable et économique à l’importation de charbon. Non seulement le coût de l’exploitation de gaz naturel est moins élevé que le coût de l’importation ou de la production de charbon en tenant compte des taxes et redevances liées au prix du gaz, mais cela attirerait aussi plus d’investisseurs. De plus, cela déchargerait l’Etat de lourdes dépenses puisque l’International Monetary Fund estime que les coûts liés à la santé et à l’environnement, avec le plan actuel de développement de l’énergie reposant sur le charbon, atteindrait 15 milliards de dollars par an d’ici 2030.

Développer les contrats d’achat d’électricité (PPA)

La German Agency for International Cooperation a formulé des recommandations concernant les contrats d’achats d’énergie éolienne et solaire (PPA) pour l’énergie renouvelable. Elles comprennent une évaluation précise des coûts et tarifs des PPA pour être plus finançables. Assurer leur mise en œuvre est fortement encouragé pour favoriser un développement durable et viable.

Les sociétés qui se sont engagées publiquement à utiliser l’énergie renouvelable et tous autres grands consommateurs d’électricité devraient avoir le droit de signer des contrats directs d’achat d’électricité (DPPA) avec des fournisseurs d’électricité. La législation vietnamienne n’autorise pas les DPPA dans les cas par exemple de Nike, Coca-Cola, Apple, Google, etc. En changeant cette politique, il y aura plus d’investissement étranger dans la chaine d’approvisionnement d’énergie verte.

 Contrôler l’utilisation de l’électricité et réduire le gaspillage d’eau

Avec une utilisation plus efficace de l’électricité et une réduction du gaspillage d’eau, le Vietnam serait considéré comme une alternative compétitive et viable pour l’investissement direct étranger. Accorder des avantages fiscaux aux ménages et entreprises qui réduiraient leur consommation d’énergie et encourager l’énergie solaire ou éolienne ou toute autre énergie renouvelable, dépressuriserait le système de distribution et éduquerait les usagers.

Le développement de systèmes de transformation des déchets en énergie (waste-to-energy) dans les communautés locales permettrait un double bénéfice : améliorer la santé et l’hygiène ainsi qu’augmenter l’approvisionnement électrique et faciliter sa distribution. Les émissions de carbone seraient automatiquement réduites.

La création d’une feuille de route du prix de l’électricité en utilisant le prix fixé par le marché avec le prix variable en fonction de l’usage résidentiel, commercial ou industriel, devrait prévaloir. La conviction que le prix de l’énergie restera subventionné par le Gouvernement supplante tous les efforts de promotion de l’investissement et de l’innovation dans le domaine de l’efficacité énergétique. Ainsi, la connaissance du coût de l’énergie peut inciter les consommateurs et les investisseurs à adopter des équipements et des procédés plus efficaces.

 Recommandations pour la règlementation du Gouvernement

Pour aider le Gouvernement vietnamien à atteindre ses buts environnementaux, le rehaussement de crédit de l’entreprise publique Electricity of Vietnam (EVN) devrait être développé. Garantir que l’EVN paiera pour des approvisionnements d’énergie renouvelable en augmentant le nombre de donneurs internationaux aidera à assurer la faisabilité du projet et à encourager l’investissement.

Un plan plus viable peut être mis en œuvre s’il s’inscrit dans un cadre politique et juridique adapté. La principale recommandation pour assurer un environnement futur plus vert est de diminuer la part des centrales à charbon dans le plan de développement de l’électricité pour 2030.

Un plan flexible pourrait être élaboré pour ajuster la demande future et pour stopper le risque d’une demande plus ou moins grande que celle qui est prévue. Ce plan pourrait attirer plus de sources d’investissement étrangères ou locales et réduire la dépendance par rapport aux gouvernements étrangers. Par ailleurs, l’établissement de normes obligatoires concernant l’efficacité énergétique et la construction des logements, bureaux ou le développement commercial, éduquerait et aurait un effet positif sur le secteur de l’énergie renouvelable.

Les perspectives de l’EVFTA

L’EVFTA signé le 2 décembre 2015, devrait entrer en vigueur d’ici janvier 2018. Les relations entre le Vietnam et l’UE seront fortement intensifiées, notamment parce que le Vietnam est le 2e à signer un tel accord avec l’UE – après Singapour qui ne concourt pas dans les mêmes domaines. Beaucoup d’investisseurs européens se dirigeront vers le Vietnam et apporteront des nouvelles technologies et techniques.

Un chapitre de l’EVFTA est dédié au développement durable et on s’attend à ce que l’UE, grande défenderesse de l’énergie verte et propre, incite le Vietnam à revoir son plan de développement d’électricité dans un futur proche.

 Les problématiques majeures

– Le secteur du charbon est sur le point d’être relancé au regard du plan de développement qui ouvre au Vietnam des alternatives plus propres et plus économiques ;

– L’International Monetary Fund a estimé que 15 milliards de dollars par an seraient dédiés aux dépenses de santés et d’hygiène. La purification de l’air ou l’arrêt de la détérioration de la qualité de l’air est un problème qui doit être résolu rapidement et qui est menacé par la relance du secteur énergétique du charbon ;

– Autoriser les DPPA stimulerait l’investissement et l’innovation dans le secteur de l’énergie verte et dépressuriserait le système de distribution ;

– Eduquer les fournisseurs, les usagers et les investisseurs à travers une feuille de route du prix de l’électricité, le système de waste-to-energy et les avantages fiscaux est le moyen le plus efficace de garantir l’observation des mesures prises par le Gouvernement relatives à l’environnement.

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Si vous avez des questions ou si vous voulez plus de détails sur cet article, n’hésitez pas à contacter Oliver Massmann à omassmann@duanemorris.com. Oliver Massmann est le Directeur Général de Duane Morris Vietnam LLC.

Merci beaucoup !

ALERTE : cet article est protégé par les droits d’auteur et par un logiciel permettant au titulaire des droits de le suivre. Ne distribuez pas cet article ou n’usez pas de son contenu sans le consentement écrit de l’auteur Oliver Massmann.