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VIETNAM ECONOMIC TIMES INTERVIEWING DR. OLIVER MASSMANN ON DEVELOPMENT IN THE FINANCIAL SERVICE SECTOR

1. It can be said that FDI inflows has become the growth momentum for Vietnam’s banking and finance industry over the past few years. How do you comment on the changes in the local financial services sector recently?

There has been increasing foreign investment in Vietnam’s banking and finance industry, especially via M&A at the end of 2017 and the beginning of 2018. Currently, foreign investors are very optimistic about Vietnam’s steady economic growth and plan to expand their coverage in the market. They believe economic development will drive more demand for banking and finance activities, thus more opportunities for growth in the sector. Moreover, M&A activities have helped local banks improve their financial capacity and competitiveness in the market. Local credit institutions have diversified their products and services, applied more modern technology in their operation. Under competition pressure from foreign credit institutions, local ones have no way but to also enhance banking governance capacity as well as human resources quality. These in turn help local credit institutions grow in a more stable and safe manner.

2. How have foreign financial organizations been contributing to improve Vietnam’s financial services sector so far?

Foreign financial organizations which have track recorded experience in other countries, with wide network and customer resources, when coming to Vietnam have brought in high technology, wide variety of finance and banking products/ services, as well as management/ governance capacity. Vietnam’s financial organizations have learnt a lot from these new players, thus modernizing their own system, creating more products/ services for Vietnamese customers who have not become a major part of customer portfolio of foreign financial organizations. These local organizations and Vietnam’s financial services have somehow developed to a modern, internationally standardized level, thus making them more attractive to foreign investors.

3. A number of free trade agreements (FTAs) that Vietnam will ratify shortly are expected to drive FDI flows into the country’ financial services sector in the coming time. How do you see about this prospect?

Both the CPTPP and the EVFTA have higher level of market access commitments than the WTO. In addition, investors are better protected under the CPTPP and the EVFTA in Vietnam. The Investor State Dispute Settlement (ISDS) will ensure highest standards of legal certainty and enforceability for investors. 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. Such legal certainties along with the Government’s attempts to improve investment environment drive more FDIs flows into the country.

4. How do you forecast about some investment trends of international financial organizations into Vietnam this year?

Given the Government’s recent encouragement of investing in current banks rather than establishing new ones, M&A in the sector will be very vibrant. It is the fact that in recent years many investors have expressed their interest in becoming shareholders in certain commercial banks, especially weak/ VND 0 banks that need assistance in recovery, handling bad debts and restructuring. Moreover, Basel II standards will begin to apply from 2020, so there will be huge demand for capital to meet such strict requirements. However, as local banks are still looking for appropriate partners, we expect more major successful deals in the upcoming time.

5. What should Vietnamese government do to make the local financial services sector more accessible to foreign investors?

The Government should open more room for foreign ownership in local financial institutions, as most of them have nearly reached the allowed limit. This will lure more foreign participation in the market, thus creating opportunities to local financial sectors to absorb experience, management capacity, technology, etc. to become a stable and promising market in the region. The Government should also continue to complete the legal framework on financial services sector to comply with its commitments under signed FTAs, thus raising investors’ confidence in the system and willingness to invest further.

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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.

Lawyer in Vietnam Oliver Massmann New Vietnam investment law won’t help public sector

“As only a minority of the shares is offered for sale, the investors are not quite interested.” Oliver Massmann, General Director, Duane Morris Vietnam LLC
A new investment law that took effect in July is likely to keep investment flowing to Vietnam’s private sector but won’t help Prime Minister Nguyen Tan Dung achieve this year’s target for selling minority stakes in several hundred public-sector firms.
Prime Minister Nguyen Tan Dung’s push to sell minority stakes and reduce bloat in nearly 300 Vietnamese state-owned firms by the end of the year is unlikely to be successful despite recent reforms in business laws implemented in July that make it easier for foreign investors to acquire companies.
“This seems to be an ambitious target as the number of privatized enterprises is only 61 in the first six months of 2015,” Oliver Massmann, general director at the Hanoi office of corporate law firm Duane Morris LLP, tells MGO via email. “Moreover, as only a minority of the shares is offered for sale, the investors are not quite interested in the transaction, especially when they would not have any decision-making power or their involvement in the management of the enterprise is very limited.”
Public sector firms account for 30 percent of Vietnam’s GDP, and the country has been seeking to privatize and restructure them in order to reduce their debt, confine spending to core business activities, and help them acquire strategic foreign partnerships. According to a piece Mr. Massmann wrote for industry magazine The Asia Miner last year, state enterprises own 70 percent of property in Vietnam and account for 60 percent of commercial bank credit.
But despite initiating the process of restructuring and reforming public firms several years ago, Vietnam has been unable so far to address a number of factors that are hampering the divestment process.
Vietnam law continues to cap foreign ownership at 49 percent in listed firms, which many public sector enterprises are. And in most cases Vietnam is not selling stakes anywhere near the 49 percent limit — or even large enough to give investors decision-blocking powers.
In addition, it remains difficult for investors to value the shares that are being offered, given the lack of adequate audit reports. As a result, the Vietnamese Ministry of Finance is carrying out valuations of each firm. As recently as last month, Asian Development Bank’s chief economist Aaron Batten noted that only 8 percent of state firms publish financial reports on their websites, according to a report in the English-language daily Viet Nam News.
Due to these unresolved factors, Vietnam also fell short of its disinvestment target in 2014. Now, with stock markets in the region wobbly, public sector firms are likely to have an even harder time than they did last year, when as many as 143 firms were able to privatize some shares, according to Vietnamese media reports.
Mr. Massmann clarified, however, that the lack of investor interest in public enterprises comes against the backdrop of an improved overall investment and business climate in the country.
The 2014 Investment Law, which went into effect July 1, does away with something called an investment certificate, a business registration for foreign investors that was supposed to be approved in 45 days but in practice took four to six months to process, according to Mr. Massmann’s firm.
The law has also reduced the number of “conditional” business activities, areas of the economy in which investors have to seek approval with provincial planning departments. Construction, urban planning and education continue to remain conditional activities, but even in these sectors, acquisitions should become much easier, business analysts say.
Meanwhile, earlier tax law changes have also drastically cut the hours businesses spend on tax preparation and filing,
Vietnam has made “positive changes to improve the business environment and strengthen the economy’s ability to compete in 2015 and 2016,” Mr. Massmann tells MGO.
The apparel and textile manufacturing sector has drawn a large share of investment this year and is likely to continue to do so. Seafood processing, electronics manufacturing and retail and banking are also likely to attract investment into next year.
Mr. Massmann also foresees that the government will try to make investing in state firms more attractive by increasing the share of equity for sale, something that has so far been resisted by the management of many state firms, who perhaps fear that equity shares that allow for closer scrutiny of corporate governance could expose poor management or even corruption.

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

Investments in the Energy Sector

Future market development and opportunities for foreign players
– Vietnam’s strategies and master plan with regard to the expansion of renewable energies by 2015 and visions for the years ahead…

General overview:

Vietnam’s requirement for renewable energies rises sustainably (in the past, in the present and in the future by an average of 10% per annum). The country becomes increasingly dependent on the world energy price because the growth of domestic energy sources is most likely not able to keep up with the economic growth rate. The high potential of the hydroelectric power will be consumed primarily in the next decade, with gas and coal supplies being limited, so that in the near future Vietnam will have to import coal for energy production. In this context, the Vietnamese government identified the necessity that the available resources of renewable energies have to be exploited and expanded, and the currently existing obstacles gradually removed.

Potential and current status of the expansion of renewable energies:

Vietnam has potential resources of renewable energies. These sources, which can be exploited and actually utilized, include small-scale hydropower, wind power, biomass, biogas, bio fuel, energy from domestic waste, solar energy and geothermal energy.

– Small-scale hydropower: taking into consideration the economic efficiency and profitability, it is classified as the most viable form of renewable energies. More than 1 000 locations show a potential for the development of small-scale hydropower in the range from 100 kW to 30 MW and a total capacity of more than 4 000.
– Wind power: Vietnam’s potential for wind power is classified as very high. However, as currently no reliable studies exist, the resources cannot be precisely quantified. In fact, available data on wind power potential show discrepancies. Figures from 1,785 MW up to more than 8 700 MW or even way above 100 000 MW are mentioned.
– Biomass: as the agriculture in Vietnam is widespread, so a high potential of power from biomass is available, too. The capacity for sustainable power production from biomass amounts to just 150 million tons per annum, 700 – 780 MW for electricity generation alone can be reached.
– Solar energy: Total number of sunshine hours up to 1400 – 3000 hours/year, the average total radiation amounts to 230 – 250 kcal/cm2, and strengthens towards the south. Solar energy can be used for water boiling, power production and other purposes, as e.g. drying, cooking etc.
– Geothermal energy: the recent figures show that Vietnam’s potential for geothermal energy amounts to about 200 – 340 MW.

Current status:
Currently, the consumption of renewable energies consists to the greatest extent in energy recovery from biomass in its original form. The proportion of energy from raw biomass to total energy requirement is high and amounts to roughly 38% of the entire final consumption of energy and about 30% of total initial energy consumption.

Power production for grid connection: There are only two kinds of small-scope hydropower with a capacity of over 300 MW; 30 MW from biomass (sugar cane waste) and 2.4 MW from household waste.

Network-independent power supply: Renewable energy sources have been utilized to supply rural areas, distant and remote territories as well as islands. 1.25 MW solar power, 1.2 MW wind power and more than 50 MW small and micro hydropower plants have been built and operated.

Biofuel: The government signed a decision on the approval of a project for “biofuel development”. In the country, 6 projects for ethanol production have been established, with each project showing an average capacity of 100 million liter /year. Several of the projects will start the production in 2010.

Summary of the strategies for the development of renewable energies and development targets in Vietnam

Development perspectives: – the development of renewable energy with economic feasibility is given priority; – the development of renewable energy to supply rural areas with electricity is fostered and supported; – support and investment in further development of certain technologies with regard to renewable energies which are not economically viable yet; – the development of renewable energies in cooperation with the government based on the principle of effective combination of market mechanisms; – the development of renewable energies in close relation to sustainable economic, social and environment-friendly development in order to reduce the effects of the climate change and the development of the environment.

Overall goals: – Improvement of the energy infrastructure, extension of energy sources, ensuring energy security, environmental protection and sustainable development, mitigation of damages with regard to the effects of climate changes; – to increase the national production and the national consumption of renewable energies; – Completion of the energy program in the mountainous region and contribution to the accomplishment of government objectives to provide electricity for rural areas.

Special goals: – to increase the share of renewable energies in the overall national energy production – from 1.3 billion kWh in 2008, by at least 7 billion kWh in 2015 and 20 billion in 2025; – by 2020, 100% of households in rural areas ought to be supplied with electricity; – increase of the number and the area of application of cooking devices which can be powered by solar energy, namely from the current very low percentage to 18 million m2 (in 2015) and 9 million m2 (in 2015); – increase and expansion of the area of application of biogas technologies from 0.12 million m3 of the current construction volume to 5 million m3 in 2015 and 15 million m3 in 2025; – to increase the number of households utilizing highly efficient biomass; – to increase the number of households using devices for conversion of efficient biomass (cooking devices with more than 30% efficiency) from the current low number to 1 million households in 2015 and 4 million households in 2025; – in 2015, the production of ethanol and vegetable oil should amount to 250 000 tons, which corresponds to 1% of the crude oil requirement. In 2015, the production of ethanol and bio-oil should reach 1.8 million tons and cover 5% of the crude oil requirement.

Solutions for implementation

General principles:

– all organizations, individuals, domestic enterprises, foreign enterprises and organizations have to be encouraged to participate; – promotion of projects concerning renewable energies in order to ensure better marketing;
– the government should support the national grid connection at the same or lower cost compared to avoidable economic cost of projects within the scope of renewable energies;
– the government should simplify the operation of the market; – preferential prices for renewable energies should be fixed on the basis of cost effectiveness aspects; – the government should support the use of renewable energies for the supply of rural areas with electricity;
– the government should support the initial phase for the promotion of installation and upgrading of technologies related to renewable energies for effective heat and fuel production and its use, based on the principles of standard and quality assurance.

Solutions and roadmap for implementation:
– establishing a national liaison body for the development of renewable energies; – preparation of a roadmap for organizational structure development; – preparation of a roadmap for supporting grid connection of the projects regarding renewable energies; – preparation of a roadmap for renewable energy development for heat and biofuel production; – preparation of most favorable terms of registration for CDM for projects based on renewable energies.

On financing of renewable energies in Vietnam: The basics

In order to be able to keep pace with growing requirement Vietnam’s for energy, an increase of the production capacity by approximately 4,000 MW per annum and its supply into the national grid are required.

Based on rapid shrinkage of Vietnamese gas and oil reserves (which will be exhausted within coming 20 to 30 years), the experts predict that, from 2020, in order to ensure the operation of its power plants Vietnam will have to import a volume of 100 million tons of coal per annum. Consequently, Vietnam will be dependent on the import of fossil fuels, unless it develops its enormous potential of renewable energy. Despite the negligible current capacities of renewable energy plants, Vietnam is blessed with considerable potential in this area which can be developed as alternative energy sources for the benefit of Vietnam. In spite of the fact that the current legal framework is very underdeveloped yet, the government, namely the Ministry of Industry and Trade, has adopted a constructive and supportive course which, in combination with political and financial assistance on the part of international institutions, makes this sector increasingly attractive for foreign investors.

Rich sources of clean energy

Vietnam has countless clean energy sources: Its abundance of streams, sources and nine main rivers gives Vietnam a place among the top 14 of countries with the best conditions for conversion of hydropower into electricity; its first-class coastal locations can boast a wind force of 860 to 1410 kWh/qm per annum or 800 to 1000 kWh/qm per annum; the tropical climate provides solar resources with a solar radiation between 3 and 4.5 kWh/gm/day in winter and about 4.5 to 6.5 kWh/qm/day in summer. Against this background, some experts even claim that Vietnam can completely cover its requirement for electricity by the use of renewable energies.

The government has gradually created a legal framework for the promotion of development of renewable energies in Vietnam. This new legislation does not establish any restriction for foreign investors that invest in renewable energies and introduces a favorable tariff for renewable power plants with an installed generation capacity of up to 30 kWh. According to this legislation, Electric of Vietnam (EVN), the only electric power company (and the only electricity buyer), will acquire electricity generated by such plants at approximately 11 US cent per kWh during peak load times of the dry season. The corporate income tax (CIT) for these project enterprises is limited to a rate of 10% and granted for a time frame of 15 years; in special circumstances, it can be even extended to just under 30 years. The entire equipment and machinery which are imported as inherent parts of solar or wind power plants are duty-free. Moreover, CDM projects (Clean Development Mechanism) are entitled to subventions provided that the production costs exceed the selling price.

… but challenges lie ahead …

Despite this country’s undisputable potential of resources of alternative energy, investors bringing in funds for Vietnam’s production efficiency within the scope of renewable energies are confronted with considerable challenges:

1 The lack of reliable legal framework conditions.

2 Protracted negotiations of electricity purchasing agreement with the EVN.

3 The lack of electricity supply tariffs which would be stringently required for successful renewable energy projects.

The supply tariff is a preferential price which is paid by power suppliers when purchasing electricity generated by an authorized producer of renewable energy for a timeframe from 15 to 20 years for electricity units fed into the grid. The payment for such renewable power plants is financed regularly by allocation of cost to all consumers as well as partly by government aid for renewable energies. The combination of preferential tariffs and the obligation to purchase enables feed-in tariffs to function in monopolistic or oligopolistic markets. Presently, the Vietnamese law does not provide for any feed-in tariffs. Article 31 of the Electricity Law provides principally that the producer price (i.e. the selling price ex power plant) must not exceed the tariff determined by the competent government agency.

EVN still refers to an out-dated rate according to Decision No. 2014/QD-BCN (of 2007) with a tariff for hydropower between 2 and 5 US$ cent and for combined gas turbine power plants from 3.5 to 4.7 US$ cent. Despite the fact that the preferential tariff was fixed for smaller renewable power plants, the price of 11 US$ cent /kWh is applied only during peak periods in the raining season. Energy purchasing at other times costs about 11 cent/kWh.

The main obstacle for electricity purchasing by EVN at an increased price is the low retail price. Even though from 2010 the electricity rates will be based on market prices, the prices for households being ultimate consumers remain a matter of annually determined fixed prices. Meanwhile, a fixed maximum price for consumers form the industry and service sector is applicable. Against the background of the risk of social unrest, a substantial increase of the retail price in the short term is not realizable.

The monopoly of the EVN is one of the main reasons why investors are discouraged from entering the renewable energy market. EVN is currently de facto the only buyer and controls the electricity feed-in, transmission and supply to ultimate consumers. A free competition in electricity generation can hardly be guaranteed because EVN, being the only buyer, operates also enterprises just in this sector. It was criticized that the National Load Dispatch Center or A0, a subdivision of EVN that is authorized to electricity feed-in for the entire national grid, does not draw on the capacity of expensive oil-fired or gas turbine power plants even in case of marginal underload of the power grid.

There is a great deal of administrative barriers which have to be broken down by investors when initiating a power project in Vietnam. A power plant project has to be in accord with the master plan at national level or at the level of a particular province. If a project is not listed in these master plans, it requires the approval on the part of the Prime Minister or the Ministry of Industry and Trade. Furthermore, before obtaining the investment certificate, foreign investors have to conclude a Power Purchase Agreement with the EVN. PPA negotiations and application for investment certificates as well as power plant operator’s licenses may take months if not years.

How can investors survive?

Projects in the renewable energy sector are – as long as no feed-in tariffs are introduced – not viable. Insofar, 2015 should be a good year with a prospect for implementation of a meaningful legislation in this area; namely, the national Master Plan for Renewable Energies and the Decree on power feed-in tariff. The adoption of such documents will clarify the attitude of the government towards the development in the renewable energy sector.

At this stage, a clear and feasible strategy regarding the investment form is a prerequisite for economic involvement in this growth sector. Project financing (as limited recourse financing) is a classical but effective approach to capital raising on a bigger scale. No large projects in the range of renewable energies have been realized in Vietnam so far, but there were already a number of financially intensive BOT power projects in the thermal power sector (namely Phu My 2.2 and Phu My 3) which can have a role model function also in the renewable energy sector. Moreover, on a case-by-case basis, preferential tariffs and other financial incentives as a basis for BOT projects can be negotiated.

Certified emission reductions (CER) trading can be taken into consideration because of continuing great demand for CERs from projects with high sustainability value for local community. The focus should be on CDM projects with smaller and medium financial volume as well as lower guarantee and delivery risk. However, CER trading should not be regarded as primary financing option. In view of yet very rudimentary legal framework for CDM projects as well as the lack of precise and official statistics on the basis of which future emissions would be determined, the validation necessary for such trading is much more difficult. It is to be stated that from 85 projects selected for validation in Vietnam yet only eight have been verified, and only one project (Rang Dong oilfield gas separation and utilization) was granted a CER.
In a growth market like Vietnam, well thought-out planning and thorough understanding of local legal situation and the obligatory approval procedures are basic prerequisites for successful investments. The renewable energy sector is no exception here.

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

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