Although the last year was a shaky one for Vietnam with high inflation, project delays, and an extremely high-profile default by state-owned shipbuilder Vinashin, the outlook for infrastructure work is bright this year. With a dynamic middle class that continues to grow, the need for road, rail and power projects has never been higher. The Vietnamese government has also taken note, and has been issuing PPP regulations to help stimulate the market as well as taking measures to bring inflation under control. As such, lawyers remain optimistic that more reforms are on the way and that opportunities remain plentiful.
“2011 was a difficult year to do business in Vietnam for law firms because the economic crisis has affected clients’ ability to implement and expand their projects in Vietnam, as well as constrained their budget for legal services,” says Oliver Massmann, partner at Duane Morris Vietnam. However, the prospects for 2012 seem a little brighter. “In terms of the market, we are still seeing an increase in infrastructure work, a definite trend,” says Martin Desautels, regional managing partner at DFDL Mekong.
Some of those projects include the headline grabbing construction of the country’s first nuclear reactor, set to be operational in 2020. Reuters reports that Vietnam intends to follow that up with another 14 reactors by 2030, and that the government has signed deals with Japan and Russia to supply the Ninh Thuận 1 and 2 reactors, although it has not decided which type to buy.
Other high-profile projects include the $1.9 billion 1240 MW Mong Duong II coal fired power project in Northern Vietnam, the development of which was handled by Freshfields duo Tony Foster (managing partner of the Vietnam offices) and Robert Longeran (counsel in Hong Kong), which had earned the Thomson Reuters, Asia Pacific Deal of the Year for the firm at the PFI Awards.
Market sources note an emerging trend of renewable energy projects, many of which are in the pipeline. But questions surround their implementation and completion. Tran Tuan Phong, VILAF’s Hanoi partner, elaborates: “For example, the IFC has entered into a joint venture with SN power (a global hydro firm) for a clean energy investment (of one GW of hydro power capacity). Some foreign funds also have their own green energy investment funds like Indochina Capital. We have also gotten involved with wind farm projects involving joint ventures with foreign investors. But it’s become difficult because the negotiations have become very long.”
Exemplifying the trend is a recent government report which says that in late 2011, the Saigon Industrial Corporation, the Ho Chi Minh City Power Corporation, Neptech, and YnS-OCBM (Russia) worked with each other to pilot the production of three wind turbines worth $4.8 million using Russian YnS technology.
At the time of writing, the latest news as reported by Reuters was that Siam Cement, one of Thailand's top industrial conglomerates, had signed a deal with partners under which it would take a 46 percent stake in a $4.5 billion petrochemical complex in Vietnam.
Dawn of the public-private partnership (PPP)
The Vietnamese government has released PPP regulations with an eye to stimulate the sector. “The Vietnamese government is trying to encourage other types of infrastructure projects,” affirms Dao Nguyen, partner at Mayer Brown JSM. “In addition to the more traditional forms of investment, such as BOT, BT, and BTO for example, Vietnam is also considering the PPP form of investment, currently implemented in neighbouring countries such as Singapore,” she says.
Desautels elaborates, saying: “Like anything in Vietnam, it will be a long road! There are already some pilot projects that have started, and a number of PPPs that have been approved recently in the water and transport sectors. We are seeing interest from foreign investors, but it’s probably too early to see the real effect.”
Foster also urges caution when he says: “It will take a substantial period of time before these regulations are relevant for private investors. The infrastructure isn’t in place yet. There’s a lot of work left to be done to make it meaningful.”
Massmann is even more conservative, stating that: “The mere provision of (a) general legal framework for PPP projects cannot bring out immediate investment increase. Especially as before Decision 71 (issuing PPP regulations), the government had already issued Decree 108 on investments in the form of BOT, BT and BT contracts in 2009. Although Decision 71 has clarified some important points with regard to PPP regulations, it is unfair to say that it contains significant reforms compared with Decree 108.”
“PPPs are just another form of the investment, but it doesn’t matter what the form is. At the end of the day, the investor has to be satisfied by the commercial viability of the project in terms of generating return,” details Hop Dang, Hanoi partner at Allens Arthur Robinson.
“It’s a difficult question as investors often demand a very high level of comfort from the Vietnamese government before they can invest or lend the money. While the government wants the projects to happen, they find it hard to overcommit themselves. They have to strike the right balance in order to promote these projects.”
Overall though, the regulations are generally perceived as a positive step forward, albeit one that could take considerable time to bring more capital to the infrastructure sector. “It’s a good signal. Now the government will help investors participate,” confirms Phong of VILAF.
Follow the money
Where is most of the foreign investment coming from? Market sources reveal that the trend identified earlier by ALB (January 2012) of Japanese and Korean investment, remains strong. Singapore and China have also increased their interest in Vietnam by investing more heavily in infrastructure projects.
Nguyen Gia Huy Chuong, managing partner at P&P Law Firm, reveals this when he says: “For infrastructure, the private investors I have seen, most of them come from Singapore or Hong Kong. For example, Temasek has done a lot of work here and I’ve seen several Vietnam-Singapore joint venture companies investing.”
Phong also affirms this when he says: “In my practice, the key financing is from Japan and also looking a bit towards China. It’s very difficult for the Western world right now to invest in Asia.”
Frederick Burke, Ho Chi Minh City partner at Baker & McKenzie, elaborates on the Japanese aspect of investment, saying: “Especially in northern Vietnam, the highway network has been largely supported by Japan’s Official Development Assistance. It’s for strategic reasons; they don’t want to be dependent on China for low-end manufacturing production.”
One trend worth keeping an eye on is the marked increase of investment from India into Vietnam. For instance, DFDL Mekong has recently started an India desk in order to capitalise on this development. Vinay Ahuja, head of the India desk at DFDL Mekong says: “A lot of these big Indian conglomerates, such as the Aditya Birla Group and the Tata Group, are expanding their footprints in the region both in terms of business portfolios and geography, going into expansion mode. We also have a lot of other Indian clients that are very interested in the hydro and mining sector.”
As the steady stream of projects work appears set to continue, legal practitioners have several salient concerns about undertaking infrastructure work in Vietnam. The one repeated most by market sources is the monopoly and inefficiency of state-owned enterprises. A recently published McKinsey report puts state-owned enterprises at producing 40 percent of the country’s output, which effectively means that their importance to the economy cannot be understated.
Massmann explains this when he says: “In order to boost investment in infrastructure, the government should consider restructuring sectoral regulations to enable a competitive market. For example, in order to boost investment in the power sector, the government has to remove the monopoly position of EVN (VietNam Electricity), and increase tariff for purchasing electricity from independent power plants.”
His sentiments find general approval as Burke says: “A lot of people are really serious about exploring clean energy alternatives such as bioenergy, wind, power and tidal. But how can you mobilise these resources? The issue is the very strong influence of the traditional energy companies in Vietnam, PetroVietnam, Vinacoal and EVN (the monopoly power distributor). They are very invested in carbon-based energy, and not keen on promoting alternate energy sources. So, incentives have been hard to come by here. It’s a policy obstacle.”
Michael Lee, partner and head of the corporate/commercial team at Tilleke & Gibbins Vietnam, further notes that: “The biggest problem besides high inflation, the trade deficit, and the devaluation of the dong, is that state-owned enterprises control a big chunk of the economy and that creates inefficiency. They need to privatise, and are trying to do it. But currently, the situation is slowing down the economy and the development here.”
Leaving aside state-owned enterprises, another fundamental issue, according to Foster, “is the ability of the utility to pay the price for power that result from these projects.” Currently, the Vietnamese government has a power policy that mandates low electricity prices to ensure industrial activity. As a result, gas sales to power plants are also priced well below market value. Commentators hope that the government will implement a policy allowing foreign investors to sell their gas on the market for a fair price; a move that would provide huge incentives and open up investment. At the moment, the situation is risky for foreign companies that plan to invest in supplying gas, as they might end up supplying their gas for a very low price or may have to abandon the project altogether at great cost.
Hand in hand with this stumbling block is another issue regarding government guarantees for foreign conversions. Dang elaborates: “A key area of concern is how to get foreign currency assurances. How can they (foreign investors) convert and remit them? Can the government guarantee these things to investors in a contractual document?”
The situation remains murky, but is one of great importance for infrastructure investors.
Many practitioners hope that legislative measures are on the way. “Economic reforms would help boost foreign investments in Vietnam. Economic reforms, which help attract more investors to Vietnam, will accelerate legal reforms and help build up a more transparent and fair legal environment,” says Massmann.
Desautels agrees, saying: “There are a lot of overlapping regulations and a lot of government procedures. The government knows this, and there are different programs aimed at improving the procedures related to investment. It has improved since the late 90s, but still a lot of improvements to be implemented in the processes before the administrative burden on the foreign investor lessen even more.” Burke details this when he says: “Infrastructure projects involve a lot of land issues that include the relocation of people and state liabilities. It’s appropriate that they have a deliberate process for that. It’s fair to say Vietnam is not unusual; it’s just a learning curve for foreign investors.”
Nguyen concludes by saying that: “There is a strong demand for, and interest in, infrastructure projects in Vietnam. However, with a limited track record and often ambiguous guidelines, the implementation process may be delayed in practice.”
At the time of writing, Reuters’ most recent reporting indicated that Vietnam's only crude refinery, the Dung Quat facility, seeks to sell a 49 percent stake to foreign investors to raise funds and boost its capacity by more than half. Three foreign firms, including Japan’s Nippon Oil & Energy Corp, Petróleos de Venezuela and another from South Korea, have been in talks to buy the stake.
Clearly, activity in this sector is not going to let up anytime soon. As demand in Vietnam for infrastructure continues to increase, the market and government can only try and keep pace. ALB