21 December, 2018
A. Outlook
Vietnam´s mining industry is still largely undeveloped. Most operations are insufficient and harm the environment.
However, there is great potential due to the variety of unexploited mineral resources. The discovery and mining of new minerals can be significantly facilitated with Foreign Direct Investments (FDIs). This provides the opportunity to use international, modern, efficient, sustainable and secure technologies for the procedure. This implementation would have a huge impact on Vietnam’s economic growth and would lead to a reduction of public debt.
For most countries in the world, mining has been the cornerstone of economic growth and infrastructural development. It has been estimated that only about 10 percent of Vietnam’s base metal and precious metal resources have been discovered so far. This is because the country has so far never been methodically researched with modern technologies and the right know-how to find deeper, richer or larger deposits. The focus of the Vietnamese mining industry has been almost exclusively on less expensive, easily findable or near-surface energy materials such as coal and bulk commodities such as iron ore, bauxite, sand and limestone.
Vietnam’s largest state-owned mining company is Vinacomin. According to their estimates, more than 1.500 mining companies are registered in Vietnam, of which about 55% are state-owned, 36% by private Vietnamese companies and only 9% by foreigners.
B. Lack of technology
Vinacomin is the first company to acknowledge the major shortcomings and confirmed the existence of obsolete technologies, lack of mechanization, inadequate infrastructure, large workforce but with low productivity, excessive energy consumption, high safety deficiencies and unacceptable environmental pollution. In Decision No. 2356-TKV of 15 June 2016, Vinacomin has now set its priority on technological innovation.
The challenge, therefore, is to modernize the Vietnamese mining industry and make innovative technologies accessible.
To do this, the government must create incentives to encourage investors, otherwise FDI’s hardly ever come to Vietnam.
C. Government´s mining policies and issues
The current mining policy in Vietnam has two major weaknesses. First, the existing laws are unstructured and are therefore applied inconsistently. There is some evidence that there are conflicting interpretations of fees, tariffs, environmental protection fees, product quality and to it related mining taxation issues between local regional authorities and ministries such as the Ministry of Natural Resources and Environment, Ministry of Industry and Trade and the Ministry of Finance.
Second, Vietnam is one of the countries with the highest taxes on mining worldwide. This has a negative impact on investments in modern technologies and technological innovations. All of this leads to further problems such as the continuation of inefficient and wasteful mining practices, the deterioration of well-known mineral deposits and the environment of Vietnam as well as the increase of illegal mining and tax evasion. Vietnam’s royalties, export duties and other charges are far above other comparable countries. As an example, the royalty for nickel is 10%, but other minerals such as tungsten and gold have even higher license rates. Many mining projects therefore fail due to lack of sufficient profitability.
Positively, there is, however one exception. A hitherto highly successful project of modern technologies and international standards on a Vietnamese mining operation is the Nui Phao. This is the largest tungsten production mine in the world to date, contributing significant value to Vietnam’s economy by converting the ore into purified chemical products before exporting. However, as with all mining projects, future development will depend on the continued evolution of global commodity prices, variability of ore grades, mining conditions, etc., and therefore the prohibitively high taxes themselves may jeopardize this project.
The reasons for the high taxation are to some extent comprehensible or the background can be explained. Hereby the aim is, to maximize benefits for the government and Vietnam´s economy. However, this can not be achieved if the taxes are so high that mines are closed because they are not profitable. As a result, this leads to a change to the contrary, namely to the loss of valuable tax revenue, because first, the tax revenue source for the government is lost (mining companies) and secondly, the number of people trying to circumvent the tax rules increases. The former also leads to the loss of legal employment opportunities.
D. Solutions and conclusion
A solution to the above mentioned conflicting legislation could be to create clear and unambiguous legal regulations. Alternatively, there is a possibility to be practice-oriented and to ensure a uniform application of the law through state support in advising the mining industry and coordinating intergovernmental departments. The effectiveness of this coordination and the associated transparency would be a clear incentive for the providers of FDI as well as for strong local investors.
Regarding the high taxes for mining, the problem can be solved by a fair tax system for the government and investors.
The taxes should simply be reduced, which means no negative consequences for Vietnam’s economic budget (see above).
The advantages associated with the solutions are obvious. It goes without saying that the richest mineral deposits are located in more remote and mountainous areas. The population in these areas is usually characterized by particular poverty and the infrastructure is in need. A modern mining project would have a positive impact on both. On the one hand, every mining project creates a large number of jobs, local goods are promoted and orders are distributed to service providers. On the other hand, the infrastructure will develop significantly, because modern and efficient mining is hardly possible without a good infrastructure, so that the construction companies are forced to build the infrastructure itself.
To sum it up, there are essentially three solution concepts. First, existing mining legislation could be revised and more transparent, clearer, investor-friendly rules could be created. Second, state co-ordination of law enforcement can be established to ensure a consistent and effective application of the relevant rules. Third, a fair tax system for government and investors likewise should be created.
E. Outlook on Major Trade Agreements TPP 11, EUVNFTA and Investment Protection Agreement
In January 2017, US President Donald Trump decided to withdraw from the US’ participation in the TPP. In November 2017, the remaining TPP members met at the APEC meetings and concluded about pushing forward the now called CPTPP (TPP 11) without the USA. The provision of the agreement specified that it enters into effect 60 days after ratification by at least 50% of the signatories (six of the eleven participating countries). The sixth nation to ratify the deal was Australia on 31 October 2018, therefore the agreement will finally come into force on 30 December 2018. Recently, on the 12th November 2018, Vietnam has officially become the seventh member of the CPTPP.
The CPTPP is targeting to eliminate tariff lines and custom duties among member states on certain goods and commodities to 100%. The Agreement could bring the needed FDI to the mining industry in Vietnam. Hence new mining methods and better technologies will be introduced to the mining industry and this will lead to the spare of environment. To be able to benefit from the TPP 11, Vietnam has to amend its mining regulations, particularly, the above mentioned taxes and royalty rates must be reduced.
One another notable major trade agreement is the European Union Vietnam Free Trade Agreement (EUVNFTA). The EUVNFTA offers great opportunity to access new markets for both the EU and Vietnam and to bring more capital into Vietnam due easier access and reduction of almost all tariffs of 99%, as well as obligation to provide better conditions for workers, which is a key aspect in terms of working at mining projects. In addition, the EUVNFTA will boost the most economic sectors in Vietnam. Due to this significant boost, the government might reconsider its mining tax regulations. If that step will be eventually taken, there are good prospects for investors that bring modern technologies and international standards to the country, that their mining project will be successful just as the Nui Phao operation is.
To enable at least some parts of the FTA to be ratified more speedily at EU level, the EU and Vietnam agreed to take provisions on investment, for which Member State ratification is required, out of the main agreement and put them in a separate Investment Protection Agreement (IPA). Currently both the FTA and IPA are expected to be formally submitted to the Council in late 2018, possibly enabling the FTA to come into force in the second half of 2019.
Furthermore, the Investor State Dispute Settlement (ISDS) will ensure highest standards of legal certainty and enforceability and protection for investors. Every investor should use these standards. It is going to be applied under the TPP 11 and the EUVNFTA. 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.
Further securities come with the Government Procurement Agreement (GPA), which is going to be part of the TPP 11 and the EUVNFTA. The GPA in both agreements, mainly deals with the requirement to treat bidders or domestic bidders with investment capital and Vietnamese bidders equally when a government buys goods or requests for a service worth over the specified threshold. Vietnam undertakes to timely publish information on tender, allow sufficient time for bidders to prepare for and submit bids, maintain confidentiality of tenders. The GPA in both agreements also requires its Parties assess bids based on fair and objective principles, evaluate and award bids only based on criteria set out in notices and tender documentation, create an effective regime for complaints and settling disputes, etc.
This instrument will ensure a fair competition and projects of quality and efficient developing processes.
For further information, please contact:
Oliver Massmann, Partner, Duane Morris
omassmann@duanemorris.com
