12 May, 2015
1. Background To The Cabotage Laws In Force In Vietnam
In 1986 the Vietnamese Government launched a campaign of political and economic renewal by encouraging the establishment of private businesses, which were permitted to operate in a free market. Foreign ownership of companies was also permitted. However, this economic liberalization cleared the way for foreign competition in the domestic shipping market and as a result of this competition the Vietnamese Government felt it was necessary to impose significant restrictions on foreign owned vessels in order to protect Vietnam's domestic shipping industry.
The Maritime Code of Vietnam in 1990 (the "Maritime Code of 1990") introduced Vietnam's cabotage laws by giving priority to Vietnamese flagged vessels to perform the domestic carriage of cargoes, passengers and luggage. All ships flying foreign flags were required to obtain prior approvals/permits from the Minister of Transport before rendering services in Vietnamese waters.
Although the Maritime Code of 1990 introduced Vietnam's cabotage laws, the cabotage laws are not contained in a single unified law. They are found in various laws and their guidelines, including the 2005 Vietnam Maritime Code, the 2012 Labour Law, the 2004 Law on Inland Waterway Navigation and their guidelines as well as Vietnam’s WTO Commitments.
In general, the cabotage laws of Vietnam address three main areas: (i) restrictions on the flag of vessels operating in Vietnamese waters; (ii) corporate structure/ management; and (iii) crew requirements.
In relation to the flag restriction, the 2005 Vietnam Maritime Code (which is the prevailing code) and its guidelines require that for domestic carriage of cargoes, passengers and luggage priority must be given to seagoing vessels flying the Vietnamese flag.
There are three exceptions where foreign flagged vessels may operate in the Vietnamese waters, namely:
(i) to transport oversize, special heavylift cargoes which must be transported by specialized seagoing vessels;
(ii) to prevent or alleviate the consequences of natural disasters and epidemics (i.e. for the provision of emergency humanitarian relief); and
(iii) the carriage of passengers and luggage from cruise ships to the mainland and vice versa.
With regard to (ii) above, the exception is not limited to alleviating the consequences of natural disasters or epidemics in Vietnam. So for example, if there were a natural disaster in Cambodia, foreign flagged vessels would be able to obtain permits to carry aid destined for Cambodia, between Vietnamese ports before it was transshipped to the disaster zone.
In order to take advantage of the above listed exceptions, the cabotage laws require a charterer:
(i) to show that Vietnamese vessels do not have sufficient capacity/capability to perform the service ; and
(ii) the shipowners/managers must obtain special certificates/permits, which usually are valid for a period of six months to one year.
Although this might not seem any different to the general position which only requires Vietnamese flagged vessels to be given priority, there are some minor differences in practice and special permits may be granted even if Vietnamese flagged vessels are available/capable.
The special certificates/permits are issued by the Minister of Transport and/or the director of a port authority and depending on the circumstances of each case, the special certificates/permits should be issued before a non-Vietnamese flagged vessel performs a service in Vietnamese waters.
In practice, a large number of special permits have been issued to the owners of offshore support vessels ("OSVs") which are often chartered to platform owners, FPSO managers and some subsidiaries of the Vietnam Oil and Gas Group, PetroVietnam.
In some very limited cases, “giant” carriers, such as MAERSK, have been granted special permits for non-Vietnamese flagged vessels to perform specific tasks in Vietnamese waters. For example, Maersk obtained a special permit to allow it to use a non-Vietnamese flagged vessel to collect its own empty containers from the five major Vietnamese seaports. However, this apparent relaxing of the cabotage laws was met with resistance from domestic shipping companies who have applied pressure to the authorities to further tighten the cabotage laws and to allow such exceptional permits for single voyages only.
In response, the Minister of Transport currently is refusing to grant similar “special” permits to giantcarriers and the domestic shipping companies are pressing the Government to have the current cabotage laws amended so that the domestic carriage of goods is performed exclusively by Vietnamese flagged vessels, instead of them simply being given priority and amendment to the existing Maritime Code is expected in the near future. However, it should be noted that special permits are still being granted to OSV owners, who enjoy strong support from their powerful Vietnamese charterers, who are involved in operating oil and gas platforms and FPSOs in Vietnamese waters.
A possible solution for an owner interested in operating in Vietnamese waters, for certain limited services, is to establish a joint venture in Vietnam and then then to bareboat charter its vessels to the joint venture. This will permit those vessels which are bareboat chartered to the joint venture to fly the Vietnamese flag and be allowed, in certain restricted circumstances, to operate in Vietnamese waters during the charter term.
However, to avoid competition from foreign owners by way of such joint venture companies, the cabotage laws in Vietnam impose restrictions on the ownership and control of vessel owning companies. Joint ventures are permitted only if the total share owned by foreign investor does not exceed 49%, so that control should remain with the Vietnamese partner to the joint venture.
Vessels owned by joint venture companies, which are part owned by foreign investors are permitted to perform only in some special services in the cabotage area, but exactly what services is uncertain with special permits being offered on a case by case basis. Based on experience, we know that part foreign owned joint venture companies have been permitted to perform towage and offshore seismic research services. The current uncertainty is in part due to changes which are being made to comply with Vietnam's WTO commitments, which require Vietnam to allow greater freedom to non-Vietnamese owned vessels. There have been discussions between the various concerned Ministries in Vietnam regarding the changes to be made to the existing cabotage laws and exactly what services part foreign owned joint venture companies will be permitted to perform but as yet there is no clear guidance. It remains the case that for the majority of services, such as the carriage of goods and/or passengers within Vietnamese waters and between Vietnamese ports priority must still be given to wholly Vietnamese owned vessels.
Vietnamese cabotage laws regarding the nationality of the crew have been relaxed. The laws are now concerned only with the flag of the vessel and the domicile/control of the owning company. It used to be the case that the cabotage laws also extended to cover the nationality of the crews on board. It was a requirement that two-thirds of the total crew of vessels operating in Vietnamese waters were Vietnamese nationals as well as the leading officers, i.e. the captain and chief officer. In 2012, such conditions were removed but the current laws require foreign crews to obtain certificate endorsements from the Vietnam Maritime Administration before serving onboard a ship rendering coastal cabotage business.
5. Laws Extended?
The cabotage laws in force in Vietnam have played a significant role in promoting the development of Vietnam's domestic shipping industry. In a recent interview, the Director of the Vietnam Maritime Administration stated that around 100% of domestic cargoes have been carried by Vietnamese seagoing vessels and the number of container vessels flying the Vietnamese flag and which operate between Vietnam's seaports has increased by more than 50% in the last two years. From the perspective of Vietnam's domestic shipping industry the cabotage laws undoubtedly have been a success. It is therefore understandable that they should want to see the existing laws maintained or extended. Given the domestic owners' apparent influence we expect that Vietnam will remain a cabotage area for the foreseeable future and that the protection afforded to domestic shipping industry will be extended.
For further information, please contact:
Chris Metcalf, Partner, Clyde & Co