Companies upbeat over 'new normal' business climate: EuroCham chairman

Foreign confidence in Vietnam's investment climate is showing an upward trend as business leaders predict an even more positive outlook, says Alain Cany, chairman of EuroCham Vietnam.

Life in Vietnam has returned to normal post pandemic - a situation one could hardly imagine last year. What about the “life” of EuroCham corporate members these days, in the “new normal”?

The recent reopening of tourism in Vietnam has brought much excitement from all. Those outside Vietnam can now easily visit family, friends, and business partners in Vietnam under pre-pandemic conditions. This is most welcome.

EuroCham's Business Climate Index (BCI), our regular survey of European business leaders and investors, also shows increasing confidence in Vietnam's investment climate. It rose to 73 during the first quarter of 2022, its highest level since the fourth wave of the pandemic. This is a 58-point rise from the third quarter of 2021. This upward trend is expected to continue next quarter, with business leaders predicting an even more positive outlook.

This all goes to show that our members are very optimistic about the country's current “new normal” investment climate.

2022 marked the second-year anniversary of the EU-Vietnam Free Trade Agreement (EVFTA) enforcement. The benefits are obvious. Is there anything in the implementation that fails to meet your expectation?

First, to maximise the impacts of the EVFTA, all EU member states must ratify the EU-Vietnam Investment Protection Agreement (EVIPA), as its ratification would establish commitments for fair and equitable treatment, investment security, and a clear legal framework.

Vietnamese exports to the EU are currently restricted by strict EVFTA rules of origin. Due to Vietnam's dependence on inputs from third countries, Vietnamese businesses have had trouble optimising tariff exemption benefits.

Pharmaceutical exports to Vietnam have been impeded by regulatory difficulties, like for marketing authorisations (MAs). The granting of new MAs in June 2022 was a positive sign, but it does not represent a major shift in the sector.

Similarly, during transition periods meant to provide time for Vietnam to adapt to newly implemented tariff regimes, new trade barriers were introduced. Foreign investors have lost confidence as a result.

Non-tariff measures (NTMs) are also prevalent in Vietnam. The country’s high number of legal documents and procedures, for example, increase trade costs. These NTMs violate the spirit of the EVFTA and should be removed.

The controversial draft Power Development Plan VIII is drawing attention and raising concerns among investors. What are your recommendations regarding the latest draft, from fossil fuels to renewables to LNG-to-power, as well as the issue of direct power purchase agreements (DPPA)?

Investing in power transmission, especially grid development, should be Vietnam's priority. Currently though, the bidding process for projects remains unclear, and obtaining permissions is challenging. Incentives and transparent legal frameworks are needed to correct this and promote private investment.

Vietnam should also encourage renewable energy producers to install grid-connected storage systems to reduce grid pressure. Following this, renewable energy capacity should be prioritised, while coal power must be reduced.

Vietnam should also develop clean energy production in its factories. Off-site use of this energy, however, requires direct power purchase agreements (DPPAs). Along with lowering government regulations for clean energy behind-the-meter plants, DPPAs would make clean energy more accessible to consumers and reduce strain on Vietnam's grid.

In addition, incentives are needed to encourage power consumers to invest in energy efficiency.

Several years ago, public-private partnership (PPP) was touted as a significant measure for cash-thirsty Vietnam to lure private capital into major transport infrastructure projects. The PPP model seems to be diminishing in the country these days. For instance, many North-South Expressway projects have turned wholly state-funded, instead of PPP as initially planned. What should be done to make PPP projects bankable for foreign investors while making the Vietnamese government feel their interests are secured?

International sponsors should be able to develop projects through unsolicited proposals or direct appointments in high-priority sectors to establish standards for documentation and risk allocation. If this is done, foreign investors will be more likely to consider financing future projects.

In addition, under the Law on Land, foreign lenders may not be granted security over "land and assets attached to it". Unfortunately, this inability to mortgage PPP land undermines the Law on PPP's land-use incentives, and severely restricts the bankability of PPP projects in Vietnam.

The Law on PPP also specifies that PPP must be governed by Vietnamese law. This contrasts with the current system in which they are governed by foreign laws under specific circumstances outlined in Vietnamese law.

To secure funding for large-scale PPP projects, neutral and well-developed international laws are essential. Though the Law on PPP says that “issues not yet regulated by Vietnamese law” may be set out in PPP contracts so long as they are not contrary to “the fundamental principles of Vietnamese law”, this does not address the concerns of foreign investors and could prevent investment.

The government is due to establish a task group specialized in implementing the “Global Minimum Tax” rule in the OECD’s Base Erosion and Profit Shifting (BEPS) actions. The adoption of a global minimum tax rate is expected to result in the reduction or nullification of the tax incentives that many businesses are or will be entitled to under the current applicable laws. What are your suggestions to the government on the implementation of the new rule, while maintaining an attractive business environment in Vietnam?

A global minimum tax would increase tax collection in many countries, including Vietnam. This would help fund sustainable growth initiatives and other high-cost high-reward policies. If appropriate measures aren't taken though, a global minimum tax could hurt Vietnam's attractiveness among foreign firms.

Under the global minimum tax, which sets a 15% corporate income tax (CIT) threshold, tax incentives that result in effective tax rates below this risk losing tax revenue to the country where a foreign firm is based, according to the Income Inclusion Rule (IIR).

To attract FDI without losing tax revenue, Vietnam must align its tax policies with global minimum tax regulations and create FDI incentives. Incentives in HR investments, equipment procurement, and R&D, for instance, would help.

These issues should be studied by a working group with representatives from relevant ministries and agencies, foreign business leaders, and international tax, law, and investment experts, since the global minimum tax’s effects are not yet fully understood.

Do you see changes in the investment interest of European companies eyeing to invest or expand in Vietnam? Are they interested in the areas that Prime Minister Pham Minh Chinh said Vietnam wants to see more FDI in like green transition, circular economy, renewable energy, and digital transformation?

Our members have supported increased investment in these sectors due to their importance in meeting consumer needs, improving efficiency, and facilitating Vietnam's transition to an upper-middle-income, developing country with a strong, sustainable economy.

As Europe is a major producer of high-quality, digital technology, European companies have played a large role in Vietnam's digital transition. With the government prioritising high-quality digital tech investment and the EVFTA benefitting European exports in this field, this trend is becoming clearer.

Likewise, several high-profile European FDI projects have demonstrated how sustainability drives growth. Lego's $1 billion investment in Binh Duong, for example, will allow it to build its first carbon-neutral factory and generate all its energy on site in addition to creating 4,000 jobs.

The German Agency for International Cooperation (GIZ) and Decathlon are also working together to help Vietnamese suppliers adapt to climate change, use water and energy efficiently, and manage chemicals. Decathlon and several of our other members are also working to decarbonise their supply chains and increase renewable energy usage.

To take advantage of the green enthusiasm in Vietnam, EuroCham will host GEFE 2022 (Green Economy Forum & Exhibition) from Nov. 28 to 30 in Ho Chi Minh City. Government officials, business leaders, academics, and students from Europe, Vietnam, and the ASEAN region will attend this event to discuss, find, and apply green European solutions in Vietnam. This event will facilitate sustainable development based on Vietnam's COP26 commitments and its National Green Growth Strategy, by transferring European technologies, funds, and knowledge to Vietnamese businesses.