What will your intellectual property be bankable
Lawyer in Vietnam Dr. Oliver Massmann Solar Energie action plan to be able to close deals with the new electricity purchase agreement
Interview with Dr. Oliver Massmann
- What significant changes does the new PPA bring for the solar energy sector?
Decision 11 introduces the feed-in tariff (FiT) rate of 9.35 US cents per kWh. The FiT rate is only to be used for solar energy projects which are to be connected to the power grid or which are already there. The solar cells must have an efficiency greater than 15%. The FiT rate depends on the exchange rate between the VND and the US dollar. The rate remains stable throughout the year. However, it is adjusted by the Vietnamese State Bank on the last working day of the year for the following year.
As a result, financial planning becomes easier and investors are granted certain security, such as protection against currency fluctuations.
- Which aspects of the new PPA have changed compared to the draft from April 2017?
Compared to the draft PPA, the FiT rate is now given in the final version of the PPA. Now there is a reference to the adjustments of the FiT in case of USD / VND exchange rate fluctuations.
The Ministry of Planning and Investment made no further major changes to the weaknesses of the April 2017 draft.
The investor still has the greatest risk to shoulder.
- Is the PPA bankable?
No! Generally speaking, the final version of the PPA is not bankable.
- Is there a way to make the PPA bankable?
Yes! You can make the solar energy PPA bankable. We have 20 years of banking experience building PPAs in gas and coal power plants and wind power in Vietnam. The investor should use all business channels and involve experienced negotiators to assist in making the PPA bankable. It is a matter of negotiation and experience in the field. Decision 11 guarantees investors the opportunity to negotiate with EVN. The price remains, it is not negotiable.
Agreements such as the EU - Vietnam Free Trade Agreement (“EVFTA”) or the Trans-Pacific Partnership (“TPP”), which is now called the Comprehensive and Ongoing Agreement of the Trans-Pacific Partnership (“CPTPP”), established one major milestone for the bankability of the PPA.
The EVFTA was signed in 2015 and is expected to be signed by all member states by 2018. Then it should probably come into force in 2019. The EVFTA is expected to increase Vietnam's GDP and liberalize Vietnam's economy. Another aspect is the elimination of almost all tariffs (over 99% of all tariff lines). As a result, there will be a huge impact on trade development and investor interest.
Another important agreement is the CPTPP. On February 4, 2016, the TPP was signed by 12 states. The signatory states together accounted for 28% of global trade and 40% of world GDP. However, US President Trump decided at the beginning of 2017 that the US would withdraw from the TPP. The remaining 11 member states discussed the future of the TPP at the APEC in Da Nang, Vietnam and agreed to bring the TPP into force under the new name of the CPTPP. Furthermore, the states decided to work out a new framework agreement, which should bring about changes to the previous TPP. The biggest changes have been made in the area of intellectual property. The protection of copyrights and the special protection of biologics or pharmaceuticals, for example, has been reduced.
Nevertheless, the market access requirements remain the same as those of the first TPP. Internal negotiations have to take place in certain member states. States also need time to adapt their laws to the CPTPP rules. The negotiators have set themselves the goal of signing the revised TPP for the first quarter of 2018. After the ratification of the CPTPP in at least 6 countries, it comes into force.
The CPTPP guarantees access to more market sectors than is the case with the WTO. Examples that can be mentioned here are: telecommunications, distribution of goods, production and processing. Nevertheless, certain restrictions will remain in the electricity and energy sectors, which will be discussed below.
Through the EVFTA and the TPP, Vietnam will gain access to large parts of the international market. This gives Vietnam the opportunity to increase its import and export rates (an increase of up to 37% is expected by 2025) and foreign investments.
Another necessary instrument is the Investor-State Dispute Settlement (ISDS), which will be used under the EVFTA and the TPP. This gives investors the right to sue in investment-related disputes, claims in the country of investment, using international arbitration. The arbitration processes should be made public in order to be able to guarantee transparency in disputes. With regard to the TPP, the scope of the ISDS was reduced to “investment agreements” and “investment authorization”, in the discussion at the APEC event on November 10th and 11th, 2017.
As a final remark: The bankability of the PPA will be improved by the effects of the EVFTA and the TPP in the next few years if the legislative framework for it is created. Access to more parts of the global market and more foreign investment will make the economy more dynamic. With the implementation of the ISDS at TPP, investors will have more security in terms of dispute settlement and protection against the risks of international trade. With the result that banks will be more willing to finance PPAs.
Our recommendations:So far, bankability has not been given to the extent that it was expected. However, you should be warned of the coming agreements, which will have a major impact on economic growth and the economy itself. If everything continues to move in the right direction, as has been the case, the PPA will become more bankable in the future and better investment opportunities will emerge from it.
- How has the bankability issue been dealt with in the past?
The TPP and EVFTA are not the only agreements that improve the bankability of the PPA.
Vietnam and the USA signed the Bilateral Trade Agreement (BTA) in 1999, which came into force in 2001. It was a huge success and an important deal for the Vietnamese economy. It was the first opening of the Vietnamese market to the outside world and was important for the creation of new business opportunities and for new standards of financing projects.
Another important fact is Vietnam's accession to the WTO in 2007. This has improved trade relations between Vietnam and other nations by removing trade barriers and making non-discrimination commitments. It was also a political sign to express Vietnam's will for integration into international trade by accepting international trade rules.
For the fulfillment of the obligations, adjustments of the laws are necessary in order to guarantee the functionality and efficiency of the projects. Many important laws have been passed in recent years. These helped to improve the bankability of the PPA, e.g. the 2014 Investment Act, the 2014 Company Act, the 2012 Labor Act, etc.
In addition, the legal framework for wind power projects was introduced in 2011.
Our recommendations:You should use existing international agreements as a basis for negotiations. Remember past successful cases and keep an eye on the difficulties of project development. With a well-structured project development it is possible to make the PPA bankable.
- What are the main problems of the PPA for investors?
With the numerous solar projects that are only spread over a few central locations, the capacity of the existing facilities for power consumption should be a cause for concern for the transfer of risks to the power producers.
EVN has a monopoly on sales, repairs, maintenance, inspection and implementation of the electricity distribution network.
There is a high risk due to the lack of a guarantee from the government regarding EVN's payment obligation in cases in which the energy is produced but EVN cannot transmit the electricity due to technical difficulties. A solution for bridging this guarantee gap can be the use of the MIGA-Backup of the World Bank (Multilateral Investment Guarantee Authority) or the support of the Asean Development Bank.
Reasons for a power distribution disruption can be, for example: cases of force majeure or contract terminations. EVN can refuse to feed in the electricity in the event of maintenance or repairs.
Circular 16 does not contain any guarantees or compensations for the investors in the event of the aforementioned cases.
Our recommendations for avoiding potential risks:
Beware of EVN's right of veto and the Vietnamese authorities! Be patient. Decision-making processes in Vietnam go through many stages and take time.
- Conflicts will arise between the investors and EVN, as the risks will be shifted to the investor. Which conflict management options does the
PPA for investors?
Basically, the PPA is determined by Vietnamese law. It does not contain any regulations for international dispute resolution.
Conflicts can be reported to the Ministry of Electricity and Renewable Energy. If this option fails, investors can seek help from the Electricity Regulatory of Vietnam (ERAV) or apply to a Vietnamese court.
The PPA allows national and offshore arbitration. However, it is in EVN's hands whether this option will exist in individual cases.
Our recommendations for successful negotiations with EVN:You have to understand how EVN works and what its goals are. Be aware of EVN's monopoly in the energy sector in Vietnam. Don't try to "reinvent the wheel".
Do not overwhelm EVN with ambitious intentions with regard to the development proposal. You might be scared of too many new things. Rely on working successful strategies from the past and establish reference to successful projects.
- What is the MoIT's view of the weaknesses of the PPA?
The MoIT is aware of the weaknesses of the PPA and knows that the PPA will not attract investors in the way it would be necessary to meet energy needs and to deal with problems related to the development of renewable energies.
The MoIT also knows that the solar energy sector in Vietnam has great potential.
Ultimately, the MoIT expects to attract small investment projects where bankability is not of great importance to investors.
- Is the MoIT's view realistic?
In our opinion, the MoIT's view is not realistic. This could lead to unworkable projects, due to the existing risks of the final version of the PPA and the non-existent insurance or support services of banks. In addition, the success of projects depends on the outcome of the negotiations with EVN.
- What advice can you give future investors regarding project development?
Be careful! You need to develop the project on a step-by-step basis and prepare for negotiations with EVN if you decide to invest in a grid-integrated energy project.
Please contact the author Dr. Oliver Massmann at [email protected] if you have any questions. Dr. Oliver Massmann is co-general manager of Duane Morris LLC.
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