New path for mining industry

January 10, 2019 | 14:53
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Vietnam’s mining industry remains largely undeveloped with most operations being insufficient and causing harm to the environment.
new path for mining industry
By Dr. Oliver Massmann, General director of Duane Morris Vietnam LLC

However, there remains great potential due to the variety of unexploited mineral resources. The discovery and mining of new minerals can be significantly facilitated with foreign direct investment (FDI). This provides the opportunity to use international, modern, efficient, sustainable, and secure technologies for the procedure. This would have a huge impact on the nation’s economic growth and would lead to a reduction in 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 per cent of Vietnam’s base metal and precious metal resources have so far been discovered. This is because the country has so far never methodically researched how to find deeper, richer or larger deposits with modern technologies. The focus of the Vietnamese mining industry has been almost exclusively on less expensive, 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.

Lack of technology

Vinacomin is the first company to acknowledge these major shortcomings and confirm the use of obsolete technologies, lack of mechanisation, inadequate infrastructure, a large workforce with low productivity, excessive energy consumption, safety deficiencies, and unacceptable environmental pollution.

In Decision No.2356-TKV dated June 15, 2016 Vinacomin set its priority to technological innovation. The challenge, therefore, is to modernise the Vietnamese mining industry and make innovation more accessible. To do this, the government must create incentives to encourage investors, otherwise foreign directors will not consider investing in the country.

According to their estimates, over 1,500 mining companies are registered in Vietnam, of which about 55 per cent are state-owned, 36 per cent by private Vietnamese companies, and only 9 per cent by foreigners.

new path for mining industry
Despite vast mineral resources, the domestic mining sector remains largely untapped due to major shortcomings, Photo: Le Toan

Mining policies and issues

The country’s current mining policies have two major weaknesses. Firstly, the existing laws are unstructured and are therefore inconsistently applied. There is some evidence to suggest that there are conflicting interpretations of fees, tariffs, environmental protection fees, product quality and related mining taxation issues.

These exist 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. Secondly, Vietnam has one of 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, as well as the increase of illegal mining and tax evasion. The nation’s royalties, export duties and other charges are far above those from other comparable countries. For example, the royalty for nickel is 10 per cent, but other minerals such as tungsten and gold have even higher license rates. Many mining projects therefore fail due to a lack of sufficient profitability.

Positively however, there is one exception. A hitherto highly successful project of modern technologies and international standards on a Vietnamese mining operation is Nui Phao. This is the largest tungsten production mine in the world to date, contributing significant value to the economy by converting the ore into purified chemical products before sending them for export.

However, as with all mining projects, future development will depend on the continued evolution of global commodity prices, variability of ore grades, mining conditions, and other factors. The prohibitively high taxes may therefore jeopardise this project. The reasons for the high levels of taxation are to some extent comprehensible or the background can be explained. Hereby the aim is, to maximise benefits for the government and the national economy. However, this cannot be achieved if the taxes are so high that mines are not profitable. As a result, this leads to negative results, namely to the loss of valuable tax revenue.

First, the tax revenue source for the government is lost, and second, the number of people trying to circumvent the tax rules increases. The former also leads to the loss of legal employment opportunities and job losses.

Solutions and conclusion

A solution to the 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 co-ordinating intergovernmental departments. The effectiveness of this co-ordination 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 the economic budget.

The advantages associated with this 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 characterised by poverty and their need for better infrastructure. A modern mining project would have a positive impact on both.

On one hand, mining projects create a large number of jobs, local goods are promoted and orders are distributed to service providers. On the other hand, infrastructure will develop significantly, because modern and efficient mining is hardly possible without a good infrastructure, so construction companies are forced to build the infrastructure themselves.

To summarise, there are essentially three concepts.

First, existing mining legislation could be revised and become more transparent, clearer, with investor-friendly rules 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.

Outlook on major trade agreements TPP 11, EVFTA and Investment Protection Agreement

In January 2017, US President Donald Trump decided to withdraw from the US’ participation in the Trans-Pacific Partnership (TPP) trade agreement.

In November 2017, the remaining TPP members met at APEC meetings and concluded that they would push forward without the US, calling the trade agreement the CPTPP (TPP 11).

The provision for the agreement specified that it enters into effect 60 days after ratification by at least 50 per cent of the signatories (six of the 11 participating countries).

The sixth nation to ratify the deal was Australia on October 31, 2018, therefore the agreement finally came into force on December 30, 2018.

On November 12, 2018, Vietnam officially became the seventh member to ratify the deal. The CPTPP is targeting to eliminate tariff lines and custom duties among member states on certain goods and commodities to 100 per cent. The agreement could help bring the needed FDI to the domestic mining industry. Hence new methods and better technologies will be introduced to the industry.

To be able to benefit from the TPP 11, the country must amend mining regulations, particularly, the above-mentioned taxes and royalty rates must be reduced.

One other notable major trade agreement is the European Union-Vietnam Free Trade Agreement (EVFTA).

The EVFTA offers a great opportunity to access new markets for both the EU and Vietnam, and will allow more capital to be brought into the country due to easier access and reduction of almost all tariffs of 99 per cent.

There will also be an obligation to provide better conditions for workers, which is a key aspect in terms of working at mining projects. In addition, the EVFTA will boost the majority of the nation’s economic sectors. Due to this significant boost, the government might reconsider its mining tax regulations. If this step is taken, there are good prospects for investors who bring modern technologies and international standards to the country.

To enable at least some parts of the FTA to be ratified more speedily at EU level, both parties have 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 being formally submitted to the European Council, possibly enabling the FTA to come into force during the second half of 2019.

Furthermore, the investor state dispute settlement (ISDS) will ensure the highest standards of legal certainty, enforceability and protection for investors.

Under the provisions 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 authorisation” as result of the discussion about the TPP’s future on the APEC meetings on November 10-11, 2017.

Further securities come with the Government Procurement Agreement (GPA), which is going to be part of the TPP 11 and the EVFTA.

The GPA in both agreements mainly deals with the requirement to treat both foreign and Vietnamese bidders equally when a government buys goods or requests a service worth over the specified threshold.

Sufficient time must be allowed for bidders to prepare for and submit bids whilst maintaining confidentiality.

The GPA in both agreements also requires bids to be assessed based on fair and objective principles, evaluating and awarding bids based only on criteria set out in notices and tender documentation, creating an effective regime for complaints and the settling of disputes.

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