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.

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.