Despite the COVID-19 pandemic, global foreign direct investment into Vietnam increased by US$7.15 billion or 6.7% in the first half of 2021
Vietnam continues to be the go-to destination for low-cost manufacturing investments in Southeast Asia despite its middling ranking on the ease of doing business as measured by the World Bank – 70th out of 190. The biggest component of this low ranking is the obstacles created by onerous and sometimes conflicting government regulations. So far, companies have been willing to accept these difficulties, either lured by the availability of a low-cost and highly productive workforce or not understanding they exist in the first place. Construction approvals are a classic example of Vietnam’s regulatory quagmire that investors need to understand.
A journey of a thousand miles begins with a single step
Selecting a site is just the beginning of a manufacturing investment project. Because of the regulatory complexities, it is important to begin any site selection assignment with the end in mind when planning on investing in Vietnam. One of the biggest challenges of any investment in Vietnam is construction approvals, and these approvals can have a significant impact on the selection of a site. According to the Vietnam Association of Construction Contractors, the cumbersome legal requirements concerning construction regulations are a nightmare for not only foreign but also Vietnamese companies.
This is because the myriad laws, regulations, and decrees that impact an investment decision, promulgated by multiple regulatory agencies, have not been developed in a coordinated way. Vietnam’s Ministry of Construction (MOC) is responsible for the writing of the Law on Construction and the Ministry of Natural Resources and Environment (MoNRE) is responsible for the Law on Land while the Ministry of Planning and Investment (MPI) oversees the Law on Investment. Without a coordinated approach to developing legislation, conflicts or gaps have been created that give approval agencies discretion in their implementation, which can greatly complicate the execution of an investment project if not taken into consideration in advance. For example, the Law on Investment does not regulate the debt-to-equity ratio of an investment, but the Law on Land does, requiring a minimum debt-to-equity ratio of 20% for projects using fewer than 20 hectares of land as a condition for leasing land from the government.
A long and winding road
Although construction regulations are continually revised to improve them, it still takes an average of 110 days to obtain permits for construction. To obtain a permit, companies need to navigate through several administrative procedures which are lengthy and time-consuming. These procedures require multiple steps as well as interacting with several government agencies and departments and understanding the many regulations applicable to just one subject.
The complexity of each procedure and the time required depends on the scale and nature of the project. For instance, the approvals process for large-scale projects (defined as more than US$43 million) regardless of the source of capital is often lengthier, sometimes taking up to 2 years because it requires appraisal and approval from various agencies each with their own functional responsibilities. Complicating this further, some of these agencies are ministerial level while others are at the municipal level.
For projects with any risk of environmental pollution, the approval bottleneck is an Environmental Impact Assessment Report (EIAR). While the regulated time for appraising and approving an EIAR is 45-60 days from the date of application, based on our experience, this can extend to 3-6 months or even up to 12 months for complex or large-scale projects with a high risk of pollution such as textiles and dyeing, plastics production using recycled materials, mining and mineral processing, chemical manufacturing, and other process industries.
A veritable Rubik’s Cube of interdependent procedures
The interdependency among different procedures makes the construction approval process timeline even more unpredictable. The approval process is regulated mainly by the Law on Construction (Ministry of Construction), Law on Environmental Protection (MoNRE), and Law on Fire Prevention and Fighting (Ministry of Public Security). These laws are not always consistent as they are drafted and revised independently of each other, creating conflicts that can confuse investors and sometimes the very agencies that are responsible for implementing them or create unintentional obstacles to a project.
An example would be how the Law on Construction requires an EIAR to be submitted for appraisal before submitting a project feasibility study report as part of the basic facility design application for approval. However, the Law on Environmental Protection requires that the EIAR include a feasibility study report of the planned environmental protection aspects of the design. As a result, the EIAR becomes a bottleneck for many projects as this is the key document on the critical path for the overall construction approvals timeline. However, it requires that front-end engineering of the environmental controls systems be in place and approved before an investor can proceed to complete the basic design and technical design and obtain a construction permit.
Practice makes perfect
If complexity was not enough, regulations are continually revised ostensibly to improve. On July 5, 2021, the MOC issued a new national technical regulation on construction planning (QCVN 01:2021/BXD) to replace the previous version (QCVN 01:2019/BXD), which was in effect only since 2019. This update concerned only the definitions of net building density and construction boundary lines and had minimal impact on project implementation. However, frequent changes in construction standards make it difficult to plan and execute projects effectively, necessitating extra time to be included in any project implementation schedule to account for these contingencies.
Sometimes, changes are made that are favorable for investors, but unless the regulation is specifically reviewed during site selection detailed due diligence, investors may not benefit from it. On December 31, 2019, the MOC issued QCVN 01:2019/BXD to replace QCXDVN 01:2008. A major positive change under QCVN 01:2019/BXD was to increase the net building density permitted when constructing factories and warehouses. Previously, the maximum building density allowed (essentially the footprint of the facility divided by the net land area) varied from 35% to 70%, but this depended on the height of buildings to be constructed and the number of floors. Projects with taller buildings―or more floors―were required to have lower building densities. This often resulted in investors needing to acquire larger plots of land (sometimes much larger) than practically needed. For projects with multiple buildings of different heights with a varying number of floors and mezzanines in each, all required careful calculations by engineering firms to ensure the proper area of land was acquired. If this is not done early enough in the site selection process, an investor might find that a site they thought could accommodate its planned facility requires a larger plot that may not be available in the same zone.
The new regulations simplified this so that the maximum net building density allowed is 70%, irrespective of the height of buildings and number of floors. While the change is favorable to investors who can now maximize land usage, many investors cannot benefit from the change unless the industrial zone that has been short-listed has its master plan compliant with the new regulations. Many zones, especially those established before January 1, 2020, have master plans approved according to the older regulation. As a result, their net building density is limited by the master planning of the industrial zone under the old standards, and thus their ability to efficiently utilize their land area is constrained.
Begin with the end in mind
Planning is always a key component in any project. Hence, there is a need to plan and schedule the activities in each phase to avoid rushed implementation which results in unnecessary expenses and delays. With the knowledge that the schedule to start construction is critical and often hard to predict, it is important to understand the complexity and nature of the investment to identify relevant and applicable construction regulations that may impact it. Moreover, it’s prudent to be familiar with precedent cases to apply best practices, lessons learned and effective time management. In addition, consultation with professional engineering companies, as well as local and national authorities as soon as possible during the site selection process, is always preferable to minimize potential project delays. Begin with the end in mind, understand local regulations, and plan conservatively to avoid difficulties in execution.
What we can do
Tractus has been assisting companies to make informed decisions about where to invest and how to expand their business in Asia and around the world for over 25 years. Our partners and senior management leverage their experience running successful manufacturing and service businesses around the world, bringing this commercial perspective to our client work. We have proven experience advising companies on their location strategy, optimizing their real estate portfolios, and identifying the optimal sites to support companies’ growth and manage the implementation of their investment projects. We use a proven, integrated site selection, real estate, and incentives negotiations methodology, comparing locations in a systematic and objective way that leads to a defensible result. Let us show you how we can support you to make your next assignment a success.
Tram Phan is Consulting Manager in Tractus’ Ho Chi Minh City office and Dennis J Meseroll is Executive Director and Michael Davies is Senior Project Manager, both based in the Bangkok office.
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