Phillips Nizer LLP Articles

Vietnam Mineral Law of 1996

An Overview

Vietnam is regarded as having substantial unexploited reserves of minerals such as iron ore, copper, gold, lead, zinc, coal, etc. Until March 20, 1996, however, Vietnam had enacted no modern mineral law which set forth the rights and obligations of prospectors, miners and processors of minerals in Vietnam. On that date the Vietnam National Assembly approved the "Mineral Law of Vietnam" ("ML") which had been for years in formulation but which as enacted is unfortunately a source of considerable disappointment to those international companies and observers who had been awaiting the enactment of the law and are anxious to participate in the development of Vietnam's natural resources. The new law does not take effect until September 1, 1996.

The ML provides that the administration of the ML is primarily the responsibility of the State Managing Body of Minerals ("SMBM") which is a part of the Ministry of Industry. The ML when it becomes effective will replace the Ordinance on Mineral Resources issued by the Vietnam State Council on August 7, 1989.

There are many provisions of the ML. This article will only address certain ones which should be of particular interest to foreign investors and which are summarized below: [Article references are to the relevant Article of the ML]

1. The ML declares that the mineral resources of Vietnam "are owned by the entire people and are uniformly managed by the State." (Article 1) This is consistent with the way mineral resources are treated by developing countries.
    
2. The government is mandated to "create favorable conditions for State owned enterprises to take the leading role in mining and processing important minerals." (Emphasis added) (Article 5) This raises the question as to what are "important minerals (undefined in the law), whether or not a foreign investor will be permitted to have majority ownership of a mining enterprise and whether or not only "State owned enterprises," as opposed to private Vietnam enterprises, will be permitted as joint venture partners in a foreign invested mining enterprise
   
3. The government is entitled to ban the export or import of minerals and is entitled to restrict the export of minerals as raw materials. (Article 5) The right to export a particular mineral (whether in the form of raw materials or in semi-finished or finished or processed forms) must be specifically provided for in any mining license obtained from the Vietnam Government at least until the mine (and a reasonable return thereon) investment has been recovered. This must be confirmed in clear and unequivocal language by any other government agency which might have the right or power to overrule an agreement by the SMBM.
   
4. If you receive a license to explore for minerals and find economically developable minerals, there is no guarantee that you will get a license to mine the minerals. (Article 31) You do, however, by virtue of your exploration license "Have the special right to apply for a mineral mining license in respect of the area covered by the exploration license" in accordance with Article 31. (Article 26) This provision must be of great concern to any foreign investor. To invest substantial sums in exploration and to find significant provable or proven reserves of a mineral and then not to be allowed to develop them will be a great disincentive to foreign investment in the mining sector unless you are willing to play "Russian Roulette." Certainly there must be a way of structuring a transaction with the SMBM so that the mining of the minerals you discover can go forward provided you have satisfied defined conditions determined in advance of the beginning of mineral exploration including financial responsibility.
   
5. If you receive a license to explore, mine and/or process minerals, you not only will be required to deal with the SMBM but the law gives the "People's Councils" and "People's Committees" the right at "all levels" to apply measures for the purpose of "management and protection of mineral resources, supervision and monitoring of the compliance of legislation relating to mineral resources in their respective localities." (Article 4) Given the sometimes conflicting and inconsistent treatment of foreign investment by the "People's Councils" and "Peoples Committees" the multiple levels of regulation does not augur well for the timely and effective progress of a project. If the experience of foreign investors in non-mining ventures is any indication, this grant of supervisory power will be the source of never ending difficulties for the foreign investor. All aspects of mining regulation should have been (and should be) concentrated in one national governmental body. Article 4 as written will give rise to enormous problems (bureaucratic and otherwise) for foreign investors.
   
6. If you are permitted to mine minerals, you are required to deposit a fund (the amount of which will have to be presumably determined in each case in negotiation with the SMBM) at a Vietnamese or foreign bank licensed to operate in Vietnam as security for the rehabilitation of the environment, ecology and land. (Article 16) Since no standards for how the amount to be deposited is to be determined are set forth in the law, this provision contains the seeds of possibly very costly problems for the foreign investor. Whether or not the regulations to be issued under the ML will adequately deal with this matter, the matter must, obviously, be dealt with in precise detail in any agreement entered into with the government.
   
7. A mineral prospecting permit is limited to an initial period of not more than 12 months and a total period not to exceed 24 months. (Article 21) This provision is probably not unreasonable given the desire of the Vietnamese to accelerate the development of their resources.
   
8. A mineral exploration license is not permitted in the first instance to exceed 24 months in duration and can only be extended for one additional 24 month period. (Article 25) This provision is probably also not unreasonable for the same reason as set forth in paragraph 7 above.
   
9. The SMBM has the right to determine the minimum level of estimated exploration costs and where the actual costs are lower than the minimum level, the difference is required to be contributed by the licensee to the "state budget." (Article 28) This is a very undesirable provision which can, among other things, penalize efficiency and/or early success.
   
10. If an application for a mineral mining license is not submitted within 6 months after the expiration of the mineral exploration license, then the government has the right to grant a new exploration license or mineral mining license for the same area to another organization or individual. (Article 28) Six months seems far too short for the license application to be adequately prepared and submitted.
    
11. The initial term of a mineral mining license cannot exceed thirty years but can be extended for a total additional period which cannot exceed twenty years. (Article 31). This provision should be sufficient to enable an investor to recover its investment but begs the question of what happens to the foreign investor's investment on and after the date the term has expired and what compensation is the foreign investor to receive for the assets left in the project from those who take over the project which assets may have many more years of usefulness left and which mine may have many more years of commercially minable reserves left.
    
12. A mineral mining plan must be approved by the People's Committee of the province where the mine is located prior to the implementation thereof. (Article 33) This is a role better left to the SMBM which presumably will have experts on mining plans to deal with such matters. To lodge approval of mining plans with provincial Peoples Committees is not going to be in the best interests of either Vietnam or the foreign investor.
    
13. There is no provision in the ML spelling out what the rates of royalty and/or taxation (including possible export taxes) will be on mining companies. As has become painfully apparent in the countries of the former Soviet Union, failure to get "risk free" assurances of what the royalty and tax arrangements will be can quickly imperil, if not destroy, the economics of a mineral project.
    
14. The mine manager is subject to the prior approval of the SMBM. (Article 36) Hopefully this will not be a problem but it could if the SMBM insists on the mine manager being a Vietnamese who does not have the depth and breadth of experience required to do the job.
    
15. Capital construction of the mine must commence within 12 months from the date upon which the mineral mining license takes effect. (Article 39) This is probably not unreasonable but see paragraph 16 below.
    
16. Production activities at the mine must commence within 12 months from the proposed date of commencement of production activities as set forth in the approved mineral mining feasibility study report. (Article 39) Arbitrary time limits on the commencement of capital construction and commencement of production without provision for government flexibility on such timing is most unfortunate.
    
17. Upon the termination of the validity of a mining license "all works and equipment for mine safety and environmental protection located in the area covered by the mineral mining license shall fall under the ownership of the State and may not be removed or destroyed." (Article 40) Unless there are very detailed and strict standards set forth in the agreement with the government as to under what circumstances "termination" may occur this can be a very dangerous provision for the foreign investor. Given the frequency of arbitrary actions being taken by government agencies against foreign-invested properties, this can lead to the equivalent of "expropriation." Also see paragraph 11 above.
    
18. A separate license is required for mineral processing "except in cases where the mineral processing activities are associated with a licensed mineral activity." (Article 44)
    
19. The rights and obligations of organizations and individuals who were issued licenses and permits to conduct mineral activities prior to the effective date of the ML will remain subject to the terms of such mineral licenses and permits unless the foregoing voluntarily choose to comply with the ML but all previous regulations which are contrary to the ML are repealed as of September 1, 1996. (Article 65)
    
20. The ML has multiple provisions mandating the protection of the environment in all mining and mining related activities and in the case of the mining and processing of minerals all this must be done in accordance with what is referred to as an "approved environmental impact assessment report." (Article 33)

Unlike, for instance, the 1994, as amended, Republic of the Philippines "Act Instituting a New System of Mineral Resources Exploration, Development and Conservation," designed to attract foreign investment in the very depressed Philippine mining sector the ML does not contain any provisions dealing with the following subjects and gives far less administrative flexibility to the SMBM:

1. Limits on number of application permits and/or mineral area agreements which can be held at any one time by an entity.
   
2. Mineral production sharing agreements or co-production agreements with the government.
   
3. Auxiliary mining rights covering timber removal, water rights, rights to possess explosives, easement rights and rights of entry into private lands and concession areas.
   
4. Provisions for settlement of conflicts over mining areas, mineral agreements or permits, etc.
   
5. Limitations, if any, on government share in mineral agreements.
   
6. Mining incentives governing the following areas
   a. Fiscal and non-fiscal
   b. Pollution control devices
   c. Income tax carry forward of losses
   d. Income tax - accelerated depreciation
   
7. Specific provisions as to under what conditions a mining permit or agreement can be canceled, revoked or terminated.

The Vietnam Government is required under the ML to make "detailed provisions" for its implementation and until this is done and depending on the clarity and completeness of such provisions, a foreign investor must (as always) proceed with great caution. If past practice is any guide, the issuance of such "detailed provisions" may not come before and may very well come well after the effective date of the ML.

It is clear that a foreign investor in the mining sector can only look to the ML for limited statutory protection of its rights and the economics of its project. This mandates that in any agreement entered into with the appropriate Vietnam Government agency(s) to engage in mining activities, you must anticipate as many eventualities as possible and build into your agreement as many protective provisions as you can possibly negotiate and leave absolutely nothing you can possibly think of or foresee to chance.

The ML does not appear to exclude the Ministry of Planning and Investment (the "MPI") from involvement in the licensing of a mining project and it, therefore, must be assumed that an investment license will have to be obtained from the MPI by a foreign investor in mining before any investment is made by the foreign investor and before a transaction can go forward. If the amount of the investment in the mining project is US $40 million or more approval may also be required from the office of the Prime Minister.