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EVFTA will broaden skies for aviation across Vietnam

02/07/2020

Never-before-seen activities in Vietnam’s aviation sphere are expected to come to EU businesses soon on the back of the landmark EU-Vietnam Free Trade Agreement. Nguyen Thi Thu Trang, director of the WTO’s International Trade Centre under the Vietnam Chamber of Commerce and Industry, talked to VIR’s Bich Thuy about how market access commitments are brightening the investment picture in the sector.

In the agreement (EVFTA), Vietnam commits to widely open the market in aircraft maintenance and repair service to EU businesses. In comparison with the country’s World Trade Organi- zation (WTO) commitments, how can the new adherence benefit investors from the bloc in the future?

Aviation transport is one of the logistics services that Vietnam commits to open the market to eu businesses in the EVFTA and this commitment is more open than that in the WTO. Among them, aircraft maintenance and repair service provides the strongest opening.

As committed in the WTO, Vietnam allows for- eign investors to join this market under the form of joint venture, holding less than 51 percent. Meanwhile, this service market will totally open to EU investors without restrictions in the form of business operations, or foreign ownership limit (FOl).

This means that as of entry into force, eu companies will enjoy never-before-seen opportunities to establish a 100 per cent foreign-invested entity or joint ventures with Vietnamese partners to provide aircraft maintenance and repair service in the southeast Asian nation.

Up till now, this golden chance has been available only in Canada, Mexico, Japan, Australia, and Singapore as committed in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Which other services will Vietnam open under EVFTA commitments, and what changes do you foresee?

Vietnam also pledges to open the aviation market for EU companies in other two groups of services, to which the country had no commitments in the WTO.

The first is in-flight meal services. Specifically, Viet- nam permits eu businesses to establish a joint venture to provide this service with the conditions that FOl is not higher than 49 percent.

The second is ground services but this excludes aircraft maintenance and cleaning services, ground transport, aircraft management, and guaranteed flight operations.

Meanwhile, for ground services which Vietnam does open, there is no set schedule as yet. This depends on the time when Vietnam allows private firms to join ground services in a specific airport, restrictions to location for specific airports and other licensing barriers, and the type of businesses involved.

Investment attraction in aviation remains modest. Will the new commitments be able to change the investment picture in the sector?

In the EVFTA, Vietnam will still keep the level of market opening similar to the WTO for core aviation services such as passenger and cargo transporting by air. However, looking globally, this is rather normal. Many countries have a similar approach with Vietnam while others even have a narrower approach.

From a market view, it is difficult to say that Vietnam’s aviation sector is not attractive enough for investment. even when gaining no foreign investment, interest from local private financers remains strong.

Regardless, for aviation services the most interest among managers is not only the room for business and investment activities, but also safety concerns and public interest. The important issue is probably not only how open the country is for the aviation market for foreign investors, but also the way of approaching that openness for the private sector in general.

Rays of sunshine in aviation clouds

Amid serious impacts of COVID-19, there are hopeful points for the aviation sector on the back of the EU-Vietnam Free Trade Agreement. Tony Foster, managing partner of the Vietnam office at Freshfields Bruckhaus Deringer LLP, delves into how the land-mark deal improves the investment and business picture in aviation services. The aviation market around the world is in a tailspin. Numerous airlines around the world are bankrupt or will be bailed out. The international Air Transport Association (IATA) estimates that 2020 losses for airlines alone will be $84 billion. To put this in perspective, that is about a third of the total annual GDP of Vietnam. Airline revenues, according to the IATA, will be down 50 percent this year.

Few rays of sunshine pierce these gathered clouds, but some may have recently caught sight of a couple of shafts of light. One is that airlines flying domestically in Vietnam appear to have achieved a V-shaped rebound that would be the envy of the aviation world, and as a result the domestic terminals at the airports in the country no longer whistle emptily.

Another positive is the EU-Vietnam Free Trade Agreement (EVFTA), which was approved by the National Assembly recently and should come into force around August. The EVFTA will doubtless improve the investment and business environment through institutional reforms and upgrades to the laws and regulations in the country, which should become increasingly standardised and transparent. But one has to dig deep into the appendices to the EVFTA, and to brush away the principle of infinite obliquity that seems to permeate these trade agreements, in order to see why the aircraft service companies of europe should be trying to locate the next available jet to Vietnam. Though whether they will appreciate the two weeks stay in the quarantine camp that will result from such a hop remains to be seen.

The EVFTA confirms several points relating to aircraft services. The first is that airlines are permitted to provide services through their ticketing offices or agents in Vietnam. The second is that there are no restrictions in computer reservation services, except that they must go through public telecommunication networks that are under the management of the Vietnamese telecommunications authority.

Also, in terms of maintenance and repair of aircraft, international companies can provide services through joint ventures with Vietnamese partners or 100 percent foreign invested enterprises. Until now, the only competition for VAECO, the Vietnam Airlines subsidiary that leads the maintenance, repair, and overhaul market in Vietnam, were two joint ventures involving Singaporean groups.

The picture is more nuanced with respect to airport services. The exciting news is that five years after Vietnam allows private suppliers access to an airport or terminal, they will be permitted to provide ground services to such airport or terminal.

Then the clouds descend again. There are various qualifications and limitations to this future right. First, aircraft servicing and cleaning, surface transport, airport management, and air service navigation are excluded from walking through this open door.

Secondly, five years begins to run when Vietnamese private companies have access to an airport or terminal. This means that the sector has to allowthe participation of at least one Vietnamese 100 percent privately-owned company or one joint venture in which private capital contribution accounts for at least 51 percent.

This remains to be interpreted and numerous details remain vague, such as how far up the corporate chain one looks for state capital. It is also unclear whether the five years will begin to run as to all ground services at an airport when the first private Vietnamese company is permitted to perform any such services at such airport, or whether the five years only begins to run in respect of the services being performed by that company. Moreover, the foreign company will need to establish a joint venture with a Vietnamese partner. The foreign equity cannot exceed 49 percent, though this can rise, three years later, to 51 percent of the capital. Next, the number of service suppliers  in each airport can be limited, if there are space constraints. This leads to the possibility that the five-year window for Vietnamese companies could fill up the available space.

Furthermore, applications for licences to establish joint ventures can be evaluated by the authorities based on the following considerations, including, among others: (i) the net socio-economic benefits that the European Union investors can generate, including but not limited to their long-term commitments, capacity building and tech- nology transfer for Vietnam, and their prior contribution to Vietnam’s economy; (ii) their financial capability and relevant experience; and (iii) the possible impact on Vietnam’s national security and defence. This review process alone reduces an apparent right into a discretionary application.

Another issue is that even if an EU investor succeeds in establishing a joint venture, its value is more limited than may appear on the surface. Any transfer of its capital in the joint venture would be subject to prior approval of the relevant authorities, and the relevant Vietnamese partner in the joint venture will have a right of first refusal to buy the interest being transferred.

Vietnam also made one more important commitment in the EVFTA. Foreign companies are permitted to provide in-flight meal services through the establishment of joint ventures with Vietnamese partners, with foreign equity not exceeding 49 per cent. Now, one can hold out modest hope that this will bring improvement upon the seafood and rice, chicken and noodles, and beef with potatoes choice that this author has so much enjoyed over the years.

Source: Vietnam Investment Review