New tendering law challenges foreign pharma producers

On November 26 2013 the National Assembly passed the new Law on Tendering, which came into force on July 1 2014. The new law (which replaces the 2005 Law on Tendering) relates to state management of the tendering process and governs the responsibilities of concerned parties as well as tendering activities.

While the new law is expected to afford greater equality among local tender participants (and promote access for small and medium-sized enterprises), its promotion of local players in the drug market at the expense of foreign players has caused concern. The law now explicitly provides preferential treatment to domestically produced drugs, which is expected to have a considerable impact on foreign investors active in this burgeoning market.

Extent of preferential treatment

Before the enactment of the new law, no clear preferential treatment was given to domestic drugs under Vietnamese law. The only minor mention was Article 16 of Circular 1/2012/TTLT-BYT-BTC (January 19 2012), pursuant to which the relevant authority gave priority to drugs produced domestically (but only for drugs of similar quality and a price no higher than the drugs imported at the time of tender). Under this circular, the criteria for selecting the winning bid was based on both the price and quality of the pharmaceutical products. No other preferential treatment existed.

However, the new law takes a protectionist approach, which directly and indirectly adversely affects foreign players in the market. The preferential treatment afforded by the circular is drastically expanded under the new law – almost to the extent that it drives foreign players out of the market.

As a direct impact, the law now prohibits those offering tenders from providing imported drugs if there are domestic drugs available that fully satisfy the requirements on medical treatment, price and availability (according to criteria published by the Ministry of Health). To add a further layer of restriction, Decree 63/2014/ND-CP (June 26 2014), which guides the tendering selection provisions in the new law, states that if any tenders are ranked equally after applying all preferential treatments, the tender that involves higher domestic production costs and uses more local employees will prevail.

As an indirect impact, the law sets a preferential treatment regime for participants in domestic and international tenders. This does not apply only to pharmaceutical players. Participants in domestic or international tenders to supply goods in which domestic production costs account for 25% of production or more will receive preferential treatment. For the supply of services, foreign tenderers in partnership with domestic tenderers which give 25% or more of the work value of the tender package to domestic tenderers will receive preferential treatment.

While these provisions apply to all industries, among the hardest hit will be those in the pharmaceutical industry.

Ambiguity in new law

While the term ‘domestic pharmaceutical products’ is used extensively in the law, a clear definition has not been provided. As domestic products are given preferential treatment, the law’s ambiguous system of classification is problematic. The number of disputes concerning the precise classification of ‘foreign’ pharmaceutical products which are partly produced (eg, packaging) in Vietnam has already increased considerably.

Decree 63/2014/ND-CP (which guides the new law) fails to address this matter, despite commentators previously stating that it was a pressing issue that had to be addressed. The lack of clarity has led to industry-wide uncertainty as to whether foreign pharmaceutical products processed in Vietnam should be considered domestic pharmaceutical products, thereby creating roadblocks in tendering activities.

Comment

As the protectionist provisions of the law come into force, foreign pharmaceutical players are expected to face greater obstacles in building a presence in Vietnam. This comes at an inconvenient time, when the number of drugs imported by domestic pharmaceutical companies is increasing. It also comes at a time when the government is increasing its efforts to promote foreign direct investment into the economy.

Together with the already stringent restrictions against foreign pharmaceutical players in Vietnam, the new law seems to pave the way for an environment that fosters an almost monopolistic position for domestic pharmaceutical companies. While Vietnam has a competition law regime in place, these provisions effectively compromise their effectiveness in the pharmaceutical industry.

As the demand for life-changing innovations increases, the only real winners in this industry are domestic players. However, as the industry’s competitiveness is lessened, the losers will be not only foreign players, but also the Vietnamese economy as a whole.

By Vietnam Law Insight, LNT & Partners.

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com

The opportunity cost of retailing 2013

While many foreign investors are looking to expand businesses in Vietnam’s retailing market, they are advised to pay attention to regulations drafted by the Ministry of Industry and Trade (MoIT), writes Hoang Nguyen Ha Quyen, partner at LNT & Partners.

The foreign retailers are expanding in Vietnam

To implement Vietnam’s commitments when joining the World Trade Organization, the government must accept businesses with 100 per cent foreign investment to carry out retailing services in Vietnam.

The government is currently following a MoIT proposal and is drafting a decree detailing retailing activities in Vietnam. This decree is long awaited for foreign investors who seek to enter Vietnam’s booming retail market. This decree is expecting coming into effect in November this year. This article highlight certain requirements of foreign invested enterprises participating in retail market in Vietnam.

The draft decree on retailing activities applies to enterprises with the right to implement retailing activities in Vietnam. Enterprises are granted the rights to conduct retailing activities in Vietnam specified in business certificate or investment certificate. The forms of retail include wholesale, retail, distribution, direct sale, e-commerce or franchising activities.

Retailers have to implement business registration regulations regarding conducting a business, quality of goods, goods’ labels,consumer protection, competition, industrial ownership and safety, environment as stipulated (Article 9).

Chapter III details all provisions on retailing goods, goods subject to prohibition, goods subject to restriction, retailing goods subject to certain conditions and state monopoly goods (from Article 11 to 15). In Article 16, conditions about space, quality, safety, food hygiene, terms of origin, effects, features, and utilities of good, labels and stamps with import taxes or special consumption taxed are regulated.

This applies to goods such as those containing radioactive substances or equipment of radiation emission or radioactive sources or explosives, gas, flammable chemicals, and other dangerous chemicals. With direct selling methods, there are conditions on types of goods not allowed to trade by this method such as quality, safety, food hygiene, terms of origin, effects, features, and utilities of goods, labeled and stamped at Article 17. Prohibited and restricted goods or goods subject to certain conditions shall not be allowed to trade via Internet or electronic devices (Article 18).

Chapter IV deals with the most important part of the draft decree – retail unit. Section 1 provides that to establish a retail unit, such unit must comply with the retail masterplan. The types of retail units include grocery store (including also automatic selling machine), factory outlet, department store, convenience store, supermarket, hypermarket, boutique shop, shopping mall. The MoIT shall specify criteria for each type of retail unit.

The establishment of a retail unit must comply with the retail masterplan to be developed by the local authority where the retail unit is established, as well as statutory requirements, such as scale and the establishment and maintenance of the operation of retail shops are detailed carefully. As noted, local authority is responsible for developing retail masterplan of its location, and the MoIT is responsible for developing the national retail masterplan. The draft decree is unclear as to whether investors are allowed to establish a retail unit if a relevant masterplan has not been developed or approved.

Under Article 24, the masterplan must comply with the national economic plan, the traffic environment, the logistics conditions, the population and other paramaters of the location involved. Article 25 further specifies the content of retail masterplan, requiring to address issues such as projects, priority of retail projects, the infrastructure conditions as well as the national or local demand of the retail market, which should be implemented exactly.

These issues are rather unclear requirements that might risk to become technical barrier preventing foreign investors from participating in retail market. Understandably, Vietnam is suffering from trade deficit and foreign exchange deficit and therefore some policymakers believe the main culprit would be foreign trading companies. However, preventing retail market from developing in the end may backfire the good objectives of the policymakers, because it would then harm consumers who have limited choice, who then will pressure on the salary increase to the government, and later inflation.

Article 28 of the draft decree regulates the application of an economic needs test (ENT). It covers the establishment of retail establishments of all traders including foreign-invested enterprises which must follow procedures defined in this decree and be in accordance with the area’s masterplan.

Furthermore, the establishment of retail units other than the first retail units of foreign-invested enterprises is subject to criteria such as the number of existing retail establishments, the market stability and inhabitants’ density. The number of retail units means the number of all shops, the number of shops of the same level and the number of shops of the same field.

The market stability indicates the effect of a new shop opened on other shops of the same field on the same certain area. Inhabitants’ density is carefully applied with the main contents such as the number of retail units on habitants’ density in a geographical region.

It must not exceed [by five times] the rate of the number of retail units on habitants’ density in the province covering the concerned region (Item b, Clause 4, Article 28) and only retail units (not wholesale units) are allowed to be established in geographical regions of inhabitants’ density [by five times] higher than the average inhabitants’ density of that province (Item c, Clause 4, Article 28).

To non-shop retailing forms including direct sale (door to door, network and multi-level sales) and sales through the internet, there are specific provisions on conditions of registration, staff and goods, except mobile retail in forms of travelling sales, sales of small articles, sales from afar must obey the regulations on goods in this decree and Decree 39/2007/ND-CP dated March 16, 2007 on individuals practising trade independently, regularly without business registration (Article 42).

Besides, guaranteeing the information about goods, prices, transaction conditions, transportation and delivery, and payment methods on e-commerce website is also required with respect to the sale through the internet form (from Article 35 to 41).

Drafting such a retailing services decree is an important step in opening the market, which may bring investors, especially foreign ones, many chances to enter and invest in the Vietnamese market. Most of the requirements, however, are not really clear and difficult to meet.

As such, investors would face many technical barriers for access retail market, as WTO commitment gives them the rights, in particular with the ENT.

Despite all of this, this is the first time where ENT criteria is detailed, as well as the retail masterplan and tough law is still better than no law at all. If the draft decree is issued, it will become the basis for foreign investors while applying for making retailing service investment decisions in Vietnam.

By Vietnam Law Insight, LNT & Partners.

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com