Law change offers construction clarity

09:00 | 23/08/2020
The National Assembly has passed amendments to the Law on Construction, which will take effect from January 2021. Frederick Burke, managing partner of Baker McKenzie and Nguyen Thanh Hai, special counsel outline the practical changes that address unclear points under the current legislation, and reflect on government efforts to clarify and simplify licensing procedures for construction operations.
law change offers construction clarity
Frederick Burke, managing partner of Baker McKenzie and Nguyen Thanh Hai, special counsel

The amended Law on Construction introduces new criteria to determine which projects are required to have a preliminary feasibility report (PFR), outlining several cases for developers.

First are projects of national importance or Group A ventures funded by public investment capital; second are those where the preparation of a PFR is required by the Law on Public-Private Partnerships; and third are those whose investment policy decision (IPD) needs to be approved by the National Assembly and/or the prime minister in accordance with the Law on Investment. The developer can also formulate the PFR on a voluntary basis. Private developers may benefit from the new, shorter list of cases requiring a PFR.

Under the current law, if an independent private initiative that has not been approved in master plans is classified as a project of national importance or Group A project under the Law on Public Investment, it is subject to the PFR requirement. This classification covers a wide range of projects, including those with a minimum investment of VND800 billion ($34.7 million). On the other hand, under the amended Law on Construction, only a private project subject to IPD by the National Assembly or the prime minister must have PFR.

Compared to projects of national importance and Group A ones, such a project has to have higher investment value (for example VND5 trillion or $217 million) or be in specific industries (such as oil and gas exploitation, airports, or seaports).

New permit exemption cases

The amended law maintains a general approach that a construction permit is compulsory before commencement, except for certain projects on the exemption list. The amended law changes the list of permit exemptions.

A new exemption are works for which the construction authority has appraised the design formulated after the basic design and which satisfy the conditions for granting a permit.

In addition, there are certain notable changes to the list of exemptions. These are abolishing the current exemption for projects approved by the prime minister, ministries, heads of ministerial equivalent agencies or chairpersons of people’s committees; and abolishing the current exemption for works in rural areas within a region for which neither a master plan for urban development nor a detailed master plan is approved.

Therefore, developers may need to review the new list of exemptions to formulate the best plan.

Design clarification

The amended law clarifies that the front-end engineering design (FEED Design) is formulated after basic design, clarifying issues for developers to determine the relevant procedures to appraise or approve the FEED Design with more certainty.

Designs under the current construction law are classified depending on the number of design steps. If the project has two steps, they include basic design and then detailed drawings for building works. For three-step ventures, there are basic, technical design, and then detailed drawings. Each stage is subject to different evaluation procedures.

Each step is based on the prior step and will provide more details (for example, the technical design needs to be in line with the basic one with more technical details and contents). Under the current law, construction designs formulated after the basic one include technical design and detailed drawings. Under the new law, however, those formulated after the basic design include the FEED Design, technical design, and detailed drawings for building construction and other designs (if any) under international practices.

The FEED Design, a common part of international practice, has been adopted in Vietnam, particularly in projects under the engineering, procurement, and construction (EPC)/turnkey delivery method. However, developers face uncertainty in complying with appraising requirements under the current law because, although the FEED Design is recognised in certain guiding decrees, there is no official provision on it in the construction law.

This new clarification demonstrates the government’s efforts to clear the uncertainties of developers who engage foreign contractors or use international standards.

New construction insurance

The amended Law on Construction introduces a new compulsory insurance for a contractor. Instead of being encouraged to purchase as per the current law, a contractor for building works will be required to purchase insurance for civil liability to third parties. After this change takes effect, a contractor for work execution must purchase two construction insurances: one for employees involved in the execution of building works on-site; and one for civil liability to third parties.

Project developers are recommended to follow up with this to ensure their position in construction contract drafting while contractors should review this to ensure compliance.

Precondition changes

The amended law provides changes to conditions for the commencement of construction works. The first notable change includes abolishing the condition that project developers must arrange sufficient capital in accordance with the work schedule.

The abolishment of this condition provides more flexibility for developers as they can arrange financing separately since it can be difficult to prove sufficient capital arrangements under the current law, which confuses project owners and might expose the owner to an administrative fine.

The second notable change includes adding a new condition that developers must notify the local construction authority about the commencement date of construction at least three working days in advance.

The notification is not a new requirement, however, the amended law now stipulates this notification as a condition to starting construction and reduces the time from seven to three working days.

There are other adjustments on certain regulations and terms.

The first is the new content of the PFR. The amended law adds the preliminary environmental impact assessment as a new item in the PFR.

The second is a one-stop shop for basic design appraisal. The amended Law on Construction provides a one-stop shop regime to simplify the review of the basic design and firefighting and prevention measures. From January 1, 2021, developers can submit a design appraisal dossier to the construction authority.

Third is the changes to projects that require the authority’s appraisal on design. The amended law changes the criteria in determining whether a project must have its design appraised by a construction authority. As such, appraisal will be required for works that materially affect the environment and the safety of the community and are constructed in areas without an urban master plan, master plans of special functional zones, and detailed rural master plans.

Lastly, the term “state capital” project has been replaced. The amended Law on Construction replaces the term with “public investment capital” and “state capital not from public investment”. This update was made to ensure consistency with the Law on Public Investment and the Law on Managing and Using State Capital Invested in Enterprises.

This adjustment provides clarity for certain projects where developers are in partnership with state-owned enterprises. Developers of projects involving “state capital” should review the change to identify the implications to their projects.

Remaining issues to consider

Certain legal issues remain in the amended Law on Construction. For example, it does not have any substantial changes in relation to contracts and foreign contractor licences.

Regulations governing contracts lack clarification for privately-invested construction schemes. Most construction contract regulations and forms are applicable to state-funded projects. Given the lack of guidance, there is uncertainty for parties in negotiating and executing contracts.

For example, a contract – even with foreign entities – is still required to use the Vietnamese language. Given the lack of clarification of “used in Vietnamese”, there is a strict interpretation that parties have to execute the construction contract in Vietnamese and another language.

In addition, the current law requires a foreign contractor to obtain an operation licence (foreign contractor licence) before carrying out any construction activities on Vietnamese territory. Given the broad definition of “construction activities” and the lack of clarification on this licensing requirement, foreign contractors could face uncertainties as to whether they are carrying out an activity and if they are required to obtain a foreign contractor licence.

The transition process

The amended Law on Construction takes effect from January 2021. However, there are exemption cases coming into force early, as well as transition provisions for consideration on a project-by-project basis.

Two notable provisions entered into force on August 15 – permit exemption for works that have obtained appraised construction design formulated after the basic design; and change of competent authority issuing permits to works of special grade, from the Ministry of Construction to local people’s committees.

There are also transitional processes to be reviewed for each project. Ventures that have their IPD decided or approved before the effective date of the amended law are not required to prepare a PFR. Also, projects that are approved before the amended Law on Construction’s validity are not required to be re-approved.

For projects in operation, cost management shall be continued as per the law before the amended law.

For construction works whose designs were formulated after the basic design have been appraised before August 15 this year, owners can be issued a permit under the current law if the owners request so.

For works that have a permit, if there is any amendment to designs formulated after the basic design from January 2021, the permit will be required to be amended as per the amended Law on Construction, except for the case where there is a request for authority appraisal on design after the basic design for the amended construction works. Works that have been commenced without a permit as allowed under the current law before the effective date of the amended law, but are subjected to permits under it, can continue their construction.

Developers should take into consideration the legal transition process to see whether they have any impact on their ongoing projects.

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