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GETTING STARTED - An Insider's Guide to Starting a Business in Vietnam
By Peter N. Sheridan

Part VI - BCC and BOT enterprise Contacts

Table of Contents

Part I - Introduction

Part II - General Business Considerations

Part III - Cultural Differences

Part IV - Mechanics of Foreign Investment - Representative Offices and Joint Ventures

Part V - More Mechanics of Foreign Investment - Fully (100%) Foreign Invested Enterprises

Part VI - Still More Mechanics of Foreign Investment - Business Co-operation Contracts and Build-Operate-Transfer Enterprises.

PART SIX -  STILL MORE MECHANICS OF FOREIGN INVESTMENT

• Business Co-operation Contracts (BCC)
• Build-Operate-Transfer Enterprises (BOT)

No legal entity is created.  A BCC is in essence a partnership agreement between a foreign and a Vietnamese party. However, the partnership agreement has no legal standing to create a new legal entity.  The object is to conduct a common business through investment in Vietnam. While MPI approval is mandated, the application procedure is less burdensome than is a Joint Venture. However, the MPI intends to approve a BCC only when there is substantial interaction between the parties.

In a recent controversy, a very vocal but uninformed Vietnamese national claimed that as the foreign party to a BCC had not formed a legal entity, the foreign party was illegally doing business in Vietnam!

The accuser was given all pertinent documents, including copies of the Foreign Investment Laws, the Contract between one of the largest domestic joint stock companies (until recently a State Owned Enterprise) and the foreign party, and even an audience with the General Director of the sponsor, joint stock company.  In the end, after much ill will passed between all three to allow any relation to continue between the formally vocal domestic party and the foreign investor, the foreign investor and it's sponsor company brook off all contact with its former protagonist.

Passive investment will generally NOT give rise to a BCC license. Accordingly, a trading or other commercial agreement where there are discrete and separate activities of the parties, even while leading to a substantial investment in Vietnam, may not meet the criteria for a BCC.

Because there is NO separate legal entity created. each party has its own, unlimited liability to the other and to third parties.

The Vietnamese party will be the only one permitted to hire and manage a work force. However, the parties are more free to reach agreement on how to manage the operation and divide the profits than in a Joint Venture. There is no mandatory 30% minimum share in a BCC as there is in a Joint Venture.

The MPI retains the right to determine how to calculate the profit of the enterprise. The rate of taxation for domestic entities is substantially higher than for foreign entities.

The MPI will review the contract between the parties, their legal and financial status, and the economic aspects of the transaction contemplated. This review for  a BCC is the same level of review it does for the other forms of licensed businesses.

While there are no standard forms for a BCC, and deviations in practice are more often the rule, the review process by the MPI requires the parties to remain cautious in their business approach. Flexibility in form can be allowed. However, the parties must still assure the MPI that their business approach is in the best interest of the State.

While there is no specified time limit to a BCC, in practice they are supposed to be used for short-term projects but have existed for many years.

The State has shown a great amount of enthusiasm for developing projects on a BOT basis. Few investors have shown any interest.   However, particularly in the power and transportation sector, there is some growing interest.

First authorized in concept by Vietnam in 1992, BOT contracts are now "regulated" (it is difficult to regulate none-existent enterprises) in greater detail pursuant to Decree 87/CP dated November 23, 1993, and in Circular 333/UB/LXT dated February 28, 1994. As of January 2005 less than ten BOT projects have been licensed. Reportedly, only one is in FULL operation.

A BOT project is a contract between the State and a foreign entity for the construction of an infrastructure project. Potential subjects are roads, bridges and tunnels; power-generation stations, waste-treatment facilities, seaports, railway systems, airports, telecommunications systems, etc.

A BOT project will be either a Joint Venture or a 100% Foreign Owned Enterprise. The enterprise will, at its sole cost and expense design, build and operate the facility for an agreed period of time. A "reasonable" profit will be allowed to be achieved during that time. The figure currently favored by the State is a 20% return on investment. However, recent projects proposed for BOT treatment include Electrical Power Generation Stations with duration’s of 30 years without restriction to profit made during that period.

The time for operating the facility is strictly prescribed. For the life of the project, the enterprise must accurately project the time to recover its investment and to earn the agreed profit. While amendments may be permitted, none are clearly provided for in the law. At the time agreed, the project becomes the State’s, without any further compensation.

The investors are permitted to manage the operation, but revenues, once set in the BOT contract with the State, cannot be changed absent approval by the State.

The Board and senior managers will be appointed in accordance with the laws of Joint Venture (if that is the form), or as the 100% FIE may choose. Given the special treatment given BOT projects, and the special problems, it is difficult to understand why a foreign enterprise would want to enter a BOT project as a JV.

Renovation of the infrastructure is given the highest priority by the State. Guarantees and incentives to encourage infrastructure BOT projects include:

• Exemption from land rent.
• Exemption for payment of utilities.
• Guarantees of the convertibility of local revenue to hard currency.
• Reduced tax on profits (10% down from the maximum 25%)
• "Reduction" on withholding tax to 5%. As most infrastructure projects exceed US$10 million in value and all investments of that magnitude receive the same 5% rate, this is an illusory incentive.
• A preferential or exemption from turnover tax. This too is a fiction. See Chapter VI below, on Tax. The turnover tax is a principal component of the tax system. The rates range from 0.5% up to a whopping 40% on gross sales revenue.

The Taxing Experience of an American soft-drink company in early 1995, not a BOT, is illustrative of turnover tax problems. There was no profit tax paid as a bottle of soda was wholesaled for 8½¢ and revenue did not exceed full costs. This high-profile company is investing substantial promotional funds to help underwrite Vietnam’s cultural expansion. Yet the company was charged a $900,000 turnover tax on gross sales.

In a BOT project, all revenues and profits are prescribed by the State, unlike a either a Joint Venture or a 100% Foreign Owned Enterprise whose management can set its own goals and profits. The investor considering a BOT should discuss these policies at the inception, and seek to achieve a definitive exemption from the turnover tax with out having to concede other positions. Here, as in all other forms of doing business in Vietnam, while many things are negotiable, negotiate firmly, but politely.

Recent large infrastructure projects are now being actively considered for the first time in many areas. Highway construction in which toll roads will be established; electrical power generation stations where the demand for power is sufficient and local rate seem able to meet a need for a reasonable return on capital invested. In some cases, BOT projects are being considered with out regard to the State setting a limit on profits to be made, only a time frame in which the projects can be operated. Some projects are being considered for as long as 30 years before the project is turned over to the State.

Western, and particularly American, business may strategically plan for periods of decades, but normal business projections are rarely longer than three to five years. However, for the life of a project one must accurately project:

• full design, development and construction costs;
• full operational expenses;
• the time to recover full design, development and construction cost; and operational expenses; and
• the time to recover the agreed profit.

The ability of the population to support payments, upon which all BOT projects depend, is a key component to signing on. Road, bridge and tunnel tolls affordable to motorbike, bicycle, cycle and pedestrian traffic, the vast majority of all roadway traffic, is the issue. The only toll road currently in operation in the south is a 500 meter stretch of road forming the entrance to Tan Son Hat Airport. Collections are less than 50¢ for each car and truck, 20¢ for motorbikes and 10¢ for bicycles.

The ability for municipalities to raise and distribute tax moneys for waste disposal is non-existent. Utilities are currently paid by the local population, but it is the foreign community that supports them. To what extent rates can be sustained, much less increased, is a major concern for all BOT endeavors.

Converting local currency into hard dollars, and then the expatriation of profits are major obstacles to overcome. We recommend working closely with the State Bank from the start in order to reach early assurances that the investment goals can be realized.

Large Investment Required. The level of investment for each BOT project can easily exceed $100 million. As a result, World Bank, Asian Development Bank, and Original Development Aid funding are the most frequently sought. Vietnam has recently sold national and international bonds, but with yields of 21%, the sense is more of speculation than solid investment.

Additional opportunities for financing include:

• Upon approval of the State Bank, opening and operating bank accounts outside of Vietnam to obtain loans there for foreign repayment.
• Mortgaging or pledging assets of the BOT project, to include the contract rights. The BOT laws of priority of payment give some measure of relief to foreign lenders, but upon default, the mortgaged is compelled to use the assets of the project to continue its operation, as must any purchaser of the assets from the mortgaged. This is a restriction on the rights of the mortgagor who may need greater flexibility to dispose of assets and cease expenditures in a liquidation to recover its loan.

The State will appoint a bank or financial institution as guarantor.

CONCLUSION

When this series of articles was first published, we had no idea where we or Vietnam were going.  The first draft appeared in a short form in 1994.  It has been re-written a few times over the years.

As we conclude the most recent edition, we enter a new phase of our own, long operations as we branch further out into Southeast Asia, yet remain firmly in Vietnam. 

VVG came to Vietnam to help other investors get a foot and hand hold on doing deals in Southeast Asia.  VVG has itself entered the ring.  It is hard to avoid.   First VVG achieved authority to promote and develop the first major land development project (372 acres with a projected capitalization of $276.3 million) authorized to proceed as a fully foreign invested project.  See what we completed by looking at our Cua Lap Resort pages. That project has now been assigned to others.

Now we are expanding our Handicrafts operations to being full time Purchasing and Export Agents for foreign buyers.  See our work on the Agency pages

For the investor with knowledge and patience to learn more, Vietnam is a good place to be.

Please Read More From This Article:

Part I - Introduction | Part II - General Business Considerations | Part III - Cultural Differences

Part IV - Mechanics of Foreign Investment - Representative Offices and Joint Ventures

Part V - More Mechanics of Foreign Investment - Fully (100%) Foreign Invested Enterprises

Part VI - Still More Mechanics of Foreign Investment - Business Co-operation Contracts and Build-Operate-Transfer Enterprises.

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