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Issue No. 17
February 1999

A Periodic Report to Our Clients
(higher numbers indicate more recent dispatches)

See VVG's new monthly feature on Current Economic Indicators

Current Dispatches

US - Made Goods Now 50% Higher. 

[Commentary by VVG]  In a move that should have been known to cause substantial distress, Vietnam on January 1, 1999 imposed a restrictive import tax on goods manufactured in nations that do not have Most Favored Nation (Normal Trade Relations) status with Vietnam. Those nations that do have existing bilateral trade agreements retain their Normal Trade Relations status and respective customs duties. Member states of ASIAN retain their multi-lateral trade agreement, more favorable trade relations.

Unlike the United States that imposes restrictive tariffs (Category X -- trade embargo, and Z -- punitive tariffs that can exceed 50% for States such as Vietnam), Vietnam has taken a route that has the same practical effect without the punitive sound.  However, the international investment community is left to wonder why Vietnam allowed such a measure to be enacted at this crucial time.

It is important to note that the only major trading partner with Vietnam that does not have a bilateral trade agreement with Vietnam is the United States. Speculation is that Vietnam imposed this new three level duty in order to inspire America to more quickly conclude the two-year old negotiations on the trade agreement. What makes this act so remarkable is Vietnam's insistence in all other matters that it will resist such pressure brought upon it by other States.  It may be this action will achieve the results of concluding the negotiations, but not as Vietnam would seemingly prefer.

In a letter addressed to the Prime Minister, the American Chamber of Commerce in Vietnam recently wrote in part:

The timing of the tax increase may delay any further trade negotiations as it introduces a new element into the discussions. Previously, negotiations had been making good progress. Both local and foreign invested businesses were optimistic that an agreement could be reached soon making increased business with the United States a near-term possibility. Now it is uncertain that trade negotiations can continue while the increased tax is in effect.

Should this matter persist, as America's window of opportunity to conclude the bilateral trade agreement will expire at the end of 1999.  No one seriously believes that an agreement will pass in the year before the presidential elections in 2000, meaning that the first possible time after 1999 will be 2001 for negotiations to resume with any possibility of passing Congress.

The bottom line may well be that Vietnam fails to complete the renovation process begun in 1986 and successfully carried out for the past 12 years.  Concluding its remarks, AmCham  writes:

Finally, such a swift and punishing change in import tax rates will damage Vietnam’s perception among current and potential foreign investors. In our view it is certainly not consistent with Government Decree No. 10/1998/ND-CP promulgated only a year ago to encourage foreign investors. Unless rescinded or postponed soon the tax could injure Vietnam’s reputation as a fair and cost effective place to engage in business and have a long-term negative impact on future foreign investment decisions.

Stay tuned. Business on the frontier of development has not ever been so interesting, or so inconsistent.  We suspect that the pragmatic Vietnamese will see the error of this most recent error in judgment, and rescind this law as it has rescinded other laws that were enacted without adequate preparation.

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Investment Action, Not Just Words

[As reported in the State owned media with commentary by VVG]   In an effort to help and encourage investors the Government has been removing long complained-of obstacles and implementing a series of strong measures. These measures, according to many economists, should have positive effects on the production and business sides of foreign enterprises which are working in a context sometimes greatly aggravated by the regional economic flu. They also, say the Government, show VN's determination to freshen the investment.  Six key moves are:

(1) Land rent prices [The State is cautiously moving in the right direction.  The question is if the movement has been too little and too late to make a difference.   It is VVG's experience that a good investor can make a good bargain on a worthwhile project.]

The first measure undertaken by the Government was a reduction in land rent prices applied for by infrastructure developers of some industrial zones in the north.  These in turn, reduced the land rent prices and fees for enterprises renting plots from them.

According to an official from the Ministry of Planning and Investment (MPI), over 100 projects in these zones have to date enjoyed a reduction in their land rentals due to the benefits of the initiative.  In addition, about 150 foreign-invested enterprises, of which 70 are joint ventures operating outside the industrial zones, are also enjoying reduced land rents.  These reductions were introduced by the Ministry of Finance (MoF) last year.

Referring to areas which have yet to experience a cut in rents, a MoF spokesman said: " I hope that reduced land rent prices will materialize as soon as the provinces' People's Committees' chairmen have been assigned to adjust the prices by the Prime Minister."

2)  Profit tax [The actions by the State are more varied than a reading of the laws, or published reports on the laws -- such as we reprint here -- would lead strong investors to believe.  Once more, it is a question of the State's cautious behavior in the face of generations of foul play by foreign interested concerns.]

The second measure is an adjustment of profit tax and tax exemption periods for 320 foreign-invested enterprises which produce exports, process agricultural produce and operate in remote areas.  Tax exemptions run for five years on imported materials of some special projects in mountainous and remote areas, as well as projects of special encouragement, while enterprises selling their products to export manufactures are also exempted from import taxes.

In addition, the Ministry of Finance has increased the import tax levels imposed on 565 imported products and reduced the taxes on 35 imports.  Products subject to increases or decreases in import levies were in part selected according to how they affected foreign-invested enterprises.

3)  Domestic consumption

The third measure was an adjustment of the proportion of goods permitted to sell in the domestic market in accordance with the enhancement of  import-export policies.   To facilitate more business for foreign-invested enterprises facing difficulties caused by limited exports markets, the MPI allowed 25 enterprises to increase marketed domestic product ratios for the 1999-2000 period.

4)  Foreign currency [Not discussed in this State presentation is the availability of foreign currency. Receiving authority to convert is important, but the adequacy of foreign reserves will not be certain unless and until NTR (formerly MFN) is granted in a bilateral trade agreement between the US and Vietnam.]

The fourth measure concerns the selling of foreign currencies to foreign-invested enterprises. Around 288 enterprises have been granted foreign currencies exchange certificates by the State Bank These allow them to buy foreign currencies at commercial banks.  Moreover, eight groups of goods were added to a list of 51 essential import-substitutes by the MPI. Businesses producing these substitutes will be given greater assistance in the purchase of hard currencies.

5)  Business scope [Not discussed but also not forgotten has been the long struggle to get to this point.   However, this does provide a good measure of comfort to investors that while the State may seem to move slowly in key directions, there is movement consistent with the opening up of the nation to foreign investment.   One need look no further than VVG's own Cua Lap Resort, the nation's first major land development project (372 acres of beach and highway frontage with investment capital of $276.3 million) authorized as a fully 100% foreign invested project.]

The fifth measure focuses on the expansion of business scope, extension of operational terms and the conversion of forms of investment. Around 80 foreign-invested enterprises are now being allowed to increase their investment capital and operational terms last year. Additionally, some enterprises with severe financial and business difficulties have been allowed to speedily convert themselves from joint ventures into 100 per cent or almost 100 per cent foreign-invested entities or change owned companies.

6)  Administration

The sixth measure should produce an improvement in administrative procedures, a simplification of customs and import-export procedures, and bring investors' proposals into better focus.

People's Committees of all provinces, cities and 10 industrial zone (IZ) managerial boards have been given permission to grant investment licenses without strict referral to the MPI or other ministries. As a result, 179 projects with a total capital of $399 million were licensed by local authorities, while 111 projects with a total capital of $590 million were licensed by the IZ managements.

In all, 260 foreign-invested projects with a total registered capital of $4.06 billion were licensed by local and central Vietnamese authorities across1998. This is 10 per cent down on 1997's total.

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Foreigners' Equitization Policies Loosened

The door for foreign investment in VN's state sector was finally opened last year after months of political indecision among Government officials.

By allowing foreign investors to purchase up to 30 per cent of shares in State-owned enterprises (SOEs) following equitization, the Government hoped to accelerate what had, on paper, amounted to a dribble of equitized companies despite the fact that months of preparation were made for an SOE drive.

The deputy head of the Equitization Board, Nguyen Van Nghia, told VN Investment Review that foreign investors would even be permitted to purchase more than 30 per cent of share holding in SOEs once documented proof of the existences had been submitted.

However, details have yet to be released as to what special circumstances would likely qualify foreign investors wishing to purchase more than 30 per cent of any one SOE.

The Government also announced plans last year to establish an Equitization Assistance Fund to simplify equitization procedures in a bid to accelerate reform.

The Binh Minh Garment Company and the Halong Bottling Company have already sold shares to foreigners under this umbrella and negotiations have begun for the partial foreign sale of two more enterprises.

The Government has tabled plans to equities 400 SOEs this year, despite having equitized only 98 last year-well short of the target of 150-bringing the total number of equitized enterprises to 116.

"VN's equitization program must be further implemented to ensure that SOE's maintain their effectiveness," said Prime Minister Phan Van Khai at a press conference earlier this month.

"We need to tread very carefully without rushing. There Prime Minister stated that the equitization program aims to mobilize idle domestic capital, improve SOE competitiveness, create more jobs, renew SOE management structures, enhance worker incomes and increase economic growth.

Initial equitization results have already proved positive, according to an official from the Central Board for Enterprise Renewal and Management. The official revealed that the equitized enterprises that have operated for over a year have made "positive achievements" in production and have mobilized capital levels higher than prior to equitization.

These enterprises, in general, show higher growth indicators than before equitization," the official said.  "Capital increased by an average of 183 per cent, revenue by 133 per cent, profit by 131 per cent, average income by 29 per cent and budget
contributions by 153.5 per cent."

But most remarkable is that share values experienced average growth of  between 2.6-5.0 per cent each month. "This proves that, in an identical environment, equitized enterprises operate more effectively, or at least not worse, than State-owned
enterprises," he said.

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Power Monopoly Set to End

Foreign investors and private enterprises will be allowed to conduct electricity trading alongside the longstanding monopoly Electricity of VN, according to a Government draft decree on electricity management.

The draft says that electricity will be wholesaled to rural, mountainous and island areas at VND 360 (2.6 cents) per kilowatt-hour on master meters, from which companies in all economic sectors can buy and then resell to rural families and businesses on independently operated grids.

According to the draft, Electricity of VN (EN), will be in charge of supplying electricity at the fences of selected industrial zones (IZs), at which investors can establish their own power stations and electricity trade.

However, the draft states that electricity prices in specified IZs will have to comply with Government terms.  " The draft decree is aimed at ensuring equality of the power industry for citizens and investors. There will be detailed regulations stipulating
punishments on the power industry if agreements signed with customers are violated, such as though sudden power cuts, which generate losses for the enterprise," stated an official from the Compilation Board.

Power plants, regardless of their ownership, must be granted certificates proving they are eligible to operate, the draft says. According to an official, only Hiep Phuoc Power Plant in Hiep Phuoc IZ held a certificate.  An independent inspectorate will oversee all electricity-related activities.

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Vietnam Vignettes is a periodic report distributed since early 1994. It is NOT a newsletter although for the ease of linkage we have called it that.  It is a summary of domestically published  media reports from more than 17 industrial sectors that we at VVG follow and report upon for our clients. * Due to the importance of certain topics of key importance to trade with Vietnam, we will occasionally include some wire and other media reports.