May 1999 - report to clients on Vietnamese business, investments & solutions to problems

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

5) Hotel Industry: It's a struggle so far

PROGRESS ON BP/STATOIL GASFIELD. Following two years long and hard negotiations, a consortium lead by British American Amoco (Britain) and Statoil (Norway), along with Oil and Natural Gas Corporation - ONGC (India) signed a memorandum of understanding with Vietnam's Petrovietnam covering the rights to exploit the Nam Con Son gas field with its huge reserves estimated at 57 billion cubic meters. Reportedly this MOU also covers the construction of a 650 megawatt, $400 million Phu My III power plant.

A separate MOU between BP-Amoco and Petrovietnam covers the construction of the needed 400 km pipeline. A third MOU deals with price of gas, currency conversion rights and other undisclosed commercial terms.

The extraction of gas will be covered by a production sharing contract in which ONGC will take 45%, BP/Stat oil will take 40%, and Petrovietnam will take 15 per cent.

The pipeline will be constructed by BP/Stat oil under a BOT arrangement with Toman and Mitsui of Japan.

US Oxbow Power plant "fired-up." Well, the negotiations have been warmed over, at least. The all important Ministry of Industry now states that the government has agreed on a set of electricity prices that may be more favorable to the American project that has been stalled for more than two years.

The issue has been the price the State would pay for the power generated from the BOT projects 300 megawatt coal-powered facility. Under the terms of a Build Operate and Transfer contract, the foreign party must turnover ownership and operation of the plant at the expiration of its term without any additional payment.

In the case of all BOT projects, it is vital that the State guarantee a rate of pay that will allow the investor to recover both its initial funds and a reasonable rate of return over the full term of the contract. The system of laws to guarantee such recovery over time is yet another issue and hurdle that has prevented other BOT projects from coming on stream.

Disagreements included the price that the project should pay for coal, as well. However, it is claimed that the cost of power purchased has been larger stumbling block. When last reported, the state offered less than five cents per kWh while Oxbow held out for approximately 5.8 to 6.0 cents.

Initially operation was due to have started in 1999 with turn over 20 years later. Watch this space for current news.

Wartsila Power Plant Plows On. Build Operate Transfer (BOT) projects are not thriving in Vietnam, although in theory they remain a darling of the Government. It is easy to see why if you have tunnel vision.

Following years of protracted negotiations and delays, the nation's first BOT power project may yet soon be commissioned this month.

This $120 million, 120 megawatt power station at the Ba Ria Power Plant was last expected to be generating power by October 1998 (after several earlier set-backs).

The Finish firm complained about a lack of access to foreign currency, weak security for lenders to the venture, and "unsatisfactory risk-sharing conditions" (read that to mean price and energy cost guarantees). Then the World Bank's International Finance Corporation (IFC) that is providing a low interest loan of $95 million to build the plant, put the project on hold, due to the many problems that could not be smoothly resolved.

IFC has asked for the right to take over the power plant if Wartsila defaults. This is no doubt due to the failure of the parties to agree on price that the plant will be allowed to sell power.

The tactics taken by some in offices of State management seem to indicate it is to the State's best interest to make terms that foreign investors cannot abide by, and thus insure early abandonment and transfer to the State that can then buy fuel and sell power without the need to recover the huge investment need in the first place.

The government predicts a power short-fall of 250 megawatts this year. This could climb to a shortage of 4,000 megawatts in the next two years.

Automakers' Rough Road Ahead. A collision course is predicted between local supply and demand that could destroy the nascent auto industry of Vietnam.

The 14 auto joint ventures in Vietnam need government protection from contradictory and shifting policies in order to be allowed to grow. Problems include less-expensive second hand cars that flow into the country, a large value added tax, special sales tax, placed on locally made vehicles, and a promised buyer market that has not matured.

The latest figures for the first quarter of 1999 shows total sales of 1,284 units, a 10% slip from 1998. For example, Toyota first quarter sales were an abysmal 343 cars, down from 485 for the same period last year. The plant has an operating capacity of 10,000 units based on only two shifts, or nearly double the annual sale of all 11 operating joint ventures.

In March 1999, Daewoo Motor Company announced that it was buying out its joint venture partner in its $32 million plant. If approved by MPI that seems inclined, it will make Daewoo the first fully foreign invested auto maker in Vietnam.

Hotel industry: a struggle to survive. HCM City hoteliers were pleased to see a sharp increase in foreign tourists visiting the city early this year, but that hasn’t translated into higher occupancy rates. According to a report released by HCM City Service for Tourism, in the first quarter of 1999 tourist arrivals were nearly 290,000, an increase of 11 per cent compared with the same period last year.

The hotel business remained sluggish and occupancy rates stand at 34 per cent, the report continues, as low as the occupancy rate in late 1998. A private survey conducted on 30 State-owned and private hotels in the city revealed that occupancy rates decreased by two per cent compared with last year, and they . have not been operating at a profit.

The Hanoi situation is not any different. Hotels in the capital city, which welcomed many Government delegations for international and regional meetings in 1998, suffered an eight per cent drop in occupancy rates last year. Several multi-million dollar joint-venture hotels and the mushrooming of mini-hotels resulted in the falling occupancy rates from 48 per cent in 1997 to 40 per cent the following year.

The solution is simple – attract more guests. Sales at these international-standard hotels were by no means up as their managers have been cutting room rates up to 25 per cent to make them "internationally competitive." Clearly that is not sufficient to attract an increase of visitors. Bangkok five-star hotels have recently been charging guests less than US$40 per night.

Contrast the new Hilton Opera in Hanoi gets over $125 per night, while the Metro pole seeks an outrageous price of over $200 per night.

The situation in HCMC is only a small degree better, with the new 5-Star Sofitel getting $55 per night on stays of two nights or longer. The now venerable New World Hotel Saigon get $68 per night.

While the industry struggles to find new ways to increase occupancy, the loss of traffic goes far beyond the ability of the hoteliers to control. Government policies do not allow broad international bookings except by the few authorized State-owned agencies. Official elimination (scheduled for July 1, 1999) of dual pricing and other burdens on foreign travelers, will have little effect so long as other problems remain, such as: (1) an artificially high rate of exchange; (2) difficult to obtain and expensive visas; (3) assaults by legions of beggars who will not accept a simple "no;" (4) similar assaults upon visitors’ wallets by hotels, shops & restaurants that overcharge foreigners in US dollars; (5) the absence of an honest police force to compel compliance; and (6) Immigration and Customs officials that demand and get entry and exit bribes.

With 3,050 hotels totaling 55,000 guest-rooms nation-wide (80 per cent located in major tourist center like Hanoi, HCM City, Quang Ninh, Hai Phong, Thua Thien - Hue, Da Nang, Khanh Hoa, Lam Dong, Ba Ria- Vung Tau and Can Tho), Viet Nam now has enough accommodation facilities for the year 2,000. A new, national, promotion campaign, "Viet Nam - A Destination for the New millennium" is expected to start soon.

More than modest promotional changes are needed to make any real difference soon.

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.

VVG - VIETNAM VENTURE GROUP, Inc.

VIETNAM VIGNETTES^Ž

VVG - VIETNAM VENTURE GROUP, Inc.

VIETNAM VIGNETTESŽ

VIETNAM VIGNETTES^Ž