June 2000 - VVG reports to clients on Vietnamese foreign direct investment.

IN THIS ISSUE
COMMENTARY: So Much Talk, but for whose benefit?
We see the effort; just look at the hard working people. We read of the effort; just open any domestic paper. We hear the desire; just listen to any official who is willing to talk. China has it now, but Vietnam is still only just talking. For whose benefit is the talk? That is the real question. See our commentary (linked above) and our dispatches (linked below).
Hanoi Water Park; domestic investment US Steel Project - Cancelled Flat?	Tax Disincentives - for domestic hires! VVG Sponsors Blind Students to Thailand

So Much Talk, but for whose benefit? We are there in force. We see, read, and listen. Sometimes we are amused; other times we are confounded. Take the 22-28 May 2000 edition of the MPI's own Vietnam Investment Review.

Reporting on selected portions of the presumptive debate in the National Assembly in May about the new amendments to the FDI law, we are told that many delegates were against granting tax concessions to FDI companies. One delegate from Quang Ninh province said:

"The most important thing is for FDI to improve the state budget revenue. This means that more incentives in terms of tax will lower FDI's contribution to the budget."

The attitude exasperated government officials who argued that the tax incentives would attract more FDI and hence increase revenue.

"We must use financial methods to boost FDI. The first priority is to promote better and stronger production capacity for FDI companies. Better state budget revenue will follow this but people always think about budget revenue and forget the rest," said [MPI] Minister Gia.

Should you wonder where it is and what is done in Quang Ninh province, it is physically in the northeast sector, bordering China and the East (South China) Sea. Quang Ninh is ranked 8th or 9th of 55 provinces in Vietnam in terms of the numbers of foreign direct investment (FDI) projects, with $846 million invested (or to be invested in) 52 licensed projects.

In terms that may be easier to understand, the amount of FDI money in Quang Ninh is about what Bill Gates earns each week. It is the size of the minimum projected increase for all of Vietnam in only the first year of export sales post NTR. The total FDI invested in Quang amounts to about 2% of all FDI in Vietnam.

Is it any wonder why a delegate from such an underdeveloped province received front page attention in the domestic media? Then the reader should realize that the media is openly called upon to propagandize the State's needs.

What we see here is the MPI calling to task the more conservative members of the politburo for their outdated ways that are still slowing Vietnam's growth in this market that should be dynamic but still stagnates.

We are reminded of the time in 1995 when we argued with MPI to allow a private, domestic land use owner to rent a building on his own land to a foreign investor. In the past, this could not be done without the land use owner first ceding his land to the state and being compensated for that act by the foreign investor.

We argued that the investor wanted to put the plant on his family's current land and not force them to leave. During our presentation, most of the good folks at MPI thought only of the lost rent that would go to the farmer if the State did not take control of the land.

Not even other foreign consultants thought we had a ice-cubes chance on a steamy HCMC street to succeed. "How can you separate a building from the land on which it sits?" queried one major law firm partner who still charges his corporate clients over $400 for an hour of his precious time. "It's like trying to take the skin off a cow to make luggage and still claim the cow can produce milk."

There appeared to be only one lone person who thought about the 350 jobs, the new technology, the increased income tax, increased turnover tax (now VAT), or the increased export revenue to be gained or lost by Vietnam. The foreign investor was not to be fooled with. He would not kick his family off its land only to be forced to pay rent to the state that id did not want to have as a land lord.

We received no support from foreign or domestic law firms, and even less from government officials. Other foreign investors openly laughed at us for trying such a foolish stunt!

For a long time it seemed that only we in Vietnam recalled that for over 1,000 years in the western world buildings and crops have been leased from the land owners, and mineral rights under the ground reserved by land owners who sold it. And then it was only we who called for logic and reason to prevail.

Eventually, MPI capitulated. In a private letter to the remote provincial People's Committee they agreed to allow the investor to rent the land from the domestic, private, land use right owner.

Then, it was only we who were surprised that our success in that early round made for headlines and long articles in the domestic media.

Now, in the present time, we must wait for the official English language translation to properly interpret the new amendments to the FDI Law.

However, while Minister Gia, was reportedly (on page 1) "quite upbeat about what the Assembly approved to what his ministry had submitted in draft recommendations," by the time he and we arrived at page 7 of the VIR, in response to the question about whether there are many changes in the new amendments, Minister Gia replied,

"There are not many differences. That's because what we submitted was suitable in regard to prevailing perceptions and circumstances."

We recently read that a Deputy Prime Minister disclosed that "meetings in late May were to resume negotiations on NTR." We were not surprised to read the next day of a complete denial from the US Embassy that was not challenged by anyone. We were surprised that the denial was printed in the domestic media.

All this is to show that there is an on-going conflict within the power circles of Vietnam's leadership as to the proper direction for Vietnam. We expect this will be resolved later this year and announced early next year in the 9th Party Congress as the five year plan (2001-2006) is announced.

We know that the good, hard working, and pragmatic people of Vietnam will eventually come to grips with the harsh reality of their own economic woes and take the no longer courageous step of opening its doors to the largest market in the world.

The alternative is to continue to hope for greater trade with China and Europe, or fall back upon the meager trade with Southeast Asia that earlier made up over 40% of all exports.

A positive sign is Party Chief Phieu's recent European trip to France, Italy and Belgium. Reportedly, this is the first time in his life that this Chairman has taken his international journeys beyond the traditional allies of the Communist party, typified by such trading giants as Laos, Cambodia, Cuba and East Germany.

Recently we described the economy of Vietnam was like the train from Hanoi to Lao Cai: old, tired, slow, in need of great repair, where the customers are put to great discomfort in order to ride for 10 hours in very difficult conditions.

An available alternative is to build a new train that can cut the drive-time to under 4 hours and allow all to make the ride in great comfort. The train will take more passengers, earn more money, and might even be able to increase the fares by offering true "first class" cars.

Of course, the management may require some changes, and the crew will all need to be retrained. But over all, the line and the people it serves will benefit.

We know both that the current flurry of words and the talk are not for the benefit of the Foreign Direct Investment Community. We also know that our metaphor is not yet universally appreciated by all elements in Vietnam. However, we are confident that true economic change will come.

The next window of opportunity is the spring of 2001 when the bilateral trade agreement and NTR will have the next chance to pass the muster of Congress.

We just don't know if the government of Vietnam will be ready by that time. However, we do hope that they are listening to and reading all those words.

HO TAY (WATER) PARK - Hanoi. The most surprising aspect of this huge park is that there is no foreign investment.

We were there on the second Sunday after its official opening and marveled at the throngs we estimated at from 6,000 to 8,000 people. With only a few 10s of foreign faces, the second amazing aspect is that so many in Hanoi are able and willing to spend over VND 100,000 per person for a day's outing.

This $9.4 million project belongs to Hanoi Entertainment Services Joint Stock Company, itself a group of eight domestic investors. First approved in 1998 and following 13 months of construction, in a nation where capital projects have not been widely seen during that period, this is all the more remarkable.

While the water slides are taller then those in the southern city of HCMC, the wave pool is noticeably far smaller. However, where the Saigon parks have room to expand for dry excitement, Ho Tay already boasts a huge, 60 meter tall ferris wheel, miniature rail way, bumper cars, and the like in its adjacent Vang Trang Park.

A dolphin pool, to rival the one in HCMC's urban district 5 location, is scheduled to open by year end.

Ho Tay Park will need dry venues to attract visitors during the cool (dipping to 40 degrees F) winter months from October to February.

While entrance fees do not discriminate between foreigners and locals, children under 1.1 meters tall can enter for VND 30,000 ($2.15) while taller folks must pay VND 50,000 ($3.60). The cost of food, drink, film, and souvenirs boost the day's expenses to a targeted, per capita average of VND 100,000 ($7.20).

Tax Disincentives - for domestic hires! Inequities in the laws of Vietnam often strike at foreign invested enterprises. But there are glaring examples of distress in the domestic labor market as well.

Hours of work are strictly regulated and watched, making foreign employers hostage to their workers staying on the job for no more than the required 8 hours a day. Workers in domestic private and state-owned enterprises still suffer from mandatory 12 to 20 hour working days, often 7 days a week. Many in the private domestic sector earning a fractional portion of the salary earned by domestic hires at foreign and some of the larger state-owned enterprises.

Health and social service fees are mandatorily deducted from domestic workers in foreign owned enterprises, but rarely in private or state owned enterprises. However, the benefits to be gained from such deductions are often elusory. The funds are directed to the general welfare of the state and not the individual domestic employees.

The American Chamber of Commerce has for years written policy papers to help Vietnamese law makers realize the inequity in domestic tax rates. They retard the growth of domestic high-end employment. Fearful that the State authorities would simply raise the tax rates on foreign workers to "level the playing field," many foreigners have been reluctant to put this item too high in their agenda of gripes with the government.

However, this information is now in the hands of domestic employees, and they are beginning to gripe.

The tax laws allow foreign firms to pay-in the taxes and fees for their domestic employees. Such payments are expenses to the firm but not considered income to the employees. This saves the foreign firms the extra cost of needing to "gross-up" the employees salaries. However, the cost to the firms to pay in the higher taxes and fees for domestic middle manager can be as much as $2,000 more than the similar costs to hire a local expat middle manager.

Not all foreign firms follow this policy. These costs that can reduce a mid-level manager's wage by 41% and more include: (i) Twenty three per cent (23%) for health and social insurance, (ii) A management fee of six per cent (6%) going to the managing Ministry, and (iii) An income tax deduction amounting to another twelve per cent (12%) for a person earning VND 6.6 million ($469) per month.

One foreign lawyer based in HCMC claims these costs are far higher, accounting for more than 70% of the total costs foreign investors pay workers.

US Steel Project Cancelled Flat? The first US project to receive a US TDA grant for a feasibility study (geared by design of the funding to specify the use of US imported material and technology), may be in a coma, if not dead according to statements from the highest levels of government.

The $360 million project, boosted for years by Greg Craft's Hanoi based organization, representing Massachusetts based Raytheon using North Carolina based Midrex Corp's technology for direct reduced iron (DRI), was slated to be in BaRia-VungTau Province an operational by 2003.

Licensed as a joint venture with State-owned Vietnam Steel Corporation, the project depended on the economical use of either associated or natural gas. As the supply of associated gas dwindles from the White Tiger fields, the new supply of natural gas from the Nam Con Son basin is stalled.

As BP-Amoco/Statoil (managers of the huge natural gas reservoirs) broker for higher gas fees in order to show a profit on their operation's need to build a line and transport the gas 400 km to Vung Tau, Craft has been brokering PetroVietnam to lower the price of his project's gas at least for the "first several years."

This high-profile project was commented upon by Deputy Prime Minister Dung who said the government has scrapped the plan. Vietnam Steel is reportedly now seeking to revive talks with an Australian group who sought to build a similar plant using different, coal-fired technology.

DRI is a feedstock in steel furnaces and reportedly one of the most sought-after raw materials in the world. The plan envisions exporting DRI and earning millions of US dollars in revenue. With a DRI annual capacity of 1.45 million tonnes, funding from the US ExIm Bank, and shares owned by Craft as well as Raytheon and Midrex, this was to have been one of the largest US projects in Vietnam, as well as making Vietnam one of the largest regional suppliers of DRI.

Reports are that the deal may not be as "asleep" or "dead" as the government claims. It is possible that this recent flurry of statements is simply another attempt to negotiate with the US side, using Vietnam's still preferred, though long outdated, brinkmanship tactics. Stay tuned for more.

VVG Sponsors Blind Students to Thailand. Long involved with assisting the blind in Vietnam, VVG, in team with Vietnam Airlines, is sponsoring two exceptional students to visit Vietnam. It is expected that more students will soon follow.

Vietnam Venture Group, Inc. and Vietnam Airlines are sponsoring a trip to Bangkok, Thailand for two exceptional achievers from the Bung Sang School of Music for the Blind in Ho Chi Minh City. The dates of the trip are from 8 - 15 June 2000. The total value of the trip exceeds US$2,000

The purpose of the trip is to allow the young men to audition for and hopefully attend a four year program of study in one of Bangkok’s leading schools of music: King Bhumibol College of Music; Chulalongkorn University’s Applied Art Department, or Ratchapat Bansomdej Institute of Music.

Mr. Duong Chi Hung, 23, born on August 6th, 1976 was blinded at age three by measles. Attending the Bung Sang School for the past 20 years, Mr. Hung has achieved the concert level of piano performance, as well as becoming fluent in English, Japanese, French, and Mandarin Chinese.

Mr. Dang Hoai Phuc, 18, born on March 15th, 1982, was blinded at age nine by an exploding military device he uncovered while preparing the ground in his family’s small rice field. Attending the Bung Sang School for the past 7 years, Mr. Phuc is the younger of the first two blind students to be accepted last September at Teachers College in HCMC. Mr. Phuc now performs at the concert level on the piano, violin and classical guitar. He also scores and writes his own music in Braille.

The achievement of both young men is typical of many of the 52 children from the physically very small but exceptional school. Two years ago another Bung Sang student won a four-year scholarship to study computer sciences in Japan.

In the past year, the Bung Sang School’s founder and teacher, Mr. Dao Khanh Trung, with a grant from Italy, established a computer science course at the school. Information about the school and its accomplishments is found on the Internet at their own web pages located at http://www.vvg-vietnam.com/bungsang.htm

When Hung and Phuc are accepted to attend a music program in Bangkok, VVG will start a new funding campaign to raise a total of $30,000 needed to finance both boys’ study in a 4-year degree program in Thailand.

The boys look forward to this opportunity to study advanced music theory in order to learn needed skills they can bring back with them to Vietnam, where they intend to teach both blind and sighted music students.

Siam University in Bangkok is now expressing an interest in speaking with additional students from the Bung Sang School to consider their applications for scholarships to study business in a four year program there.

Siam University, with 17,000 enrolled students, is one of Thailand's largest private universities. It has the second largest International program in the nation where all courses are taught in the English language by native English speakers. The teacher - student ratio in the International Program is one to five.