March ‘98 - report to clients on Vietnamese businesses, investments & problems

IN THIS ISSUE

Jackson-Vanik Waiver Granted

Proctor & Gamble Accord Reached

Land Lease Rentals Reduced

New Laws Against Corruption

New Foreign Investment Rules

Redefined: First Oil Refinery

Jackson-Vanik Waiver Granted. The 1974 amendment to the Foreign Relations Act was inspired to hold the former Soviet Union to task for prosecution and other harassment of Jewish residents who sought to emigrate to Israel or America, and were prohibited by the Soviet leaders. The amendment requires for all Communist (non-free-market) nations that freedom of emigration is a pre-requisite for allowing the Import-Export Bank and OPIC insurance and trade benefits to be granted. These steps are also themselves, pre-requisites for the establishment of a bilateral trade agreement with America, and a standard for entry to the multilateral World Trade Organization.

In early March 1998, President Clinton declared Vietnam to be in full compliance with the US efforts to account for US servicemen missing in action or taken prisoner during the war. One week later he waived the requirements of the Jackson-Vanik Amendment. Congress will annually review this waiver to insure that Vietnam continues to improve its internal policies on the right of its citizens to freely emigrate.

Citing the waiver as the best way to encourage further progress, President Clinton's message broadly refers to many changes in Vietnam in the past several years. Since 1979 more than 480,000 Vietnamese have entered America through the Orderly Departure Program (ODP). The almost one million who entered via refugee channels are not included in this ODP accounting.

The Resettlement Opportunity for Vietnamese Returnees (ROVR) allows for a review of those Vietnamese who sought and were denied refugee status, and preliminarily deemed economic and not political refugees. It is estimated that more than 18,000 of the returning refugees are included in the ROVR grouping, and to date 14,000 have been re-interviewed by the US INS.

Vietnam announced a relaxation on the issuance of passports to all its citizens, and withdrew its requirement for an exit visa in addition to a passport. It is too soon to tell if and how these has freed the right of ordinary Vietnamese to travel abroad. It is well known that many long-time, multi-generational residents of Vietnam are still routinely denied citizenship, and therefore passports. However, this does not seem to be a focus of American authorities.

Proctor & Gamble Accord Reached. Following months of dispute, the State has agreed to relax its earlier agreement for a joint venture with P&G, but that is not the end of the story. Proctor & Gamble elected in early 1995 to form a joint venture manufacturing concern as the best way to make and distribute its products in Vietnam. At the time, the minimum ownership share of any joint venture was 30 percent. See GETTING STARTED - An Insider's Guide to Starting a Business in Vietnam for a discussion on the pros and cons of such a decision.

Following its initial investment of $10 million, P&G determined a need to increase its capitalization. This we most easily accomplished by borrowings that did not require any government approval. The initial ownership distribution, 70 per cent P&G to 30 per cent to the State owned company, Phuong Dong, did not change. However, the loans amounting to more than $28 million and and an operating loss of a further $7 million (versus an initial capitalization of $13 million: including $3 million as the minimum value given to Phuong Dong's interest), proved a challenge: both for the State to pay, and for P&G to carry alone and yet retain a "30% partner."

Seeking to convert its Joint Venture into a fully foreign owned enterprise (as has been done by a few other who faced similar but smaller problems), P&G has now accepted a reduction of its partners share to a mere 7 per cent and will carry the losses, and increase its capitalization accordingly. However, major problems remain as Vietnam will no doubt seek to exert its veto powers over major decisions in operations, and extract what ever money it can in projected profits.

That is the problem. P&G, one of the world's greatest marketing geniuses remains subject to the dictates of one of the newest entrants to the free-market world. Complicating matter further is that the same Vietnamese joint venture partner is also a partner with Unilever in Vietnam, P&G's arch rival. There is little doubt that such conflicts are not yet over.

Land Lease Rentals Reduced. Although the numbers are not yet clear, the Ministry of Finance has reduced the fees for new projects, both in developed urban centers and isolated, underdeveloped areas. The concept is to attract investors by bringing land use fees down. The stated goal is to "save investors paying urban rents on rural property," but indications the actual reasons are far more broad.

Land, near to top-grade urban areas, will have a minimum leasing fee of from $0.18 to $1.08 per meter square per year. These rates will apply to new projects only. Fees on existing projects will not be changed. However, rent in Industrialized Zones and Export Processing Zones will also be reduced.

Investors who pay rent for five years in advance will get a 5 per cent reduction, and a further 1 per cent reduction for each following year. These fees will apply only to projects that receive a license after 10 March 1998.

New Laws Against Corruption Explained. Three ordinances now make it more clear that prosecution will be taken against any state employee or official who either (i) embezzles VND 5 million or more (US$385) or (ii) takes a bribe over VND 500,000 (US$38.50).

Civil servants are banned from setting-up or running private enterprises in sectors in which they have power or authority. Parents and children of the head or deputy head of Government enterprises are prohibited from buying shares of companies operating in the same type of business. The head or deputy head of a Government office or company is not allowed to have a parent, spouse, sibling or child employed as the head of the personal section, accounting department or payroll section in that same office or company, or buying material or equipment for that same office or company.

New Foreign Investment Laws. The Prime Minister issued Decree 10/1998/ND-CP in January 1998 that provides new guidelines for increasing incentives to foreign investment but at the same time guarantees that no interpretation shall hinder projects earlier licensed. That is a big step for Vietnam, where retroactive aspects have sometimes been applied to the disadvantage of companies established under earlier, more favorable laws. In middle March he amended the decree in several significant ways.

Encouraged Projects: Especially Encouraged Projects (EEP) and simply Encouraged Projects (EP) are now clearly and openly listed, also a first. Additions include: (i) projects for new or hybrid breeds (EEP); (ii) technology for the preservation of food (EP); and (iii) production of insecticides which are safe for humans, domestic animals and environment (EP).

Geographic areas where investment is encouraged are listed for the first time. Specific regions, provinces, towns and even districts are now listed, nationwide, in both (i) mountainous, remote and deep-lying areas, and (ii) areas with socio-economic difficulties. It is in these two areas that some surprises may be found to those not very familiar with Vietnam.

Dong Nai province is the third most heavily invested province in Vietnam (196 projects, 3rd after HCMC and Hanoi) holding more than 11% of all foreign invested projects. Yet three districts of this province are indeed, and are now listed, as remote and deep-lying.

HCMC, the nation's leader both in terms of number of investment projects and dollars invested, yet has two districts listed as Areas with Socio-Economic Difficulties that enable special incentives for encouraging investment.

Projects banned from investment are for the first time clearly listed. They include projects that: harm the national security; damage historical relics; adversely effect the environment; importation of toxic waste for treatment; and production of toxic chemicals or use of toxic elements prohibited by international agreements.

Additional Changes: (i) Newly licensed projects can immediately begin operations and need not delay for other licensing procedures; (ii) Finance Ministry will coordinate with MPI and Land Management Administration to make public new regulations governing land rental; (iii) Custom must now for the first time make public "immediately" all regulations under its jurisdiction "to simplify procedures for domestic and foreign companies; (iv) Foreign and Interior Ministries are to allow foreign investors to stay for one-year with extension, with multiple-entry, three year visas to be available for investors. The fees for visas will be adjusted, but no direction in that adjustment has been stated.

Redefined: First Oil Refinery. Dung Quat, for all time until the past few years a sleepy coastal community near DaNang in the Central Region, has been the center of controversy since the French oil giant, Total, pulled out of the original $1.2 billion project to build Vietnam's first-ever major oil refinery. Originally planned for Vung Tau, near the southern oil fields and the heart of Vietnam's commercial capital, HCMC, the refinery was later on paper moved to Dung Quat. Total claimed the cost would be increased by that move to from $1.5 to $2.0 billion. The Vietnamese did not agree, and the project seemed to languish.

Within a few months, a consortium of more than 10 companies was formed to replace Total, but they too, following the completion of a multi-million dollar feasibility study, pulled out after concluding that insufficient profits would be made due to the high costs of transportation and government- enforced low sales price for refined products. Interestingly, the project was described as a $1.5 billion investment.

Vietnam then proclaimed it would build the project alone, asserting its ability to raise $1.5 billion from state funds and international financing without the presence of a foreign partner. The project did not sit still, however. The state began to clear land and make preparations for the eventual construction of the refinery, as well at the development of the surrounding area.

In mid-March the Russian State petroleum company, Zarubezhneft, announced with PetroVietnam, their agreement to build the refinery with a total projected investment of $1.4 billion. Zarubezhneft and PetroVeitnam have long been joint venture partners (VietSovPetro) on the first, and to date only commercial viable oil production fields. Bach Ho, Rong, Dai Hung and Bunga Kekwa reportedly produce 33,000 tons of crude daily.

The Bach Ho field has also been flaring billions of cubic meters of associated gas since 1986. In late 1997 with the completion of a compression station, 3.5 million cubic meters of gas can now be brought ashore to fire power plants in Ba Ria and Phu My.

Coming at the time of a series of meetings this month with high-level Russian visitors meant to strengthen mutual ties, and given the long-standing negative economic review by respected, international petroleum leaders, it seems that the investment by Russia may not be for purely economic motives. It is of interest for Vietnam to both bring refined oil products on-shore more cheaply than by importation, and to build-up the central region. The close cooperation with Russian interests may provide the necessary method to achieve these important national goals that were not available under a purely market-driven project.

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.

VVG - VIETNAM VENTURE GROUP, Inc.

VIETNAM VIGNETTES