March 2001 - VVG reports to clients on Vietnamese foreign direct investment.

Issue No. 41
March 2001
Our eighth year in Vietnam & fourth year on the Internet

IN THIS ISSUE
COMMENTARY: Where Foreign Direct Investment Is Heading
The Nation awaits announcements from the now delayed 9th Party Congress: who will lead the next Five Year Plan and where will it take the State? It is no wonder that the foreign investment community keeps its powder dry. See our commentary (linked above) and our dispatches (linked below).
Ninth Party Congress To Meet 19 April NASDEQ, Morgan Stanley, & $ for VN? NTR Notes - Trade Barriers ....Fall? Gas Prices to Move..., UP? Not Political, but Worth Noting...	BP Consortium To Start Pumping Gas* HoChiMinh Highway Progress Report Internet Price Wars $930 Million Bauxite Plant Near Dalat Who Gets What? An inventory of benefits under the US - Vietnam Trade Agreement

WHERE FOREIGN DIRECT INVESTMENT IS HEADING. The Economist Intelligence Unit reported in late February that FDI inflow to the Asian-Pacific region has increased each year since 1992 with a record total of US$126.80 billion invested in year 2000. With a projected slowdown in recent mergers and acquisitions, a slow down to $123.10 billion is expected in 2001 but is expected to thereafter rise steadily to $170.7 billion in 2005.

While developed nations attracted the highest FDI, developing countries are expected to hold up better in the coming years, with their share of global FDI to grow over the next five years to nearly 30% from the current 20 per cent level.

Ten nations were expected to account for as much as 70% of the world's FDI, with the United States topping the list with an annual average of $236.17 billion or 26.6% of the world's share over the next five years. The UK, Germany, and China round out the top four FDI recipient nations.

China is expected to receive $57.60 billion a year over the next five years and lead the emerging market recipients. Hong Kong is ranked 9th expected to receive $20.50 billion per year. Brazil is the other emerging market recipient to make the top 10 list, coming in at number ten.

State oil and gas monopoly Petrovietnam is in talks with Morgan Stanley about a possible listing in the United States, the first ever by a firm from the communist country.

A U.S. mission reportedly will arrive in Hanoi next Monday to discuss the plan to add Petrovietnam shares to the list of tech-heavy Nasdaq shares. HANOI, March 8 (Reuters) See full story.

PARTY CONGRESS TO MEET - Vietnam's Ninth Communist Party Congress will open April 19 and will last for "three or four days," the head of the government's Ideology & Cultural Commission said on March 24.

First scheduled for March and then delayed for unexplained but well speculated reasons, the Congress will approve the Politburo's choices for senior personnel and policy changes. It has not been often that all three of the top leaders (Party Secretary, Prime Minister, and President) change at once, but there is speculation that may happen this April.

Policy changes will no doubt address recent civil unrest in the Central Highlands, but the foreign invested community hope for sweeping changes in investment policies, along the broad lines ushered in after the Sixth Congress in 1986 with the start of Doi Moi or "Renovation."

It is often easier to know the future by reading tea leaves than published reports in and about Vietnam, but stay tuned for more.

NTR NOTES - trade barriers.... Fall? The implementation by the State of Vietnam on trade practices and procedures required by various agreements are not couched in terms of the US Vietnam BTA, but each is directly related to Vietnam’s need to change the way in which business is conducted in order to comply with many of provisions of the BTA which mirror requirements for Vietnam to join the WTO.

Importers and exporter must pay attention to these important changes. The basic tenant is that Vietnam may not do with non-tariff barriers that which is it prohibited from doing with tariff barriers. Not all of these protections will come into force at once. For details on the BTA see our linked pages at :www.vvg-vietnam.com/bta2000.htm The full agreement consists of more than 135 pages and can be found on line. For more information start at http://www.state.gov/www/regions/eap/fs-us-vietnam_trade_000713.html

Recent headlines in Vietnam read, "Vietnam to take broom to trade restrictions."

However, in the US, the headlines are a bit less rosy, "US Official Sees Hurdles To Passage Of Vietnam Trade Pact"

Behind the headlines and before the propaganda, what is really happening is found our new article, BTA-March 2001 update.

GAS PRICES TO MOVE... UP? In order to get the long stalled natural gas industry moving, to allow gas to flow from the reserve-rich fields of Nam Con Son and others, the Ministry of Industry, EVN, and PetroVietnam must all reach agreement to raise the price of natural gas to the end consumer. Now for the first time, in the related field of LNG and LPG used for home cooking, the ceiling on such products may be lifted beyond the present VND 8,600 (US$59.3) per kg.

Gas generated from the Dinh Co plant in BaRia-VungTau that processes gas from the Bach Ho fields is presently US$100 per tonne lower than imported gas.

Once this barrier is lifted, it should be only a matter of time before the powers can agree on a fair price to the developers and allow the Nam Con Son gas lines to flow with the real power of the nation.

[See the late dispatch from Reuters that follows below about the start up of the BP gas fields.]

NOT POLITICAL BUT WORTH NOTING.... Following the visit to Vietnam of President Bill Clinton in November, the senior most leaders of China, India, and Russia have all made calls. The economic and strategic importance of Vietnam to Indochina and perhaps all of East Asia has not been lost on any of these major powers.

The economic climate has not been favorable to sustained growth in Vietnam for the past three years. ODA from Japan has not been the major factor it was once considered, and all ODA funding is seen as counter-productive to FDI. Who can or wants to compete with grants in assistance?

At present, it has been considered certain that India and the USA would not be making substantial grants to Vietnam. While there is some trade between Vietnam and these two nations, it is not significant.

US trade is expected to increase post NTR (MFN), that is expected this spring or summer. However, such growth will be incremental and without drama. The first industries to benefit are expected to be from the textile and foot ware sectors. That will first help foreign owned and not domestic controlled companies, but new hard currency will be infused into the local economy as well.

Chinese "grants" are few and wanting, and while there is major trade between the two nations, the vast majority seems to be clandestine or outright illegal smuggling practices.

However, Russia is a force to be reckoned with. The economic strength of Russia can be called into question, and particularly the viability of projects such as the two planned oil refineries and the new Investment arm of PetroVietnam (reportedly in league with the US's Morgan Stanley).

However, it is the lease on beautiful but more strategically important Cam Rahn Bay that expires in 2004 that can provide a driving force for even more largess from this not so sleeping giant.

We see that interest in taking over the Cam Rahn Bay lease may be the real cause for so much recent attention from major world powers.

Given that Russia is and intends to stay in Cam Rahn Bay, we can only wonder what sweeteners India and the USA may give to Vietnam in the form of economic assistance in order to win greater favor.

We doubt there will ever be any major economic assistance from China, and absent a complete regional upheaval, we also doubt there will ever be a Chinese presence in Cam Rahn Bay.

Foreign investors with an eye to the short and long term future, may want to pay greater attention to possible ODA grants from India and the USA.

*BP CONSORTIUM TO START PUMPING GAS. HANOI, Feb 28 (Reuters) A foreign consortium led by BP Amoco and Vietnamese state firm Petrovietnam on Wednesday formally launched a long-negotiated integrated offshore gas project worth up to $1.5 billion.

Executives from the consortium, which groups BP, Norway's Statoil and India's ONGC Videsh Ltd, attended a launch ceremony in Hanoi with representatives of Petrovietnam and contractors who will carry out construction work.

Wearing hard hats, representatives turned on a symbolic valve to inaugurate the project, which will tap natural gas from the Lan Tay and Lan Do fields in the block 06-1 in the Nam Con Son basin off southern Vietnam.

Negotiations first began on Nam Con Son in the early 1990s and dragged on to become a symbol of foreign investor frustrations with Vietnam. Key breakthroughs came at the end of last year.

Still undecided is who will build a third power plant to take gas from the field, a contract BP and Statoil are bidding for and would ask Germany's Siemens to construct.

The midstream and upstream parts of the project already approved are worth a combined $1.1 billion, including a $580 million pipeline.

BP has a 26.67 percent stake in the overall project, Statoil 13.33 percent, ONGC Videsh Ltd 45 percent and Petrovietnam 15 percent.

The foreign consortium estimates Nam Con Son has reserves of 59 billion cubic meters, which would be commercially viable for 20-25 years. The peak pumping rate envisaged is 2.7 billion cubic meters a year. It is aiming for first gas in 2002.

Last week, Vietnam approved a Petrovietnam feasibility study to develop a urea plant in the southern coastal province of Ba Ria-Vung Tau that will take Nam Con Son gas.

It would cost an estimated $486 million and will use technology from Denmark's Haldor Topsoe and Italy's Snamprogetti.

Haldor Topsoe is 50 percent owned by Snamprogetti, a subsidiary of the large Italian energy group ENI.

CONSTRUCTION OF THE HO CHI MINH HIGHWAY - Construction is accelerating, according to Vietnam's official news agency VNA.

By early March this year, more than 8,000 road builders from 28 units of Vietnamese Ministry of Transport and Communication had cleared 442 kilometers (km) of ground and removed 16,514 unexploded bombs, mines and bullets. The road surface was also enlarged by more than 200 kilometers by removing 8.5 million cubic meters (cu.m) of stone and soil, building 53 bridges and 5,000 meters of sewerage and cutting 200, 000 cubic meters of stones.

The 1,690-kilometer highway is planned to connect Hoa Lac village in northern Ha Tay province to the Cross Road of Ho Chi Minh City's Binh Phuoc via the historical Ho Chi Minh Trail. Construction of the second trans-national highway in Vietnam started on April 5, 2000.

INTERNET PRICE WARS - Even under the market style economy pursuant to Vietnamese Socialism, when supply exceeds demand, prices should fall. That does not always work that when it comes to goods and services offered to foreigners, but this is one of those exceptions.

With ever increasing numbers of “cafés” (coffee shops, small restaurants, small hotels, and tourist shops) offering Internet service, the basic on-line fee of 300 dong (two cents) per minute has been reduced from 800 to less than 200 dong, and reportedly as low as 150 dong (1 cent) per minute.

This below cost pricing would be considered “predatory” but for the small size of the market and the smaller size each café has of the market.

We also understand that the computer wizards program several PCs to operate on a single connection, so that the actual on-line cost of 300 dong is divided among several users if there are many on-line at the same time.

In reality, the low price is in line with domestic retail values where a family will rent an apartment for $10 per month, Coca-Cola sells for 20 cents a glass (33 cents for a can); a meal for under $1, and a Honda taxi driver makes almost $1.50 in a twelve hour day.

Clearly the cafés are using their Internet connections to attract customers for their other services, and not always as loss leaders.

But their customers are not domestic Vietnamese. Interviewed in the local media, many locals feel the Internet is still too costly for them and therefore “useless.”

One law student claimed he had no need for the Internet. “The government provides us with all the information we need, and more than I can ever read. Why should I waste my money to read the lies on the Internet?”

Who ever has been teaching that young man must have been grooming him for a high level position in the Government as it may have existed in 1981. The pity is this is a contemporary comment by a 24 year old student.

We are told that rates are still dropping, not only in Vietnam but also in smaller Laos. Let’s hope that law students in both nations are not widely persuaded to avoid using the Internet, and that the government will make access available to more of the highly educated youth, some of whom are clearly in need of a broader band of data.

$930 Million BAUXITE PLANT - Vietnam has selected a site within 100 km of the DaLat resort hill station for a $930 million plant, and reached an agreement to receive French technology and equipment to operate it.

The government reportedly reached agreement with French aluminum firm Pechiney to a proposal to build the bauxite-aluminum complex to include a hydropower station at Tan Rai in the central highland province of Lam Dong. Pechiney will also transfer the needed technology and equipment.

Bauxite is the raw material from which aluminum is produced. According to an initial feasibility study, the plant will be 220 km (137 miles) northwest of Ho Chi Minh City and consist of bauxite mines, smelters and aluminum electrolysis factories.

The first phase is planned to be operational in 2006 during which the complex would tap 1.7 million tonnes of bauxite a year to electrolyze more than 300,000 tonnes of alumina, an intermediate raw material in the production of aluminum. More than half of this would be exported and the rest used to turn out 72,600 tonnes of aluminum ingots per year.

Vietnam reportedly has bauxite ore reserves of up to eight billion tonnes, among the largest in the world, but all remains untapped. The complex in Tan Rai would be the biggest of its kind in Southeast Asia.

Vietnam holds considerable potential but key impediments are an unattractive 1996 Mineral Law and a perceived stranglehold over the industry by state-owned enterprises. The law, which governs all mining in Vietnam, does not give finders of commercial deposits automatic rights to tap the discovery, only so-called "special" rights, a status considered too risky for most foreign firms.

WHO GETS WHAT? An Inventory of Benefits Under the Trade Agreement with Vietnam - From the Coalition for U.S. - Vietnam Trade.