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

Issue No. 44
June 2001
Our eighth year in Vietnam & fourth year on the Internet

IN THIS ISSUE
COMMENTARY: The BTA and other good signs point the way forward, but....
With the Bush team passing the BTA to Congress, and the growth in domestic enterprises, we would like to feel encouraged. However, Vietnam remains a land of two steps forward and one step back. See our commentary (linked above) and our dispatches (linked below).
World Bank View: Progress but...* The service stops, but only the consumers care Land Law: VK can buy land, almost.... Trade Pact Sent to Congress	400 euro million plant in Vung Tau Russia and Cam Ranh Bay* Vietnam eases restrictions on banks

TWO FORWARD AND ONE BACKWARD STEPS. The BTA and growth in Domestic Enterprises are forward steps of substantial size. However, domestic cronyism, lack of real transparency in the decision making stages, and the fact that no deal is completed until it is completed, do not bode well for Vietnam's investment future.

By way of contrast, consider the Cannon investment in both Vietnam and China. Where US$67 million will be invested by Cannon over time in the new photocopy plant announced several months ago for Vietnam (see Vignettes No. 42), over US$ 1.2 billion from Cannon will go to build it's new facility in China. It is not just that China is larger, but they do things better then in Vietnam with regard to meeting the foreign investors need know, close on a deal, and to recover both investment and a profit.

Large projects not inherently unprofitable as Vietnam seems to tell investors. Vietnam does not capture many medium and small projects either. Many developers, still not able to attract investors due to the inherent problems of doing business in Vietnam as well as the regional slow down, are now being threatened with the revocation of their license. Such pressure merely provides support to foreign boards to hasten the end of their work in Vietnam, not invest earlier.

Domestic media reports are difficult to find about new plant openings and project commissioning. We read about plans to change this, concerns to modify that, and hopes to build a better climate tomorrow.

One of the silliest articles recently published was not news at all. The British insurer insists on sticking to the representations made by a famous opera singer when she applied for life insurance. Her estate now wants to collect the princely sum of less than US$5,000 when the insured's insurance application had two boxes checked that give grounds for denial of coverage. In one box the insured claimed that she had not been recently hospitalized. Another checked box represented that she had never traveled abroad.

The carrier seeks to disclaim coverage due to the "false and material" representations as the insured had been hospitalized the year before for the very ailment that killed her and had made over 150 foreign trips.

We know that insurers traditionally claim the right to collect premiums and no obligation to pay claims. But the current attack by the State on the denial of coverage is typical of Vietnam-think that confronts all foreign invested enterprises. The State run media wails, "Why was the insurance agent who handled the contract so careless to miss such obvious mistakes... [for] it might have been better for the firm to privately acknowledge the agent must have performed badly."

Doesn't the insured fill out the forms or at least read them (printed in Vietnamese as they are) before signing, or take responsibility for failing to read before signing, presuming that there was an "innocent" error? It is difficult for foreigners to take such claims as offered by the State seriously, and yet we must. For this is still the way business is transacted here on hundred million dollar contracts as well.

*WORLD BANK VIEW: FDI POLICY REFORM YIELDS PROGRESS, but legal reforms enforcement is lagging.

HANOI - With the current progress in policy reform, Vietnam should become an appealing Southeast Asian market to foreign investors, says World Bank Country Director Andrew Steer, who recently chaired a mid-term review conference of Vietnam's donors held in Hoi An in central Quang Nam province.

The executive expressed his strong belief in the success of Vietnam's determination to remove obstacles standing in the way of sustainable economic development and a favorable investment environment.

In an interview with the army paper Quan Doi Nhan, he stressed once investors are assured of the smooth operation of their ventures, they will increase investment into and strengthen their cooperation with Vietnam. The country, therefore, will become one of the most appealing markets in the region.

"This [prediction on the prospect of the Vietnamese investment market] was well grounded as shown through signs of current recovery of foreign direct investment [FDI] in Vietnam," said Steer, adding that it's one of Vietnam's strengths.

Eleven FDI projects with a total registered capital of US$436 million were licensed for operation in May, bringing the total FDI into the country up to $882 million so far, or 2.5 times as much as that of the corresponding period last year.

Vietnam has made serious efforts in legal reform, which is much better than the government did 10 years ago, the World Bank country chief said. He cited the government's recent approval of a concrete program of action for legal reform to remove obstacles to a sustainable development, and its recent decisions on reform in trade, banking and public spending management. These reform efforts have won support and aid from the World Bank, international organizations, and donors.

However, Steer called for better enforcement of laws. Authorities in certain localities have not really yet created favorable conditions for investors. The country's policies have undoubtedly worked very well in many areas, but it took the government a lot of time to make concrete decisions on how to implement those policies, Steer said. The country should also address major challenges from outside.

The world economy is slowing down as the growth rate was halved to 2 percent at present from 4 percent in 2000. Farm produce prices have been sharply dropping in the world market, badly affecting Vietnam's exports. Worst hit have been processed products, with almost no growth over the past five months compared to 16 percent in 2000, said the executive.

These challenges, as well as the legal reform process and the potential of Vietnam, will be taken into account in Vietnam's upcoming Donors' Mid-term Conference. They will serve as a foundation for donors to consider their concrete aid projects to the country in the near future, said Steer.

Central to the conference's agency is the latest information on the economic development, the legal reform process, the post-national Ninth Party Congress situation, progress in implementing poverty-alleviation projects and progress made in comprehensive development.

Vietnam's donors will officially meet in November this year to discuss thoroughly a strategy to attract foreign investors into the country in the next five years. Every donor country has its own potential and will offer aid to a certain area. Vietnam itself must determine suitable donors to make sure of the aid's highest possible efficiency.

The World Bank and prospective donors are trying to work out concrete measures following a joint strategy. In addition to aid, donors will provide consultation services and technical analysis. In the next six months, donors have to decide their aid projects.

For the best decisions, the World Bank and donors are thoroughly studying relevant documents, especially one entitled "Reviewing Vietnam's economic reform process, progress and follow-up steps and donors' assistance". Documents on the development of cooperative relations between Vietnam and its donors and international organizations also draw their interest, the World Bank Country Director concluded.
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The deputy director of a State monopoly recently said, “I don’t think we need to put in place a compensation policy because customers who were unable to access [our service] have already saved money as they” cannot be billed for the time of the service outage. Guess which utility:

The answer is that while directors and their deputies from all three monopolies most likely voiced the same sentiment in private, the VDC deputy director went public about the only admitted interruption in the Internet and cell phone networks.

As reported matter of factly in the MPI organ, Vietnam Investment Review, we wonder if the good folks at MPI were having a bit of fun at the expense of other bureaucrats who are as yet not aware of their need to provide service as they are of their opportunities to collect outrageous fees from offering those services?

The National assembly recently granted limited rights for Vietkieu to purchase land use rights, provided they fall within one of four categories. Those who: (i) are permanent residents; (ii) are committed to long-term projects; (iii) have made valuable contributions to the nation; and (iv) are scientists or cultural researchers.

In regrettably still typical domestic style, the definitions of the four categories are not clear, and there is little hope that regulatory agencies charged with identifying these privileged persons will find common ground or agree. More than just simple details are called for.

There are already some projects geared for the returning VK community. One that is not yet commissioned is VVG’s own Cua Lap Project, a luxury $276.3 million resort community on 150 ha and along 4.5 km of beachfront property, 83 km from down town HCMC. Another that is up and running is the Saigon South project of Taiwan’s Phu My Hung.

A third project that had its Vung Tau ground breaking in 1996 but has not yet been able to secure financing or start development is a $56 million luxury hotel complex on 8 ha of land being developed by Australian Keira and Malaysia’s Kumulan Hiliran Jaya, a joint venture with two local Vung Tau State-owned companies.

A fourth enterprise, one lead by a French Canadian concern also to be built along the beach is called CondoVietnam. It is a rather straight forward $200 million project to build in planned smaller stages, condominiums for returning VK along more than 2.5 km of the Long Hai coast of BaRia-Vung Tau province.

All of these projects are sound, none of these projects lack buyers (domestic or foreign), but all are shy of investors.

An impediment seen by some is that there are more VK and other foreigners who would want to buy into such a project for their own and their family or corporate use. However, unless the State further relaxes the rules to permit greater sales and time-share rentals, the only method will be for the buyers to obtain long term leases.

One week after President George W. Bush granted a one-year renewal of trade privileges to Vietnam, he sent the historic Bilateral Trade Agreement between Vietnam and America to Congress.

Even with current steep U.S. duties, two-way trade with Vietnam has risen from $224 million in 1994 -- when former President Bill Clinton lifted the U.S. economic embargo -- to nearly $1.2 billion last year. Two-thirds of the latest tally represents Vietnamese sales to the United States.

The Vietnam agreement enjoys the support of leaders of the Senate Finance Committee and the House of Representatives Ways and Means Committee. Under rules of the 1974 trade act, which has barred normal trade relations with Vietnam, those panels will have 45 days to act on the agreement before sending it the full House and Senate for a vote.

The pact also has strong support among Vietnam War veterans in Congress, including Sen. John McCain, an Arizona Republican, Sen. Chuck Hagel, a Nebraska Republican, and Sen. John Kerry, a Massachusetts Democrat.

Such is the broad support for free trade and for commercial links with Vietnam in particular that any challenge is expected to fail.

The United States denies Vietnam normal trade relations, but US businesses in Vietnam can claim export guarantees or government credits under an amendment to a 1974 Trade Act designed to encourage freedom of emigration.

Former president Bill Clinton's administration last year signed a historic trade bill with Vietnam that will extend normal trading privileges subject to yearly review.

Signing of the Agreement was held up by the Vietnamese from October 1999 until June 2000. Then the agreement had been held up while Bush administration set priorities under new US Trade Representative (USTR) Robert Zoellick, prompting regular warnings of the dangers of delay by Vietnam.

The lack of action on the pact coincided with mounting criticism in the United States over Vietnam's human rights record, and a souring of ties between the two countries following former president Bill Clinton's visit to Hanoi and Ho Chi Minh City last year.

Moving beyond the annual Jackson-Vanik waiver review process will help the United States cement its role as an economic leader in Southeast Asia, he said.

It has been said that there is now an opportunity to build a long-term relationship with Vietnam that's in the interests of both nations, and which will continue to secure the United States as a world leader in the global economy, particularly in Southeast Asia.

Technip & Samsung to Build 400 Million Euro Plant in Vung Tau.

TotalFinaElf unit Technip said it and Samsung have won a 400 Euro million engineering contract from the Vietnam Oil and Gas Corporation (PetroVietnam) for a fertilizer complex. Earlier this week Samsung Engineering Co. announced that it won US$400 million urea fertilizer plant construction project for Vietnam's state-owned PetroVietnam.

We suspect this is the same plant, the one to be located in Phu My Industrial Complex, about 70 km from Ho Chi Minh City. The plant will have an annual production capacity of 740,000 tons. Construction work is to be completed by April 2004.

Samsung Engineering said that the construction project represented the largest single contract in value since Korea and Vietnam opened diplomatic ties.

This is as well among the largest foreign invested projects announced in recent years.

The differing Samsung announcement reminds many in Vietnam that Korea's information and technology has often been called into question from earlier projects. It remains to be seen when and what the State announces, particularly the granting of a project license.

The State has often spoken about the need for this project, in line with the anticipated land-fall of natural gas from Nam Con Som Basin expected in the next few years.

[VVG Note: We do not comment or report on political matters as a general rule. However, the strategic importance of Cam Ranh Bay has been the subject of quiet discussions since Vietnam and America first parted company in the mid 1970s and then 20 years later started putting the past behind them. Other than the US, interest in the base has been quietly expressed by both China and India. For a while it was speculated that Russian interest in and financial support of the proposed oil refinery at Dung Quat was to be its cost basis for a renewal lease at Cam Ranh Bay. It seems the price being suggested to Vietnam by other interested parties may be far ahead of this speculated price.]

(AP) MOSCOW: Russia is considering whether to abandon its military base at Vietnam's Cam Ranh Bay once its lease expires in 2004, the Interfax news agency quoted a high Foreign Ministry official as saying in late May.

"The question is how much we need this base, how much we can use it to our interests and how much its use is justified," Deputy Foreign Minister Alexander Losyukov was quoted as saying.

The base, once used by U.S. forces, serves as Moscow's strategic foothold in the region. China and the United States are both believed to be interested in gaining access to the massive base.

Russia currently pays no rent for the base, "but that agreement expires in a couple of years. If we pay considerable money for renting this base, the question arises of whether these costs are justified," Losyukov was quoted as saying.

He said the issue may be discussed when Vietnamese Foreign Minister Nguyen Dy Nien visits Russia next week.

Vietnam eases reins on banks - Under a State Bank of Vietnam (SBV) decision, from June 1 credit institutions will be free to fix their own interest rates for their US dollar lendings but with a few provisos. The decree, issued on May 29, brings to an end the practice of regulating the dollar interest rates, thus freeing credit institutions from pricing their dollar credit within an SBV-set band.

Outstanding loans and credit contracts already signed will apply the contracted interest rates; any change to the contracted rate should be agreed to by both parties. Moreover, the interest rate on overdue debt cannot exceed 150 percent of the lending rate specified in the original credit contract.

In another development, the state-owned commercial banks will be required to apply international audit standards to their annual audits, according to a SBV source.

It is expected that this new provision will be applied from January next year in most state-owned banks, with the Bank for Foreign Trade of Vietnam as the pioneer.

The audit reports, used to assess the bank's operations and financial status, will not be open to the public, but will be submitted to the World Bank, the Ministry of Finance, and other institutions overseeing the banks.

At a meeting in late May (led by SBV Deputy Governor Duong Thu Huong and attended by HSBC, ANZ, the Bank of Tokyo-Mitsubishi, Standard and Chartered, Credit Agricole Indosuez, ABN AMRO, and Deutsche Bank), the foreign bankers recommended: