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

Issue No. 45
July 2001
Our eighth year in Vietnam & fourth year on the Internet

IN THIS ISSUE
COMMENTARY: Mix your message and miss your opportunity.
In Vietnam where there is a growing sense of tomorrow, too many domestic enterprises still follow the Government practice of mixing their messages. See our commentary (linked above) and our dispatches (linked below).
Coffee: New Market Heights & price lows* Foreign Investments On the Rise Again* Vietnam Has the Most Red Tape In Asia BTA Update	Meet Vietnam's New Ambassador to DC World Bank View: Progress but...* The service stops, but only the consumers care Land Law: VK can buy land, almost....

MIXED MESSAGES AND RESULTS create only missed opportunities in Vietnam. When that occurs (still too often) Investors respond by talking with their feet. The message seems to be clear but we wonder if it is. That message is, “we will go (or stay) elsewhere until the Vietnamese get it right." Consider late breaking June events.

1. Bourse Trading band loosened to 7 per cent, from the former 2 per cent cap. Immediately the shares offered for sale shot up to the new limit yet the paucity of available shares kept the total day’s trading at under US$ 6,000. Most expats in high end jobs loose multiples of that on a bad day of trading in Wall Street action.

2. Each week it seems the domestic media plays up the same theme from a different location. In late June it was “HCMC draft aimed at quickening up FDI pace." The measures touted include shortening the time for approvals and improving the quality of investment consultations. Sound like great stuff if you arrived off the boat last month. The lead time was so long and the quality of services so poor that almost 8 years after we first came here the nation is still shortening the time and improving the quality of services. The sad new is that there is still a long way to go.

3. "Land Tax Relief granted to farmers", read the headlines, but now the State announces its plans to plug the huge hole created in the State budget from those lost revenues. Guess where from….?

4. Hefty tax hike (from 10% to 25%) to impact expat workers not on long term contracts, or on contracts for less then 6 months. But not to worry, because the first 8 million VN dong are tax exempt. Sounds great until you do the math and realize that it’s the first US$ 533 that is tax exempt, and that the first 25% of every dong/dollar thereafter will go to the State.

We remember the time when almost no Vietnamese could conceive of anyone earning as much as US$ 1,000 per month, so of course many foreigners claimed they earned less. Country heads who lived in villas then renting for upwards of US$ 10,000 a month claimed less than their housekeepers back home, and they were believed.

No longer. The aim of the Ministry of Finance is “to ensure the equality of tax-payment responsibilities between residents and non-residents.”

If that message is not clear enough, consider the next breath. “The objective of the Ministry of Finance is to create equality between foreigners and nationals.” Don’t worry, said the MOF. Under the new plan payroll deductions will be introduced so that you will not need to pay the tax yourself.

And just imagine the relief of not needing to cart home so many bags of money either.

Vietnam is thinking in big dollar terms these days: a $4 billion dam, two, $1.5 billion oil refineries, and a $900 million monorail system for ever-to-be-more congested downtown Saigon. Clearly the leaders expect the revenue needed to build these projects to come from somewhere other than collection of taxes from its domestic citizens who have an average, annual per capita income of under $400.

As one correspondent recently wrote about the considered monorail project, " Even at 2.5 percent for forty years it will require around $3,000,000 per month just to service the debt."

Should government leaders or their advisors read these pages, we respectfully call upon them to think through not merely the impact of their actions on the domestic population, but to cater to the special needs of, and make the foreign investor community feel happy and welcome to be in Vietnam.

As many have told us similar stories over the years, we will share one that friends told about a minister-level conversation when the leader asked those friends to keep a sense of humor and not loose patience. The response to the minister:

We came here at the start filled with hope, humor, and patience. We lost humor when our national advertising signs and logos were taken down, and the police kept making midnight raids in our residence homes, only because you were not able to take control. OK, you finally got that right and that problem is over; we hope.

However, patience was lost a few years later when the regional economy went on a back slide. At that time we urged you to seize the limited window of opportunity and change your system to get on top of the region. However, all you could produce were more promises to shorten the time for approvals and improve the quality of services.

Keep up this level of progress and we will eventfully loose hope as well. You can live in tough times if that’s what makes you comfortable and happy. However, we are free to go virtually anywhere that makes it easy and profitable for us to stay.

It is our belief that the proper officials are in fact now paying attention but their calls for yet more patience in the face of the need to fight the same battles does make for a challenge many wish to face. Surely Vietnam will receive small investments from some. But to fund the really huge projects, business life must be made both more comfortable and profitable.

[VVG Note: Having learned how to produce more coffee - to the distress of some ethnic minorities in the Central Highlanders who have lost and are still loosing their farmlands to the majority Kahn people who have the money to plant coffee - Vietnam is now flooding the world's market with its new product. Free market principals are at work and the extra capacity is a boon to coffee drinkers, but also a detriment to coffee producers including Vietnam.

If this were a cartel operation such as oil or sea shipping, the cartel would limit production of its member states to keep the price up. Vietnam's strategy in its actions is now being discussed, if there is one. Does Vietnam wish to be recognized and help to lead a coffee cartel? Is this a short term strategy to boost its recognition as a significant producer, gain market share, and then switch from non-arabaca (Robusta) to the more popular and higher priced variety favored the world over? Or is this just simply an uncoordinated act of greed as farmers rush to produce what was recently a most profitable crop? The following dispatch describes current market conditions.]

NEW YORK -- Coffee fell almost 3 percent to an eight-year low, after an industry report showed a surge in exports from Vietnam, which has eclipsed Colombia as the No. 2 grower behind Brazil.

Vietnam shipped 65 percent more coffee in May than a year earlier, a report from the International Coffee Organization showed. Vietnam has a crop pegged at a record 13.3 million bags by the U.S. Department of Agriculture. So far during the year that began in October, Vietnam's exports are up by one-third.

``At the rate that Vietnam is exporting coffee, their crop could be as big as 15 million bags,'' said Roberio Costa, a coffee trader at Fimat Futures USA in New York.

Coffee for September delivery fell 1.6 cents, or 2.7 percent, to 56.9 cents a pound on the Coffee, Sugar & Cocoa Exchange in New York, the lowest closing price for a most-active contract since April 1993.

Coffee has traded at or close to its lowest price since 1993 for much of the past three months, as supplies exceeded demand from processors. Prices are down 35 percent from this time last year.

Vietnam's coffee exports in May rose to 1.28 million bags, each weighing 132 pounds, from 776,006 bags a year earlier, the London-based ICO said. In the first eight months of the crop year, exports totaled 10.8 million bags, up from 8.11 million in the year-earlier period.

While the robusta coffee grown in Vietnam isn't deliverable against futures contracts in New York, the country does ship coffee to the U.S., which adds to the overall supply available to roasters.

Overall world exports in May totaled 8.34 million bags, little changed from 8.29 million a year earlier, the ICO said. Brazil exported 1.66 million bags, up from 1.52 million a year earlier.

On the London International Financial Futures and Options Exchange, which trades robusta, coffee for September delivery fell $2, or 0.4 percent, to $551 a metric ton (24.99 cents a pound).

*FOREIGN INVESTMENTS ON THE RISE AGAIN - The Netherlands is leading the charge for new foreign investment in the first half of this year, with two projects worth a total of US$523.8 million licensed. The projects are the 716.8-MW Phu My 3 power plant in the southern province of Ba Ria-Vung Tau and the Metro Cash&Carry farm produce processing plant in Ho Chi Minh City.

The Ministry of Planning and Investment said Japan was running second in the race, with 12 projects licensed worth $86 million. Taiwan had invested in 49 projects, worth $81 million, and the United States in 16 projects, worth $55 million. [For a listing of the top 12 investing nations, updated each month, see Economic Indicators.]

Overall, the Netherlands operates 42 projects with a total capital of $1.71 billion, ranking eighth among the list of 60 foreign investors in Vietnam. US businesses operate 120 projects with total registered capital of $949 million and legal capital of $484 million.

Vietnam has granted licenses for 197 foreign invested projects over the past six months, with a total registered capital of $973 million. This figure represents growth of 37 percent in the number of projects and 43 percent in capital year-on-year.

Ho Chi Minh City attracted the largest number of projects, with 46, with the southern province of Binh Duong coming in second, with 39 projects, and neighboring Dong Nai third with 18.

Of the total figure, 143 were industrial projects, with a combined registered capital of $734.8 million. They accounted for 72.5 percent of the total number of projects and 75.5 percent of the total capital.

Ho Chi Minh City's foreign-invested sector output value reached VND4,607 billion ($307.1 million) in the first half of this year, 10.1 percent higher than the corresponding period last year. The growth rate was higher than the city's average economic growth rate of 9.3 percent.

VIETNAM HAS THE MOST RED TAPE. A recent survey first published in Hong Kong by an economic risk consultancy ranked countries and territories on a scale of one to 10 for quality of corporate governance with one being the highest score and ten being the lowest.

Vietnam with a score of 8.5 edged out Indonesia for the nation with the most red tape in the region in the annual survey of expatriate business executives in the region. Indonesia came in near the bottom with a score of 8.33

The big surprise is that Malaysia (with a score of 3.0) is identified as the easiest place in Asia for foreign companies to do business, thus doing better than its former big sister, Singapore that finished second with 4.0 and Hong Kong that finished third with a score of 4.48.

Taiwan took fourth with a score of 5.38, and India came in fifth place with a score of 5.63. Japan was in sixth place with a score of six.

South Korea, Thailand, the Philippines and China filled the following four places with scores ranking from 6.67 to 8.13 while the 11th spot went to Indonesia and Vietnam coming up with a high score and the lowest ranking of 8.5.

While the research company urged caution over the top results, saying Malaysia's rise to top spot might be influenced by other factors.

Malaysia is well known to lack transparency and Kuala Lumpur-based executives fighting for head office attention rather than “sound analysis”, the report said, might have influenced the results.

BTA UPDATE - The BTA, which was agreed to in principle last July, is now before the House Ways and Means Committee and the Senate Finance Committee. With strong backing from Vietnam War veterans Sens. John McCain, R-Ariz., and John Kerry, D-Mass, passage is expected before Congress takes its late summer recess on August 4.

Vietnam, a developing country with a per capita income of just $374 a year, is spoken of largely in terms of potential. But observers say its potential is considerable. Vietnam hit 8 percent growth during most of the 1990s, except in the latter part of the decade when the Asian financial crisis cut that rate in half. By 2000, growth rebounded to 6.7 percent. While the economic power of Vietnam is small, its population is huge. Nearly 80 million people make Vietnam 13th in the world.

With the implementation of the BTA, observers anticipate there will be two initial burst of growth. First will be the orders flowing in to textile and footwear industries, dominated by companies owned or controlled by Taiwan, South Korean, and Singapore interests. The second impact will come from the American veteran and Vietnamese American communities. A large number from both groups have for years been developing relationships with Vietnamese companies and starting up companies in Vietnam.

However, caution is still the most often word head when discussing investments in Vietnam. That is because there is still a bureaucracy, red tape, corruption, and no rule of law. See companion article, above.

Vietnam's tight restrictions on the press and population in the forms of controlled speech and religion are reasons many in America feel a need to monitor closely and enter into all Vietnamese agreements with caution. Importantly, the enforcement of contracts remains dependent on close personal relationships and not the courts.

However, the risk are both identifiable and manageable. With due, conservative investment strategies, we believe that Vietnam remains a sound place to invest in. Those with both vision and a good investment plan will prosper in these yet early years of growth.

Vietnam Names New Ambassador to U.S. - Vietnam has named a career diplomat with economic expertise as its new ambassador to the United States, state-controlled media reported Thursday.

Nguyen Tam Chien, 53, served as ambassador to Japan in 1992 -95 before being promoted to vice foreign minister in 1997. One of five vice foreign ministers, Chien has been responsible for overseeing economic issues and Vietnam's participation in international organizations.

Chien's selection underlines the importance Vietnam is placing on economic ties with the United States. Congress is expected to soon approve a deal that grants normal trade status to Vietnam, effectively completing the normalization of relations between the two former foes.

Hanoi and Washington established diplomatic ties in 1995, 20 years after the end of the Vietnam War, and exchanged ambassadors in 1997.

Chien is to replace Vietnam's first ambassador to Washington, Le Van Bang. Vietnamese ambassadors are typically rotated after about three years in a post.

U.S. Ambassador Pete Peterson, a prisoner of war during in the Vietnam War, has submitted his resignation effective July 15.

*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.