COMMENTARY

The Silent Turn to ... Normalcy. It is no longer popular to write of Vietnam as the former war, even in America.  Vietnam, not yet an easy place to be, has yet begun to arrive in the minds of the world as -- well, just another developing place and not very much in the minds of the world.  

That is not so bad.  In fact, it is exactly what the good people of Vietnam have been working so hard to achieve for the past 12 years. As we've said so many times before,  "When things get easy there will be no need for us to make enterprise formation a focus of our work."    

The stories below tell more than we could in this limited space.  Finances on the Refinery are being made known, land leases being granted to foreign developers for re-lease to renters, and the GDP is targeted to exceed those in the region, including that of China. 

With so much happening, the story is in what we don't have room in this format to report: Large screen motion pictures in a modern Cineplex arrived in Saigon.  OK, so the sound tracks are in Korean or Vietnamese, at least the format is present.  It will only be a matter of time before the US and European distributors learn what the Koreans have known for a long time: Vietnam is a good place to invest in.

With thanks to our alert Hong Kong associate, we hear that the new visa policies announced in May of 2001 are now being implemented. See earlier article on this point. 

In short, with FDI investment and ODA grants down along with exports, the message of change in the proper, forward direction is yet in the wind.  The fact that Vietnam is no longer in the world's eye does not mean it is not getting ready to be a world class player. 

Borrowing from last month's comment, "It is often said that cream, the richest and best part of fresh milk, always manages to rise to the top."  It seems that the rising journey has begun -- again.  We expect this time that growth will be sustained.

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DISPATCHES

Big office tower project to revive - Kumho Saigon Joint Venture advises it will submit plans to build a multi-use tower, Asiana PLaza, located at 39 Le Duan, District 1 to the MPI in September.

According to a senior official of the JV, the Asiana Plaza complex, a US$223-million JV between Korea's Kumho Construction and Engineering and Vietnam's Saigontourist and District 1 Housing Development, will include a luxury apartment building, a 5-star hotel and retail shops. 

Construction of the project, licensed in 1996, was to start in October 1997 and to complete in three years. However, the Korean partner asked for permission to delay due to financial difficulties.

The JV leased the project site in 2000 to commercial establishments on a contract due to  expire in September. The partners will discuss how to proceed with the project. The current demand for office space now is higher than that for hotels. STW

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Massive gas pipeline reaches Long Hai

The complete pull of the 26-inch diameter pipeline took about two days. For the last section of the pull, the pipeline emerged from the water through a 200m long cofferdam (a sheet piled excavation) onto the beach.

Over the last three months, construction activities on Long Hai Beach have been aimed at bringing the pipeline ashore so it can be connected to the onshore section of pipeline that leads to BP’s new gas terminal at Dinh Co in Ba Ria-Vung Tau.

Before its arrival at Long Hai, the Semac had completed 283km of pipelay in 80 days, consisting of 23,708 pipe joins, each 12m long, commencing at the Lan Tay Field in March of this year.

"Pipelay will be completed in mid-July and the first gas will be delivered to Dinh Co Terminal in November," Will Banks, project engineer pipeline of Nam Con Son Gas Project told Viet Nam News during an interview at the site on Long Hai Beach last Thursday.

When commissioned, the pipeline will deliver gas from BP’s Lan Tay Field in the Nam Con Son Basin, approximately 361km from Long Hai.

Viet Nam Oil and Gas Corp. (PetroVietnam) and BP turned ground for the Nam Con Son Pipeline Project at Dinh Co Terminal on May 31 of last year after a prolonged period of discussions and negotiations.

The US$565 million Nam Con Son Pipeline Project will create a pipeline for transporting gas from fields in Nam Con Son Basin, on the continental shelf off southeastern Viet Nam, to Phu My power complex in Ba Ria-Vung Tau Province’s Tan Thanh District.

The 399km pipeline will have a capacity of 2.7 billion cu.m per year in the first stage of the project.

This is a joint venture between PetroVietnam (51 per cent stake), the UK’s BP (32.67 per cent), and Norwegian Statoil (16.33 per cent). BP is now operating the entire Nam Con Son Pipeline Project.

The pipeline is part of the larger Nam Con Son Gas Project, which encompasses gas production, transportation and power generation.

The $1.3 billion gas project’s upstream section will produce 3 billion cu.m of gas per year from the reserves of 58 billion cubic meters. The midstream section will produce 11.3 million cu.m of gas per day through the terminal.

BP will invest in the 715MW Phu My Combined Cycle Plant No. 3, known as Nam Con Son’s Power Project.

The thermal power plant will be a BOT (build-operate-transfer) project wholly owned by BP.

A fertilizer plant will also be located near the Phu My Industrial Complex.

The gas project will enable the generation of some 12 billion kWh of electricity per year, equivalent to 40 per cent of the current national demand, thus reducing power shortages.

"Forecasted gas prices and the economics of the plan seem agreeable to Vietnamese authorities, and will offer BP a fair rate of return on its investment," said President and Director General of BP Viet Nam Steve Walker.

"It will be several years before BP sees a return on its investment, but we plan to provide offshore gas to Viet Nam for 30 or 40 years," Walker told Viet Nam News during the ground breaking ceremony at Dinh Co. — VNS

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US poised to become top buyer of Vietnamese seafood

HCM CITY — The US will, before long, be the biggest market for Vietnamese seafood, American Vice Consul General Sharon White told a seminar in Ho Chi Minh City at the weekend.

Therefore "Vietnamese partners should pay attention to conditions in the US," she added.

"Last year, Viet Nam exported US$85 million worth seafood to the US, and I believe that the number will continue to increase every year," Sharon told delegates at the third annual seminar on exporting seafood to America.

Seafood proved the nation’s third largest revenue earner in 2001, at $1.8 billion, an increase of 20 per cent over the previous year.

Viet Nam has set its sights on revenue of $4.5-5 billion in 2010 from seafood exports and hopes to sell 335,000 tonnes of shrimp, 300,000 tonnes of fish and 500,000 tonnes of shellfish. — VNS

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Plans for Power.  Electricity of Vietnam signed a contract to build the 450 MW Phu My 4 gas-fired power plant with a consortium of Alstom (France), Marubeni (Japan) and Lilama (Vietnam). The US$ 216-million project, to be commissioned in 2004, will receive gas from the Nam Con Son Basin. The tender helped reduce its cost by US$ 44 million from the original estimate of US$ 260 million.

Between now and 2010, thirty-seven (37) power plants will be built and expanded with a total capacity of 12,400 MW. According to Electricity of Vietnam Corp., the number includes 22 hydropower plants with a total capacity of 4,000 MW, 8 gas-thermal power plants with of 5,200 MW, and 7 coal fueled power plants with 3,200 MW. The new projects will raise total generation capacity of Vietnam's power plants to 20,500 MW by 2010, of which hydropower makes up 40%, gas-diesel thermal power 38.5% and coal thermal power 21.4%. — STW

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US Textile Import Quotas.  Deputy Minister of Trade Luong Van Tu, upon returning from a recent market study tour of the U.S. reportedly said the U.S. seeks to protect its textile industry while garments would face no restriction. Tu also attended a meeting to forge a textile agreement between the two countries last week. According to a trade official, the meeting did not conclude a bilateral textile and garment agreement but only discussed protective measures for the U.S. textile industry.

It was earlier reported in Vietnam that during previous trade talks American negotiators agreed upon a quota-free period for Vietnamese textiles and garments so that Vietnam could import relevant materials and accessories from the U.S. — STW  [Note: International commentators suspect the Vietnamese  have run into this conflict before. It is the challenge of trying to put a good face on hard facts that often winds up as reports of miss-information from not understanding or just not reporting the full picture. See for example the next dispatch below about bank ratings.]

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Vietnam's bank ratings. Fitch Ratings has given several banks in Vietnam low ratings following a Fitch team's visit to Vietnam in April at the Government's request.

The company gave an E rating, the lowest ranking, to the Bank for Investment and Development of Vietnam (BIDV) and the Industrial and Commercial Bank. The Bank for Foreign Trade of Vietnam (Vietcombank) was given a D rating, which is slightly higher than the other two banks, in recognition of its superior finances and operations. The D rating also went to Saigon Thuong Tin Bank (Sacombank), Asia Commercial Bank (ACB) and VID Public Bank, a JV between BIDV and Malaysia's Public Bank. Bank for Agriculture and Rural Development was not rated because it has not been completely separated from the Bank for the Poor.

Fitch Ratings offers A for very strong banks, B for strong banks, C for average banks, D for banks which have weaknesses of internal and/or external origin and E for banks with very serious problems that require support.

According to banking experts, banks should not worry about the low ratings as they are undergoing restructuring under the Government plans. They can receive higher ratings after the restructuring plan is completed.

The Finance Ministry has invited Fitch Ratings, Moody's and Standard & Poor's to rate banks in Vietnam. Standard & Poor's has given Vietnam a BB rating. 

BB is ranked fifth and bonds given this level are considered relatively safe. — STW

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NOTE:  The above dispatch can present a misleading impression of strength from a BB rating absent an explanation of the Standard and Poor’s Ratings Schedule: 

AAA : The operations provide extremely strong protection against losses from credit defaults. ‘AAA’ is the highest  rating assigned by Standard & Poor’s.

AA : The operations provide very strong protection against losses from credit defaults. It differs from the highest-rated insurers only in small degree.

A : The operations  provide strong protection against losses from credit defaults. It is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than higher-rated institutions.

BBB : The operations provide adequate protection against losses from credit defaults.  However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the institution to meet its financial commitments.

Institutions rated ‘BB’, 'B', 'CCC', and 'CC' are regarded as having significant speculative characteristics. ‘BB’ indicates the least degree of speculation and ‘CC’ the highest. While such institutions will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

BB : The operations provide uncertain protection against losses from credit defaults. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions that could lead to the institution’s inadequate capacity to meet its financial commitments.

B : The operations exhibit vulnerability to losses from credit defaults, but the institution currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the institution’s capacity or willingness to meet its financial commitments.

CCC : The operations make it extremely vulnerable to losses from credit defaults. and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.

CC : An institution rated 'CC' is CURRENTLY HIGHLY VULNERABLE

Plus (+) or minus (-) The ratings from ‘Aa’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

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Vietnam’s Legal System - A Failure but In Good Company - Hong Kong’s Political and Economic Risk Consultancy surveyed leading expatriates throughout the region. Their conclusion is that is that corruption and political interference is common throughout police and judicial systems of Asia. 

"Nations with roots in the British legal system (but for the Philippines and India) ranked high, while those graded the most harshly are either relatively poor, under Communist control, or both." The survey took the United States and Australia as a western barometer.

Specific Comments:

Thailand - “The failure to raise the ethics of the police force has become a national scandal. They are undereducated, underpaid, and a major engine of corruption. They drive around in expensive European cars for routine work but have almost no forensic experts.”

China - “That many citizens in the public and private sectors are willing to risk draconian penalties for crimes indicates that they do not feel threatened about being caught or prosecuted. The judicial system is unreliable, vulnerable to corruption, difficult to deal with, and the ultimate authority is the Communist Party and not the law.  It is not a question of simply of changing laws, but of training lawyers, judges, and police, and then making systematic changes to remove the present system’s idiosyncrasies. This will take years, if not decades.”

India - “The legal system has been seriously hurt by corruption brought on by low levels of pay for the judiciary and police.”

Indonesia - “The bottom line is that Indonesia’s whole legal system is in desperate need of an overhaul, but it is doubtful that the present government has the will or the ability to conduct such an exercise.”

Malaysia - “Of all the developing countries, throughout the relatively controversial period [during the trial of former deputy prime minister Anwar Ibrahim], a lot of debate over the integrity and independence of the legal system was carried out by lawyers and judges as an example of the checks and balances that exist in Malaysia.”

The Philippines -  “Police are involved in kidnappings and murders.  People feel so insecure that some areas are said to have established their own militias.” 

Vietnam - Our source did not disclose specific comments to us, so that must be left to our respective imaginations.

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Vietcombank lends $250m to Dung Quat oil refinery

[VVG note: The following information is important for many reasons -- including that it is different from prior announcements.]  The Bank for Foreign Trade of Viet Nam (Vietcombank) will inject a US$250 million loan into the nation’s first oil refinery in the Dung Quat Industrial Zone.

This project is still carrying a licensed value of $1.3 billion but the division of interest has changed in a meaningful and significant way.  As first announced, Russian and Vietnamese petroleum company partners were each to contribute $500 million and the State Budget would contribute the remaining $800 million.  For earlier background, click here.

[VVG note: Now it is announced for the first time that] Some $800 million of the $1.3 billion capitalization [but see report below where the capitalization if reported at $1.5 billion] is legislative capital and $500 million comes from loans – shared between the Russian Government and Vietcombank.

Vietcombank and its partner, Vietross which is guaranteed by the Finance Ministry, signed a credit contract for the project in late May, 2002.

Vietross, the project’s investor, is a joint-venture between the Viet Nam Oil and Gas Corporation (PetroVietnam) and Russia’s Zarubeznheft.

The loan will be provided over a 12-year term and in accordance with the agreement reached by Viet Nam’s Finance Ministry and Russia last February.

It includes a three-year grace period and will have a 5 per cent annual interest rate for the first part, worth $100 million, and London Interbank Overnight Rate (Libor) plus 1.5 per cent per year for the second part.

The entire project, to be built in the central province of Quang Ngai, is worth $1.3 billion. 

The Dung Quat Oil Refinery, with an annual capacity of 6.5 million tonnes of crude oil, is designed to ensure a stable supply of petrol and oil in the domestic market and end the reliance on imports.

The project comprises storage tanks, ports, dykes, administrative and service buildings. [VNN)

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Second oil refinery in the pipeline -  PetroVietnam has submitted to the Government the pre-feasibility study for Oil Refinery No. 2.

The US$2.1-billion project with an annual capacity of 8.5 million tons of petroleum products will be built in Thanh Hoa Province, northern Vietnam. Work is due to start in 2004 and to be completed in 2008-2010. PetroVietnam will make up 50% of the investment capital.

The first refinery, capitalized at US$1.5 billion with annual capacity of 6.5 million tons, is being developed in Dung Quat, Quang Ngai Province.

The petroleum industry will spend nearly US$1.8 billion on services this year, up US$670 million from last year. However, local service providers will earn only less than one-third of sum due to lack of high-technology. 

According to PetroVietnam, survey and exploitation will take the biggest sum, over US$1 billion, pipeline installation will need US$231 million, and construction US$510 million. 

The company estimates that the industry will need US$2 billion a year for services over the next three years. Its service enterprises only hold a 30% share of the local oil and gas service market while foreign suppliers control the rest. It hopes to increase the share to 45% by 2005. [STW]

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Apartment Rentals in Vietnam - Are They Worth the Price?  VIR reports (No. 551, p.14) that a 145 sq.m Hanoi apartment renting now for US$ 3,300 per month was able to rent for from $6,000 to $8,000 per month before the 1997 regional crisis (that finally hit Vietnam in 1998).  While some Hanoi apartments report occupancy rates of 80 to 90 per cent, real estate interests complain the rates are too low.

Cited in example is the Oriental Park that rents a 40 sq. m. apartment (actually a large closet with a window and bath) for $ 990 per month, while the Golden Lodge charges $1,000 for less space (38 sq. m).  This is gross space and includes the width of the interior and exterior walls, and public hall way access as well.

The regional slump emptied Hanoi and HCMC of foreign residents, as the ridiculously high rents and tax on rents coupled with the absence of international standard amenities should have years before.  Add to the picture exploitive landlord's who asked for and received 6 to 12 months advance rent, and it is a wonder there are any foreigners left in Vietnam but for the most wealthy - who notoriously spend the least but for rent.

Further listings in Vietnam show rents at top end Golden Lodge running from $1,000 for a 38 sq. m "studio" to $4,000 for a 183 sq. m 4-bedroom unit.  Pan Horizon offers its 40 sq. m studio at $900 topped by it 130 sq. m 3-bedroom apartment for $2,600.

For all this the renter also suffers from (i) no international standard public transportation, (ii) no potable water, (iii) no live-in housekeeper's room, (iv) no free access cable TV, (v) no high speed internet access, (vi) severe restrictions on the number of telephone lines, (vi) no international standard movie houses and severely restricted entertainment of other forms; (vii) and an individual and corporate tax rate that is among the highest in the world. Of course, there are no international standard hospitals either, but who counts on being ill?

Contrast neighboring Bangkok where most if not all the missing services are found at almost every high end apartment for domestic and foreigners alike.  At toney Sukhumvit 16, a Lake Avenue residence offers a fully furnished, 82 sq. m apartment for $640 per month. The much more posh Regent Royal overlooking the Royal Raceway offers a 128 sq. m two bedroom unit for $1,259 per month. And to beat the band, at the upper level of the high end, in the heart of the banking district near Satthorn and Silom, a 450 sq. m 4 bedroom 5 bathroom apartment rents for $3,432. 

Are we supposed to compare or contrast spending $3,400 in Bangkok for 450 sq. m vs. $3,300 in Hanoi for 145 sq.m?

There is no need to ask about who gains from the still non-convertibility of the VN dong, as it is most assuredly not the foreign resident.  The question that should be asked of the business and political leaders in Vietnam is: who beside yourselves really believes the cost of doing business in Vietnam is worth the price you put on foreigners? 

The foreigners have clearly voted their response with their feet. While some still in Vietnam tell us that is not being loyal, we know that we are being both loyal (to those who have our interest as well as their own in mind), and smart (for our and our company's account).

The State's response is less than well considered. A commission for the Ministries of Construction (setting prices) and Finance (setting taxes) concludes that greater central management of prices is needed to combat inflation by allowing set prices at a limit of no more than 20 per cent lower than current market prices.

We've not noticed that inflation is the problem, or that setting a floor to the high existing prices will solve the present problem.  One would think that if there was to be rent control, it should be at the upper end to prevent inflation rather than prohibiting prices to fall to meet actual market conditions.

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New Motorbike Helmets For Vietnam - It looks very much like a bicycle helmet but was conceived to meet the needs for vanity and safety along Vietnam's major highways and congested city streets.  

Endorsed by capital contribution from the American Insurance Group, American President (shipping) Lines, British Petroleum - Amoco, two foundations (Freeman and Starr), and two others, following a test run of 30,000 helmets donated to pupils in Hanoi, we hope for the best yet wonder....

The US$ 1.5 million project was spearheaded by Greg Craft, an American entrepreneur in Vietnam for ten years who reportedly has invested $250,000 of his own funds into the total capital.  Readers may recall that in June 2000 we reported a DRI project of his (DRI is a feedstock used in steel mills), like so many other key projects in Vietnam at the time, did not make it to commissioning due to government policy changes along the long road from inception.

The new helmet does not obscure the ability of riders to chat-up each other while driving or stopped for traffic, but will not favor hair dos, particularly the current trend towards gels. These are important concerns in fashion conscious Vietnam where the loss of peripheral vision or covering the ears by other helmets have spelled the death knell for earlier attempts to protect Vietnam's 3.5 million motorbike riders. 

Projected sales of from $2 million to $3 million ( 200,000 to 300,000 units at an average price of $10) would make this one of Vietnam's most successful enterprises.  What company would not want to recoup twice its total investment capital in the first year of operation.

If the company charter does in fact call for this to be a not-for profit organization,  no one said such companies can't pay out good salaries, even to advisors.  

As concerns acceptability, we will take a more cautious look at this project from time to time and report when this project is a bit further along.

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Success Breeds Success.  Successful investors in Vietnam invest more in their own units and as well help lure more investment into HCMC, Dong Nai, Binh Duong and Ba Ria-Vung Tau provinces.

Japanese owned Nidec Tosok Vietnam, initially capitalized at US$ 1 million in Tan Thuan Export Processing Zone (EPZ) in the past eight years raised its investment to US$ 20 million, and now produces computer fans and other hi-tech equipment besides the original automotive wire.

Nidec Tosok is now adding US$ 40 million more to build a factory making automotive gears and has invited six Japanese companies to join it in Vietnam. Three of them-DID Electronics, Okayx and Meinan with total registered capital of US$ 4 million-have since built factories in Linh Trung and Tan Thuan EPZs.

Japanese industrial sewing machine producer Juki Vietnam, also in Tan Thuan, is another example, having doubled its investment capital from the initial US$ 4 million. It has lured Towa and Organ Nidle to invest in Vietnam.

Dong Nai's industrial parks (IP) are seeing the same effect. Taiwan Vina Industrial of Korea, which makes sport shoes for export, has extended its investment capital to US$ 41 million from the US$ 23 million in 1994. It has persuaded another Korean manufacturer to invest here and supply accessories to shoe manufacturers in Dong Nai.

Ho Nai IP in Dong Nai Province is home to 15 Taiwanese motorcycle-part manufacturers with total investment capital of nearly US$ 45 million, selling screws, batteries, piper, frames and bulls to Taiwan's VMEP and Japanese bike makers. All are preparing to invest more in equipment to raise production capacity. Hepza, the agency overseeing the IPs and EPZs in HCMC, states, "No one can be as persuasive as investors who have been successful in Vietnam."

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Land Leases for Foreign House Developers   The Ministry of Planning and Investment (MPI) will issue legal documents to make official the sale of houses by foreign house developers to Vietnamese residents and overseas Vietnamese (Viet Kieu). It will also allow foreign-invested enterprises and foreign investors investing for long-term in Vietnam to buy houses. Vietnam has licensed five foreign-invested projects on building houses for sale on a pilot basis. Upcoming legal documents will detail guidance on the business and house prices.

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ABB Transformer Project is itself transformed.  After losses of more than $12 million, the government has allowed ABB to buy out its local partner and become a 100% foreign invested enterprise. The death knell on non-performing JV partners thus continues, affecting even the oldest and presumably most well established operations.

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Vietnam’s GDP To Top All In Region.  Viet Nam is set to register the highest economic growth rate in Asia this year, according to official government forecasts from each country.

The Vietnamese Government is forecasting growth in gross domestic product (GDP) of up to 7.3 per cent for 2002, outpacing even China’s official 7 per cent prediction of its own GDP growth.

India (6 per cent), the Philippines (4.3 per cent) and the Republic of Korea (3.9 per cent) make up the remainder of the top five, well below the pace of the leading pair.

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Phu My steel mill gets green light. The Government has approved the construction of a US$ 135 million Phu My steel mill in Ba Ria-Vung Tau.

The mill will be built over 25 ha in the province’s Phu My Industrial Zone No.1 and will have three main components – a port with a loading capacity of one million tonnes per year, an arch-furnace steel refinery with an annual capacity of 500,000 tonnes and a hot-rolling steel workshop with a design capacity of 400,000 tonnes a year.

Its main products will include square steel ingot, bar steel, coil steel and angle steel.

The mill, which is being built by the Southern Steel Company (SSC), will be granted a sum of $57 million in preferential loans from the State budget funds reserved for metallurgy. Meanwhile an additional soft loan with an annual interest rate of 5.4 per cent has been earmarked for the building of the port.

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