COMMENTARY

Overcoming Inertia - Perhaps this will be our year?  We've felt that for ten years now.  Many things change, some matters improve, but for foreign direct investors, too many of the old songs sung by those who can make things happen just sound tired. 

Business is up, however.  Most foreign businesses will not recover their losses from prior years based upon last years sales, but many domestic businesses, particularly those formed under the Domestic Enterprise Law, seem to be thriving.

The infrastructure and planning sectors still are the most successful. That is, roads, bridges, and ports are being cared for, and the planners are planning ever bigger and bolder projects to include billion and multi-billion US dollar: two petroleum refineries - when neither shows any fiscal promise of a return of investment; a nation-long highway in the wilderness along the war-famous Ho Chi Minh Trail; a new satellite city next to Hanoi, a nuclear power generation station when most nations find them unprofitable and dangerous; and an underground rail system for HCMC which itself is 1 meter or less above sea-level.

Among the more needed of these mega projects are the two monorail systems proposed for HCMC that need approximately $790 million in investment cash.

Business is growing.  A shortage of office space for large firms is apparent to all.  And as discussed below, tourism seems to be on the rise.  However, caution also is called for.  Look only to neighboring Thailand that still has dozens of half-built skeletons all over Bangkok's cityscape.  As for a surge in tourism, while rack rates have not ever been increased, room rates for large tour groups have not been much lower, thus denying the industry of much needed income.

As for numbers, Vietnam has along way to go.  Business and tourist numbers often mask multiple entries and not actual visitors.  Vietnam's claim to 2.6 million foreign visitors is a far cry from Thailand's transparent announcement of over 16.5 million tourists alone in year 2002.

Then there is the bureaucratic maze to deal with. In early 1997, while representing interests wanting to build a power generation station, no one seemed to know the actual status of the Wertzella station in Phu My.  Between the MPI, MOF, MOI, EVN, and the Office of the Prime Minister, we were told the plant was in various stages of completion, from just week following the first steel in the ground  to weeks away from testing and commissioning. Having just visited the plant and not allowed to take photos, we could not convince anyone that there was no such plant to be seen any place in Phu My.  In late 2002 the government finally announce that the project had expired.

There has been no change.  In October of 2002, when told by a ministerial level office that a major, 100% foreign invested project has been approved by the Provincial People's Committee, is being drawn into the Provincial Master Plan, and will soon be submitted to the Prime Minister for approval, that particular Committee Chair reports to potential investors that the project is no longer available for foreign investment.  At this rate, if we wait that long, we will read by 2009 that this particular project too has expired.

We know interest is building among investors wanting to look into Vietnam.  Our best data comes from this web site.  The number of monthly visitors continues to climb at a steady rate and has topped 12,000.  The only people who visit this web site are those who have an interest in investing in Vietnam, or those who have investments on the ground here already.

We also know that representatives from the government of Vietnam read these pages. Thus we add our small, friendly voice to those others who are helping to persuade our partners in the direction of success by continuing not just to promote but to effect change and growth.

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DISPATCHES

Son La Hydro Plant Approved.  The National Assembly approved the construction of a huge hydro-power station and dam in Muong La District, Son La Province in a low format, which entails a 215-meter dam wall. The project is designed to have a capacity of 1,970-2,400 MW and to generate 7.55-9.2 billion kWh per year. Work is expected to start in 2005 and to be finished in 2015. The total cost is estimated at VND31-37 trillion (US$2.06-2.46 billion) with 70% to be sourced from domestic funds. Some 79,000-91,000 people will be relocated to make way for the project.

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Dung Quat Redeux.  The plan to dissolve the joint venture to build Vietnam's first oil refinery is proving to be a challenge.  It was reported that the Russian government does not want the dissolution although the chairman of Zarubezhneft, the Russian partner in the JV, reportedly has agreed to it. Vietnam wants to build the US$1.3-1.7 billion refinery alone as disagreement with the Russian partner over selection of contractors has delayed its development. Work on this project, the outgrowth of a 1992 project started by Total of France, most recently was to have been completed in 2003.  Currently, commissioning has been delayed to 2005.

By year end the picture of this troubled project seemed no less murky while the role of the Russians may have cleared.

An agreement under which Zarubezhneft will shift from partner to contractor was inked in Hanoi during the ninth meeting of the Vietnam-Russia Joint Committee for Economic, Trade, Science and Technology Cooperation. 

PetroVietnam will be the sole investor and Zarubezhneft will cooperate with Vietnamese partners to carry out two packages on designing and building oil tanks and installing oil pipelines.

PetroVietnam and Zarubezhneft held an equal stake in the project. Now that the Russian partner has withdrawn, PetroVietnam will pay back some US$220 million that the Russians invested in the project plus some interest. According to government reports, both parties reached the agreement favorably.

The Dung Quat Oil Refinery project is designed to have an annual capacity of 6.5 million tons. The most recent incarnation of this long troubled project was set up in 1998 and scheduled for operation in 2003. 

However, the scheme failed because of disagreement over the choice of technology and the selection of the main contractor.

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Phu Quoc - Regional tourist hub.  Phu Quoc Island (Kien Giang Province) will hopefully be developed into a tourist hub for the Mekong Delta as well as Southeast Asia.

According to a master plan for development of Phu Quoc to 2015 drafted by the Ministry of Planning and Investment (MPI), Phu Quoc is to be developed into a tourist center with the launch of a new tour package of Phu Quoc, Con Dao and Ha Tien. Businesses will be encouraged to operate weekend tours by air from the island to HCM City, Bangkok, Kuala Lumpur and Singapore, and by sea to countries near the Gulf of Siam. Local authorities will cooperate with Cambodian counterparts to build tourist sites in Kep and Koh Tusay, and launch a Phu Quoc-Kep-Phnom Penh-Angkor tour.

The plan envisages that ports, quays and airports will be built on Phu Quoc. A port at Mui Dam will accommodate vessels of less than 2,500 tons, container carriers of under 1,000 TEUs and cruise ships. Three terminals will be built to receive hydrofoils on the Rach Gia-Ha Tien-Kep route. An international airport will be developed in 2006-2010 to receive foreign tourists from other countries.

The huge investment funds to turn the plan into a reality are estimated at US$3-4 billion, which will come from the State budget, local and foreign investors and venture funds.  These are nice plans to ruin a lovely hide-away.  We’ve been advising you for years to get there while you can still enjoy its peace and tranquility.

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Tourism surging arrivals.  The tourism industry is experiencing a boom time at the moment as Vietnam has emerged as a safe tourist destination in the Asia Pacific following terrorist threats elsewhere.

In 2002, of the reported 2.6 million foreign tourists visiting Vietnam, 900,000 arrived in Hanoi while Ho Chi Minh City received 1.4 million foreigners over the same period.  In the last months the numbers swelled to over 3,500 every day for HCMC.

This means the total tourism numbers are 100,000 above target. To provide accommodation for more foreign visitors estimated at 3.5 million by 2005, Vietnam envisages that a further 17,000 hotel rooms will be needed.

Most foreign tourists are from China (700,000), Japan (260,000) and America (210,000). The tourism growth also benefits the hospitality sector.

Many international hotels in HCM City report room occupancy as high as 80-95%. Approximately 70% of the guests reportedly are business people and investors.

Hanoi now has seven out of 15 five-star hotels in Vietnam. HCMC has seven and there is one in Da Nang. Room occupancy in Hanoi reached between 80% and 90% in the State-owned sector, 65%-70% in the foreign-invested sector and between 75% and 80% in the private sector.

The dramatic surge of foreign visitors to HCM City in the last three months of 2002 brought the local tourism sector a windfall. However, it has also posed several challenges for the industry including how to sustain the growth by providing services that satisfy hard-to-please tourists to come.

There may be a hotel room shortage if the surge continues into and beyond the Tet Holiday Season that starts now. Tet begins at the end of January and traditionally goes for two weeks beyond.

The current situation raises concerns that local hotels do not have sufficient rooms to accommodate such increases, particularly in light of the 8,000 visitors expected to arrive in the country's largest city during the Southeast Asian Games (SEA Games) to be held in Viet Nam late this year (2003).

Saigontourist Holding Company plans to sell 10 small accommodation establishments and use the revenue to upgrade Rex Hotel into a 5-star property as well as to upgrade and expand the Continental and Majestic hotels.

Nineteen foreign-invested hotel and tourism projects with a combined investment of US$140 million were licensed in Vietnam in 2002, four times the capital in the previous year. Eight of the 19 projects are resorts and five are hotels. 

Vietnam now has 132 foreign-invested tourism projects with a total investment of US$3.3 billion, of which 80 worth US$1.7 billion are operational.

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Lower airfare for foreigners.  Vietnam Airlines announced lower airfares for foreigners on domestic flights from January 1, 2003 and higher fares for Vietnamese as part of its move to harmonize airfares for locals and foreigners.

The one-way fare for foreigners on the HCM City-Hanoi route will be reduced to VND1.65 million ($107) from VND1.8 million ($117) and on the HCM City-Danang route to VND950,000  ($62) from VND1 million ($65).

On the flip side, the fare for Vietnamese on the HCM City-Hanoi route will rise to VND1.35 million ($88) from VND1.2 million ($78) and the HCM City-Danang route to VND720,000 ($48) from VND680,000 ($44).

Given that domestic travelers outnumber foreigners by a ratio of over 10 to 1, some might question the wisdom of making any fare increase just before the start of the soaring number of passengers expected during the Lunar New Year (Tet) period that runs from early January to beyond mid-February this year.  It seems destined to give short term gains and long term re-evaluation of the need for domestic passengers to fly as often has they have been.

Vietnam Airlines plans to add 48 international and 152 domestic flights from January 1 to February 15. Most of the extra flights will be on the HCM City-Hanoi and Hanoi-Danang runs while the additional international flights will be for services to and from Thailand, China and Japan.

In the first 11 months of this year, Vietnam Airlines transported 3.6 million passengers, up 17% year-on-year. The carrier expects to serve 4 million passengers this year, up 14% over last year. Total sales are estimated at VND10.7 trillion ($694.8 million), up 10%, and profit VND600 billion ($39 million). 

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Vietnam's economy grew 7.04 % in 2002 from a year earlier, the government reported.

The growth in Vietnam's gross domestic product (GDP) fell short of the government's 7.3 percent target but was higher than the 6.89 percent growth in 2001, the General Statistical Office said.

Vietnam set a GDP growth target of 7 percent to 7.5 percent for 2003, and targets an industrial growth rate of 14.5 % for the current year, against an estimated 14.2% figure for 2002.

Industrial production and construction grew 9.44 %, while agriculture, forestry and seafood expanded 4.06 percent and the service sector saw an increase of 6.54 per cent.

Vietnam saw its trade deficit grow to $2.77 billion, with exports worth $16.53 billion and imports of $19.3 billion, claiming export values increased about 10 percent against last year.

In 2002, 669 foreign-invested projects were licensed by Vietnam, up 32.4 percent from 2001 but still sharply down from the heady days in the mid 1990s. 

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Consumer price index increases 4% in 2002.  According to the General Statistics Department increases took place in foodstuffs up  7.9%, accommodation and construction material up 7.1%; drinks and cigarettes up 3.6%; food grains up 2.6%; transportation up 1.7% and post (telephone and mail) up  1.7%.

Gold sharply jumped up with an increase of 19.4% against 2001 figure, and  reached the highest level of the past ten years. 

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Information Technology Outlook.  The Internet subscriber rate in Vietnam is expected to reach 1.3-1.5 subscribers/100 people by 2005. According to the Prime Minister's Decision 33/QD-TTg approving the Internet development plan in Vietnam in 2001-2005, all research institutes, colleges, universities and vocational schools will be linked to the Internet by 2003.  

By 2005, the rate of Internet users is projected to be 4-5%, and 50% of the number of high schools, 100% of the centrally-run hospitals and 50% of provincial hospitals will be networked.  But there is no change in sight to revise the government’s practice of blocking many web sites, keeping a low connection rate, and maintaining the high cost to private, domestic users, all of which will continue keep Vietnam in the backwater category of Internet accessibility.

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FDI Update.  By year-end 2002 there were about 3,600 foreign direct investment (FDI) projects that held operable licenses with total investment capital of $38 billion, of which more 1,900 projects are in operation and over 1,000 projects are in the process of capital construction.

During 2002, it has been estimated that newly approved FDI capital, including capital increases for ongoing projects, amounted $2 billion, with implemented capital being $2.3 billion.

In 2002, the FDI sector constituted one third of total industrial output, a quarter of total export volume excluding crude oil, and generates employment for around 460,000 laborers.

It is planned that FDI capital implemented in 2003 will increase by 2.3 percent on 2002 figure, reaching $2.4 billion.

Vietnam’s demand for FDI capital during 2001-2005 is targeted at US$12 billion and US$25-30 billion for 2000-2010.

See our monthly reports on Foreign Direct Investment, Economic Indicators.

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Handicraft sector targets US$600 million in 2003 and 1 billion by 2005.

While the needs to make better use of Vietnam's abundant raw materials and cheap labor, Vietnam's main advantage is its workforce of skilled artisans from 1,400 handicraft villages who specialize in traditional trades - not to mention the many farmers who produce handicrafts between harvests.

Preparing to join the ASEAN Free Trade Area (AFTA), the handicraft sector needs to secure big contracts to compete with regional rivals.  Vietnam exports 11 types of handicrafts, but the five strongest are rattan, ceramics, wood products, carpets and brocade. Eighty percent of Vietnamese handicrafts are currently exported through a go-between.

The officials were confident that locally made handicrafts could compete internationally with the help of incentives such as preferential taxes and bank loans.

The Trade Ministry has identified several main priorities to boost exports.  These include urging local enterprises to devise consistent pricing and diversify their designs.

Experts have called for more training for designers from the five leading craft groups, and want cities and provinces to open more sales outlets to promote Vietnamese handicraft.

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