UNCLAS SECTION 01 OF 20 HANOI 001808

SIPDIS

UNCLASSIFIED

SIPDIS

STATE FOR EAP/BCLTV
STATE FOR EB/IFD/OIA
DEPT PASS TO USTR

E.O. 12958: N/A
TAGS: KTDB, ETRD, EINV, ECON, ELAB, ETRD, OPIC, VN, FINREF, BTA
SUBJECT: VIETNAM: 2003 INVESTMENT CLIMATE STATEMENT

REF: STATE 128494

1. This cable provides the text of the 2003 Investment
Climate Statement for Vietnam. As requested reftel, post
has also sent the ICS via email to EB/IFD/OIA.

2.Begin text of the 2003 Investment Climate Statement
for Vietnam:

INVESTMENT CLIMATE STATEMENT - 2003


--------------
A1. Openness to Foreign Investment
--------------

1. Vietnam, in principle, maintains a policy of
encouragement of foreign investment. A crucial element in
its long-term development strategy is the continued ability
to attract and utilize relatively large amounts of overseas
capital, both foreign direct investment (FDI) and official
development assistance (ODA). (Vietnam does not yet allow
any significant foreign portfolio investment.) For the
2001-2005 period, the Government of Vietnam (GVN) has
established targets for FDI at US$ 11 billion in
disbursements from existing and newly licensed foreign
investments and for approximately US$ 10-11 billion in ODA
disbursed by foreign donors, for a total of US$ 21-22
billion from foreign sources, the levels of FDI and ODA it
estimates are required to support the government's GDP
growth target of 7.5 percent per year.

2. By April 2003, Vietnam had attracted nearly US$ 39
billion in investment commitments since the country was
opened to foreign investment in 1988. Approximately US$22
billion, or 56 percent, of that amount has been disbursed
in more than 3,897 projects. Sixty-four percent of
disbursed investment was made into projects concentrated in
or near the two major cities of Ho Chi Minh City in the
south and Hanoi in the north. U.S. businesses have
received 163 investment licenses for projects worth US$
1,128 million and have injected US$563 million thus far
into Vietnam. Significant additional U.S. investment is
counted as investment from third countries in cases where,
for example, the investment involves a third-country
subsidiary of a U.S. company.

3. As the GVN continues to proceed with its long-standing
policy of reform of the economy, openness to foreign
business, and integration of the nation into the world

economy, Vietnam's rapidly growing population of 79 million
should become an increasingly attractive investment
destination. Vietnam entered into the Asia-Pacific
Economic Cooperation forum (APEC) in late 1998. It is
committed to enter into and fully comply with its
obligations under the ASEAN Free Trade Area (AFTA) by 2006.
In addition, it is currently engaged in negotiations to
join the World Trade Organization (WTO). Perhaps the
strongest recent signals of the country's commitment to
economic reform and improving business climate were entry-
into-force of the U.S.-Vietnam Bilateral Trade Agreement
(BTA) in December 2001 and completion of agreements on
economic reform with the International Monetary Fund (IMF)
and World Bank also in 2001. In light of Vietnam's strong
macroeconomic performance despite the global economic
downturn and continued progress on economic reform,
Standard and Poor's assigned Vietnam's foreign and local
currency bonds a BB minus long term and a B minus short
term rating and labeled the long term outlook stable.
Moody's assigned Vietnam a B1 long-term rating and, in June
2002, labeled its outlook positive. These developments,
taken together with the country's relatively low-wage work
force and natural resource base, are convincing foreign
investors to consider Vietnam when looking for their next
investment location

4. However, despite an official policy encouraging foreign
investment and a solid economic performance, Vietnam
remains a difficult investment environment and potential
investors should carefully scrutinize any investment plans.
Currently in a period of transition from a command economy
to a 'state-supervised' market economy in which the state
sector retains a 'leading role,' Vietnam is implementing a
series of gradual reforms that will enable the economy to
function more efficiently. As the GVN engages in this
complex process, foreign investors must cope with a wide
range of problems and costs. These include poorly
developed infrastructure, underdeveloped and cumbersome
legal and financial systems, an unwieldy bureaucracy, non-
transparent regulations, high start-up costs, arcane land
acquisition and transfer regulations and procedures, and
shortage of trained personnel. Issuance of investment
licenses can be a lengthy process. Moreover, investment
projects in both pre- and post-establishment phases must
cope with frequent changes in the investment environment in
areas such as taxes, tariffs, import and export policies
and procedures. Additionally, the Vietnamese courts have
so far proved unwilling or unable to enforce laws related
to investor protections, in particular, the enforcement of
arbitral awards. Finally, investors cite official
corruption as a significant problem in establishing and
running their business. In particular, investments
involving joint ventures with State-owned enterprises have
proven especially vulnerable to corruption and abuse.

5. Foreign investment in Vietnam is regulated by the
Ministry of Planning and Investment (MPI) through the Law
on Foreign Investment (LFI) and related implementing
regulations, decrees, and circulars. It was first
introduced in 1989 when the country was opened up to
investment and was followed by a series of amendments and
supplements in order to improve the climate for foreign
investors. The latest guiding regulation is Governmental
Decree Number 27 issued in March 2003. It provides
amendments of and to the 2000 Decree Number 24, which
promulgated detailed regulations on the implementation of
the LFI. It includes an explicit pledge against
expropriation , guarantees the right to repatriate profits,
and states the GVN's intent to treat private and State
sectors equally. The law provides significant fiscal and
tax incentives to attract foreign capital.

6. There are four primary forms of investment for
foreigners in Vietnam:

a) Joint venture (JV) agreements pair foreign and local
companies sharing capital and profits. The contribution of
the local company, typically a State-owned enterprise
(SOE), to the JV frequently consists solely of land use
rights. The minimum percentage of foreign involvement in a
JV is 30 percent, but examples of JVs where the foreign
partner is not a majority shareholder are rare. The
minority partner retains veto power over the majority
partner concerning selection of senior management and
changes in the JV charter. However, under the BTA these
rights will be phased out within three years of entry into
force of the agreement for U.S. investors. Joint ventures
account for the majority of foreign investment to date as
many investors find JVs attractive because they can benefit
from the assistance of an established Vietnamese firm in
dealing with bureaucratic and administrative procedures.
They also provide foreign investors access to land which
may otherwise be difficult to secure. Some investors
complain the government allows local partners to overvalue
their land use rights.

b) Business Cooperation Contracts (BCC) permit a foreign
firm to pursue business interests in cooperation with a
Vietnamese firm by investing capital and sharing revenues
without conferring the right of establishment or ownership.
In many respects, it is the most flexible arrangement
Vietnam offers to foreign investors. However, a BCC
license typically does not contain tax holidays or
concessions given to other types of foreign investments.
BCC's have predominated in the telecommunications sector
and, as production sharing contracts, in the petroleum
sector, where the government limits foreign involvement in
operations and management.

c) 100-percent Foreign-Owned Enterprises have become more
popular recently, as investors have learned to navigate the
local system on their own. The GVN has shown increasing
willingness to permit them on a case-by-case basis,
particularly in industrial production for export.

d) Build-operate-transfer (BOT) agreements are the least
commonly used form of foreign investment. While authorized
under the LFI and specific BOT legislation, the legal,
regulatory, and financial framework for BOT's remains
incomplete. The LFI also recognizes build-operate-own
(BOO), build-transfer-operate (BTO), and build-transfer
(BT) forms of investment. Under a BOT agreement the
investor builds an infrastructure project, operates it for
an agreed period of time to recover the investment and earn
a profit, and then cedes it to the government without
further compensation. Several foreign-invested BOT
licenses have been granted, but many others have been held
up in protracted negotiations. The most intractable BOT
issues have been financing, product pricing and government
regulatory and cost-recovery guarantees.

7. Foreign investors have pressured the Vietnamese
government for years to expand the permissible forms of
foreign investment. The Ministry of Planning and
Investment (MPI) has submitted to the Government the final
draft of the decree providing for the establishment of new
foreign invested shareholding companies (FISCs) and the
conversion of existing foreign invested enterprises into
FISCs, in which both foreign and Vietnamese investors may
purchase shares (subject to maximum 30% foreign
shareholding). Currently 24 foreign invested enterprises
operating in Vietnam are seeking permission to convert to a
FISC, though it not known in which sectors FISCs will be
permitted. However no approval has been issued to date.

Recent reforms under the Government Decree Number 27 issued
in March 2003 include:

A new 100% Foreign Owned Enterprise (FOE) may now be formed
between an existing FOE and (i) another existing FOE and/or
(ii) new foreign investor(s);
A Business Cooperation Contract may now be established by
an existing joint venture enterprise or an existing FOE
with another foreign organization or individual;
A new Joint Venture Enterprise (JVE) may now be established
between an existing FOE and a Vietnamese enterprise or
between an existing FOE and an existing JVE. However, a JVE
may not be established between an existing FOE and a
foreign investor or an overseas Vietnamese investor.

Decree 27 also abolishes the restriction that any legal
capital (equity) in the form of technology transfer must
not exceed 20% of legal capital, and is subject only to
agreement by the parties of the company.

8. At present the Government maintains an extensive
investment licensing process which is characterized by
stringent and time-consuming requirements that are
frequently used to protect domestic interests, limit
competition and allocate foreign investment rights among
various countries. The Ministry of Planning and
Investment (MPI) is the primary point of contact for most
foreign investors. But Vietnam currently does not offer a
'one-stop shop' for investment negotiation and approval.
Foreign investors typically must contact and obtain support
and/or approvals from a number of national and local
agencies; indeed, licensing approval is required from other
ministries or government bodies which regulate particular
sectors, especially oil and gas, pharmaceuticals, financial
services. In addition, investors may not always be aware
of all regulatory requirements for licenses, which has led
at times to complaints of unfair or discriminatory
treatment. Licensing is required not only for
establishment, but also in order to make significant
changes to an operating concern such as increase investment
capital, restructure the company by changing the form of
investment or investment ratios between foreign and
domestic partners, or add additional business activities.

9. In the early 1990's, all foreign investment projects
required approval by the Prime Minister. Overtime, in an
effort to reduce obstacles to foreign investment, this list
of projects subject to approval at the highest levels was
reduced. At present, Prime Ministerial approval is
required for investment licenses for the following:

projects with investment capital in excess of US$ 40
million in electricity; mining, metallurgy, cement,
mechanical engineering, manufacture, chemicals, hotels,
apartments for lease, tourism and entertainment;
projects of any value in the following sectors:
Infrastructure construction of industrial zones (IZ) and
export processing zones (EPZ), urban areas, build-operate-
transfer, build-transfer-operate and build-transfer
projects;
Construction and operation of seaports and airports;
operation of sea and air transportation;
Oil and gas;
Post and telecommunications services;
Culture; including publishing, press; radio and television
broadcasting; medical examination and treatment
establishments; education and training; scientific research
and production of medicine for human diseases;
Insurance, finance, auditing and inspection;
Exploration and exploitation of rare and precious natural
resources;
Construction of residences for sale; and,
National defense and security projects.

projects that use five hectares or more of urban land or 50
hectares or more of rural land.


10. Vietnamese authorities evaluate investment license
applications using a number of criteria including:

the legal status and financial capabilities of the foreign
and Vietnamese investors;
the project's compatibility with Vietnam's 'Master Plan'
for economic and social development;
the benefits accruing to the government or to the
Vietnamese party, especially acquisition of new production
capabilities, industries, technologies, expansion of
markets; and job creation;
projected revenue;
technology and expertise;
efficient use of resources;
environmental protection;
plans for land use and land clearance compensation;
project incentives including tax rates and land, water, and
sea surface rental fees.

11. Overtime, the GVN has gradually but steadily improved
its investment licensing regime. Greater authority over
investment licensing has been devolved to provinces,
municipalities, and investment zones. Provincial People's
committees now have authority to issue investment licenses
for projects not subject to Prime Ministerial approval
which do not exceed US$ 5 million in invested capital, or
US$ 10 million in invested capital in the areas of Hanoi
and Ho Chi Minh City. MPI may also authorize Provincial
Industrial and Export Processing Zone Management Boards to
issue investment licenses for projects those projects which
are not subject to approval by the Prime Minister and not
exceeding US$ 40 million. Several provincial committees
and IZ management boards have significantly streamlined
licensing procedures in their jurisdictions, reducing the
time to days if not hours in some cases. While this
decentralization is frequently in the foreign investor's
favor, it has also given rise to considerable regional
differences in procedure and interpretation of relevant
investment law and regulation.

12. In addition, the 2000 amendment to the LFI added a
"Registration" licensing procedure where previously only an
"evaluation" or approval procedure had existed. Under
Registration procedures: projects cannot be refused a
license so long as all the necessary documents have been
submitted; the applicants are not required to submit a
detailed feasibility study; and the review time limit is
only 15 days compared to the 45-day period mandated for the
licensing via the Evaluation procedure. Registration
procedures are only open to those projects which are not
subject to prime ministerial approval and/or environmental
impact assessment. Furthermore, projects submitted for
Registration must satisfy at least one of the following
conditions:

Export all products;
Invest in an IZ and satisfy all relevant export
requirements; or
Invest in the manufacturing sector, with invested capital
less than or equal to US$ 5 million and export at least 80%
of production.

13. Because it recognizes the need for increased foreign
direct investment if Vietnam is to reach the ambitious
development goal set out in the 2001-2010 Socio-Economic
Development strategy, the GVN has a policy of trying to
improve the climate for investment, although that policy
does not always translate into concrete action. Perhaps
the single most important event in Vietnam's recent
economic history is the entry-into-force of the U.S.-
Vietnam Bilateral Trade Agreement (BTA). As Vietnam's
commitments in the BTA are implemented, it will help ensure
fair access and treatment for U.S. investment, goods and
services. The BTA provides a broad range of benefits for
U.S. investment in Vietnam that should significantly
enhance the investment environment for U.S. firms. A
major part of the BTA is devoted to investment which:
provides national and most-favored-nation treatment, except
where explicit exceptions have been made; guarantees access
to third-party investor-state dispute settlement;
disciplines trade-related investment measures; ensures
treatment of expropriation consistent with international
standards. In addition, other chapters of the BTA will
reduce tariffs and quantitative restrictions on U.S.
investor's imports; permit U.S. investors to engage
directly in trade; require the government to operate more
transparently; open sectors of interest to U.S. business
including banking, insurance, professional services,
telecommunications, distribution, etc.; and provide
protection consistent with World Trade Organization (WTO)-
standards for U.S. investors' intellectual property.

14. Also, a number of important policy decisions and legal
changes have been made which are intended to create a more
open, business friendly investment climate for foreign and
domestic private investment alike. On December 25, 2001,
the National Assembly adopted changes to the Constitution
of 1992 which contained several business related items in
Articles 15 and 16. One provided the constitutional basis
for Vietnam's integration into the international economy.
Another formally recognized the foreign direct investment
and the domestic private sectors as components within the
Vietnamese economy in addition to the already recognized
sector comprising SOEs. Previously, the approach under
Vietnamese law was to permit business to only engage in
those activities for which they had explicit permission.
The amendment package formally stated the principle that
businesses could engage in all activities except those
prohibited by law. These constitutional changes codified
at the Constitutional level, changes in approach with
respect to foreign and domestic private sector investment
contained in the economic reforms of the 1990's, lending
them a level of permanence that they had heretofore not
enjoyed.

15. In addition, in 2001-2002, hs, both the Government and
the Communist Party of Vietnam (CPV) issued policy
documents supportive of the private sector, domestic and
foreign. In August 2001, the Government signaled its
intent to continue to improve the climate for foreign
investment when it issued a resolution calling for
continued efforts to improve Vietnam's attractiveness to
foreign investment in the next five years by:

expanding of the sectors open to foreign investment, to
include the real estate, import services and domestic
distribution;
easing the conditions for foreign-ownership of equitized
state-owned enterprises;
permitting foreign invested enterprises (FIE's) to issue
stock to be sold on the local stock exchange;
facilitating foreign investors' participation in BOT's;
narrowing the list of prohibited FIE exports;
establishment of a level playing field among foreign,
domestic private and state-owned enterprises; and
continuing reform of law and regulation on foreign
investment.

16. Perhaps more significantly, the CPV issued a
resolution in March 2002 clearly stating its support for a
mixed economy with equal treatment of foreign, private
domestic and state-owned enterprises. In this document,
the CPV made several important recommendations which, when
translated into actual policy, will provide significant
support for the private sector in the future including:
continuing reforms to make it easier to do private
businesses; eliminating discriminatory treatment of
domestic or foreign private sector activity; making clear
distinctions between civil and criminal offenses so as to
avoid the prevalent criminalization of certain commercial
decisions and disputes; simplified lending procedures to
give private enterprise greater access to domestic credit;
and amendment of existing accounting procedures to
encourage private enterprise to perform financial audits
and disclose the results annually.

17. The above actions strongly indicate the Vietnamese
leadership's intention to continue to improve the country's
foreign investment climate, even if its efforts sometimes
fall short. This effort began in 1989 when the country
adopted the Law on Foreign Investment (LFI) and has
continued with four major amendments of the LFI, the most
recent in 2000, and the issuance and amendment of numerous
implementing regulations. Most recently, the GVN has
issued laws and regulations intended to facilitate foreign
investment by reducing or eliminating discrimination
against foreign investors in pricing for goods and
services, transfer requirements, use of land use rights for
mortgaging purposes, unanimity rules applying to certain
decisions made by joint venture boards, rights of first
sale and many others. Many of these changes were mandated
under the BTA.

18. Nonetheless, many additional official measures that
discriminate against foreign investment persist. These
can be found listed among the permanent exceptions to the
non-discrimination obligations contained in the BTA
investment chapter. Some must be eliminated at a later date
under the BTA; others will remain indefinitely.
Additionally, Vietnam continues to impose unofficial and
arbitrary measures that negatively affect foreign investors
and in some cases, threaten their capital investments.

19. At present, most foreign importers are barred from
direct participation in Vietnam's distribution system,
although foreign investors have the right to sell, market,
and distribute what they manufacture locally. Foreign
investors have the right to import goods needed for their
investment projects, provided this right is included in
their investment licenses, however, they must import the
goods through licensed Vietnamese import/export firms. An
exception is made for foreign manufacturers importing
inputs directly to production when such import rights are
explicitly included in their investment licenses. Under
the BTA, trading rights and market access in distribution
services for foreign investors will be gradually expanded.
While Vietnam has greatly expanded in recent years the
number of Vietnamese firms permitted import/export rights,
the vast majority of general import/export companies remain
SOE's.

20. The GVN holds regular 'business forum' meetings with
domestic and foreign business associations to discuss
issues of importance to the private sector. Foreign
investors use these meetings to draw attention to
impediments to investment and commerce imposed by
Vietnamese law and regulation as well as by improper
implementation. These fora, together with frequent
dialogues between GVN officials and foreign investors held
between the semi-annual fora, have led to improved
communication and have sometimes allowed foreign investors
to make timely comments on and influence legal and
procedural reforms.

21. Foreign enterprises also have the right to apply to the
Ministry of Trade or the Service of Trade in Hanoi or Ho
Chi Minh City for a representative office license, which
gives foreign firms the right to conduct market research
and to pursue business interests, short of actually selling
products and services in Vietnam. Foreign banks must apply
to the State Bank of Vietnam for representative office or
bank branch licenses.

22. Previosly, Vietnam applied different corporate income
tax rates to foreign investors and to domestic enterprises
(being 25% and 32% respectively). The National Assembly in
its May 2003 session approved the Ministry of Finance
amendments to the Law on Corporate Income Tax, w. which
provide for a uniform rate of 28% applied to foreign
invested and domestic businesses, representing a 3%
increase for foreign invested enterprises and a 4%
reduction for domestic companies. Tax incentives will also
be the same for both foreign invested and domestic
enterprises and will be offered to investors in selected
priority sectors and in remote areas. The Amended Law on
Corporate Income Tax is takes effects 1 January 2004. The
Ministry of Finance also proposed to abolish profit
remittance tax for foreign invested enterprises. Foreign
investors have sought changes to the high personal income
tax rates for Vietnamese national employees in the higher
pay scales, which significantly increases the gross salary
employers must pay to maintain competitive and reasonable
take home salaries.

--------------
A2. Conversion and Transfer Policies
--------------

23. Vietnam's foreign exchange regime has been
significantly improved with the amendments to the LFI (the
2000 Governmental Decree Number 24 and 2003 Decree Number
27), which explicitly gave foreign investors the right to
exchange local currency for foreign currency for the
purpose of meeting certain current transactions or
remitting certain categories of earnings. In addition,
conversion of Vietnamese dong into hard currency no longer
requires a foreign exchange license. Despite these
significant improvements, various subsequent decrees and
circulars issued by the State Bank continue to stipulate
conditions on, among other things, the opening of bank
accounts, conversion of Vietnamese Dong into foreign
currency, documentation requirements, and remittance of
foreign currency in and out of the country.

24. Foreign businesses are allowed to remit profits,
shared revenues from joint-ventures, incomes from services
and technology transfers, legally-owned capital and
properties in hard currency. Foreigners also are allowed
to remit abroad royalties and fees paid for the supply of
technologies and services, principal and interest on loans
obtained for business operations, and investment capital
and other money and assets under their legitimate
ownership. But their ability to convert dong into hard
currency is subject to availability, causing Foreign-
invested-enterprises (FIEs) to experience problems in
securing hard currency. No information on average delays
in remitting investment returns is available. Approval by
investment authorities is needed to increase or decrease
the capital of a foreign-invested business.

25. In principle, most FIEs are expected to be 'self-
sufficient' for their foreign exchange requirements,
although this sometimes proves impractical. Government of
Vietnam guarantees to assist in the balancing of foreign
currency for foreign invested enterprises and foreign
business cooperation parties that invest in the
construction of infrastructure and certain other important
projects in the event that banks permitted to trade foreign
currency are unable to fully satisfy their foreign currency
demand.

-------------- -
A.3. Expropriation and Compensation
-------------- -

26. The U.S. Embassy knows of no recent instances of
expropriation of a foreign investment by the Government of
Vietnam.

27. Under the BTA, in any future case of expropriation or
nationalization of U.S. investor assets, Vietnam will be
obligated to apply international standards of treatment -
that is taking such an action for a public purpose; in a
non-discriminatory manner; in accordance with due process
of law; and with payment of prompt, adequate and effective
compensation.

--------------
A.4. Dispute settlement
--------------

28. Vietnam's legal system, including dispute and claims
settlement mechanisms, remains underdeveloped and sometimes
biased against foreign entities. Negotiation between the
concerned parties is the most common and preferred means of
dispute resolution. Although contracts are extremely
difficult to enforce in Vietnam, particularly if one party
to a dispute is a foreigner, investors generally should
negotiate and include dispute resolution procedures in
their contracts. However, even with such provisions,
resolution is not guaranteed.

29. In the event of an investment dispute, there are a
number of domestic avenues available. Economic courts, in
addition to hearing bankruptcy cases, also have
jurisdiction over cases involving business disputes.
Administrative courts hear cases that concern alleged
infractions of administrative procedures by government
authorities. In such cases, the plaintiff must pay a bond
to the court, half of which is forfeited if the dispute is
resolved before the beginning of court proceedings. Also,
the court proceedings must begin within six months of the
date of the dispute. Many international investors express
concerns about the ability of the court system to
impartially and promptly render a decision that accurately
reflects the facts and properly interprets the relevant
Vietnamese law and/or international law and practice.
Thus, they prefer to have other options available to them.
According to Vietnamese press accounts, many court
judgments on business issues are ignored because the
affected party can use "influence" to forestall the
application of the judgment.

30. Outside of the court system, economic arbitration
centers operate in a number of provinces and cities.
However, it is not clear if these centers are legally
competent to settle disputes involving foreign parties. The
second type of arbitration institution in Vietnam is the
Vietnam International Arbitration Center (VIAC), which
operates in close coordination with the Vietnam Chamber of
Commerce and Industry (VCCI). It has authority to settle
disputes arising from international economic transactions
including contracts on foreign trade and investment.
However, it is not clear if investors would be free to
choose foreign arbitrators. Nor can international standard
arbitration rules, such as those of the International
Chamber of Commerce (ICC) or the United Nations Commission
on International Trade Law (UNCITRAL), be used. The
decisions of the VIAC are final and cannot be appealed to
any domestic court. The center does not yet have an
established track record for competence or impartiality,
and questions have been raised about the enforceability of
its awards. The Government is scheduled to submit an
Ordinance on Commercial Arbitration to the National
Assembly in 2002, which may improve the domestic commercial
arbitration system. But for now, most foreign parties
choose to stipulate "third party" arbitration in their
contracts with Vietnamese parties and the government.

31. Foreign and domestic arbitral awards are technically
legally enforceable in Vietnam. Vietnam acceded to the New
York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards in 1995, meaning that foreign
arbitral awards rendered by a recognized international
arbitration institution must be respected by Vietnamese
courts without a review of the case's merit. In practice,
however, the U.S. Embassy is aware of contradicting
judgments and decisions by different Vietnamese courts with
regards to a foreign arbitral award for a case between a
subsidiary of a U.S. firm and an Australian-Vietnamese
joint venture. The foreign arbitral award was recognized
by a municipal Economic Court, but was subsequently
reversed by the Supreme Court (the highest judicial level)
upon appeal. The Supreme Court rearbitrated the case in
Vietnam (contrary to the agreed upon procedures in the
contract) and ruled that as a construction contract did not
fit the narrow definition of commercial contract found in
the Commercial Code, a foreign arbitral award relating to
it could not be enforced in Vietnam. The results of this
case indicated that the enforceability of a foreign
arbitral award in Vietnam currently remains questionable.
In February 2003, the Government tried to address some of
the issues addressed by this case through an Ordinance on
Commercial Arbitration. The ordinance defines "commercial
activities" more broadly to include, inter alia, leasing,
construction, consultancy, licensing, investment,
financing, banking, insurance, exploration, mining
activities and transportation. But, it is not clear
whether this change will positively affect the way courts
address these issues.
32. Under the investment chapter of the BTA, Vietnam
gives U.S. investors the right to choose a variety of third
party dispute settlement mechanisms in the event of an
investment dispute with the GVN. Vietnam has not yet
acceded to the Convention on the Settlement of Investment
Disputes between States and Nationals of other States
(ICSID), but has asked the U.S. to provide advice in this
area as part of the U.S. technical assistance program
designed to assist Vietnam to fully implement the BTA.

33. For the time being, exit strategies for foreign
investors remain limited and problematic. GVN permission
is required to liquidate an investment or business venture
and is sometimes hard to get. At present, the bankruptcy
process can be quite complicated and often takes more than
a year to complete. The Bankruptcy Law applies to all
domestic and foreign-invested companies except national
defense and public service organizations, but since its
enactment only a small number of firms have been put into
bankruptcy proceedings and declared bankrupt. In addition,
if the partner is a state-owned enterprise, it remains
unclear who is ultimately assumes the debts of the SOEs.
To date, the Government asserts that it is not financially
responsible for SOE debts unless it has pledged a sovereign
guarantee.
--------------
A.5. Performance Requirements/Incentives
--------------

34. While Vietnam is not yet a member of the World Trade
Organization (WTO), under the BTA Vietnam is obligated to
gradually discontinue application of any trade-related
investment measures (TRIMS) or performance requirements
inconsistent with the WTO TRIMS agreement. Vietnam
currently does impose a number of performance requirements
with respect to the establishment of an investment and/or
the receipt of a benefit or incentive. The BTA stipulates
Vietnam must phase out several TRIMS-inconsistent local
content requirements within five years or less of the BTA's
entry-into-force. Vietnam has eliminated trade-balancing
requirements previously imposed through restrictions on the
importation of goods used for production by foreign
investors. In the same vein, it has removed foreign
exchange balancing requirements. Under the BTA, Vietnam is
also obligated to refrain from imposing requirements to
transfer technology as a condition for the establishment,
expansion, acquisition, management, conduct or operation of
an investment.

35. The GVN employs an extensive range of incentives in an
attempt to attract foreign investment into certain priority
sectors or geographical regions. The LFI and subsequent
decrees authorize MPI to 'encourage investment in
mountainous and remote areas' of the country and in regions
with 'difficult economic and social conditions'. MPI also
encourages investment in export production, agricultural
and forestry production, high technology, ecology, research
and development, labor-intensive processing of raw
materials, and large industrial and/or infrastructure
projects. The law also favors, to a lesser degree,
investments in metallurgy, basic chemicals, petrochemicals,
fertilizer manufacture, manufacturing (especially
electronic components and car and motorbike parts), and
planting industrial crops. Under Circulars 1817 and 1818
(1999), the Ministry of Science, Technology, and
Environment (MOSTE) also encourages projects in the areas
of treatment of environmental pollution and waste,
production of new or rare and precious materials,
application of new biological technology, application of
new technology for manufacturing communication and
telecommunication equipment, and electronic and informatics
technology. More recently, the GVN opened the healthcare
and education sectors more widely to foreign investment and
began providing a variety of incentives for such
investment. Although the GVN encourages investment in the
provinces, enforcement of investor protections and BTA
rights with Provincial Authorities has proven difficult at
best. Investors should use due diligence when working at
the Provincial or local levels.

36. Under the LFI, the standard rate of corporate income
tax rate is 25%, with preferential rates for designated
project categories. However, various tax reforms are
proposed for 2003, including applying the same corporate
income tax rate (28%) and tax incentives to both domestic
and foreign-invested enterprises.

37. Depending on the sector, FIEs and foreign parties to a
BCC may be exempted from profits tax for a maximum period
of two years commencing from the first profit-making year
and may be allowed a 50 percent reduction of profits tax
for a maximum period of two consecutive years. Certain
'encouraged' projects may be exempted from profit tax for
up to four years from their first profitable year and may
be allowed a 50 percent reduction of profits tax for a
further four years. Where the investment is 'especially
encouraged,' the maximum period of tax exemption shall be
eight years. Such exemptions are generally written into a
company's investment license.

38. The law on export and import duties specifies the rates
which FIEs and parties to BCC's must pay on exports and
imports. Equipment, machinery, specialized means of
transportation, components and spare parts for machinery
and equipment, raw materials and inputs for manufacturing,
and construction materials that cannot be produced
domestically, which are imported to Vietnam to form fixed
assets of an FIE or a BCC are exempted from import duties.
Other exemptions or reductions of import and export duties
can be stipulated by the GVN for 'encouraged' projects and
are also generally contained in an enterprise's investment
license

39. Other special incentives are available to foreign
investors in build-operate-transfer (BOT) projects and
projects located in export processing zones (EPZ) and
industrial zone (IZ). BOTs may be joint ventures or 100%
foreign-owned. They are exempt from land tax and from
payment of duties on goods imported to implement the
contracts. They enjoy a lower profits tax rate (10%), a
five percent withholding tax rate (the lowest normal rate),
an eight-year tax holiday starting from the first
profitable year, and a government guarantee for conversion
of revenue from local to foreign currency. The term of a
BOT can extend to 50 years, after which project ownership
reverts to the government.

40. Projects in EPZs are entitled to profit tax rates of
10-12% for the duration of the investments. EPZs were the
first production zones developed in Vietnam, but interest
in them has been less than anticipated due to inadequate
infrastructure and a requirement that these firms export
100% of their product. Ho Chi Minh City's Tan Thuan Zone
is Vietnam's largest EPZ, while others are planned or in
operation in Danang, Can Tho, Hanoi, and Ho Chi Minh City.
Export-producing firms wishing to operate in an EPZ apply
for licenses and pay taxes directly to the EPZ management
boards, which streamlines the process. Imports of
machinery and raw materials enter the zones duty-free, and
EPZ firms sometimes also benefit from lower rents, fewer
regulations, and a variety of tax incentives.

41. IZs are open to companies engaged in construction,
manufacturing, processing or assembly of industrial
products, and service to support industrial production.
Companies submit license applications and pay taxes
directly to the IZ management boards. IZ firms also are
eligible for certain tax benefits, including a 10% profit
tax for the duration of the investment. Companies that
reinvest profits may be eligible for refund of profit
taxes. Foreign-invested automobile manufacturing projects
are subject to local content requirements in their
investment licenses.

42. Vietnam has also instituted a number of incentives
designed to attract investment from foreign investors of
Vietnamese origin. They are allowed to choose to operate
under domestic, as opposed to foreign, business licenses,
although they may choose to operate as a foreign business
where doing so would be advantageous to them. The land
law has also been amended to permit limited categories of
these investors to buy land use rights to build homes,
which other foreigners are not permitted to do. However,
the GVN often does not recognize the adopted nationality of
many Vietnamese origin persons unless they have formally
renounced their Vietnamese citizenship and may consider
them to be Vietnamese nationals. U.S. investors of
Vietnamese origin should consult the U.S. Embassy in Hanoi
or the U.S Consulate General in Ho Chi Minh City for more
information.
-------------- --------------
A.6. Right to Private Ownership and Establishment
-------------- --------------


43. Until the late-1980's, the Vietnamese economy was
organized according to principles of socialist central
planning. Since then, the government has moved to develop
a market-oriented economy and has formally recognized the
existence of the private sector. In recent years, the
private sector, foreign and domestic and, to a lesser
extent, a small collective sector have begun to play
greater roles in the economy, although current policy
dictates that the state sector will continue to "play a
leading role" in the economy.

44. SOEs continue to dominate the industrial economy of
Vietnam. A large majority of these SOEs suffer from weak
finances, high debt, obsolete plant and equipment, poor
management, poorly trained staff, low labor productivity,
and low product quality. According to the World Bank,
Vietnam has approximately 5,600 SOEs, down from around
12,000 in the early 1990's. At least 60 percent of the
remaining SOEs are incurring losses, and some estimates
indicate this number may even be higher.

45. As part of its 2001 economic reform agreement with the
World Bank and the IMF, the GVN has committed to equitize
roughly one-third of the current SOEs over three years and
ensure that those remaining become competitive. However,
actual implementation of the reform program has been slower
than planned. In addition, many international observers
expressed disappointment that the government did not agree
to completely dismantle its SOE sector over time.
Especially disconcerting to these observers is the Socio-
economic strategy for 2001-2010 which reconfirms the
"leading role" of the state enterprise sector and instructs
the government to strengthen SOE operations in broad range
of sectors which hold considerable interest for the
international investor, including telecommunications,
banking, insurance, petroleum and more.

46. A vibrant private sector is emerging in Vietnam.
Dozens of large-scale Vietnamese private enterprises and
tens of thousands small and medium sized firms now exist.
The single most crucial GVN action in supporting of the
development of the domestic private sector was the
enactment, in January 2000, of the Enterprise Law, which
provided, for the first time, simplified domestic business
registration rather than discretionary government approval
and licensing. At the end of 1999, official statistics
counted 28,000 companies in the formal domestic private
sector. Since, then almost 55,000 enterprises have been
registered, the large majority of which are new
enterprises. The rest were previously existing firms that
moved from the informal to the formal sector. Also, as
part of implementation of the new law, the GVN has moved to
abolish nearly 200 "unnecessary" permits required by
various ministries and localities for operation of a
business. Unfortunately, these agencies keep adding to the
list of these "baby permits" in an effort to re-establish
control over issues they previously influenced via the
licensing system. Domestic private enterprises have
created substantial new employment in Vietnam, while
employment in the state sector has been stagnant or
declining.

47. Private firms, however, continue to be severely
disadvantaged relative to SOEs in terms of access to credit
and land, and in legal and regulatory treatment. Private
firms face restrictions in using land use rights for joint
ventures with foreign investors. SOEs also receive most of
the lending from state-owned banks, which dominate the
banking sector. In general, despite these restrictions,
the relatively larger private firms that are emerging in
Vietnam operate with better management and greater
efficiency than the SOEs. Moreover, high-ranking
government officials have stated the GVN's intention to put
foreign and domestic investment on more or less even
footing with SOEs with respect to access to credit, legal
and regulatory treatment, pricing, and fees. However, SOEs
are likely to retain better access to land and will
continue to be expected to "dominate" in key sectors as
identified by the political leadership.

--------------
A.7. Protection of Property Rights
--------------

48. The Vietnamese legal system is in a state of
transition to support a more market-oriented economy and
undergoes frequent and at times significant change. The
rudiments of a legal system that protects and facilitates
property rights have been established. But much more work
needs to develop the laws and enforcement mechanisms needed
to adequately protect property rights in Vietnam.

49. All land in Vietnam belongs to "the people",
administered or managed by the State. Private land use
rights (LURs) were established for the first time in 1988.
A LUR is a State-granted right to use land for a specific
purpose. The 1992 constitution granted stronger land
rights to individuals, including rights over commercial and
personal property. LURs may be granted for up to 50 years,
depending on the specific use of the land. Individual
holders of LURs can sell them if they move to a new
location, change jobs, or are unable to work. In 1998
several changes to the land law were enacted, primarily to
distinguish between corporate leaseholders, who can use
their land for domestic or foreign joint ventures, and
individual leaseholders who are not permitted to enter
joint ventures with foreign entities. In the 1993 land
law, the National Assembly broadened LURs to include rights
to exchange, transfer, rent, inherit, and mortgage land.
Additional amendments to the land law in 2001 and
subsequent implementing regulations decentralized authority
for leasing land to businesses and permitted local
officials to lease land to foreign organizations,
individuals and overseas Vietnamese. Still, foreign
investors can currently only lease land from the Government
or in industrial parks. These limitations may soon be
lifted. The Government issued Resolution Number 2 in
January 2003, proposing allowing domestic private companies
with long-term land use rights to lease their land to
foreign investors, provided that the lease is not longer
than the rights held by the leaser. The Ministry of
Natural Resources and Environment has been tasked with
formulating regulations to be issued in the second quarter
of 2003.

50. Vietnamese LUR-holders have the right to mortgage
them, but Vietnamese banks generally value land at a
maximum of 70 percent of the total rent already paid on the
property, not the property's appraised value. As
organizations only were obliged to begin paying rent in
February 1995, the values of mortgages on land are not
large, which limits their usefulness for property-based
project finance. The amended LFI permits foreign banks
branches to accept mortgages of land use rights. But to
date, widespread use of collateralized bank loan actions
have been hampered by a lack of central registration for
mortgaged assets. Foreign banks also want to see an
amendment to the land law to permit them to take possession
of the land after a foreclosure, and amendments to banking
regulations. In March 2002, a good first step was made
when the New National Register for Secured Transactions
opened for business in Hanoi and Ho Chi Minh City. But
the registry does not have jurisdiction over land-use
rights or buildings, assets that remain under the control
of local authorities and the enforceability of collateral
in the form of LUR and property remains uncertain.
51. Vietnam is a member of the World Intellectual Property
Organization (WIPO) and is a signatory to the Paris
Convention for Industrial Property. It has acceded to the
Patent Cooperation Treaty and the Madrid Agreement. While
not yet a party to the Berne Convention, Vietnam agreed
under the U.S.-Vietnam Bilateral Copy Right agreement to
provide U.S. copyrights protection on national treatment
basis in accordance with the terms of that convention.
Under the terms of the BTA, Vietnam is obligated, within
two years, to make its system for protecting intellectual
property rights (IPR), including enforcement, consistent
with the WTO TRIPS agreement. Considerable progress had
been made over the past several years, with new regulations
expanding legal protection to areas previously not covered,
such as business secrets and new plant varieties, for
example, protection of which were the subject of new
regulations issued within the past 12 months.

52. However, in June 2003, the GVN announced that it
planned to change the way intellectual property rights are
handled in Vietnam and as of this writing, the situation is
in flux. Previously trademark registration in Vietnam was
relatively straightforward. However, the GVN has proposed
to remove responsibility for trademarks from the National
Office of Industrial Property (Patents and Trademarks) and
move just the registration function to the Ministry of
Trade, although not the research or adjudication function.
If the GVN implements the changes as planned, Vietnam may
have a much more incoherent system of IPR protection, in
particular, trademark protection will be more difficult
and foreign trademark holders, as well as domestic
trademark holders, will be more vulnerable to infringement.
IPR infringement continues to be widespread and enforcement
of administrative orders and court decisions finding IPR
infringement remains problematic. Vietnam's laws offer
some protection for foreign patent holders, but there are
infringements. Potential investors should contact the U.S.
Embassy in Hanoi or the Consulate General in Ho Chi Minh
City for the latest information regarding the ongoing
changes to IPR protection in Vietnam. Obtaining
expeditious adjudication and administrative enforcement of
patent and trademark violations remains difficult and may
get worse with the proposed changes. Vietnam's copyright
office is under the control and supervision of the Ministry
of Culture and Information. Significant progress has been
made putting in place the laws protect copyrights including
those belonging to foreigners but enforcement is almost
non-existent.

53. Enforcement of IPR remains weak and violations of IPR
are rampant and may get worse under the proposed changes.
While Vietnam recently has conducted considerable
administrative and law enforcement actions against IPR
violations, IPR enforcement remains the exception rather
than the rule. For some types of products, such as PC
software, music and video CDs, VCDs and DVDs, as well as
brand trademark violations, such as logos on t-shirts and
other consumer items, IPR enforcement is virtually non-
existent. Industries estimates of piracy rates for
software, music and video, run as high as 99 percent.
Local police authorities often are slow to act on
administrative orders finding infringement and court
decisions. Violators sometimes negotiate with plaintiffs,
demanding payoffs to stop producing pirated material.
However, there is the beginning of some progress with
increased awareness of the need for effective IPR
enforcement to foster investment, both foreign and
domestic, in sectors such as software development and the
arts. In addition, Vietnamese authorities are becoming
increasingly concerned that the proliferation of pirated
products also undermines their ability to prevent the
distribution of pornography and other illegal content.

--------------
A8. Transparency of the Regulatory System
--------------

54. As Vietnam undergoes a transition to a more market-
oriented economy, the legal system is changed frequently,
and at times, significantly. Vietnamese officials have
limited experience drafting legislation, and new laws and
regulations sometimes are contradictory or unclear. Not
all officials, especially those at the provincial and local
levels, are fully up-to-date on all the new laws and
regulations which impact on their work. Nor are all laws
and regulations readily available to business and the
public. Different officials, sometimes within the same
agency, may interpret laws differently. There is a
shortage of practicing lawyers, law-graduate judges, and
law professors. Substantial foreign assistance is being
devoted to assist Vietnam to establish a legal structure
compatible with international standards.
55. Although the Vietnamese government has begun to
streamline and rationalize the investment licensing process
over the past year, MPI and other national, provincial, and
local government agencies retain a great deal of
discretionary authority. U.S. and other investors
frequently encounter the need for further negotiation and
administrative processes after the licensing process has
been completed. A general lack of transparency in law and
regulation make it difficult not only to exercise rights,
but to even be aware of what rules apply to an investment.
In recent years, Vietnam has improved its process for
making and publicizing laws, but beyond major national laws
and regulations, much rule-making affecting foreign
investors still occurs at the ministerial, sub-ministerial
and local levels, without any regular process for public
notification and little possibility for advance warning of
changes in rules or for public input during the rule-making
process.

56. Under the BTA, Vietnam is obligated to promptly
publish all existing and future laws, regulations and
administrative procedures which might affect any matter
covered under the agreement including investment and trade
in goods and services. The BTA further commits Vietnam to
enforce only laws, regulations or administrative practices
that have been so published and to publicize such laws in
sufficient advance of their effectiveness to ensure U.S.
investors have adequate time to adjust their operations
accordingly. Vietnam has committed to provide a process by
which the U.S. Government and U.S. nationals have the
ability to provide their views to the GVN on any such laws,
regulations or administrative practices while they are
still being formulated. Finally, U.S. nationals have the
right to appeal administrative action relating to matters
relating to the agreement. In December 2002, the National
Assembly passed the "Law on Legal Normative Documents".
Although this Law meets some of its BTA commitments, the
GVN is not yet in full compliance with these obligations,
in particular regarding prior notice and consultation on
proposed regulatory and legal changes...

-------------- --------------
A.9. Efficient Capital Markets/Portfolio Investment
-------------- --------------

57. Vietnam' financial system is in the early stages of
reform and is not yet an efficient allocator of financial
resources. At least 50% of personal savings are held as
cash, gold, or other assets outside the banking system.
However, as part of its World Bank/IMF program, the GVN
adopted a comprehensive banking reform program that relies
on market-based action which is intended to ensure the
stability of the banking system, and in the medium-to-long
term, promote better mobilization of domestic resources by
improving allocation of those resources to commercially
viable activities, and expand banking services throughout
Vietnam. Raising capital for development is one of
Vietnam's main economic priorities.

58. Foreign investors generally meet their foreign
currency credit needs offshore or with foreign bank
branches, although availability of foreign exchanges to
convert dong assets to cover dollar liabilities can be, at
times, uncertain. Foreign banks are severely limited in
their right to take dong deposits and frequently encounter
difficulties meeting customer's dong cash and credit needs.
However, under the BTA, U.S. banks now enjoy more a more
liberal policy on dong deposits. The State Bank and the
Ministry of Finance have conducted sales of state bonds
denominated in local currency, but Vietnam only has an
informal secondary market for such instruments.

59. The banking industry in Vietnam is characterized by its
small size in terms of deposits and loans and by the
relatively large number of banks, both foreign and
domestic. However, the four state-owned banks -- the
Vietnam Bank of Foreign Trade (Vietcombank), the Vietnam
Industrial and Commercial Bank (Incombank), the Bank for
Agriculture and Rural Development, and the Vietnam
Investment Bank -- still dominate domestic banking
activity, providing an estimated 70 percent of all lending.
Most local banks are under-capitalized, particularly when
non-performing loans are taken into account. Most are also
weakened by state-directed lending under non-commercial
criteria. Furthermore, local banks, including the four
state-owned banks, hold a large number of non-performing
loans, mainly to SOEs. IMF staff estimate that non-
performing loans are roughly 30% of outstanding loans.

60. In 1997, the government introduced a new accounting
standard, the 'Vietnamese accounting system.' The Ministry
of Finance continues to refine and amend this standard to
bring it into consistency with international accounting
standards. After several years of grace period, foreign
banks and companies are now required to comply fully with
its parameters. A number of major international accounting
firms have opened offices in Vietnam and, unlike foreign
law firms (which are subjected to restrictions including
advising clients on Vietnamese law and hiring Vietnamese
lawyers), can provide advice on accounting and business
issues directly to foreign clients in Vietnam.
Nonetheless, a continued lack of financial transparency and
compliance with internationally accepted standards among
Vietnamese firms continues to pose problems for the
government's plan to expand stock and securities markets to
raise capital internally.

61. Despite these challenges and after years of discussion
and planning, Vietnam opened a stock market in July 2000.
A total of 21 joint stock companies, primarily former SOE's
now under a restructuring/equitization program, have listed
on the exchange. Several more are expected to do so soon,
and before the end of the year, experts anticipate that
there will be 20-25 listed companies. Under current market
regulations, share prices of a listed company cannot
increase or decrease by more than five percent per trading
session. To date, with its small trading volume, and
restrictive rules on both listing and investor
participation, the nascent market has yet to become a real
source for financing or intermediation.

62. Foreign organizations and individuals can only hold a
maximum of 30% of total shares issued by a listed company,
of which a single foreign organization may hold a maximum
of seven percent and a single foreign individual may hold a
maximum of three percent. MPI maintains a list of sectors
and business lines in which foreigners may purchase shares
in Vietnamese private enterprises in an effort to encourage
private domestic enterprises to list and foreign investors
to buy shares. In April 2002, the latest version of this
list was issued. It includes selected commercial
activities in five broad areas: agriculture, forestry and
aquaculture; industry and processing; hotels and
restaurants; transport, warehousing and communications; and
science, technology, health care and education.

63. In March 2003, the Government issued Decision 36/QD-
BKH revising the regulations on foreign shareholdings in
Vietnamese companies, which are not listed on the Vietnam
stock market. The new Decision governs purchase of shares
and capital contribution by the following foreign
investors:

?Foreign economic and financial organizations
established pursuant to foreign law and conducting
business overseas or in Vietnam;
?Non-resident foreigners in Vietnam;
?Foreigners who reside, earn their living and live
long-term in Vietnam;
?Overseas Vietnamese

An important reform is that Prime Minister's approval is no
longer required for the sale of shares to foreign
investors. However the maximum level of capital
contribution and purchase of shares by any one or more
foreign investor in Vietnamese companies is still capped at
30% of the charter capital of the Vietnamese companies.


64. A handful of regional and Vietnam-specific investment
funds were set up to invest in Vietnam following the
lifting of the U.S. trade embargo in 1994, but their
results have mostly been poor. After promising beginnings
in 1995, by 1998 shares in some of the funds were trading
at an average discount of nearly 50 percent, and some were
ere
forced significantly to write down the value of their
portfolios, while most failed to fully invest the funds
raised for Vietnam due to a dearth of attractive
opportunities. The continuing lack of a developed stock
market means funds do not have access to portfolio
investment.
--------------
A.10. Political Violence
--------------

65. Vietnam is undertaking an ambitious course of
transition both domestically and internationally, but
remains essentially stable under the continued leadership
of the CPV. As the country proceeds with its transition
from a centrally-directed economy to a more genuinely
market-based economy, a process which began in the late
1980's, the GVN and the CPV have, at the same time, reduced
official interference in private lives of citizens and have
permitted a broad expansion of personal liberties. But the
GVN remains a one-Party state that brooks no overt
criticism of the GVN or CPV and continues to restrict
freedoms of religion, speech, assembly, and press, while
denying true choice of political system or leaders. There
are no signs of active opposition to the GVN or CPV,
however, and most Vietnamese appear satisfied with the
economic and social improvements of the last 16 years.
There have nonetheless been isolated protests, such as
large demonstrations by ethnic minorities in the Central
Highlands in 2001 and smaller gatherings at the semi-annual
meetings of the National Assembly by a variety of
disaffected individuals.

--------------
A.11. Corruption
--------------

66. U.S. and other foreign firms as well as domestic
private sector firms, have identified corruption in
Vietnam in all phases of business operations as an obstacle
to their business activities. Vietnam scored a 2.4 out of
a possible high score of 10 points on Transparency
International's Corruption Perception Index behind
neighbors Malaysia and Thailand but above Indonesia. In
large part due to a lack of transparency, accountability,
and media freedom, widespread official corruption and
inefficient bureaucracy remain serious problems that even
the CPV and GVN admit they must address squarely and soon.
Competition among government agencies for control over
business and investments has created a confusion of
overlapping jurisdictions and bureaucratic procedures and
approvals which in turn create opportunities for
corruption. Low pay for government officials and woefully
inadequate systems for holding officials accountable for
their actions compound the problems. Implementation the
GVN's Public Administration Reform, developed in with the
assistance of the World Bank, and the country's obligations
under the transparency provisions of the BTA promise some
improvement in the situation. But it appears unlikely that
they will be successful in this effort to eliminate
corruption the near term.

--------------
B. Bilateral Investment Agreements
--------------

67. Vietnam has 45 bilateral investment agreements with
the following countries and territories: Algeria,
Argentina, Armenia, Australia, Austria, Belarus, Belgium
and Luxembourg, Bulgaria, Burma, Chile, China, Cuba, Czech
Republic, Cambodia, Denmark, Egypt, Finland, France,
Germany, Hungary, Iceland, India, Indonesia, Italy, Laos,
Latvia, Lithuania, Malaysia, Mongolia, Netherlands, North
Korea, Philippines, Poland, Romania, Russia, Singapore,
South Korea, Sweden, Switzerland, Taiwan, Tajikistan,
Thailand, Ukraine, United Kingdom, and Uzbekistan. Vietnam
has not concluded a Bilateral Investment Treaty (BIT) with
the U.S., but the BTA contains an investment chapter which
closely resembles U.S. BITs and contains most of the
principal obligations common to such agreements Vietnam
also does not have bilateral taxation treaty with the U.S.

-------------- --
C. OPIC and other investment insurance programs
-------------- --

68. According to U.S. law, the Overseas Private Investment
Corporation (OPIC) may not operate in Vietnam until the
President determines the country is in compliance with the
emigration standards of the Jackson-Vanik Amendment to the
1974 Trade Act, or waives compliance as being in the
national interest, and until OPIC certifies that Vietnam is
making adequate progress toward protection of workers'
rights. In March 1998, the President executed a Jackson-
Vanik waiver and OPIC and Vietnam signed a bilateral
agreement to enable OPIC to begin operations in Vietnam.
The waiver for Vietnam, and therefore continued
availability of OPIC services to U.S. business in Vietnam,
is subject to annual renewal and has been renewed each year
since the waiver was first issued. As of May 2003, OPIC
had signed one active insurance contract in Vietnam. OPIC
is reviewing several applications to support other
potential projects.

69. In the event OPIC should pay an inconvertibility claim
in the future, the U.S. Embassy estimates its total annual
local currency disbursements to be approximately 51
trillion Vietnamese dong (VND), or about US$ 3.3 million
(June 2003). The exchange rate on June 20, 2002 stood at
15,480 VND/USD. The value of the Vietnamese dong
depreciated 1.4 percent over the past year, and is expected
to gradually depreciate at approximately the same or slower
rate over the next year.

70. Vietnam joined the Multilateral Investment Guarantee
Agency (MIGA) in 1995.

--------------
D. Labor
--------------

71. One of Vietnam's principal attractions for foreign
investors has been its large, relatively well-educated (the
GVN reports a literacy rate of over 90%), and inexpensive
labor force. Now estimated at nearly 40 million, the labor
pool continues to increase by up to 1.5 million workers
annually due to the post-war population explosion.

72. Despite its attractions, labor in Vietnam poses some
problems for foreign investors. There is a shortage of
managerial talent and skilled workers, resulting in higher
salaries for those employees. Another factor raising the
cost of skilled and managerial workers is Vietnam's sharply
progressive personal income tax system, resulting in labor
costs for relatively high-paid local staff to be 2-3 times
higher than in other Asian countries. One western manager
estimated that if he wanted one of his engineers to receive
a net salary of US$ 2,000 per month, the gross cost to his
firm for wages, taxes, and benefits would exceed US$ 9,000
per month. In some cases, he said, it would be less
expensive to employ an expatriate worker.

73. Under two 1999 directives, foreign organizations,
including FIEs, must recruit and hire staff through state-
owned employment bureaus, a requirement many investors find
onerous. Under amendments to the Labor Lawthat entered
into force on January 1, 2003, FIEs and foreign business
cooperation parties are now allowed to directly recruit
Vietnamese workers and foreigners. However, the
requirement to use such employment service agencies will
continue to apply to branches and representative offices of
foreign companies, foreign non-governmental organizations
and foreign diplomatic missions.

74. Employers are required by law to establish labor
unions within six months of establishment of the company.
All labor unions must be members of the Vietnam General
Confederation of Labor, an organization under the Communist
Party-affiliated Fatherland Front. There were, 79 labor
strikes in 2002, that latest statistics available. Strikes
took place in SOEs, FIEs, and domestic private companies.
There were no known strikes at U.S.-invested companies.
Most of the strikes involved labor-management disputes over
health, safety, or other working conditions, work hours, or
late payment of wages, and were settled quickly.
75. Vietnam is a member of the International Labor
Organization (ILO). As of May 2003, it had ratified three
of the eight core labor conventions: 100 (Equal
Remuneration); 111 (Non-discrimination in Employment); and
182 (Worst Forms of Child Labor). Vietnam ratified the
first two conventions on October 7, 1997 and the last on
December 19, 2000. Vietnam has not ratified ILO
Conventions on freedom of association, protection of the
right to organize and collective bargaining. However,
under the Declaration on Fundamental Principles and Rights
to Work, all ILO members, including Vietnam, have pledged
to respect and promote all the core ILO labor standards,
including those on association, right to organize and
collective bargaining. A number of technical assistance
projects in the field of labor sponsored by foreign donors
are underway in Vietnam, including work by the ILO and the
U.S. Department of Labor.

--------------
E. Foreign Trade Zones/Free Ports
--------------

76. Companies may choose to produce within an export
processing zone (EPZ) to take advantage of exemptions from
customs duties for equipment, raw materials, and
commodities imported into the zones, and for finished goods
and products exported from the zones, subject to specific
provisions regulating EPZs. All of the production within
an EPZ must be exported. Industrial zones (IZs) have been
developed to offer tax advantages for establishing
factories within the zones. Companies can produce within
an IZ for the domestic market or for export. The companies
pay no duties when importing raw materials, if the end
products are exported.

77. From the establishment of its first EPZ in 1991 through
March 2003, Vietnam established a total of 73 IZs and 3
EPZs. As of March 2003, there were 1,253foreign invested
enterprises licensed in the zones with a total registered
capital of US$ 10.85 billion, of which over US$ 4.5 billion
has been realized.Many foreign investors commented that it
is faster and more convenient to implement their projects
in the industrial zones than outside the zones as the land
is already planned and they do not have to be involved in
site clearance, compensation works and the construction of
necessary infrastructure, which are time consuming and
sometimes causes headaches. Foreign investment in the
industrial zones currently concentrates on light industry
projects, such as textile and garments, food processing.
The number of projects in heavy industry is still modest.

78. The operation of customs warehouses was approved in
1994. There are bonded warehouses in Can Tho, Haiphong, Ho
Chi Minh City, Mong Cai, Quang Ninh, Binh Duong, Dong Nai
and Vung Tau. Entities permitted to lease customs bonded
warehouses are foreign enterprises, individuals, and
overseas Vietnamese; Vietnamese import-export license
companies; and FIEs licensed to perform import-export
activities. Most goods pending import and domestic goods
pending export can be deposited in bonded warehouses under
the supervision of the provincial customs office. The
exceptions are goods prohibited from import or export,
Vietnamese-made goods with fraudulent trademarks or labels,
goods of unknown origin, and goods dangerous or harmful to
the public or environment.

79. The lease contract must be registered with the customs
bond unit at least 24 hours prior to the arrival of goods
at the port. Documents required are a notarized copy of
authorization of the holder to receive the goods, a
notarized copy of the warehouse lease contract, the bill of
lading, a certificate of origin, a packing list, and
customs declaration forms. Owners of the goods pay import
or export tax when the goods are removed from the bonded
warehouse.

80. Customs warehouse keepers can provide transportation
services and act as distributors for the goods deposited.
Additional services relating to customs declaration,
appraisal, insurance, reprocessing or packaging require the
approval of the provincial customs office. In practice the
level of service needs improvement. The time involved for
clearance and delivery can be lengthy and unpredictable.
-------------- --
F. Foreign Direct Investment Statistics
-------------- --
Year Capital Number Licensed Actual
per project of capital inflows
(million US$) projects (billion US$) (billion US$)

1992 10.5 193 2.027 0.478
1993 9.5 272 2.588 0.871
1994 10.3 362 3.746 1.936
1995 16.4 404 6.607 2.363
1996 23.5 367 8.640 2.923
1997 14.0 333 4.659 3.137
1998 15.0 260 3.897 2.364
1999 5.2 298 1.568 2.179
2000 5.8 344 2.014 2.228
2001 5.3 461 2.521 2.300
2002 1.97 697 1.376 N/A

Note: Authorities have been steadily adjusting the final
figures for investment inflows for recent years upwards.
It is not clear whether these adjustments reflect
additional information that has become available to
investment authorities or if they reflect an attempt to
make the investment downturn in the wake of the Asian
financial crisis appear less severe.

The licensed capital statistics for 1997 and 1998 may be
unrealistic. A Singapore-invested resort complex in 1997
worth US$700 million is unlikely to be completed in the
foreseeable future, and the Russian partner has recently
pulled out of a joint venture petroleum refinery project
licensed in 1998 worth US$ 1.3 billion. Absent these
projects, the decline in newly licensed FDI after 1996
would appear to have been even sharper.


Total FDI (as of 04/20/2003):

-- licensed projects: 3,897 (US$ 38.892 billion)
lion)
-- disbursed capital: US$ 21.815 billion
(56 percent of licensed capital)

Note: GVN authorities routinely revise or revoke
investment licenses which have not been utilized and other
investment licenses contain automatic expiration clauses
that take effect if a project or certain phases of a
project are not implemented by a certain date. Statistics
on the number of licensed projects and the value of
licensed projects are then adjusted accordingly.

Foreign direct investment in selected sectors (cumulative):
(as of 04/20/2003)





Sector number of licensed capital implemented
projects (billion US$) capital
(billion US$)
1. General Industry 2,329 16.30 8.83
2. Oil & gas 31 1.94 3.35
3. Construction 255 3.43 1.96
4. Real estate devel 104 3.42 1.61
5. Hotels & Tourism 135 3.23 2.01
6. transp/commun. 110 2.58 1.00
7. Ag & forestry 412 2.40 1.33
8. Fisheries 85 250 0.12
9. Finance & banking 47 0.61 0.54
10. Health & Education 133 0.64 0.22

Foreign direct investment by country (2002):

Country number of licensed
projects capital
(million US$)
1. South Korea 137 248
2. Taiwan 173 247
3. Hong Kong 53 143
4. United States 32 139
5. Japan 42 90
6. Malaysia 25 70
7. British Virgin Islands 31 63
8. China 50 60
9. West Indies 1 50
10. Thailand 13 40


Foreign Direct Investment by country:
(cumulative, as of 4/20/2003)

Country number of licensed of which
projects capital invested to date
(billion US$) (billion US$)

1. Singapore 276 7.35 2.78
2. Taiwan 980 5.38 2.44
3. Japan 384 4.35 3.46
4. South Korea 536 3.78 2.19
5. Hong Kong 276 2.97 1.78
6. France 127 2.08 0.86
7. Brit.Virg.Isl 166 1.83 1.02
8. Netherlands 47 1.70 1.27
9. Thailand 112 1.38 0.58
10.United Kingdom 46 1.18 1.06
11. Malaysia 125 1.14 1.20
12.United States 163 1.13 0.56
13. Switzerland 23 0.63 0.52

There is little data available on Vietnam's direct
investment abroad. According to the Ministry of Planning
and Investment, as of April 2003, Vietnamese businesses had
invested in 78 projects worth about US$ 187.3 million in
Russia, Singapore, Laos, Japan, Hong Kong, Cambodia,
Tajikistan, the Middle East, the United States, Uzbekistan,
the Middle East, the United States, Uzbekistan,
and Taiwan. These investments were concentrated in the
following sectors: transport, communications,
construction, food processing, oil and gas, hotel,
restaurant, and agriculture sectors. Vietnamese businesses
have two investment projects worth US$260,000 in the United
States. One Vietnamese government-owned telecommunications
firm established an office in California. There are no
Vietnamese government regulations on investment overseas.

Note: Statistics, including those on investment, are often
difficult to come by and are generally based on definitions
that differ from internationally-accepted standards. Those
published in government statistical surveys are generally
incomplete and often inconsistent from publication to
publication and over time. It is the policy of the
Ministry of Planning and Investment to respond only to
written requests for statistics or information on how they
are compiled and calculated, a process that is cumbersome
and very time consuming. Additional statistical data is
often released in the local press but is difficult to
confirm and update year-to-year, because it is not also
provided in a database, which is readily available to the
public.

3.End text of the 2003 Investment Climate Statement for
Vietnam.
BURGHARDT