VIETNAM: 2003 INVESTMENT CLIMATE STATEMENT

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





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A1. Openness to Foreign Investment

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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.



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A2. Conversion and Transfer Policies

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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.



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A.3. Expropriation and Compensation

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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.



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A.4. Dispute settlement

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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.

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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