Socialist Republic of Vietnam

INVESTMENT POLICY OF STATE

Over recent years, total development investments rapidly increased. Direct State investment expenditures rose from 2,246 billion VND (1991) to 12,020 billion Vietnam Dong (1995), 16,000 billion VND in 1998 and over 20 billion VND in 1999, thus accounting for over one-fourth total of State budget expenditures. Development investments were made through the Development Support Fund, and control over expenditures from the Fund was performed by the State Treasury. The Government has given more powers to the provincial authorities who can now display more initiative in development investments in the principle of ensuring the balance between revenues and expenditures. The Government has also provided loans through programmes related to national objectives (Programme No.120 on employment creation Programme No. 327 on greening waste land and bare hills; Programme No.773 on development support to coastal economic regions; Programme No. 136 on eradicating hunger and reducing poverty...) which have yielded fairly results. Still, the ratio of State expenditure on development investments to total budget expenditure was still low and so was the economic efficiency; further, they were marked by fund leakage and waste for which remedial measures were slow to come. In general, disbursement of development investment fund was slow, late and even blocked in some cases. In addition, the policy of restructuring State investments suffers many weaknesses and shortcomings, lacks nation-wide orientations, and in fact hinders economic restructuring along the line of industrialization and modernization.



State credit funds rapidly rose from 5.6% of total investments (1991-1995) to 8.5% (1996-2000), and are expected to reach 10% during the 2001-2010 period. These credit funds have been financed by State budget allocations and funds which the State has mobilized from the population for the sake of providing loans (so far, the mobilized funds are bigger by 5 times as compared with State budget allocated funds). State credits should be given on the principle "to borrow and to repay". These credits are given to cutting-edge industries which are likely to make goof profits, and to industries which provide guidance to the economy and over which the State wants to hold the monopoly.

In the forthcoming period, it is necessary to increase the diversification of State investments joint ventures, economic association, capital contribution, bidding for State projects, bidding for credit sources, producing goods in accordance with State orders. We should, through experimentation, proceed toward increasing the purchase by the State of investment projects executed by non-State enterprises (wholly or partly), combining funds of various economic components for meeting the demand of the State in economic management and achieving socio-economic development objectives.



PREFERENTIAL TAX POLICY

Preferential tax policy now constitutes the key tool for inducing investments, and is being applied frequently and on a rather wide basis, with fairly high preferential rates: 15-25% preferential rate in corporate income tax with respect to domestic enterprises enjoying State encouragement, 10 to 25% with respect to enterprises with foreign invested capital during the initial years (as against the general tax rate of 32%); reduction of import tax with respect to machinery, equipment, means of transportation as part of the fixed assets of the enterprises, reduction of import tax in case the investment project is going to be further enlarged in scale; in the forthcoming period, the Government may provide tax exemption to imports of machinery, equipment, means of transportation which are part of the production line, and materials not available in Vietnam in case the investors concerned want to expand the scale of the projects, improve or replace the technology; the policy of selective preferential tax will be implemented with respect to priority industries, priority regions, labour-intensive industries, etc... with a view to encouraging investments in certain industries and in highlands and distant and secluded regions. The imple-mentation of the value-added tax will be delayed with respect to export industries, as an encouragement to investors. Preferential tax treatment will be given (in value-added tax, corporate income tax, tax levied on persons having high income) to securities companies, organizations engaged in the issuance of securities, individuals engaged in portfolio investments... with a view to developing the financial market. As Vietnam's income tax rate is higher than the one levied by countries in the region, it is important to work out a starting point in the tax rate levied on persons with a high income, so as to encourage foreign investors. But tax on repatriated profits -with a tax rate of 5 to 10%- would encourage foreign investors to set aside a part of their profits for reinvesting in Vietnam.


POLICY ON REDUCING LAND RENT

With a view to inducing investors and, in particular, channeling them into export-processing zones and industrial zones, and stalling the gradual fall in foreign investment due to the financial and monetary crisis in East Asia, the Vietnamese Government has reduced land rent by ten times, and in some areas land rent now amounts to a few dozen American cents/m2/year. Some advance have been made in clearing construction sites, which would, as intended, reduce expenditures for the investors. But the pace is still slow, the main stumbling block being the failure to reach agreement on a reasonable amount of compensation, and this has prolonged the period of preparations, causing us to miss investment opportunities and to incur many unnecessary expenditures.

In fact, there should be no excessive reduction in land rent because this would negatively affect the capital recoupment of investors engaged in the construction of export-processing zones and industrial zones with modern infrastructure. Land rent has also been reduced for less healthy purposes: To compete with other industrial zones in increasing the number of investors in certain industrial zones, but such attempts have failed to achieve their purpose in many cases (Nomura, Dinh Vu... industrial zones).


POLICY ON REDUCING THE PRICE OF SERVICES (travel, communications, power and water supply) for investors:
It is necessary to reduce the price of services and make them more in harmony with the floor price in the world in order to increase the competitiveness of Vietnam's investment environment.

In 1999, similar service prices were enforced for Vietnamese citizens and overseas Vietnamese, and as a result many overseas Vietnamese were eager to return to the country for seeking investment opportunities. But the price of a number of services still remains high. For example, the price of trunk calls from Vietnam to the USA is 3 times higher than trunk calls from the USA to Vietnam.

There is no equality in service prices as yet between domestic and foreign investors, and therefore discrimination has not been done away with entirely. For example, from July 1, 1999 equality has been ensured with respect to installation of telephone, water and power supply for production, internal telephone fees, and travel fees. But there is still discrimination with respect to several other items: Telephone rental (68,000 VND/apparatus for Vietnamese; 10 USD/apparatus, that is 140,000 VND for foreigners), air travel from Hanoi to Ho Chi Minh City (one-way ticket, 1 million VND/1 person for Vietnamese; 1.9 million VND for foreigners; two-way ticket, 2 million VND/1 person for Vietnamese, and 3.65 for foreigners that is, two times higher for a foreigner).. Further, there are some other obligatory fees (waste disposal and hygiene, environment..) and requests for various types of contribution which might upset foreign investors.


POLICY ON PREFERENTIAL FINAN-CIAL TREATMENT TOWARDS INVESTORS

Self-accumulated capital of State enterprises now constitutes an important source for in-depth investments designed to improve their technology and to enhance their competitiveness. Yet, the ratio of this capital source to total investment is less than stable (13.5% from 1986 to 1990; 2.6% from 1991 to 1995; and 9.75% in 1996 and 1997). This capital source comprises money deducted from basic amortization and a part of after-tax profits. But in the present conditions when goods are effected by slow sales or are even unstable, and the rate of profits of the State enterprises is quite low, and the amortization rate is quite small, this capital source is bound to be minimal. In fact, many State enterprises suffer from chronic capital shortage, loss of capital, very low ratio of profits to capital, and are even incurring losses. In 1998, some 13% of State enterprises were suffering from chronic losses, and 46.4% of them were inefficient, with average profit ratio to capital attaining 11% (1996), 9-10% (1998-1999).

In order to encourage self-investment by State enterprises, the Vietnamese Government has simplified the amortization of fixed capital: only fixing the maximum and minimum amortization time, reducing to 30% the minimum amortization period. It is hoped that these two measures would make it possible for enterprises to take the initiative in working out the plan on amortization and for the fixed assets to emerge from borrowed capital that is invested in-depth in expanded production. Further, the Government has encouraged the State enterprises to establish an investment fund by giving tax exemption to the portion of corporate income used for re-investment.



POLICY ON DEVELOPING THE BANK-ING SYTEEM AND OTHER FINANCIAL INTERMEDIARIES

It is important to develop a network of commercial banks and joint stock commercial banks in the urban and rural areas so as to increase the supply of fund to investment projects. We should develop forms of fund mobilization for the sake of providing loans such as the people's credit funds, the insurance companies, the financial companies, the financial buy-and-lease companies, the securities companies.. So far, credit organizations are not evenly spread in the country: they are concentrated in the urban areas, and only a few are located in rural areas and in secluded and remote areas, and this is particularly so in central Vietnam. The banks have a very small amount of capital, from some dozen billion VND to more or less than 1,000 billion VND, that is, very inadequate with their counterparts in the world, and also as compared with the requirements in capital of medium-size projects in the country. The non-banking financial intermediaries are small in number, poor in capital and in professional skills and, therefore, have great difficulty in providing development loans and, in particular, direct and indirect investments.


POLICY ON PROVIDING LOANS

The Government has boldly allowed the use of a portion of short-term fund for long-term loans. Improvements have been made with respect to procedural work on loans, collaterals... thus creating favourable conditions for investors to have more rapid and easier access to credit sources. Guarantee measures are waived in case the applicant seeks loans for investing in a project that is part of a State plan, or for making boats for offshore fishing. Credits granted to non-State economic components have changed for the better: their ratio to the total amount of credits given rose from 10% (early years of the 1990s) to nearly 50% (by the end of the 1990s).

While the government policy on increasing credit investments is designed to promote economic growth and demand, the capacity of banks and other credit organizations to peruse loan applications is very low, and as a result many loans have been inefficient, leading to the accumulation of irrecoverable loans, loss of capital and loss of solvency. Yet, a number of good projects have failed to obtain credits. The ratio of overdue loans to total given credits has surpassed the safety threshold, rising from 6% (1994) to 12% (1997) and over 13% (1998). Procedural work on loans and collaterals remain quite complicated and causes numerous difficulties to clients, while also involving loopholes that made it possible for fund leakage and other rent-seeking activities. Some 80% of the funds are mobilized on a short-term basis, and this hinders the increase of funds for medium-term and long-term loans.


POLICY ON REDUCTION OF LOAN INTEREST RATE


Over recent years, Vietnamese banks have repeatedly reduced loan interest rate on the basis of the maintenance of a positive real interest rate, and this has, to some extent, stimulated investments and encouraged enterprises to borrow for expanded production. Recently, the ceiling interest rate on loans has decreased to 0.85% per month. The interest rate on foreign currency loans has also been continuously reduced, thus narrowing down the gap between loans domestic currency and loans in foreign currency. But the reduction in interest rate has exerted little impact on investments because of cumbersome procedural work on loans, too low profit rates of enterprises, high ratio of borrowed capital to the total capital of enterprises which results in big sums being used for loan repayment. There are limits to the continued reduction of interest rate because of the limited capacity to reduce the interest rate of bank deposits and because of other macro economic factors such as inflation rate, rate of exchange etc..



POLICY ON EXCHANGE RATE AND FOREIGN CURRENCY CONTROL


The readjustment of the exchange rate in accordance with the market mechanism, and the use of the inter-banking market exchange rate within a fluctuation band of 0.1% for the official exchange rate has helped to stabilize the exchange rate and has contributed to the stabilization of the financial environment to the benefit of investments, thus making domestic and foreign investors feel less concerned, and even more at ease about the exchange rate, as different from what was the case a few years ago. The country now has an adequate supply of foreign currency for meeting the imports in machinery and equipment necessary for the growth of production and business. But the policy on foreign currency control involves a number of shortcomings which affect investors in export-oriented ventures and give rise to partial excess or shortage in foreign currency, and tensions in foreign currency supply and demand.


POLICY ON PROMOTING EQUITISA-TION OF STATE ENTERPRISES


The equitisation of State enterprises has provided encouragement to domestic investors and helped State enterprises to attract more capital, and has energized the fledgling capital market of Vietnam. Equitisation has gained momentum and speed since 1999 and it is planned to intensify it in the forthcoming years. Equitized State enterprises have become more efficient thanks to changes in the financial management system and the enjoyment of some preferential treatment in tax and credit funds. Yet, the process of equitisation is still low and cannot meet the demand on improving State enterprises because of hindrances in mechanism, law and psychology... By the end of 1999, we equitized only 370 State enterprises, that is 7% of the total. In 1998-1999, the plan of equitisation was fulfilled by about 50%. Less than 30% of the shares of the enterprises have been sold to the public, and in some cases no shares have been sold to be public, thus giving little encouragement to investments.


(Excerp from Vietnam Economic Review August 2000)