Vietnam Oil & Gas

VIETNAM - A LAND OF OPPURTUNITY
(OIL & GAS SECTOR)

PROJECT International Marketing | Surya Srivastava ( Roll No 32)
[Type text] Page 1

Project International Marketing

TABLE OF CONTENTS
I. COUNTRY PROFILE: INTRODUCING VIETNAM .......................................................................................... 3
1.1 History, geography, population .................................................................................................................... 3
1.2 Economic Indicators .................................................................................................................................... 4
1.3 Why spotlight has now turned to vietnam .................................................................................................... 5
II ECONOMIC SECTORS ......................................................................................................................................... 6
2.1 Agriculture, fishing and forestry .................................................................................................................. 6
2.2 Mining and Minerals .................................................................................................................................... 7
2.3 Industry and manufacturing ......................................................................................................................... 7
2.3 Energy .......................................................................................................................................................... 8
2.4 IT outsourcing: Still small scale ................................................................................................................... 8
2.5 Tourism: "Vietnam – The hidden charm" .................................................................................................... 8
2.6 Infrastructure: Ambitious projects ............................................................................................................... 9
2.7 The banking sector: High growth potential from a low base ........................................................................ 9
III PROSPECTS FOR VIETNAM ............................................................................................................................. 9
3.1 Investment Environment ............................................................................................................................ 10
IV PESTLE ANALYSIS ............................................................................................................................................ 11
4.1 Political ...................................................................................................................................................... 11
2.2 Economic ................................................................................................................................................... 12
4.3 Social ......................................................................................................................................................... 12
4.4 Technological............................................................................................................................................. 13
4.4.1 Industrial Zones ...................................................................................................................................... 13
4.5 Legal .......................................................................................................................................................... 13
V BUSINESS ENVIRONMENT ............................................................................................................................... 15
5.1 Infrastructure.............................................................................................................................................. 15
5.2 Labour Force .............................................................................................................................................. 16
5.3 Foreign Investment Policy ......................................................................................................................... 18
5.4 Tax Regime ................................................................................................................................................ 19
5.5 Security Risk .............................................................................................................................................. 21
IV. INDIA- VIETNAM ECONOMIC RELATIONS .............................................................................................. 22
4.2 Investment and Joint Ventures ................................................................................................................... 23
V SWOT ANALYSIS ................................................................................................................................................. 24
5.1 Political Swot ............................................................................................................................................. 24
5.1.1 Strengths ..................................................................................................................................... 24
5.1.2 Weaknesses ................................................................................................................................ 24
5.1.3 Opportunities .............................................................................................................................. 24
5.1.4 Threats ........................................................................................................................................ 24
5.2 Economic Swot .......................................................................................................................................... 24
5.2.1 Strengths ..................................................................................................................................... 24
5.2.2 Weaknesses ................................................................................................................................ 25
5.2.3 Threats ........................................................................................................................................ 25
5.3 Business Environment Swot ...................................................................................................................... 25
5.3.1 Strengths ..................................................................................................................................... 25
5.3.2 Weaknesses ................................................................................................................................ 25
5.3.3 Threats ........................................................................................................................................ 26
VI OIL & GAS SECTOR .......................................................................................................................................... 26
6.1 Actors in the Vietnamese Petroleum Market.............................................................................................. 28
6.2 Other Actors............................................................................................................................................... 28
6.2 Entering Vietnam ....................................................................................................................................... 29
6.3 Challenges in the industry .......................................................................................................................... 30
6.4 Opportunities ............................................................................................................................................. 31
6.5 Unsettlement within the deep sea areas ...................................................................................................... 32

Upcoming Opportunity in VIETNAM(Indian Institute of Foreign Trade) Page 2


I. COUNTRY PROFILE: INTRODUCING VIETNAM
1.1 History, geography, population
Vietnam is a densely-populated developing country that in the last
30 years has had to recover from the ravages of war, the loss of
financial support from the old Soviet Bloc, and the rigidities of a
centrally-planned economy. Vietnamese authorities have
reaffirmed their commitment to economic liberalization and
international integration. They have moved to implement the
structural reforms needed to modernize the economy and to
produce more competitive export-driven industries. Vietnam
joined the WTO in January 2007 following more than a decade-
long negotiation process. WTO membership has provided
Vietnam an anchor to the global market and reinforced the
domestic economic reform process. Agriculture's share of
economic output has continued to shrink from about 25% in 2000
to about 21% in 2009. Deep poverty has declined significantly
and Vietnam is working to create jobs to meet the challenge of a
labor force that is growing by more than one million people every
year. The global recession has hurt Vietnam's export-oriented
economy with GDP growing less than the 7% per annum average
achieved during the last decade. In 2009 exports fell nearly 10%
year-on-year, prompting the government to consider adjustments
to tariffs to limit the trade deficit. The government has used
stimulus spending, including a subsidized lending program, to
help the economy through the global financial crisis, and foreign
donors have pledged $8 billion in new development assistance for 2010. Domestic investment
grew 16% while committed foreign direct investment fell 70%, a steep reduction after 5 years of
growth. Nevertheless, the weaker economy, current account deficit, and subdued foreign
investment environment means Vietnam's managed currency, the dong, faced downward pressure
through 2009, leading the government to devalue it by more than 5% in December.

The economy of Vietnam is a developing market economy. Nowadays, Vietnam is in the period
of integrating into world's economy, as a part of globalization and is in transition from a planned
economy to a market-oriented mixed economy under one-party rule. Vietnamese economy is
mainly characterized as a market economy based on private property ownership. Almost all
Vietnamese enterprises are SMEs with some nationwide trademarks. Vietnam has been rising as
a leading agricultural exporter and an attractive foreign investment destination in Southeast Asia.
In 2009, the nominal GDP reached $92.439 billion, with nominal GDP per capita of $1,060 .In
December 2005 by Goldman-Sachs, Vietnamese economy will become the 17th largest economy
in the world with nominal GDP of $ 436 billion and nominal GDP per capita of 4,357 USD by
2025. According to a forecast by the PricewaterhouseCoopers in 2008, Vietnam may be the
fastest growing of emerging economies by 2025, with a potential growth rate of almost 10% per
annum in real dollar terms that could push it up to around 70% of the size of the UK economy by
2050.



Source: Wikipedia (http://en.wikipedia.org/wiki/Economy_of_Vietnam#Agriculture.2C_fishing_and_forestry)

1.2 Economic Indicators
• GDP growth advanced 5.8% in Q1-10, a soft rebound from the 3.6% pace in Q4-09 due to the
Underlying weakness in the first quarter of last, but still above the 5.3% rate registered in all of
2009. The government‘s targeted growth of 7-8% in 2010 seems a long shot, however. EDC
Economics expects 2010 growth on par with 2009. The trend in export and industrial production
growth are picking up again, but the most recent figures hide base effects and New Years effects

• The recent devaluations of the dong (Nov-09 and Feb-10) helped stabilize the economy, with
the black market rate now only marginally above the official rate, compared to a gap of 15%
previously. EDC expects the dong to devaluate further to 19,700 per USD by the end of the year.

• Monetary policy was effectively tightened recently when the Central Bank remove the bank cap
on lending rates, and injected liquidity into the banking system, which should help domestic
firms access credit. EDC expects more tightening later this year to effectively contain credit
growth and rising inflation



1.3 Why spotlight has now turned to vietnam
Vietnam's growth rate in recent years has been second only to China in Asia (see chart 3). But
Vietnam‘s attractiveness has also been helped along by other factors, not all of its own making:

 The US-Vietnam bilateral trade agreement in 2001 opened the door to the US market for
Vietnamese exports which have since skyrocketed.
 The current commodity boom is a big opportunity for a country which has oil and gas
reserves and has become the world’s largest exporter of pepper and the second-largest
of rice and coffee.
 Strong demand for capital goods like machinery and equipment attracted the attention
of infrastructure suppliers and exporters in industrial countries as ongoing
industrialisation of the economy has triggered a domestic investment boom (investment



as a share of GDP has increased by 7 percentage points to currently 33% since the late
1990s).
 Preparation for WTO accession (in January 2007) led to reforms and liberalisation
measures and fostered a domestic entrepreneurial spirit.
 As Vietnamese culture, its political system and economic reform process are perceived
to be very similar to China's, Vietnam is increasingly seen as an alternative or "second
leg" to a China engagement by many investors looking for a location with low labour
costs and a stable political environment.
 Vietnamese companies are becoming more competitive, which is being noticed in the
region. Reportedly, Thai businesses have voiced concern about increased competition
from Vietnam. Some Vietnamese companies are viewing their country as a gateway into
Indochina and plan to branch out into Cambodia and Laos. However, Southern China is
also an option.
 For the tourism industry, the country is a "fresh face", a safe destination, with an
interesting history. The country is not troubled by threats of domestic terrorism or
radical Islamist groupings; it is an exotic and still relatively cheap place for travelling. The
fact that it won a war against the United States makes many curious enough to want to
visit.
 Domestic financial market development has finally progressed to a point where it has
attracted the interest of the international financial community. Portfolio diversification
strategies and the "search for yield" have been supporting factors in Vietnam's
"discovery" as well.
 Political stability, broad social consensus and a relatively favourable macroeconomic
environment make for a favourable business environment. Ample capital inflows reduce
the need for borrowing and are keeping debt servicing low.

II ECONOMIC SECTORS
2.1 Agriculture, fishing and forestry
Vietnam‘s fishing industry, which has abundant resources given the country‘s long coastline and
extensive network of rivers and lakes, has experienced moderate growth overall. Agriculture,
forestry and fisheries accounted for 1.5 per cent of Territory GSP in 2008-09 and 2.5 per cent of
resident employment. In 2008-09, about 2930 people in the Territory were directly employed as a
result of the agriculture, forestry and fisheries industries. Moreover, the industry contributes to
retail and wholesale trade, manufacturing and construction activity in regional and remote areas.

In 2008-09, the total value of agriculture, forestry and fisheries production was $519.2 million. In
the last five years, the value of horticulture has grown by 13.6 per cent to $99.3 million, while the
value of cattle production has decreased by 6.1 per cent (Chart 13.1) to $261.2 million. Export
revenue from agriculture, forestry and fisheries production in 2008-09 was about $206.0 million,
or 3.3 per cent of Territory exports.

In 2009-10, the Territory Government‘s Department of Resources estimates that the value of
agriculture, forestry and fisheries in the Territory increased by 5.5 per cent to $548 million.



Increased live cattle exports overseas and interstate movement, as well as increased harvest from
mangoes and
Melons are the major contributors to growth in 2009-10.

2.2 Mining and Minerals
In 2003 mining and quarrying accounted for a 9.4% share of GDP; the sector employed 0.7
percent of the workforce. Petroleum and coal are the main mineral exports. Also mined are
antimony, bauxite, chromium, gold, iron, natural phosphates, tin, and zinc.

2.3 Industry and manufacturing
Although industry contributed 40.1 percent of GDP in 2004, it employed only 12.9% of the
workforce. In 2000, 22.4% of industrial production was attributable to non-state activities.
During 1994–2004, industrial GDP grew at an average annual rate of 10.3 percent.
Manufacturing contributed 20.3 percent of GDP in 2004, while employing 10.2 percent of the
workforce. During 1994–2004, manufacturing GDP grew at an average annual rate of 11.2
percent. The top manufacturing sectors — food processing, cigarettes and tobacco, textiles,
chemicals, and electrical goods — experienced rapid growth. Almost a third of manufacturing
and retail activity is concentrated in Ho Chi Minh City.

The footwear and garment industry was one of the first sectors to discover the potential of
Vietnam as manufacturing site. The main market of Vietnam's garment exports is the US (56%),
followed by the EU (19%) and Japan (11%).18 Garment exports surged by almost 30% in 2006
in anticipation of WTO accession.19 The shoe industry's export performance has been so good
that it was included in the anti-dumping measures the EU raised in 2006 against Asian shoe
imports. Nevertheless, footwear exports rose by roughly 20%20 yoy last year. Often China is the
location for mass market production, while specialised, high-quality orders are routed to
Vietnam. There is also a budding electronics / ITC equipment manufacturing sector in Vietnam.



2.3 Energy
Petroleum is the main source of commercial energy, followed by coal, which contributes about
25% of the country‘s energy (excluding biomass). Vietnam‘s oil reserves are in the range of 270–
500 million tons. Oil production rose rapidly to 403,300 barrels per day (64,120 m3/d) in 2004,
but output is believed to have peaked and is expected to decline gradually.
Vietnam‘s anthracite coal reserves are estimated at 3.7 billion tons. Coal production was almost
19 million tons in 2003, compared with 9.6 million tons in 1999. Vietnam‘s potential natural gas
reserves are 1.3 trillion cubic meters. In 2002 Vietnam brought ashore 2.26 billion cubic meters
of natural gas. Hydroelectric power is another source of energy. In 2004 Vietnam began to build
a nuclear power plant with Russian assistance.

2.4 IT outsourcing: Still small scale
Although on a scale in no way comparable to that in India, several firms have been exploring the
possibility of outsourcing software development projects to Vietnam, attracted by low labour
costs and the comparatively high English proficiency. Wage inflation and high staff turnover in
India have led firms to look at alternative locations like China, the Philippines and Vietnam.
Industry observers estimate Vietnamese IT developers‘ salaries to be 15-20% lower than in India,
and turnover ratios to be less than 5% compared to 35% at some Indian sites22. The still small
scale of the operations can be an issue though, but with 50% annual growth in recent years23 this
could change soon. Vietnam‘s software outsourcing industry's revenue in 2005 was estimated at
USD 70 m.24 There are currently over 600 software-related firms in Vietnam.25

2.5 Tourism: "Vietnam – The hidden charm"
Vietnam has been a magnet for backpackers and adventurous travellers for some time, but in
recent years more and more mainstream tourists have come to visit the country as beach resorts
are expanding and marketing of the country as a safe, affordable, but still exotic destination has
increased. Vietnam boasts approximately 3,400 km of coast, consisting mostly of sandy beaches.
Tourism revenue reached roughly USD 3 bn26 or 5% of GDP in 2006. Growth in tourist arrivals
has been in double-digits in the last decade, from only 1.3 m people in 1995 to 3.6 m in 2006.
Compared to other Asian countries, however, this is still paltry (see chart 21), pointing towards



significant future growth potential, provided that skilled personnel becomes more easily
available.

2.6 Infrastructure: Ambitious projects
As already mentioned, the country's infrastructure needs are still huge and the construction sector
has been booming. Especially in the area of transportation (airports, ports) a lot of ambitious
projects are under way. Upgrading and constructing six international airports,
with one envisioned to be able to compete with Singapore and Bangkok27, is on the drawing
board as well as a subway in Ho-Chi-Minh City and an elevated railway in Hanoi. Another area
in focus is the energy sector. Vietnam's relies to a large extent on hydropower to feed its energy
needs (see chart 22), but droughts in the North can lead to major disruptions in the energy supply.
Hence, natural gas and increasingly coal have been or will be tapped as a source of energy.
Government plans include the construction of seven new coal power plants by 2010, one natural
gas plant and one nuclear power plant28 - with the help of foreign investors.

2.7 The banking sector: High growth potential from a low base
In the past couple of years, Vietnam's banking sector has become attractive for foreign banks
looking for new growth markets. There is high growth potential as only about 5-7% of the 85 m
population have bank accounts and use banking services (at least 50% of all payments
transactions are still in cash). Moreover, there are only about 4 m people using credit cards at
present (2005: 1-2 m).29 Hence, credit card business and consumer banking are considered the
current growth areas. Market researchers estimate the annual average per capita income in Ho-
Chi-Minh to be currently as high as USD 2,40030 (which would be more than triple the country's
average per capita income). The number of high net worth individuals (i.e. USD millionaires) is
still very small at an estimated 12,50031 –especially when compared to India's 83,000 or China's
320,000. But in terms of the overall population, Vietnam is not out of line with India and China
(see chart 23). Moreover, the ratio of bank credit in relation to GDP in Vietnam is still relatively
low (compared to its Asian peers) at an estimated 70% for 2006 (see chart 24), pointing to
significant growth potential. However, only roughly a quarter of the population is urbanised,
which is one of the lowest rates in emerging Asia (see chart 25), comparable to India's, but much
lower than China's 40%. Ho-Chi-Minh is the biggest conurbation with
about 7 m inhabitants. This makes it difficult for a large part of the population that lives in the
countryside to access banking services. The Vietnamese government has been cautious about
embracing foreign banks. In line with WTO requirements, foreign banks should face a level
playing field from April 1, 2007. They are now permitted to establish 100% foreign–owned
subsidiaries, provided that the bank has total assets of more than USD 10 bn32, and to receive
unlimited VND deposits33 and issue credit cards. Foreign ownership ceilings for banks have
been raised to 15% for a single investor (which is less than the 20% originally expected) but
remain at 30% for all foreign investors in a bank. There are currently 28 foreign banks in
Vietnam and several have bought stakes in Vietnamese
banks or announced plans to do so

III PROSPECTS FOR VIETNAM

The implementation of the WTO in 2007 provided better and more stabile business environment
in Vietnam. It seems that the Vietnamese government is eager to fulfill the demands set by the



WTO, and that this will provide companies with better options when doing business in Vietnam.
There is stabile political power in Vietnam, which is expected to continue. Despite this the
governments need to implement reforms on several areas such as macro-economic management,
the education system, infrastructure and fight against corruption. These are important topics
which have to be granted attention such that Vietnam can continue its growth.

One of the largest challenges for doing business in our main sectors is infrastructure. This is a
huge bottleneck today both in communication, transportation and in power supply. Reducing the
bottlenecks is necessary for further development in Vietnam.

Vietnam have a young population and still have a demographical advantage; there will be new
generations coming in to the labor force every year, and this is likely to catalyses for sustained
high growth in GDP over the coming years . The average age in Vietnam is 26
Years and this is six years behind the average age in China, this gives Vietnam an advantage to
China in the years to come. Despite this demographical advantage, Vietnam lack skilled workers.
This problem can only be solved through better education institutions.

3.1 Investment Environment
Vietnam is gradually moving from a highly-regulated and closed investment environment to one
that is more open. The reform process was accelerated in the lead-up to and following Vietnam‘s
formal accession into the WTO in 2007. A number of laws strengthening the investment
environment have come into effect since 2006. The government‘s economic reform
plans and market opportunities have resulted in increased FDI into Vietnam. For example FDI
commitments almost doubled between 2006 and 2008 to USD 66.5 bn. While inflows dropped to
USD 21.5bn in 2009 due to the financial crisis, recent data highlights a recovery in FDI inflows
in 2010. In spite of considerable progress on foreign investment-related reform, foreign
companies continue to face challenges. Corruption is endemic and Vietnam remains one of the
most corrupt countries in Asia. In spite of the 2006 anti-corruption law, graft scandals in the
public and corporate sector highlight the endemic nature of corruption. The judiciary lacks
institutional capacity and has a tendency to take direction from the government. Although dispute
resolution mechanisms exist it often takes a very long time to have awards enforced.
While the government is generally supportive of foreign investment and has put in place
legislation to encourage this investment, there remains a degree of protectionism among elements
of Vietnamese society. Foreign companies may also find themselves in a disadvantaged position
should they be in competition with one of Vietnam‘s 3,000+ state-owned enterprises (SOE). The
SOE ‗equitisation‘ program to convert SOEs into limited companies or shareholding entities has
been slow, mostly as a result of internal divisions between reformers and conservatives. As such,
SOEs will remain a fixture of Vietnam‘s investment environment for the foreseeable future.
Inadequate infrastructure continues to hamper the investment and operational environment, but
also offers opportunities for foreign investors especially in the power and transportation areas.
Vietnam faces an acute power shortage, and has had to resort to power cuts with negative impacts
on the manufacturing and industrial sectors. This shortage has resulted in the government
approving several large infrastructure projects including USD 18bn for road development, USD
2.5bn for Vietnam‘s largest thermal power plant and a USD 56bn bullet-train link joining Hanoi
and Ho Chi Minh
City. While the opportunities exist, SOE dominance in many infrastructure sectors is a challenge
that foreign investors will have to overcome. Vietnam remains in dispute with several


neighboring countries over ownership of portions of the South
China Sea. The issue came to the forefront in 2008 when the
Chinese government voiced its discontent with the oil
exploration plans of ExxonMobil and PetroVietnam. This
dispute is likely to hinder but not prevent oil and gas extractive
activity in these waters. While their maritime boundaries remain
contested, in 2009 the two countries reached agreement on the
demarcation of their land
border – a decades-old dispute.

IV PESTLE ANALYSIS
4.1 Political
Vietnam is a one-party state with the Communist Party of
Vietnam (CPV) ruling at the national, provincial and local
levels. All institutions of government, including the judiciary,
take their cues from the CPV. The 11th National Congress
where the CPV approves and appoints its leaders will occur in
January 2011. With the party‘s top leadership slated to step
down in January, leadership hopefuls within the CPV started
jockeying for top leadership positions. Although this jockeying
is expected to continue, the change in leadership in January
2011 is highly unlikely to create political instability or result in
significant changes in the policy environment.

Vietnam observers have pointed to divisions within the CPV
between reformers and conservatives, the latter which prefer to
maintain the state‘s control over the economy. In spite of these
competing factions, the CPV‘s prioritization of economic
growth renders it unlikely that the party would make drastic
changes to ongoing economic reform programs for fear of
impacting economic growth.

Having embarked upon a process of reform in 1986, Vietnam
has come to follow a path that resembles China‘s development
model. Specifically, the CPV has concentrated on fostering
economic development as its main source of continued legitimacy.

Vietnam is governed by a communist party that controls the economy through the banking
system and large state-owned enterprises. Although they have been gradually reforming and
privatizing, approaching a more marked – oriented economy. This was the intention of the
DoiMoi Policy which was implemented in 1986, where developed countries encouraged Vietnam
to privatize to be able to participate in the global economy. During our visit in Vietnam it was
pointed out that the one party system might have led to a more stable and predictable political
situation than what neighboring countries experience.

Political violence is of little concern in Vietnam due the government‘s control over the



population, and the military‘s support for the regime. However, reports of localized protests over
land, labor, and economic injustices including corruption surface periodically. With the National
Congress just months away, the government is likely to quickly clamp down on any form of
dissent.

2.2 Economic
Vietnam‘s troubled past has had a large impact on the economy, especially in the northern region.
Even today the southern provinces are wealthier and more modernized compared to the north.
Reaching peace in 1975 Vietnam has experienced rapid growth, especially the last 15 years.
Although they did experience some slowdown during the Asian financial crisis in the late 1990
they were not as affected as some of the other countries in the region. Vietnam is today the fastest
growing economy in South East Asia based on strong investment, consumption and exports. The
previous year‘s GDP growth has been around 8 %annually and the growth is forecasted to
continue. The GDP per capita in 2007 was slightly above 830 dollars and it is expected that
Vietnam will in the next years be given status as a middle income country reaching a GDP per
capita of 1000 dollars.

The main challenge for Vietnam‘s economy is the high inflation rate which reached 12.6 % this
previous year. High inflation rate has arisen due to booming energy prices which have caused a
rapid increase in price of non-oil materials, commodities and real estate. A factor that could add
to Vietnam‘s inflation risk is that the weak US dollar leads to the effective exchange rate of the
Vietnamese Dong depreciating. This is due to the Vietnamese Dong being closely linked to the
US dollar. Improvement in the area of macroeconomic management is needed. Due to factors
such as increased focus on foreign investment and WTO membership, foreign trade and foreign
direct investments have improved significantly. Last year export grew 20 % compared to the
previous year. Vietnam‘s main exports include coffee, plastic and textiles.

4.3 Social
Three million people died under the French War and later the American War, leaving Vietnam
with a relatively young population where 60 % is under the age of 30. The population which is
now about 86 million is increasing rapidly. Due to the young population, Vietnam can offer a


large labour force where the willingness to relocate is high, in addition wages are still relatively
low compared to the countries around. The problem is the under educated population. Lack of
skilled personnel is a problem within all sectors in Vietnam.

Although literacy among the population has improved and reached about 90%, the education
system is still poor where the Government has so far not been able to improve the situation. Most
of the literature is outdated and the educational facilities are below standards that should be
expected. Vietnamese workers are described as hard working with high morals and a genuine
interested to help you. When asked what the differences between the Vietnamese and Chinese
are, Vietnamese are by foreigners characterized as less arrogant and friendlier than the Chinese.
Vietnamese workers can also enjoy better work conditions than workers in China do. Although
Vietnamese has experienced hard times, social development has been a priority the last years
improving the life of the Vietnamese people.

4.4 Technological
Although the DoiMoi Policy led to an increased focus on telecommunications, public Internet
access was not available in Vietnam before 1997. The reason for its late arrival was the
communist party‘s fear that the open access to information could harm the Governments position
in society. Today Internet is relatively common especially in the larger cities and areas around,
however there are still challenges related to increasing capacity and providing access to rural
areas. Usage of mobile phones has also increased, due to factors such as lower phones charges
and network providers offering services with higher quality. There is a need for technology and
technological competency throughout all sectors in the Vietnamese
economy. Lack of skilled personnel and universities that do not have adequate resources to do
significant research and development contribute to Vietnam being below international standards
when it comes to research activities. Researches that are being carried out tend to be theoretical,
supply-driven and not connected to the needs of the productive sector.

4.4.1 Industrial Zones
Industrial zones are geographically limited areas that can only be used for industrial production
and industrial services. They are established through decisions from the Government or from the
Prime minister. The industrial zone can be created and operated by private enterprises, and the
operator is authorized to sub-lease land in the zone to other companies.

On provincial level there are Management Committees which carry out management of the
industrial zones. They are responsible for drafting the zones development plans, the internal
regulation for the zone, supervising the construction of the zone and acting as an intermediary in
disputes concerning the industrial zone. For the members of the industrial zone this is a benefit,
as it reduces bureaucracy. Enterprises located in industrial zones eligible to preferential corporate
income tax rates. The particular terms depend upon the field of activity for the enterprise, but in
general they give 1-3 years of tax exemption, 1-4 years of very low tax rates and then still
subsidized rates for the rest of the projects life. More about the regulations for industrial zones
can be found in Decree No. 36/2997/ND-CP dated April 24, 1997.

4.5 Legal
Vietnam has a two-tier courts system, with courts of first instances and courts of appeal. The
court system consists of the Supreme Court, the provincial People‘s Courts and the district


People‘s Courts. The Vietnamese legal code is currently in a state of flux and the authorities are
drafting a unified legal framework for the conduct of business.
Most of the legal documents in force relating to business were issued in the early 1990s under
market-led reform programmes. However, Vietnam rewrote almost all of its laws and regulations
affecting commercial activity and judicial procedures between 2002 and 2006. Despite some
progress in protecting intellectual property rights (IPRs), the overall legal system in Vietnam is
regarded as excessively cumbersome.
Vietnam‘s judicial system lacks transparency and there are widespread concerns about the
independence of the judiciary. Both local and foreign firms prefer to resort to arbitration or other
non-judicial means as a result of weaknesses in the judicial system – there is a general lack of
confidence that the judiciary is capable of interpreting and enforcing the law.
Vietnam‘s legal system remains underdeveloped and, largely, biased against foreign entities. The
court system provides inadequate redress for commercial disputes while contracts are difficult to
enforce, particularly if a party is non-Vietnamese. Foreigners also see the commercial arbitration
system as weak.

When disputes arise, foreign investors tend to try to negotiate or include dispute resolution
procedures in their contracts: however, even these are far from failsafe. Foreign and domestic
arbitral awards are legally enforceable in Vietnam since it acceded to the New York Convention
on the Recognition and Enforcement of Foreign Arbitral Awards in 1995. Local courts must
respect awards rendered by a recognised international arbitration institution. However, this
provides no assurance that contracts will be honoured. Non-judicial means are therefore
frequently used to enforce debt obligations. Firms generally avoid the judicial system because the
process is lengthy and expensive, decisions are considered arbitrary and enforcement
mechanisms are ineffective. Smaller companies rely on personal relationships while larger
foreign companies may make use of their access to government to ensure
contract enforcement.
The 2006 Uniform Enterprise Law has allowed foreign investors to form any type of company
instead of only limited liability companies. In general, foreign companies and the private sector
are at a disadvantage compared to state-owned companies in terms of access to land, which is still
viewed as the property of the ‗the people‘. Legislation has, however, progressively enhanced the
status of private investors in recent years. The 1992 constitution granted stronger land rights to
individuals, including rights over commercial and personal property. Private land use rights
(LURs) may now be granted for up to 50 years. Since July 1 2004, the Land Law has allowed
local private companies with long-term LURs to lease land to foreign investors.
The enforcement of IPRs is wholly inadequate, with widespread piracy of products, particularly
software, music and videos. The requirements of WTO accession mean that the government will
have to substantially beef up IPR protection. Consequently, in July 2006, a new Intellectual
Property Law came into effect, designed to clarify the responsibility of government agencies
charged with protecting IPRs, though doubts remain over the effectiveness of its implementation.
The police service is generally slow to act on administrative orders where trademarks have been
infringed. Often, violators will seek to extract a payoff in compensation for ceasing the
infringement. The US State Department has therefore, despite significant improvements in the
protection of IPR in 2006, kept Vietnam on its 2007 ‗Special 301 Report‘
watch-list of countries with inadequate protection of IPR. Investors see official corruption as one
of the biggest hindrances to running a business in Vietnam. Joint ventures (JVs) with state-owned
enterprises are particularly prone to corruption and abuse, though surveys indicate that while


corruption affecting businesses is quite prevalent, the amounts involved are usually quite small.
However, rapid economic growth provides opportunities for graft to grow more quickly than
government systems evolve. Vietnam scored 2.7 out of 10 in Transparency International‘s
2008 Corruption Perceptions Index, placing it in 121st place among the 180 countries surveyed.
One of the best tools in restricting opportunities for corruption has been the expansion of the
‗One-Stop Shop‘ (OSS) network – single agencies that deal with applications for a range of
activities, including construction permits, LUR certificates, business registrations and approvals
for local and foreign investments.

The Law on Corruption Prevention and Control was passed by the National Assembly in
November 2005. A central anti-corruption steering committee was established in 2006,
comprising representatives from the government, the National Assembly, state procurator, court
and police. The committee is headed by the prime minister and has the authority to temporarily
suspend ministers and chairs of people‘s committees and people‘s councils if suspected of
wrongdoing. The committee discovered 584 cases of alleged corruption, involving close to 1,300
people, in 2007. Among the most noteworthy convictions of corrupt officials was that of former
deputy trade minister Mai Van Dau, who was handed a 14-year prison term in
March 2007 for accepting bribes in return for export licenses.
The burden of red tape is amplified by the overlapping of government approvals. Vietnam ranks
poorly in the length of time it takes to close a business. It can take about five years to close a
business, compared to an average of 3.4 years in East Asia & Pacific, and 1.5 years in OECD
states.

V BUSINESS ENVIRONMENT
5.1 Infrastructure
Vietnam‘s physical infrastructure rating is 59.1, placing the country in 78th place in our rankings.
The country‘s inadequate infrastructure has become a major grievance for foreign investors and
may thus impair future FDI. Our communications ratings for Vietnam stands at 59.9, but is set to
improve as the government, thanks to development assistance from international donors, is
investing heavily in constructing new roads, railways, ports and power plants. These projects
include the US$33bn 1,600km high-speed railway currently being constructed, thanks to
Japanese funding, between Hanoi and Ho Chi Minh City, which will cut travel time to less than
10 hours when completed.

As an example of progress already made, more than 90% of rural households now have
electricity compared to just over 50% 10 years ago. Rapid industrialisation of the economy has,
however, seen power demand increase by 15-17% per year and Vietnam is now struggling to
expand its electricity production, which produced 59bn kWh in 2006, according to the Asian
Development Bank. It has been estimated that Vietnam needs to build 124 new power plants
between 2006 and 2010, adding a total capacity of roughly 36,000MW, to satisfy demand.
Several ongoing construction projects of power plants have been hit by delays – due to slow land
clearance, delayed equipment supplies and poor contractor performance – and power blackouts
and brownouts are therefore likely to remain a problem. Our electricity access rating for Vietnam
stands at 58.3, placing Vietnam 49th in our rankings.FDI has also helped to improve Vietnam‘s
telecommunications system, with foreign groups investing heavily in fanning out 3G telecom and
broadband networks over the most populous parts of the country.



5.2 Labour Force

Vietnam‘s large, well-educated and inexpensive labour force remains one of the country‘s chief
attractions to foreign investors. The labour pool is increasing by up to 1.5mn a year, while wage
costs are still low compared to other countries in the region, although wage growth has picked up
pace in recent years. The Vietnamese General Statistics Office estimated the number of employed
at 44mn in 2005, equivalent to 81.4% of people aged 15-64. The unemployment rate is expected
to remain between 4-6% in 2009.

Vietnam‘s reform-driven economic growth has resulted in a restructuring of the labour market,
with a shift away from agricultural employment to non-farm employment. The General Statistics
Office estimated that farmers constituted 52% of the workforce in 2006 with close to 19%
working in industry and construction, and just over 25% working in the service sector.
Managerial talent and skilled workers are generally in short supply, which has the effect of
raising costs. The expanding financial sector is particularly plagued by labour shortages and is
said to be in need of tens of thousands of skilled personnel by 2010. Foreign companies are
becoming increasingly troubled by an excessive turnover of qualified workers, which is driving
up salaries for skilled personnel. Foreign companies have previously been the prime choice of
Vietnamese professionals as they pay 14% more than domestic firms on average, according to a



2007 survey by human resources consultancy Navigos Group. Working for domestic firms is,
however, becoming increasingly popular as they are currently closing the salary gap with foreign
firms.

Labour shortages and a sharply progressive income tax system have pushed up the costs for
skilled personnel. Vietnam has, on the other hand, maintained its cost advantage in
manufacturing wages. The Japan External Trade Organisation (JETRO) found in a survey in
November 2006 that monthly salaries for ordinary workers ranged from US$87-198 around
Hanoi in northern Vietnam and from US$122-216 in Ho Chi Minh City in the southern Mekong
delta region. This can be compared with an average salary for workers in Thailand of US$164 per
month and between US$134-446 in China‘s Guangzhou province, the source of much of Chinese
manufacturing output. Although wages are rising – by 19.5% between April 2007 and March
2008 according to Navigos – we believe Vietnamese labour is still very competitively priced, in
particular after the imposition of the Chinese Labour Contract Law on January 1 2008, which is
estimated to have raised labour costs in China by between 5 and 40% and which has
prompted many South Korean and Taiwanese firms to consider moving factories to Vietnam. The
regulatory burden in Vietnam‘s labour market has traditionally been high, but is easing over time.
In 2003, legislation was introduced that allowed foreign companies to recruit staff directly, as
long as they provide government agencies with a list of recruited workers. However, the
requirement to use employment service agencies continues to apply to branches and
representative offices of foreign companies.

One of the main regulatory burdens is the social protection system, which imposes a compulsory
social insurance contribution scheme in which employers must pay in 15% of the salary, with
employees proving 5%. Regulations for hiring workers are significantly more onerous than the
East Asia & Pacific average. Whereas the hiring cost is 17% of the salary in Vietnam, it is only
5% in Thailand, for example. The imposition of the Chinese Labour Contract Law on January 1
2008 has, however, made many foreign companies view Vietnamese labour market regulation
more favourably. Employers are required by law to establish labour unions within six months of
setting up, and these must be members of the Vietnam General Confederation of Labour. While
most factories have trade unions, many of these do not operate in practice. Trade unions are more
active in the public sector and only one third of foreign companies have collective agreements
with their workforces.

Vietnam does not have a bad industrial relations record. There were about 400 strikes in 2006,
most of them at foreign-invested firms in the textiles and apparel sector, despite working
conditions often being better at these firms than at 400 SOEs. Most strikes have resulted from
legal or contractual breaches, including failure to pay wages and benefits, failure to pay social
insurance contributions, and failure to pay severance pay at termination. The sharp uptrend in
consumer price inflation, especially of essential goods such as food, fuel and housing, prompted
increased labour unrest in late 2007 and early 2008 as workers demanded higher wages. The
increasingly pressed economic conditions for labourers prompted tens of thousands of workers to
go on strike in Ho Chi Minh City and Dong Nai province in January 2008.

The Vietnamese government decided on October 10 2008 to raise the minimum wage for basic
work from VND1mn to VND1.2mn per month for workers in foreign-invested enterprises within
central Hanoi and Ho Chi Minh City. The minimum wage for workers in foreign-invested plants


in other parts of Vietnam are arranged in three levels with the lowest lying at VND920,000. The
equivalent wage tranches for workers in Vietnamese-owned plants range between VND800,000
and VND650,000. The new minimum wage levels become effective on January 1 2009.

5.3 Foreign Investment Policy
Increased FDI is an integral part of Vietnam‘s ambitious economic expansion plans, and with
ratings agencies pushing their grades higher, the country looks like a solid investment destination,
especially for manufacturing. FDI amounted to US$20.3bn in 2007 and we believe it could have
risen even higher in 2008, despite adverse conditions in global markets.
The rising levels of official development assistance (ODA) – which hit a record of US$5.4bn for
2008 – pledged by multilateral donors are also important, but have been outpaced by inflows
from foreign private sources over the last five years. However, as the country tries to transform
from a centralised to a more market-oriented economy, the investment framework is still poorly
developed in many areas, with bureaucracy and a lack of transparency cited among major
problems. Despite ambitious targets for foreign investment as an important source of fuel for
economic expansion plans, a number of barriers to investment remain. An opaque legal system,
an inflexible financial system, corruption, a lack of regulatory transparency and consistency, a
ponderous bureaucracy and complex land purchase rules are among areas criticised by foreign
investors.

The government has been introducing and amending legislation in an effort to remedy these
perceived shortcomings.

Key legislation includes:
 The Law on Foreign Investment (1989), which has been amended several times to make
FDI more attractive.
 Government decree 24 of 2000, which carries a pledge to avoid expropriation and
guarantees the right to repatriate profits. It also outlines the government’s intention to
treat private and state sectors equally.
 A revised bankruptcy law and a Law on Competition, both passed by the National
Assembly in 2004, in a bid to improve the FDI climate. Fully owned foreign banks are
now allowed to compete on an equal footing with domestic banks.
 The Vietnamese legal code is currently in a state of flux and the authorities are drafting a
unified legal framework for the conduct of business. A new Common Investment Law
and a Unified Enterprise Law came into effect in July 2006, as did a new Intellectual
Property Law designed to clarify the responsibility of government agencies charged with
protecting IPRs, but doubts remain over the effectiveness of its implementation.

The main forms of foreign investment are:
 JV agreements, under which foreign and domestic firms share capital and profits.
 Business Cooperation Contracts (BCC), which allow a foreign company to carry out
business in cooperation with a Vietnamese firm through capital investment and revenue
sharing, but without gaining right of establishment or ownership.
 Wholly foreign-owned enterprises are becoming more common, especially those
involving industrial production for export.



 Build-operate-transfer (BOT) agreements are the least common form of FDI, and have a
reputation among foreign investors of providing regulatory and financing problems.
 Foreign portfolio investment is only permitted in small quantities, with aggregate foreign
ownership of listed companies capped at 49%. Foreign ownership of banks is capped at
10% per investor and 30% in aggregate. Moreover, many of the shares listed on the Ho
Chi Minh City Stock Exchange (HSCE) are too illiquid to attract foreign investors.
 Investments in export processing zones (EPZs), industrial zones (IZ) and high-technology
zones (HTZs) attract tax and other incentives, and offer a ready-made operational
infrastructure, which may be difficult to arrange outside.
 EPZ investments carry 10-12% profit tax. The first established was the Tan Thuan zone
near Ho Chi Minh City in 1991, where over a hundred manufacturers currently operate.
A number of others have since been built, though they have not been as successful as
hoped, partly because all produce from EPZs must be exported.
 IZs are for use by firms in construction, manufacturing, processing or assembly of
industrial products, often food processing and textiles production. IZ firms pay a 10%
profit tax and get refunds if profits are reinvested. IZ firms may produce for the domestic
market, as well as the export market.
 Most FDI into Vietnam comes from North East Asia, notably Taiwan, South Korea, Japan
and
 China/Hong Kong. Canada and the US are the largest non-Asian FDI sources. Leading
sectors for FDI are manufacturing, other industry and oil and gas.

5.4 Tax Regime
A surtax of 10- 25% is charged progressively on income from land use rights. Individual tax:
Levied progressively up to 40%. Different regimes apply to domestic employees and resident
expatriates. The income threshold above which tax is paid is higher for expatriates than for local
employees. Resident individuals are taxed on global income. Non-residents are taxed on
Vietnamese sourced income only, at a flat rate 25%. Indirect tax: Main VAT rate is 10%. A 5%
rate is charged on some goods, including computers and accessories, construction, machinery,
chemicals, coal and metallurgy products. The following attract a zero VAT rate: exported goods
and software, and services exported to firms in export processing zones. Registration is
obligatory for businesses. Capital gains: Usually taxed as income at corporate rate. Gains by
foreign investors on the transfer of an interest in a foreign or Vietnamese enterprise attract a 25%
tax. Gains by individuals on the transfer of a home or on land-use rights are taxed progressively
up to 60%.

Foreign companies present in Vietnam are mainly subject to corporate income tax (CIT), value
added tax (VAT) and special sales tax. Taxes are regulated by the law on corporate income tax,
as stated in law no. 09/2003/HQ11. Implementing is covered by Decree no. 164/2003/ND/CP.
The standard CIT rate in Vietnam is 28%. However, many companies are benefiting from
preferential rates based on their sector of activity and geographical location. These regulations
are listed in the Decree‘s exhibit under. The figure shows how the tax rates for a foreign
enterprise might be.



Taxable income in Vietnam is calculated the following way: Turnover – reasonable expenses +
other taxable income. Reasonable expenses in Vietnam is defined to include such things as
depreciation of fixed assets, cost of raw materials, wages, expenditures on research, costs from
conducting education and costs related to healthcare.

As in many other tax systems losses incurred may be carried forward to the following year, and
set against the profits in subsequent years for a maximum of five years.

Companies self declare their turnover, expenses, taxable income and amount of tax payable for
the year. CIT are collected quarterly in accordance with such declarations. The special sales tax is
applicable to companies operating in certain specified industries. Few of these sectors are
particularly relevant to companies, but among them are the sale of cigarettes, spirits, imported
cars and petrol products.

In Vietnam there are currently three rates of VAT applicable. These are 0%, 5% and 10%. There
are also several products and services in the sectors of health, agriculture, education and arts that
are not subject to VAT. The laws for entities operating, but not being physically located in
Vietnam are based upon the provisions of Circular No. 05/2005/TT/BCT. Foreign companies
adapting the Vietnamese accounting system are subject to VAT and CIT according to the
standard tax regulations. For companies not adapting the Vietnamese accounting system must pay
VAT based on the following formula: VAT payable = Value added x VAT rate, where the VAT
rate is subject to which sectors the company is operating in. The CIT is determined as a
percentage of taxable turnovers, and like for the VAT the tax rate is determined by the sector
where the company operates. The law on accounting in Vietnam (No. 03/2003/QH11) aims at
establishing in Vietnam an accounting model based on international and modern basis. According
to the law on enterprise, each company must provide books of accounts, accounting records and
annual financial statements.



TAX STRUCTURE for High Tech Industries

5.5 Security Risk
Vietnam is generally a very safe country for foreign residents and travelers. Petty street crime is
rising in the major cities but there have been very few serious offences against foreigners
reported. Unexploded mines and ordnance are a continuing hazard, particularly in central
Vietnam and along the Laos border. The poor standard of roads and other public infrastructure is
also a safety risk, as is the poor level of driving which makes traffic accidents one of the most
prominent health risks for both foreigners and nationals.

Macroeconomic risks need to be managed carefully
In general, Vietnam's macroeconomic environment has been relatively stable, but some risks
need to be monitored closely:
— High inflation: There is a risk of entrenched high inflation (5-7%), especially as additional
price pressures might emerge from the liberalisation of administered prices (planned for
petroleum, steel,cement, and fertiliser for example). Using administrative measures is currently
preferred by the authorities over the usual monetary policy tools

— Rising fiscal deficit and public debt: Fiscal accounts remain deep in the red (about 4% of
GDP) and the use of off-budget items is a concern. Public debt (around 50% of GDP) is rising.
The issue is how to avoid jeopardising medium-term debt sustainability given
the need to expand public infrastructure spending.

— Tightly managed exchange rate: The Vietnamese dong (VND) is only fully convertible on the
current account. The exchange rate is tightly managed by the central bank in a trading band of +/-



0.5% (widened from +/- 0.25% in January 2007). There are plans by the government to
progressively liberalise the currency regime, possibly making the VND fully convertible (i.e. also
on the capital account) by 2010. The possibility of a Chinese-style basket peg is being mulled
over. Trading bands will be gradually loosened and capital controls gradually relaxed61.
However, recently officials have become wary about appreciation pressures stemming from
strong capital inflows for export competitiveness reasons.

IV. INDIA- VIETNAM ECONOMIC RELATIONS

The bilateral relations between the Republic of India and the Socialist Republic of Vietnam have
been traditionally friendly but have strengthened considerably with bilateral cooperation over
issues such as terrorism, trade and regional security.
India supported Vietnam's independence from France, opposed U.S. involvement in the the war
and supported unification of Vietnam. India established official diplomatic relations in 1972 and
maintained friendly relations, especially in wake of Vietnam's hostile relations with the People's
Republic of China, which had become India's strategic rival.

Development of bilateral and commercial ties:
India granted the "Most Favoured Nation" status to Vietnam in 1975 and both nations signed a
bilateral trade agreement in 1978 and the Bilateral Investment Promotion and Protection
Agreement (BIPPA) on March 8, 1997. The Indo-Vietnam Joint Business Council has worked to
promote trade and investment since 1993. In 2003, both nations promulgated a Joint Declaration
on Comprehensive Cooperation when the General Secretary of the Communist Party of Vietnam
Nong Duc Manh visited India and both nations are negotiating a free trade agreement. In 2007, a
fresh joint declaration was issued during the state visit of the Prime Minister of Vietnam Nguyen
Tan Dung. Bilateral trade has increased rapidly since the liberalisation of the economies of both
Vietnam and India. India is the 13th-largest exporter to Vietnam, with exports have grown
steadily from USD 11.5 million in 1985-86 to USD 395.68 million by 2003.Vietnam's exports to
India rose to USD 180 million, including agricultural products, handicrafts, textiles, electronics
and other goods. Between 2001 and 2006, the volume of bilateral trade expanded at 20-30% per
annum to reach USD 1 billion by 2006. Continuing the rapid pace of growth, bilateral trade is
expected to rise to USD 2 billion by 2008, 2 years ahead of the official target. India and Vietnam
have also expanded cooperation in information technology, education and collaboration of the
respective national space programmes. Direct air links and lax visa regulations have been
established to bolster tourism.

4.1 Strategic cooperation
India and Vietnam are members of the Mekong-Ganga Cooperation, created to develop to enhance
close ties between India and nations of Southeast Asia. Vietnam has supported India's bid to become
a permanent member of the U.N. Security Council and join the Asia-Pacific Economic Cooperation
(APEC).[9] In the 2003 joint declaration, India and Vietnam envisaged creating an "Arc of Advantage
and Prosperity" in Southeast Asia;[6] to this end, Vietnam has backed a more important relationship
and role between India and the Association of Southeast Asian Nations (ASEAN) and its negotiation
of an Indo-ASEAN free trade agreement.[6][2] India and Vietnam have also built strategic
partnerships, including extensive cooperation on developing nuclear power, enhancing regional
security and fighting terrorism, transnational crime and drug trafficking.



4.1 Investment and Joint Ventures
With the two countries focusing on open economy, their respective private business players are
showing interest in investing in each other. Therefore, the bilateral investment scenario is improving.
Vietnam is one of the biggest recipients of Indian FDI in ASEAN with a capital of over US$550
th
million. However, India only occupies the 35 position among 73 countries investing in Vietnam.
Indian investors are investing in Vietnam mainly in the production of sugar, edible oil,
pharmaceuticals, office furniture, plastic production, oil and gas exploration, etc. Recently, the
ESSAR group, a leading Indian conglomerate signed a joint venture agreement with Vietnamese Steel
Corp. (VSC) and Vietnam General Rubber Corp. (GERUCO) to build a hot strip mill plant in Ba Ria-
Vung Tau in Vietnam. Estimated to cost around US$527 million and expected to be completed in 30
months, the project will significantly boost total investment from India to Vietnam. A Vietnamese
company, FPT has made an investment of US$150,000 in an Indian technology development and
investment project. Vietnam as a leading producer of oil and gas also has a vital place in India‘s quest
to diversify its energy supply sources. The overseas arm of India‘s state-owned exploration company,
Oil and Natural Gas Corporation (ONGC) is involved in exploration projects in Vietnam and has
signed a petroleum sharing contract with PetroVietnam for three blocks 06, 12E and 19 in Nam Con
Son basin, about 370 km offshore. It also signed a MOU with PetroVietnam Investment and
Development Company (PIDC) on 9 January 2001. for collaboration between ONGC Videsh and
PIDC in the exploration and production of hydrocarbons in Vietnam. ONGC Videsh also has a 45%
stake in a joint venture project of gas exploration with British Petroleum, PetroVietnam and Statoil in
Vietnam‘s Lan Do and Lan Tay offshore gas fields. ONGC Videsh would get US$60 million in
revenue from this project. This project would transmit gas along a 399-km pipeline to a power
complex in the south of Ho Chin Minh city where it will be used to generate electricity for Vietnam‘s
domestic consumption.

4.1 Bilateral Treaties and Aggreements

 Bilateral investment Promotion and Protection Agreement (BIPPA) – signed in March 1997.

 Avoidance of Double Taxation Agreement, signed in September 1994 Consular Agreement –
signed in September 1994

 Agreement on Cooperation in Science & Technology, signed in 1976 and renewed in
February 1996.

 Joint Declaration on the framework of Comprehensive Cooperation - 1 May 2003.

 Agreements signed during the state visit of Prime Minister of Vietnam to India on 6 July
2007:

 MoU on Cooperation in the field of Fisheries and Aquaculture. Work Plan in the field of
Agriculture 2007-2009.

 MoU on Cooperation between Vietnam Steel Corporation and Tata Steel Ltd.



V SWOT ANALYSIS

5.1 Political Swot

5.1.1 Strengths
 The Communist Party government appears committed to market-oriented reforms
necessary to double 2000's GDP per capita by 2010, as targeted. The one-party system is
generally conducive to short-term political stability.
 Relations with the US are generally improving, and Washington sees Hanoi as a potential
geopolitical ally in South East Asia.

5.1.2 Weaknesses
 Corruption among government officials poses a major threat to the legitimacy of the
ruling Communist Party.
 There is increasing (albeit still limited) public dissatisfaction with the leadership's tight
control over political dissent.

5.1.3 Opportunities
 The government recognises the threat that corruption poses to its legitimacy,and has
acted to clamp down on graft among party officials.
 Vietnam has allowed legislators to become more vocal in criticizing government policies.
This is opening up opportunities for more checks and balances within the one-party
system.

5.1.4 Threats
 The sharp slowdown in growth expected in 2009 is likely to weigh on public acceptance
of the one-party system, and street demonstrations to protest economic conditions
could easily develop into a full-on challenge to undemocratic rule.
 Although strong domestic control will ensure little change to Vietnam's political scene in
the next few years, over the longer term, the one-partystate will probably be
unsustainable.
 Relations with China have deteriorated over the past year due to Beijing's more assertive
stance over disputed islands in the South China Sea and domestic criticism of a large
Chinese investment into a bauxite mining project in the central highlands, which could
potentially cause widescale environmental damage.

5.2 Economic Swot

5.2.1 Strengths 
 Vietnam has been one of the fastest-growing economies in Asia in recent years, with
GDP growth averaging 7.6% annually between 2000 and 2007.
 The economic boom has lifted many Vietnamese out of poverty, with the
official poverty rate in the country falling from 58% in 1993 to 20% in 2004.



5.2.2 Weaknesses
 Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving
the economy vulnerable as the global economy enters into recession in 2009. The fiscal
picture is clouded by considerable 'off-thebooks' spending.
 The heavily-managed and weak dong currency reduces incentives to improve the quality
of exports, and also serves to keep import costs high,thus contributing to inflationary
pressures Opportunities .
 WTO membership has given Vietnam access to both foreign markets and capital, while
making Vietnamese enterprises stronger through increased competition.
 The government will, in spite of the current macroeconomic woes, continue to move
forward with market reforms, including privatisation of state-owned enterprises, and
liberalising the banking sector.
 Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban
population to rise from 29% of the population to more than 50% by the early 2040s.

5.2.3 Threats
 Inflation and deficit concerns have caused some investors to re-assess their hitherto
upbeat view of Vietnam. If the government focuses too much on stimulating growth and
fails to root out inflationary pressure, it risks prolonging macroeconomic instability,
which could lead to a potential crisis.
 Prolonged macroeconomic instability could prompt the authorities to put reforms on
hold, as they struggle to stabilise the economy.

5.3 Business Environment Swot

5.3.1 Strengths
 Vietnam has a large, skilled and low-cost workforce which has made the country
attractive to foreign investors.
 Vietnam’s location – its proximity to China and South East Asia, and its good sea links –
makes it a good base for foreign companies to export to the rest of Asia, and beyond.
 Proven natural gas reserves are estimated at 557bcm, but we see scope for a rise to an
estimated 650bcm by 2014.

5.3.2 Weaknesses
 Vietnam’s infrastructure is still weak. Roads, railways and ports are inadequate to cope
with the country’s economic growth and links with the outside world.
 Vietnam remains one of the world’s most corrupt countries. Its score in Transparency
International’s 2008 Corruption Perceptions Index was 2.7, placing it in 20th place in the
Asia-Pacific region.
 Net crude oil exports peaked at 427,000b/d in 2004, and could fall to just 93,000b/d in
2014, as new refineries come on stream and begin consuming domestic crude supplies.
Opportunities



 Vietnam is increasingly attracting investment from key Asian economies, such as Japan,
South Korea and Taiwan. This offers the possibility of the transfer of high-tech skills and
know-how.
 Vietnam is pressing ahead with the privatization of SOEs and the liberalization of the
banking sector. This should offer foreign investors new entry points.
 Vietnam’s first refinery, the US$2.5bn Dung Quat complex, started operations in Q109.
Dung Quat will process at least 130,000b/d of locally produced and imported crude,
producing diesel, gasoline, jet fuel, liquefied petroleum gas (LPG) and propylene.
 Amendments to Vietnam’s Petroleum Law in 2000 paved the way for a more open and
transparent licensing round scheme through which E&P projects would be offered to
international investors.

5.3.3 Threats
 Ongoing trade disputes with the US, and the general threat of American protectionism,
which will remain a concern.
 Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels
could leave Vietnam a second-rate economy for an indefinite period.
 The cost of refinery projects is exceeding original forecasts.

VI OIL & GAS SECTOR



Vietnam is today the 6th largest oil producer in Asia. The government is determent to increase
the development of the Oil and Gas industry, by increasing the investments in exploration and
enhance the cooperation with foreign companies.

Petrovietnam is the national petroleum company and is the only company to conduct petroleum
operations in Vietnam; therefore it is necessary to cooperate with them when entering the
Vietnamese market.

In summary we consider the
best opportunities for
companies are within the
possession of advanced
technology as well as
extended knowledge and
experience about the oil and
gas sector. The
Government‘s 20 year plan
include develop the domestic
gas market, develop the
processing industry and
modernize the industry. This
leads to opportunities within
subsea, enhanced oil
recovery(EOR), refinery
equipment and technology to
develop
the gas market.

There are also needs to
enhance skills within health,
security and environment
(HSE) and project
management. If the conflicts
with China regarding the
deep sea territories will be
solved there is expected to be
great opportunities within
deep sea oil and gas
exploration and production.

The beginning of Vietnam‘s exploration activities found place in the Song Hong delta in the early
1960s. Today Vietnam is the 6th largest oil producer in Asia and the 3rd largest in South East
Asia, offering several attractive attributes for foreign investors; Strong underlying economic
growth, a rapid growth in population and growing product demand.Deficit product markets and



the possibility for low operating costs enable an attractive business environment for foreign
investors. The Vietnamese Government has realized the importance of foreign
capital and is considering offering more beneficial tax incentives to foreign oil companies. The
Vietnamese regulatory framework is another area the government is improving. This is to
increase the incentive for foreign companies to invest in the Vietnamese market, and join the
more than 30 foreign companies that already operate in Vietnam. These include firms
from the US, Korea, Japan and Europe.

Petrovietnam who holds the role as the National Oil and Gas Corporation of Vietnam has worked
out a strategy and development plan for the oil and gas industry . The plan was approved by the
government in 2005 and has a 20 year horizon. In short the plan includes increasing investments
in exploration, more cooperation with foreign companies, develop the
domestic gas market, develop the processing industry and modernize the industry.

6.1 Actors in the Vietnamese Petroleum Market
Petrovietnam is the national petroleum company,their revenue contributing to a large fraction of
the state budget. As Petrovietnam are aligned to implement government plans and is the only
company to conduct petroleum operations in Vietnam, it is necessary to cooperate with them
when entering the Vietnamese market.The Petrovietnam group consists of 27 subsidiaries that
compete against each other. In addition Petrovietnam is involved in more than 20 different joint
ventures. They operate in all areas of the petroleum sector such as exploration, production,
storage, transport, processing, crude oil export and import and are described as an effective
provider of a range of upstream services, being strong financially,technically and commercially.
Petrovietnam is structured as a diversified group who aims to have a large share of their
production internationally. Their future plans include developing technological and managerial
abilities to be able to adapt to the development of the petroleum industry in both domestic and
international business environments.

In addition to expanding their exploration and production domestically they also want to increase
production overseas and are therefore seeking partnerships with international companies.
Petrovietnam have been conducting exploration and production in areas such as Malaysia,
Indonesia,Algeria and Iraq, but are looking to increase their activity abroad. They also intend to
attract more foreign investment.

6.2 Other Actors
In addition to PetroVietnam and its subsidiaries there are more than 30 international oil
companies operating in Vietnam‘s shell continental waters. Some of these are of the biggest
actors in the oil and gas market such as BP, Chevron, Shell, Petronas, KNOC and Conoco-Philip .
Vietsopetro, PetroVietnam's Russian joint venture, provides around 90 % of the country‘s
oil production throught the White Tiger field.



6.2 Entering Vietnam
There is no doubt that the Vietnamese Oil and Gas industry welcomes companies to
contribute to the expanding oil and gas market and the growing demand for petroleum products.
To meet the needs in their expanding market the Government in Vietnam is encouraging foreign
investors to invest in the Vietnamese oil and gas industry. Petrovietnam
aims to have a large share of their activities internationally and are interested in cooperating with
foreign companies on international, as well as on domestic projects within Vietnam. They have
also shown interest in swapping oil blocks with foreign companies as a step in diversifying risk.
Fifty years have past since Vietnam first started their exploration activities and can now offer
foreign companies competency within exploration and production in the shallow water areas
outside the coast of Vietnam.



6.3 Challenges in the industry
In Vietnam there is a critical shortage of skilled and semi skilled labor and the petroleum sector is
no exception. The economy has developed so fast that there are not enough people with adequate
training and education to cover the huge demand. Short term there is no clear solution, there are
few schools for higher education and the facilities are poor, further more the educational
methodology and literature is outdated. Since there also is a lack of skilled labor
in other countries, talented Vietnamese are often head-hunted by foreign companies from areas
such as Saudi Arabia and the Middle East who offer better terms and conditions than Vietnamese
companies.

Many companies are also having problems getting enough semi-skilled middle managers. Lack of
project management skills stand out as challenging.Having experience from Vietnam is a huge
advantage when entering the Vietnamese market. Much of this is due to the importance of having
a network, arriving without a one and especially without intention and a plan how to acquire a
network might be fatale for a project. Building a relationship and earning trust is a
time consuming activity.



6.4 Opportunities
Foreign companies who want to enter the oil and gas market in Vietnam have to cooperate
with Petrovietnam and be prepared for long term involvement. The Vietnamese authorities are
not interested in companies that are present for only short- periods of time. Most projects involve
lengthy feasibility studies, financial issues and a government approval process. Another issue is
that handling the

Vietnamese bureaucracy is time consuming. Vietnam has a fairly complex licensing system. All
oil and gas contracts need to be approved by the Government, and signed by the prime minister
before being returned to the company

If deep-sea fields are ―opened‖ there is a great potential for new oil discoveries, but
disagreements with the Chinese regarding territories has so far put a stop to exploration in these
areas. Therefore the oil and gas potential is unexplored and the potential is
to a certain degree unknown. However the area is expected to have a large potential and if
exploration and production is executed, Vietnam will need deep sea expertise.

There is a lack of certain technology in the oil and gas sector in Vietnam. Oil production has been
declining the recent years leading to a demand for EOR technology and experience. In addition
competency within subsea and gas is needed. Vietnam is improving the downstream activity and
their first refinery is expected to be completed within 2009. The refinery capacity is forecasted to
be 60 % of the domestic market.

Activities in the oil and gas market in Vietnam have so far been upstream; having experience and
technology related to downstream activities might be a potential business area for companies.



6.5 Unsettlement within the deep sea areas
The industry is getting more aware of the importance of HSE management in general and
requirements and certification are being implemented in Vietnamese companies. Many of these
lack experience in HSE management and would like to cooperate with companies that possess
this knowledge. Pollution is something Vietnamese authorities have started to take more seriously
and they strive to fulfill western standards.

The Vietnamese politic is getting more liberal regarding the legislation towards full or partial
Vietnamese ownership in the companies that are operating in Vietnam. In other business areas
there is now possible for a full foreign ownership, except in the maritime and oil and gas sector.
Today a normal distribution is 49/51.

As presented, there are many opportunities for oil and gas companies in Vietnam. Having
a reputation of being experienced and in possession of needed technology; Vietnamese
companies are very interested in establishing cooperating .

The main challenge within the deep-sea sector is that China claims possession of these territories.
For instance when conducting seismic survey in these areas Chinese vessels have been known to
sabotage the work by ruining the seismic equipment. This makes it impossible to explore the
potential of the deep waters and utilize the expected resources. Therefore there are today no
activities within these territories and there will not be any before the dispute has been settled.
When the conflict with China will be solved is uncertain, although Vietnam claims to have back
up from international laws.



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