Investors go against the flow

THE first contrarians have emerged among Vietnam's growing band of foreign investors. Hanoi is now weathering its first string of high-profile investor pull-outs, and those that remain are hoping that only dead fish go with the tide. About US$330 million worth of departures in recent weeks have clearly shaken investor confidence. They emerged from the underbelly of a flow of capital that has been rosy so far this year, with total foreign commitments rising more than 60 per cent to $16.2 billion. They have departed as the first big-ticket investors have arrived - Japanese, South Korean and American money of the sort Hanoi desperately wants. 'Hype is dead and goodwill counts for little at the moment,' one senior Asian bank executive based in Hanoi said. 'These are tense times, times of a new commercial reality in Vietnam. The vast, long-term potential is still as alluring as before, and now is the time to get in early. But anyone who is coming here for quick money on the strength of emerging market bulls is a fool.' As the end to Washington's embargo against Vietnam 20 months ago and diplomatic normalisation fade into history, investors are finding that old problems generated by a fearsome bureaucracy remain. Offshore operations big and small have reported delays, high costs, corruption and petty officialdom. Raising finance can be tough, and negotiations through Vietnam's under-developed legal framework often arduous and painful, no matter what the sector. In addition, many continue to be fearful about the real book strength of joint-venture partners. The highest levels of Hanoi's government and Communist Party leadership are publicly committed to streamlined investment procedures, progress and development of industry, law and commerce. But for day-to-day business it is the 'great grey middle' of lower-ranking cadres that must be dealt with. Foreign investors are starting to demand a greater pace of change. The mood is underscored by reports that Australian oil giant Broken Hill Proprietary (BHP) is threatening to shut down one of Vietnam's only oil wells by April, in what could be a blow to Vietnam's hard currency earnings. Vietnam's state oil chiefs had been hoping that the Dai Hung field - operated by a BHP-dominated consortium - would be the biggest producer of Vietnam's three fields by 2000. Oil is by far Vietnam's most important export, worth $976 million of foreign exchange last year and a key area of early foreign investment. Of the $4 billion of investment coming in, well over $1.5 billion is tied up in the industry, which has become a barometer of investor confidence. 'There's not a lot of good news around at the moment,' one oil industry source said. 'BHP are the glamour boys; they got in fast and oil started to flow, so the latest row is of great concern.' Other recent strikes in nearby fields, by consortiums headed by Mobil, Mitsubishi, Total and British Petroleum, have yet to prove commercially viable. Industry sources say the real potential of most fields is obscured by a fractured, geologically complex sea bed beneath deep water, driving up exploration costs. The same seabed conditions have hampered BHP's two-year production-sharing contract with state oil monopoly PetroVietnam. When the deal was signed in 1993, BHP Petroleum chief executive Peter Willcox said: 'We think it's the biggest untapped oil field in Asia.' By 1998, he envisaged an 800,000 barrels per day flow of 'light, sweet, low-sulphur crude'. But in October last year the first oil flowed at a rate of about 35,000 barrels per day and 12 months later, sources say, it is down to half of that. When asked about company morale, senior officials privately referred to lingering resentment over the withholding of crucial three-dimensional seismic data by PetroVietnam. BHP knew of the existence of the information, compiled by Russian scientists after Mobil abandoned an exploratory well as the Saigon government fell to communist tanks in 1975. It accepted that the data had a strong commercial worth and signed the deal to see information which, its analysts said, over-estimated the size of the field. PetroVietnam has yet to accept the latest estimates. It will not comment publicly on whether it will accept attempts to re-draft the production-sharing deal. Privately, senior officials say simply that they want more wells drilled - and fast. 'You have a flash car, but you must put the gasoline in to make it run. When you do you can drive it for thousands of miles,' one said. The possible BHP shut-down comes weeks after Total, also a member of Dai Hung consortium, pulled out of a $1 billion project to build Vietnam's first oil refinery at a site 900 kilometres from the oil fields. Analysts alluded to politics being put before market forces, with the site at Dung Ouat an attempt by Hanoi to spread development to poorer rural provinces - where 70 to 80 per cent of Vietnam's 74 million people live. Wesfarmers, one of Australia's biggest companies, was more frank when it pulled the pin last month on a $10 million joint venture to distribute and market liquefied petroleum gas. 'Import duties have been imposed, tax rates were higher than we anticipated, and a number of other things like that occurred,' managing director Michael Chaney said at the time. 'One of the expectations we had, or the undertakings received, was that there wouldn't be any more licences issued in some of these areas, but subsequently a number of licences have been issued.' Several weeks later, P & O Australia walked away from a $19 million southern container terminal development. It claimed that, despite repeated attempts at talks, nothing moved in eight months. Japanese steel maker Toa and supermarket operator Seiyu also have walked away from ventures in recent months. But for major Singaporean property investor Antara Koh Development, delays must just be coped with. Withdrawal is simply not an option. 'Anybody who came here thinking everything would be easy is just ignorant,' says general manager Robert Lai. 'You've got to make sure there is singularity of purpose with your partners, that you are both working towards the same thing when difficulties arise. On balance we are happy and fully committed.' That is no idle boast. Singapore's Senior Minister Lee Kwan Yew headed the ground-breaking ceremony in March for Antara's $250 million Song Hong Kong City project. Nothing had happened since, but Mr Lai insisted the first construction work would start in the first quarter of next year. A joint venture with the People's Committee of Hanoi, the project is one of the largest and most ambitious yet attempted in Vietnam. It will convert a 560,000 square foot site into office, hotel and apartment blocks on the edge of the Red River. But land-use rights have been slow in coming, and permission for piling has been stalled by the furore surrounding illegally built structures on the ancient dyke protecting Hanoi. The delays came despite public warnings from Mr Lee - within an hour of his ground-breaking visit - that Vietnam was 'discouraging investment' by not doing enough to smooth development and avoid the ever-present problem of a high level of corruption. He was one of the first to sound frank warning bells that Vietnam has to move more quickly towards reform if it is to attack the $40 billion worth of investment needed to meet state growth aims by the turn of the century. Gross domestic product rose 8.7 per cent last year to $15.5 billion, or $214 per head. Despite inflation approaching 20 per cent, the government is targeting 9.5 per cent growth rate this year. In the southern commercial hub of Ho Chi Minh City, growth is topping 15 per cent on the back of its burgeoning Chinatown, Cholon. There, Taiwanese, Hong Kongers and Singaporeans are using old ties to snare off-book underground manufacturing and trading operations. Foreign economists believe there could be as much as $2 billion in dispersed off-the-books capital fuelling Cholon. 'As soon as things get official in Vietnam, there is bureaucracy. If you want to make money, work with people you know, and keep it quiet,' one Taiwanese operator said, claiming already to have made a clear million from his tropical fish import operation.