Capstone Project Go To Asia: Exploring Business Opportunities in Vietnam

Capstone Project
GO TO ASIA:
Exploring Business
Opportunities In
VIETNAM
Sponsored by:
AZERENERJI
Prepared By:
MASTERS OF ARTS IN DIPLOMACY
AND INTERNATIONAL AFFAIRS
CLASS OF 2014
ADA UNIVERSITY
2014
EXPLORING BUSINESS OPPORTUNITIES IN VIETNAM 2
PREFACE
The Capstone Project is a module of the MADIA program in ADA University aiming at
producing comprehensive reports on assigned topics. This year, Capstone‘s theme ―Go to Asia‖, is
devoted to exploring business opportunities in three countries: Japan, Mongolia and Vietnam. The
ADA students that attended the module, under the supervision of Ambassador Araz Azimov, were
divided into three groups each of them focusing in one of the above-mentioned countries. The
Project has been sponsored by AZERENERJI– the biggest power producer of the Republic of
Azerbaijan. After an initial research the three groups made short-term trips to the countries of study
for data collection under the supervision of faculty members of ADA University.
This report, which is based on the findings from the online and field research, explores the
business opportunities in the energy sector in Vietnam. Its aim is to provide with a clear picture of
the benefits and risk that a potential investment in Vietnam‘s energy sector would hold for the
Azerbaijani companies that would be interested in making business in the this country of South East
Asia. The authors of the report, Ali Antoinette, Afag Alizada, Aygul Rasulova, Eleni Gkiola, Gunay
Dashdamirova, Nurana Sardarli, Ramiz Hajizade, Rugiyya Melikova, Sabina Taghiyeva, Shafa
Mammadli, Tunjay Musazade, would like to express our gratitude to Ambassador Azimov, Dr Anar
Valiyev and Dr Rashad Ibadov, the staff of ADA and Azerenerji for giving us the opportunity to
participate in this significant project but mostly for providing with all the necessary assistance to
overcome the difficulties that we came across with along the way. Their support was invaluable and
indispensable for the completion of the project. Finally, the authors of the report would like to thank
the Vietnamese authorities and private sector companies for their hospitality and for willingly
answering our persistent questions. The inside information they gave us on Vietnam‘s economy and
energy market constitute the pillar of this report.

MAP OF VIETNAM
Table of Contents
PREFACE 2
Map of Vietnam 3
ABSTRACT 6
1. Introduction 7
1.1. Geography 7
1.1.1. Position on the map 7
1.1.2. Climate and natural resources 8
1.1.3. Major cities 8
1.1.4. Transportation 11
1.2. Population 12
1.2.1. Ethnicity 12
1.2.2. Population Data 13
1.3. Religion and Culture 13
1.3.1. Religion 13
1.3.2. Language and Education 13
2. Political and Social Risk Analysis 15
2.1. Vietnam after Unification 15
2.2. Political Analysis 18
2.2.1. Government 18
2.2.2. Press Freedom 19
2.2.3. Judiciary 19
2.2.4. Corruption 20
2.2.5. Rule of law 20
2.2.6. Doing business 20
2.2.7. Elections 20
2.2.8. Decentralization Policy 21
2.2.9. Power Master Plan 21
2.3. International Relations and Disputes 23
2.3.1. Vietnamese Military 23
2.3.2. Membership to international organizations 23
2.3.3. Diplomatic Relations between Azerbaijan and Vietnam 24

3. Economic Analysis 26
3.1. Macroeconomic Analysis 26

3.1.1. Gross Domestic Product 27
3.1.2. GDP Per Capita 28
3.1.3. Unemployment Rate 28
3.1.4. Trade Balance 29
3.1.5. Exports – Imports 29
3.1.6. Poverty Rate 31
3.2. Investment Climate and Regulations 32
3.2.1. Procedures for establishing business and investment 35
3.2.2. Obstacles in Legislation 37
3.2.3. Right to Private Ownership 38
3.2.4. Development of legal framework and further expectations 38
3.2.5. Environmental Standards 40
3.3. Financial Analysis 42
3.3.1. Banking system 42
3.3.2. Dollarization, Depreciation, Inflation and exchange rate 44
4. Power Sector 47
4.1. Sources of power generation in Vietnam- future plans 47
4.2. Structure of the Vietnamese Power Sector 48
4.3. Issues of inefficiency, affordability, governance and lack of investment 48
4.4. Legislative reforms and the master plan vi 50
4.5. Equitisation of EVN-owned generation capacity;
Investment regulation: IPPs & BOT 52
4.6. Review of some IPP investments - lessons learned 56
4.7. SWOT Analysis 60
Conclusions – Recommendations 61
References 63
Contact list 68
ABSTRACT
This study presents the business opportunities in one of the world‘s fastest growing
economies – Vietnam. The objective of the report is to investigate the business environment,
determine the potential of the business sectors and appraise the overall situation in Vietnam for
assessing its availability as a strategic investment location. Exploratory research included the review
of the available literature and data and in-depth interviews with Vietnamese governmental officials
and representatives of international and Non-Governmental Organizations. The major finding of the
analysis of Vietnam‘s business environment, especially the power sector, is that the country is in
need of foreign investment. However, despite the fact that the country is becoming an attractive
investment location with its low-cost workforce, tax incentives, growing domestic demand in
various spheres, at the same time sits in a risky position because of challenges including poor
infrastructure, bureaucratic barriers, corruption, low-skilled labor force, etc. The above will be
analyzed in detail in the following report which consists of an introductory part, chapters on
Political and Social Risk Analysis, Economic Analysis, Vietnamese Power Sector and their
subsections, a SWOT Analysis and, finally, the Conclusion-Recommendations.
Keywords: Vietnam, Power Sector, Investment, Business, FDI, Investment Regulations

1. INTRODUCTION
This report is designed with the purpose to analyze and provide a contemporary image of the
business environment in Vietnam to the benefit of Azerbaijani owned companies. The analytical
data gathered and presented in this paper, are a synthesis of information gained from formal
interviews with Vietnamese state entities and international organizations, as well as the review
of the existing literature and open sources. In the following chapters the reader will be
familiarized with the country‘s profile (ethnographic data, political and economic analysis) and
later through the specific analysis of the Power Sector in Vietnam will draw valuable
conclusions concerning Vietnam‘s business and investment opportunities.
1.1. Geography:
1.1.1. Position on the map
One of the basic background information,
before moving on to more detailed presentation
of the Vietnamese business environment,
includes a general overview of the country.
Vietnam has S-shape, bordering with China in
the north and the Gulf of Thailand in the south.
In the center, the East (or South China) Sea is
bordering Laos.
Vietnam occupies about 331,211.6 square
kilometers, with a coastline of 3,444 km, excluding the islands. Vietnam claims 12 nautical miles
(22.2 km) as the limit of its territorial waters, plus 12 nautical miles as a contiguous customs and
security zone, and 200 nautical miles (370.4 km) as an exclusive economic zone (CIA World
Factbook). The country is situated in the center of Southeast Asia, where the geographic diversity
includes tropical coastal lowlands as well as temperate mountainous zones. Seventy five percent
of Vietnam consists of mountains and hills, mainly in northern and central regions close to the
border with Laos and Cambodia.
1.1.2. Climate and natural resources
The climate in Vietnam can be very hot in the South and cold or even snowy in the
mountains. In the North the seasons succeed each other with the summer being hot and humid,
followed by a smooth autumn, then a cool winter and finally a warm spring. The humidity can
reach 90 percent in the rainy season, but this might be the least of the natural problems; the
central and northern Vietnam are at risk for seasonal
flooding, due to the heavy rains and typhoons, between
July and November. Two major rivers, the Red River
Delta in the North and the Mekong Delta in the South, are
in flood control measures, because of those severe natural
phenomena. However, in cases when those measures fail
to control the flood, villages look like islands and the rivers are spread out over the countryside in
all directions (Ashwill M., 2005)
Nevertheless nature has been generous with the Vietnamese soil, since it is rich in earth
elements like phosphates and coal. The country also enjoys oil and gas deposits, most of which
are still at the exploitation stages (PetroVietnam, 2014) and the capacity of hydropower (CIA
World Factbook).
1.1.3. Major cities1
Hanoi is the capital of Vietnam, the second largest city with architecture influence by the
French colonial era. The image of the busy and noisy city of the three-lined boulevards is
1
The data concerning the construction plans at the major Vietnamese cities referred on this section are product of our
groups discussion with Ms Nguyen Thi Bich Hue, Deputy Director General of MoC, but there are also available at the
book “Vietnam: A Guide to a nation at the crossroads”, written in 2005 (Ashwill, M, 2005), a fact which indicates the
slow rate of constructions in Vietnam. Reasons could be lack of capital, limited foreign investments and poor
managerial policies.
balanced with the existence of green parks and seven natural lakes. In Vietnamese pronunciation
―Ha Noi‖ literally stands for the two Chinese characters, ―river‖ and ―inside‖; a city inside the
two rivers of Lich and Kim Nguu (Ashwill M., 2005). Hanoi has one international airport (Noi
Bai), but limited port facilities.
The most important seaport with large maritime facilities is located in the third largest city
of Vietnam in the north, Haiphong, which is literally translated to ―coastal defense‖ (Ashwill M.,
2005). The port is one of the largest in
Southeast Asia and it supports national
commercial activities. Nevertheless, this
port cannot meet the needs of the
increasing cargo volumes, thus the
government is currently planning to
upgrade the northern region of Vietnam as
one of the international distributions center
and is willing to construct a port equipped with ―a sufficient depth to accommodate large
container vessels‖ (Ministry of Constructions,
2014). There are plans for further development of
the city with the construction of the biggest
international airport in the northern Vietnam,
situated in Tien Lang district of Haiphong, since
currently there are one international airport in
Haiphong, ―Cat Bi‖ and a domestic ―Kien An‖
(Ashwill M., 2005).
Close to the Cambodian border, nearly 800 square miles from the East (or South China) Sea
is situated the largest city of Vietnam, Ho Chi Minh (or former Saigon) city.
The city is described by many locals2 as ―more metropolitan and business oriented than
Hanoi‖. A metro line is under construction at the city (a project expected to be complete in 2017
according to our discussions with the representative of the Ministry of Constructions), but it is
also notable that HCM city is terminal for many Vietnam railway train routes of the country. The
city‘s location on the Saigon River is serving as a commercial and passenger port of the South.
HCM city has the largest international airport of the country, ―Tan Son Nhat‖, which also serves
domestic flights, while in 2025 the largest airport of the South is scheduled to operate under the
name ―Long Thanh‖.3
Finally Da Nang City, in central Vietnam is
also an industrial center with a modern airport (Da
Nang International Airport) and a seaport which
serves as a port of entry for the Central Vietnam (3-
4 million tons of cargo annually). (Ashwill M.,
2005).
2
Interview material
3
Interview material
1.1.4. Transportation
Overall the country has nine international, fifteen domestic and ten military airports.
Additionally there are ten
seaports and six container
terminals in the country. The
Vietnamese railway network
has a total length of 2,600
kilometers, with most
significant being the 1,726
kilometers North – South
Railway connecting Hanoi and
Ho Chi Minh City. There are
also International railway links
with China (Yunnan- Vietnam
Railway) and there are projects
for railway connections with
Cambodia and Laos (in the
framework of ASEAN
agreement). Vietnam‘s road
system has 222,179 km length from which only the 19.0% is properly paved (mainly the national
and provincial roads). Finally, Vietnam has 28 km of condensate pipeline, 10 km of
condensate/gas pipeline, 216 of natural gas line, and 206 km of pipeline for refined products
(Ashwill, M., 2005).

1.2. Population:
1.2.1. Ethnicity
Vietnam‘s population includes fifty four ethnic groups, each with its own idiomatic in
language. However, the country is relatively homogeneous since 90 percent of the population is
ethnic Vietnamese; the fifty two ethnic groups consist only the 7 percent of the population, living
mostly in the central and northern mountainous areas. The rest 3 percent is the largest minority
group, the ethnic Chinese, who mostly live in the Cholon district of HCM City (Ashwill, M.,
2005). Although it seems that the ethnic groups, even small, are concentrated at specific regions,
they are not causing tensions (political or ethnic) within the country. Nevertheless, this does not
mean that there are not regional differences; Ashwill (2005) supports the prevailing view among
Vietnamese and foreigners that ―Vietnam is actually three countries, each with unique qualities
and characteristics that derive from very different histories and conditions‖.
From our groups observations when visiting Hanoi and discussing with locals, majority of
them seem to agree that the regional differences are based not on the appearance or other
physical characteristics, but mainly on history; it was during the French colonial era that Vietnam
was divided into three parts (northern, central, south). That said, our findings partially agree with
Ashwill‘s (2005) that : ―Northerners are considered more austere, serious and conservative […]
many of Vietnam’s leaders come from the central region, which is poor in natural resources; it is
said that the difficult living conditions have shaped their thinking and acting to be successful.
[…] South was a colony, which means it was more open and susceptible to influence from other
countries, thus many claim it is easier to do business there.‖ Based on our delegation‘s
understanding of Hanoi – with all the ministries, the parliament, the party and the embassies
there- it is the center of decision making and actions which drive the projects at the rest of the
country and nowadays Hanoi adopts a Western oriented business attitude.

1.2.2. Population Data
By 2013, Vietnam‘s population was 92.5 million with a population density of 265 persons
per square kilometer (World Bank, 2014). At the end of Vietnam War in 1975, a baby boom
pushed Vietnam population to unsustainable high levels, thus in 1976 the government issued a
two-child only policy (Ashwill, M., 2005). Today the growth rate has been stabilized and
government has removed the limit on birth rates.
The significance of the historically explained young population of Vietnam and its growth
rate can be detected in the labor market force, a fact which supports the country‘s economy and
attracts investors who are interested in cheap labor.
1.3. Religion and culture:
1.3.1. Religion
Photo: Spring Festival in Quan Su, one of the most famous pagodas in Hanoi
There are four religions in Vietnam with major that of Buddhism. The rest are
Confucianism, Taoism and Christianity. Vietnam‘s constitution guarantees religious freedom.
1.3.2. Language and education:
The official language of Vietnam is the Vietnamese language, which assembles to Chinese
and Thai, in the sense that one word may have several different meanings, which depend on the
tone of the speaker (Ashwill, M., 2005). The ethnic minorities which are occupied with the trade
of touristic products may as well practice French and English. Russian language, since the
collapse of Soviet Union has been replaced by English as the first foreign language that
Vietnamese learn. Other popular languages are French, Japanese and Chinese.
The country has also high literacy rate due to Confucian heritage (Ashwill, M., 2005).
Photo: Confucian Temple in Hanoi

2. POLITICAL AND SOCIAL RISK ANALYSIS
2.1. Vietnam after Unification
The political decisions, social dynamics and economic facts that led to the unification of the
country have left an indelible mark in the Vietnamese business culture. On that issue, a
purposeful analysis of the historical facts, as those were presented by the work of C. Ronald
(1987), will enable a deep understanding of the Vietnamese realities.
When Vietnam was unified, in 1976, there was not central planning for the integration of the
North and South, which had completely different economic and social systems. Until then, the
South was governed by the Provisional Revolutionary Government (C. Ronald, 1987). However,
the Communist Party officials did not have confidence in the elite of the South. Therefore, they
dispatched a number of specialists there in order to control the transition. Rapid transition to
socialism which it later proved calamitous for the economy was a decision made by the
Communist Party (C. Ronald, 1987).
According to C. Ronald (1987), the unification in 1976 caused a large scale of political
repressions. The property of a large number of people who had links with previous government
was expropriated. Under the name of re-education camps, these people were imprisoned without
any trials in labor camps. Many businessmen, intellectuals, writers, experts, union and religious
leaders who were against the war were held in terrible conditions (C. Ronald, 1987).
To those events one should also add Vietnam‘s relations with both China and Khmer
Rouge allies (Cambodian communist party), which were at that time really fragile. Therefore, it
seemed that the war between these parties was inevitable. An anti-capitalist campaign started by
the government in March 1978, confiscating private property and businesses. The victims of this
anti-capitalist policy were mostly, the ethnic Chinese, who later became refugees. This situation
gradually created a tension in the relations between China and Vietnam (C. Ronald, 1987).
In 1978, the Vietnamese military forces entered Cambodia, achieving to remove Khmer
Rouge from power in January, 1979. As a result, a pro-Vietnam government was established in
Phnom Penh. The Vietnamese attack on the Khmer Rouge was considered a blatang provocation
by China, which started a seventeen-day war against Vietnam, invading it in February, 1979. (C.
Ronald, 1987).
In addition to those national conflicts, the communist economy discouraged the commercial
instincts of Vietnamese rice farmers. Even though Vietnam is the world‘s leading rice exporter
today, it was a rice importer in the early 1980s. War and revolution destroyed most spheres of
Vietnam‘s life. This situation called for radical changes (C. Ronald, 1987).
When Mikhail Gorbachev came to power in the Soviet Union, in 1985, openness called
―glasnost‖ and restructuring called ―perestroika‖ were implemented and radical revolutionaries
were out. Following this path Vietnam chose reformist Nguyen Van Linh to lead the Vietnamese
Communist Party in 1986. Economic reform called ―Doi Moi‖ was primarily applied in
Cambodia and then introduced to Vietnam. As Vietnam was not able to keep the occupation
under control, it decided to unilaterally withdraw its forces from Cambodia in 1989. In that
framework, it was one way for Vietnam to embrace the capitalist market, find its place and
visibility again in the global economy and move towards development.
In this vision of a socialist but economically engaged
Vietnam, one cannot ignore the leading paradigm of the country‘s
national hero: Ho Chi Minh. Today‘s Vietnam is a result of the
struggle of Ho Chi Minh who was remarkable both for the
persistency and patience with which he pursued his aim of
Vietnamese independence and for his success in mixing
Communism with nationalism. Therefore, after his death, Ho Chi
Minh has remained an important figure and source of inspiration

for the Vietnamese people (A. Whitman, 2014).
FOCUS POINTS:
 1945- 1969: Ho Chi Minh‘s presidency; his success was mixing Communism
with nationalism. Ho Chi Minh has remained an important figure and inspiration
for Vietnamese people.
 1976: Unification of North Vietnam and South Vietnam and the policy of rapid
transition to socialism in South Vietnam.
 1979: Seven-day war between Vietnam and Cambodia and the establishment of a
pro-Vietnamese government in Cambodia
 1986: The reformist Nguyen Van Linh was elected to lead the Vietnamese
Communist party.
 1991 - present: the collapse of the Soviet Union and the economic decision for
Vietnam to embrace market models in the economy

2.2. Political Analysis
"Marx is a great thinker, but if we never had Marx it would have been even better."
Nguyen Phuoc Tuong, a former adviser to two prime ministers
2.2.1. Government :
Photo: Vietnam’s current President Truong Tan Sang
In Vietnam, the political system relies on the one party rule. Since the unification of the
country 39 years ago (in 1975), the Communist Party of Vietnam (CPV) has been tested by
conflicts with Cambodia and China, financial crises and internal conflicts (T. Fuller, 2013).
Today, the Communist Party is split into two big groups: the traditionalists, who want to continue
the country‘s socialist course and maintain a monopoly of power, versus those calling for a more
pluralist system and the rise of capitalism. The main battle is over the direction of the country —
between those who are support the one-party system and those who want a more democratic and
pluralist system. Vietnam has an awkward mix of a market economy closely chaperoned by the
Communist Party. Despite the Socio-Economic Development Strategy (SEDS) 2011-2020, which
calls for economic reforms towards capitalist economy, the ruling Communist Party shows little
willingness to give up its monopoly of political power.

There is a crisis of trust in government in Vietnam. The level of disappointment with the
political system among the intelligentsia and entrepreneurs is very high (T. Fuller, 2013). There
is a wide-spread opinion that Vietnam is directionless, which make people be concerned about
the direction that the country is going. Vietnamese business people complain of arrogant
government regulations imposed by the communist party, speculations in the stock market and in
real estate, failed state-owned enterprises (SOEs), stagnant economy and a worsening in
corruption. All that makes Vietnam vulnerable to social unrest and unattractive to investors. The
frequency of protests has increased in recent years. So has the tendency for protests to turn
violent. All in all, the Communist Party is at risk of losing authority and warned that public
disappointment is growing, "though not as yet to revolutionary levels."
2.2.2. Press Freedom:
According to the Reporters without Borders‘ report (2013), in its annual index of press
freedom, Vietnam ranked 172 out of 179 countries. One should mention that there is not a single
private newspaper in the country. As the government blocks certain Internet sites, many
Vietnamese use social networks to maneuver around the censorship. Although courts have
sentenced numerous bloggers, journalists and activists to prison, criticism, especially online,
continues. On 1 September 2013, as a result of continued public protest led by blogs and social
media, the government introduced Decree 72, which stipulates that social media websites and
blogs should only be used for personal information and not used to share news articles (T.Fuller,
2013).
2.2.3. Judiciary:
Vietnamese courts are only partially independent. The judicial authorities of the country are
subordinate to the CPV, which controls courts at all levels. Objective trials are almost impossible
as the judicial system is marred by political influence and corruption (Freedom Barometer,
2013). Judges rarely rule against members of the government. The CPV, by the means of the
tightly controlled judicial authorities of the country, hosted a series of show trials for
inconvenient thinkers (D. Wagner, 2013).
2.2.4. Corruption:
In spite of improvements over the past years, corruption is still considered widespread
throughout the country. Corruption is prevalent through the health, education, construction, land
management and natural resources sectors (Freedom Barometer, 2013). Corruption and criminal
mismanagement of Vietnam's industrial titans and the state-owned enterprises are considered as a
long-term damage. The corruption problem is one of the things holding the nation back.
Transparency International (2013) gave Vietnam a rank of 116th on corruption score out of 178
countries.
2.2.5. Rule of law:
Whether it has to do with the foreign partners or international institutions such as the World
Bank and the International Monetary Fund, nobody really knows what an official piece of paper
means in Vietnam and what the authority behind it is, if any (A. Forde, 2013). Economic growth
has slowed in recent years, and many economic policies remain formal documents, particularly,
measures to stop corruption and recover macroeconomic stability.
2.2.6. Doing business:
Vietnam was ranked 99 out of 189 countries in the World Bank‘s 2014 Doing Business
report (for comparison Azerbaijan was ranked 70). Informal labor activities are widespread in the
country. Starting, operating and closing a business are subject to a number of regulations. It takes
34 days and 10 procedures to start a business, according to World Bank data.
2.2.7. Elections:
Last elections were held on 25 July 2011. Truong Tan Sang was elected as a president, while
Nguyen Tan Dung was appointed as prime-minister. According to local news sources, Vietnam's
elections for the National Assembly (NA) on May
22nd drew a 97%-99, 51% voter turnout (Economist,
2011). This was the first time that Business people
were allowed to enter the National Assembly.
Citizens hope that the new commercial class ought to
bring positive changes to the management of the
country; while the head of NA thinks that businessmen should not sit in Parliament.
2.2.8. Decentralization Policy:
The central government controls all the resources of the local government (mandatory
powers, financial, political and informational resources). Despite the adoption of the Regulation
on Exercise of Democracy in Communes 1998 and requirement of Prime Minister in the Decree
No 33/2004, there is no grassroots participation of people in the process of planning development
(M. Thi Vu, 2008). In fact, there is no informing and involving of the main stakeholders or the
most affected communities in the planning process. All in all, Vietnam‘s planning system is still
based on a vertical, top-down approach under a unitary system.
2.2.9. Power Master Plan:
The Power Master Plan VII for the 2011-2020 Period calls for diversification, balanced
development of power sources, investment in energy efficiency, and power market liberalization
in energy sector. The power market liberalization still remains the biggest issue.
To summarize what have been said, according to Michigan State University investigations
(2013), Vietnam Country Rating is C (a very uncertain political and economic outlook and a
business environment with many troublesome weaknesses can have a significant impact on
corporate payment behavior. Corporate default probability is high.) Vietnam Business Climate is
rated as C as well (the business environment is difficult. Corporate financial information is often
unavailable and when available is unreliable. Debt collection is unpredictable. The institutional
framework has many troublesome weaknesses. Intercompany transactions run major risks in the
difficult environments.) For comparison, Azerbaijan has exactly the same rating for both country
and business climate - C.
FOCUS POINTS:
 Government is stable with low to zero probability of revolution/changes
 Judiciary is controlled by the government.
 High Corruption rate (116 out of 176 countries).
 Vietnam was ranked 99 out of 189 countries in the World Bank‘s 2014 Doing Business
report.
 Vietnam‘s planning system is still based on a vertical, top-down approach under a unitary
system.
 According to Michigan State University investigations, Vietnam Country Rating is C and
Vietnam Business Climate is rated as C as well. Azerbaijan has exactly the same rating
for both country and business climate.
 Power Master Plan calls for diversification, balanced development, and liberalization in
energy sector. Market liberalization still remains the biggest issue.

2.3. International Relations and Disputes
Vietnam is considered as a country with stable government and social structure. However
there are disputes with neighboring Laos and Cambodia due to ―bordering issues‖. Vietnam has
successfully secured the western and southwestern land border, but in the borders with China and
specifically at Macclesfield Bank, parts of the South China Sea, Paracel Islands and the Spratly
Islands there are claims from both countries, leading to some legal disputes with no potential of
military escalations. (Economic Times, 2013).
In his work, Vu Le Thai Hoang4, from the Vietnamese side, indicates that ―since the
Cambodian endgame, Vietnam has sought to improve political relations with all neighbors
(including China) and, on that basis, consistently applied fundamental principles of international
law while adopting the region‘s common practice in order to resolve border issues‖. On the other
hand, the Communist leadership in Laos and the Hun Sen regime in Cambodia have been eager
to sustain the Cold War border treaty system to achieve their own political and economic
interests.
2.3.1. Vietnamese Military
Vietnamese military is called Vietnam People‘s
Army and it has a specific political role, to support the
one-party regime and defend the state from external
attack (www.viet-studies.info).
2.3.2. Membership to international organizations
4
A Ph.D. candidate at the Department of East Asian Studies, University of Leeds, United Kingdom, with fields of
interest in Vietnam’s foreign policy and Southeast Asia’s political and security affairs.
Vietnam is a member of several international organizations. Since 1995 Vietnam has
become more integrated internationally. In 1995 Vietnam signed an economic and trade
cooperation agreement with the European Union (EU). In the same year Vietnam became a
member of ASEAN, furthermore, adhered to CEPT/AFTA in 1996 and became an APEC
member in 1998 (www.viet-studies.info).
Considering its trade relations, United States play an important role. In 2000 Vietnam and
the United States signed a Bilateral Trade Agreement (BTA) which made a great contribution to
the trade volume between the two countries (www.viet-studies.info).
On January 11th, 2007 Vietnam became a member of the World Trade Organization (WTO).
Moreover, Vietnam is also ―in advanced negotiation stages with 10 other members include the
United States, Japan and Australia etc‖, with the focus of easier trade in the Asia Pacific area
(Ernst and Young, 2013).
Vietnam‘s membership in WTO regulates the following:
- Market access for exports of goods and services of WTO‘s members
- Greater transparency in regulatory trade practices
- Encouragement of Foreign Direct Investment
Vietnam has shown great consistency so far with the above WTO restrictions, a fact that
improves country‘s credibility abroad (Ernst and Young, 2013).
2.3.3. Diplomatic relations between Azerbaijan and Vietnam
Diplomatic relations between Azerbaijan and Vietnam were established on September 23rd
1992. On December 1st 2011 the President of Azerbaijan accepted the credentials of the
Ambassador Extraordinary and Plenipotentiary of Vietnam to Azerbaijan, Mr. Fam Suan Shon
(www.president.az). On December 16th 2013 Azerbaijan officially opened its embassy in Hanoi
(Azernews).
There are historic ties between the two countries. Azerbaijan as a republic of USSR
facilitated the education and training of many Vietnamese students and officials at graduate level,
particularly in the oil and gas industries. Furthermore, Azerbaijan expressed its wish to cooperate
with Vietnam in the realms of oil and gas and in training technical workers in the same fields
(www.vietnamembassy-brunei.org).
Photo: The current Azerbaijani Ambassador to
Vietnam, Mr. Anar Imanov giving his credentials to
the National Assembly (NA) Chairman, Mr. Nguyen
Sinh Hung
FOCUS POINTS
 Proven international integration: Vietnam has signed an economic and trade cooperation
agreement with the European Union, became a member of ASEAN, in 2000 signed Bilateral
Trade Agreement (BTA) with the United States, which made a great contribution into the
trade volume between these countries. In 2007, it became a member of WTO
 Diplomatic relations between Azerbaijan and Vietnam were established on September 23rd
1992
3. ECONOMIC ANALYSIS
3.1. Macroeconomic Analysis

3.1.1. Gross Domestic Product
GDP was worth 141.67 billion US dollars in 2012 (World Bank, 2012). The Gross
Domestic Product (GDP) increased by 4.96% in 2014 compared with the same period of 2013
(General Statistics Office of Vietnam). GDP Annual Growth Rate was 6.51% on average from
2000 until 2014. It reached its highest level -8.48% in the end of 2007 and was recorded least-
3.12% in the beginning of
2009 (World Bank, 2009).
Slow global growth and the
lack of satisfactory structural
reforms have led to an
economic slowdown.
Vietnam‘s economy is
experiencing its longest period of moderate growth since the beginning of economic reforms in
the late 1980s (World Bank, 2013). GDP growth slowed to 5.2 % in 2012 from 6.2 % in 2011
and 6.4 % in 2010. Approximately 29,000 businesses stopped their business permanently or for a
while in 2013 (first half). It is calculated as a 10.5% increase in a period of one year. New 39,000
businesses were registered in the same period. The forecasts expect higher growth for 2014. For
example, The Economist Intelligence Unit expects GDP annual growth to rise to 5.8% in 2014.
Services, which comprises of 43 percent of total output, rose 6.6 % in 2013 compared to the
previous year. Industry and construction, which mean 38 % of economy, increased 5.4 % in 2013
(World Bank, 2013). Lastly, agriculture, fishing and forestry make up 22 % of GDP. Public
spending in Vietnam is 31 % of total output. Government debt is over the half of gross domestic
income (Vietnam Official Statistics). The overall tax rate is equivalent to 21.1 % of domestic
economy.
Although Vietnam‘s GDP growth began to intensify after a period of slow growth, it still has
some problems with a lot of risks and challenges. The urgent structural reforms are needed,
however the government delays it.
3.1.2. GDP Per Capita (PPP):
The GDP per capita was last calculated to 931.03 US dollars in 2012 (World Bank Report,
2013). Its value equals 8 % of the world‘s average.
The Gross Domestic Product per capita, adjusted by purchasing power parity was last
calculated at 3133.06 US dollars in 2012. (World Bank Report) It equals to 14 % of the world‘s
average.
3.1.3. Unemployment Rate:
Unemployment Rate diminished to
2.22 % in the first 9 months of 2013
from 2.28 % in the first 6 months of
2013 (General Statistics Office of
Vietnam). Vietnam is one of the top
countries that have the lowest
unemployment rates. High wage and expensive life has made companies outsource to
neighbouring states instead of China (A. Kyle, 2011). In the past 20 years, the increase in
education level of Vietnamese people helped them to find jobs in high end jobs rather than in the
agriculture sector (World Bank Report, 2014). This boosted fast economic development and
reduced poverty. However, Vietnam has vulnerable employment problem which grew more in
late 2013.
Informal employment moved up by 2.2 % in the end of 2013. Hence, vulnerable
employment in Vietnam was equivalent to 62.1 % of total employment during the same period
(A. Kyle, 2011).
3.1.4. Trade Balance:
Vietnam‘s trade deficit is 196 USD Million in March 2014 (General Statistics Office of
Vietnam). The reason why Vietnam experienced the trade deficit is that, while exports moved up
by 17% in 2013, more increase in imports diminished the trade surplus.
3.1.5. Exports - Imports:
Exports in Vietnam raised up to 12280 USD Million in March 2014 from 9540 USD Million
in February 2014 (General Statistics Office of Vietnam). The average export value was 4099.91
USD Million in the period of 1990-2014. The exports were peaked to 12613 USD Million in
October 2013 and were in their lowest limit of 700 USD Million in February 1998. Vietnam
primarily exports rice, garment, oil, sea products, electronics, rubber and computer. Vietnam
exports mainly to United States, Japan, China, Australia and Singapore. Vietnam began to raise
its high-tech goods supply recently and this should support strong export growth. Approximately
20% of its exports were high-tech goods in 2013, which were 5% in 2003. The multinational
companies, such as Intel, Samsung and Nokia invested (Bloomberg, 2013) to Vietnam in past 5
years. Samsung is the most important investor in this sector, and Vietnam has a challenge of
over-reliance on Samsung which can bring many problems (East Asia Forum, 2014). It is
expected that Vietnam will shift its exports towards higher value added products gradually. This
will result better economic performance of Vietnam in long term. Meanwhile, its competitiveness
in garment production will stay for upcoming years.
Imports rose to 12470 USD Million in March 2014 from 10090 USD Million in February
2014 (General Statistics Office of Vietnam). Average imports were 4451.78 USD Million within
the period of 1990-2014. It peaked to 12512 USD Million in October 2013 and experienced the
minimum level of 740 USD Million in February of 1999. Vietnam mainly imports steel, fabrics,
machinery tools, petroleum, and plastics. It imports primarily from China, Japan, South Korea,
Taiwan, Thailand and Singapore. Tariffs are averaged in 5.7 %. Import licensing, tariffs and
quotas hinder the imports (www.heritage.org).
Photo: Market Intelligence data, source
http://www.tradecommissioner.gc.ca/eng/document.jsp?did=91398&cid=539&oid=595
3.1.6. Poverty Rate:
According to the World Bank‘s Poverty Assessment (2012), the poverty rate decreased from
60 % to 20.7 % in the past 20 years based on the new poverty line -equal to $2.25/person/day
(2013). Fast structural transformation and transition to a market economy helped boost the
economy of Vietnam and poverty reduction. Meanwhile, inequality in incomes is still very high,
supported by divergent opportunities and development between urban and rural areas across
diverse socioeconomic groups.
According to the CIA Factbook, Gini index in Vietnam is 37, 6 (2008). Nevertheless,
wellbeing of most people improved significantly in 2010-12 the economic growth was less than
in previous years. This resulted in a decrease in the poverty rate and inequality. Welfare of ethnic
minorities living in Vietnam showed improvement in recent years. Nonetheless, poverty is still a
major political and social issue within the communities of the minority groups.
According to JETRO reports, average monthly salaries in Vietnam remain low,
approximately 32 % of the respective wages in China, 62 % in Indonesia and 43 % in Thailand
and Malaysia.
FOCUS POINTS:
 GDP was worth 141.67 billion US dollars in 2012 (World Bank).
 The GDP per capita (PPP) value equals 14 per cent of the world‘s average.
 Top country with the lowest unemployment rates
 Trade deficit 196 USD Million in March 2014 (General Statistics Office of
Vietnam).
 20% of Vietnam‘s exports high-tech goods in 2013 (Bloomberg, 2013)
 Import tariffs are averaged in 5.7 %. Import licensing, tariffs and quotas hinder the
imports.
 According to the World Bank‘s Poverty Assessment (2012), the poverty rate
decreased from 60 % to 20.7 % in the past 20 years
 According to CIA Factbook Gini index in Vietnam is 37,6
3.2. Investment climate and regulations
Since 1986, ―Doi Moi‖ (the economic reform program), focus on the encouragement of
domestic and foreign private investment. These reforms transformed Vietnam from a centrally
planned economy to a socialist-oriented market economy. Starting from 1995 Vietnam began
negotiations over its accession to the World Trade Organization. For eleven years, the country
had demonstrated the positive changes in the process of market liberalization. In order to make
the investment environment more transparent, Vietnam refurbished much of its legal system,
particularly, the Civil Code, Land Law, Labor Code, and Law on Securities, Enterprise Law, and
Investment Law. Eventually, Vietnam became the WTO's 150th member on 11 January, 2007.
The reforms and membership to the WTO positively affected investment climate in the country.
For example, since 1st January 2009, Vietnam has relaxed the initial restriction on foreign
investment wherein the proportion of the foreign capital could not exceed 49%. Now, at least in
theory, a 100% foreign invested company can be established in Vietnam (T. Trung Kien, 2013).
The government continues the liberalization of key economic sectors, and Vietnam is a part of
the Trans-Pacific Partnership free trade negotiations.

The Law on Enterprises and the Law on Investment are the main legislation governing
foreign direct investment (FDI) activities in Vietnam. Both laws were adopted by the National
Assembly on November 29, 2005 and entered into force on July 1, 2006. They apply to all
enterprises established by foreign as well as Vietnamese investors. Together with their lower-
level legal provisions and decrees guiding the implementation, they cover most aspects of the
investment procedures in Vietnam, from business registration to operation start-up.
The Investment Law provides five main forms of foreign direct investment:
According to the Law on Enterprises, a foreign-invested enterprise (i.e., JVE or 100 % FOE)
can be established as a limited liability company (LLC) consisting of a single member or
multiple members, a joint-stock company (JSC), or a partnership.
There are four types of sectors for investment in Vietnam:

1) Sectors where investing is prohibited are:
a. Private investigation and security agencies,
b. Construction within heritage sites,
c. Asexual reproduction,
d. Production and importation of toxic materials,
e. Production of games and toys considered ―harmful to the personal development
and health of children or to the security, order and safety of society‖,
f. Pornography
2) Encouraged sectors:
a. Areas with difficult socio-economic conditions; areas with especially difficult
socio-economic conditions.
b. Industrial zones, export processing zones, high-tech zones and economic zones.
3) The conditional sectors are:
a. sectors affecting national defense and security, and social order and safety;
b. the banking and finance sector;
c. sectors affecting public health;

d. culture, information, the press and publishing;
e. entertainment services;
f. real estate business;
g. Surveying, prospecting, exploration and mining of natural resources, and the
ecological environment;
h. development of education and training; and other sectors in accordance with law‘
5
4) Moreover, some sectors require the Vietnamese Prime Minister‘s personal approval. The
eight types of projects requiring prime ministerial approval are:
a. Construction of air infrastructure,
b. Construction of port infrastructure,
c. Exploration, production and processing of petroleum and mining minerals,
d. Radio and television broadcasting,
e. Commercial operation of casinos,
f. Cigarette production,
g. Establishment on universities and training establishments,
h. Creation of industrial, export-processing, special economic and high-tech zones.
3.2.1. Procedures for establishing business and investment:
The Vietnamese Ministry of Planning and Investment (MPI) is in charge of
recommendations in sectors and regions requiring investment. It also guides in taxation issues.
On the other hand, local provincial and municipal-level departments of planning and investment
– the implementers of these policies- encourage FDI into Vietnam.
5
*In addition to the Conditional List, under article 29.2, foreign investors may be subject to
conditions in further sectors according to international treaties of which the Socialist Republic of
Vietnam is a member.
Investing in Vietnam for the first time, foreign investors must have investment project(s) and
conduct the procedure in order to be granted a Certificate of investment registration. This
certificate is also the ‗Business Registration Certificate‘. If the foreign invested enterprise is
located in a special-purpose zone (Industrial Zone, Special Economic Zone, or High Tech Zone)
the licensing authority will be the Zone‘s Board of Management who has rights and obligation to
grant an Investment Certificate.
Within 15 working days from the reception of the valid files on investment & business
registration, the state agency on investment management investigates the validity of the
investment registration file and grants the investment Certificate.
Investment certificate granting duration
Investment registration Investment assessment Investment assessment
(for projects under the (for projects not under
approval authority of the approval authority
the Prime Minister) of
the Prime Minister)
Max. 15 working days Max. 55 working days Max. 45 working days
A file for investment registration applicable to foreign investors consists of:

Source: Vietnam Trade Promotion Agency
3.2.2. Obstacles in Legislation:
Some conditions for FDIs are not clearly defined in the laws of the country. So, conditions
are sometimes unclear. As such, in order to invest in conditional sector there is a requirement to
contact the ministry which is responsible for this sector. For example, if investing in real estate,
there is a need to contact the Ministry of natural Resources and the Environment. The other
option would be to hire a law firm or a consulting agency.
Protecting the State sector negatively affects business opportunities in Vietnam. In fact, no
economy of scale -needed for international standard business- can be achieved by the private
sector in the country, because of the reduction of business opportunities. Due to the limited
opportunities, the domestic private sector is not growing quickly, and foreign investors are trying
to avoid investment to Vietnam. In addition, protectionism, which supports state companies,
negatively affects the power and role of the private companies. State-owned firms in Vietnam are
under the administration of the ministries, that is why they are considered as parts of the
ministries. Such a situation also gives some political power to the state companies. For example,
top management of PetroVietnam State Oil Company is appointed by the government. So, there
is a direct dependence on the current regime.
3.2.3. Right to Private ownership:
All land in Vietnam is owned collectively and managed by the State and, as such, neither
foreigners nor Vietnamese nationals can own it. Real estate rights in Vietnam are divided into
collective land ownership, and land-use and building rights, which can be held privately.
Foreigners can own apartment, durable trees and planted forests for production purposes, but not
the land. ―Forests, rivers and lakes, water supplies, wealth lying underground or coming from the
sea, the continental shelf and the air, the funds and property invested by the State in enterprises
and works in all branches and fields - the economy, culture, society, science, technology, external
relations, national defense, security - and all other property determined by law as belonging to
the State‖ are also a part of collective property. According to the Land Law of 2003, foreign
investors can lease land for (renewable) periods of 50 years, and up to 70 years in some poor
areas of the country.
3.2.4. Development of legal framework and further expectations:
In order to continue the process of improving the country‘s investment climate,
Vietnam‘s Ministry of Planning and Investment has announced that it has completed a draft of
the country‘s amended Investment Law. The amended law is expected to be approved by the
National Assembly at the end of 2014.
The legal procedures for foreign investors were too complicated, too expensive, and was the
cause of much time wasting. This situation was preventing effective investment by the investors.
However, the proposed changes to the investment procedures shall result in an increase in
simplicity and transparency. The change will affect economic integration in the region.
The Investment Law of 2005 did not create a competitive environment for all investors
(domestic and foreign). The 2005 law put in place restrictions on foreign investors. The main
goal of these restrictions was to secure the policies of the Vietnamese government. The
government has now made the correct choice to loosen the restrictions.
The certification process was too fragmented and complex. The amended law will be able to
systematize and simplify the certification process; this will result in a vastly improved business
environment (Vietnam-Briefing, 2014).
Improvement of one-stop-shop system is one of the main expected results.
The new law will also separate business registration from investment registration for foreign
investors. Foreign investors will first follow regulations for sourcing an investment certificate
and then will register their business in order to implement the investment projects (Vietnam-
Briefing, 2014).
In practice, the institutional situation in the country gives hard time to anyone who wants to
navigate through, but, still a lot of companies have built successful operations, even if in
conjunction with the state-owned companies. Generally, to improve the situation equal
opportunity for all sectors- state, private, and foreign- is needed. Anyway, the market will not
allow the foreign companies to win a large market share. However, the capital and the rule of law
will encourage them to invest (P. N Sheridan, 2004).
Encouraged investment fields and areas will be widened to projects that:
* Create/use cutting edge and green technologies;
* Produce and/or use clean energy;
* Support industry projects;
* Further the development of training, education, and healthcare;
* Invest in forestry, agriculture, fisheries, and rural areas.

Generally, projects will be prioritized if they have a major social and economic impact, and
invest in areas with difficult socioeconomic conditions.
3.2.5. Environmental Standards:
The Ministry of Natural Resources and the Environment (MONRE) defines and manages
environmental standards, and incorporates them into the Vietnam Environmental Protection
Agency and the Department of the Environment. There are two standards to measure the impact
of a project on the environment.
Surrounding environment quality standards: Soil Quality, Surface and underground
freshwater used in business activities, Costal sweater used for aquaculture and entertainment, Air
quality, Noise, light and radiation in residential areas
Waste Water quality standards: Waste Water, Industrial gas emissions from equipment
used in waste disposal and incineration, Gas emissions from transport, machinery and special
equipment, Hazardous waste, Noise and vibrations caused by industrial activities
According to Decree 80, implementing the Law on the Protection of the Environment, a
foreign investor must write Environmental Impact Assessment Report (EIAR) depending on the
nature and scale of the investment project.
Reports are mandatory for seven groups of projects:
 Projects of ―national importance‖
 Projects with potentially adverse effects on natural conservation areas, natural parks or
cultural /natural heritage sites
 Projects with potentially adverse effects on watercourses or protected ecosystems
 Construction of industrial and high-tech parks
 Residential development
 Large-scale exploitation and/or utilization of groundwater

 Any other project with potentially adverse risks on the environment (Trade Commissioner,
2011)
In order to continue the process of improving the country‘s investment climate, Vietnam‘s Ministry
of Planning and Investment has announced that it has completed a draft of the country‘s amended
Investment Law. The amended law is expected to be approved by the National Assembly at the end
of 2014.
Source: FOREIGN INVESTMENT AGENCY - MINISTRY OF PLANNING AND INVESTMENT PROMOTION
CENTER FOR CENTRAL VIETNAM

FOCUS POINTS:
LEGAL FRAMEWORK
Domestic Laws  The Law on Investment;
 The Law on Enterprises
International  WTO membership;
Treaties/Membership  Party to New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (1958)
 Trans-Pacific Partnership (TPP)
 ASEAN country
Bilateral Treaties  35 Bilateral Investment Treaties
 38 Double Taxation Avoidance Agreements
3.3. Financial Risk Analysis
3.3.1. Banking system
Financial liberalization in Vietnam has sped up from the early 1990s. The financial systems,
in general, and the banking system, in particular, have achieved a lot of progress. These twenty
years of progress have proved that, the banking system has been transferring from a one-tier system
into a two-tier system which allowed all households to compete fairly and effectively (Suiwah,
Bingham, Davies, 2010).
In 1990 two important Decrees were announced. The first was the Decree on the State Bank
of Vietnam (SBV). The second was the Decree on Banks, Credit cooperative and financial
companies. In fact these decrees divided the Vietnamese financial system from monopoly (or one-
tier) system into two-tier system, in which SBV now mainly acted as a central bank, while other
banks and financial companies have freedom to independently be established, acted and even
closed.
Improvements in the banking sector are mainly derived from cooperative activities and
initiatives of IMF and WTO via Vietnamese government. Since 1991, the number of state-owned
commercial banks (SOB) in Vietnam went up by one unit reaching 5 SOB-s in 2010 (D. McCargo,
2004). As a result of the decrees mentioned above, in 1991-2013 the number of operating joint-
stock commercial banks (JSB) raised to 39 while in early 1990-s there was only 4 JSB-s on average
(D. McCargo, 2004).
On the other hand, the Vietnamese banking system by 2013 have experienced high increase
in the number of established joint-venture banks which in its turn means a lowered rate of
government intervention to financial venture establishment. The crucial changes in terms of
independent multilateral structuring and injections of foreign financial institutions since 2001
resulted in the increase in the number of banking institutions to 26 branches (A. L. Johns, 2010).
From 2009 up to present the number of FBB-s reached to 45 (Johns, 2010).
Overall, book reviews and face to face interviews with Vietnamese government officials
corroborate the fact that within the past 15-20 years, the banking system in Vietnam developed not
only in number of banking institutions but also in the share of the banking sector in Vietnamese
economy, in the amount of credits for the economy, and the amount of other banking services as
well. A consequence of that is, the amount of capital mobilized through the banking sector was
around 1,800 trillion VND, nearly 30% up compared to early 1990-s (M. Backman, 2008). Hence,
the amount of domestic credits that the banking sector provided to the economy was more than
135% of the total GDP (D. T. Ngo, 2014).

The reduced government involvement in the banking system meant higher rates of liquidity
assets. According to the Asian Development Bank report (2012) the percentage of total liquidity
over Gross Domestic Product (GDP) was doubled by 51.7% from74.2% nominally to 140.8% in
2003 and in 2012 respectively. Consequently, the ratio of cash over total liquidity assets that was
reduced rapidly in the 2000s, suggests that the financial activities in terms of cash are now being
shifted through operations regarding non-cash payments such as ATM/POS, checks, credit and debit
cards, banking transactions, online payments. Thus, the lower the coverage of ratio of cashes over
liquid assets, the more likely that a business will be able to pay debts to financial institutions as they
became due while still funding the remaining operations.
Deposits of local customers and finance, in general, in terms of GDP per capita in Vietnam
rose in 2003-2012 by 23% and 37% respectively, proving the sustainability of financial system and
reduced intervention measures of government (D. T. Ngo, 2014).
Despite the fact that the banking system in Vietnam did a lot to restrict government
intervention and openness to foreign financial institutions, still more reforms to further develop and
restructure it are needed in order to finance the current and future capital needs of the economy.
3.3.2 Dollarization, depreciation, inflation and exchange rate
Dollarization, the holding of foreign currency denominated assets by local residents, is a
common feature in developing and transition economies. Thus, Vietnam was also faced up with first
stage of dollarization in the 1960s as a result of the U.S. military intervention. A second stage
followed in 1988-1989 during the transition period toward the market-oriented economy. Generally
speaking, dollarization affected several macroeconomic indicators such as the exchange rates,
which led to the depreciation of VND (dong) and inflation. The Vietnamese government in the early
1990s adopted numerous monetary policies in order to reduce dollar‘s financial strength in the
country, such as, solding huge amounts of dollars in foreign exchange markets, which resulted with
appreciation of VND in short-term.

Monetary policies actually brought the expected positive results. The inflation rate went
down from 350% in 1994, to 35% in 1998 (A. Palit, 2011). Together with the control of monetary
expansion, the Vietnamese government successfully put into practice a policy of pegging the VND
to the foreign currencies for the next ten years. According to analysts and Vietnamese officials,
within the period of 3-4 years the state economy and financial system overall could recover from the
2008 crises so that economy had an inflation rate lower than 10% in 2010-2012. On the other hand
the reemerged inflation did not harm significantly to deprecation figures in the financial system.
The depreciation rate in 2008-2012 had experienced a minor climb at 1.5% which was lower than
that in 2003-2006 (A. Palit, 2011).
Nowadays the Vietnamese government pursues strict regulations and policies to keep stable
exchange rates and inflation rate lower than 7% per annum by pushing down exports of some
industrial goods and restricting foreign currency
inflows into the economy. Overall, starting from
2009, the Vietnamese government has achieved a
6.8% inflation rate per annum, on average,
depreciation rate of 3% and, in general, exchange
rates on VND-USD fluctuate between 0.7% -
1.3%, which makes the local and foreign investors more accessible to financial resources with less
risks (D. McCargo, 2004).

FOCUS POINTS:
 In 1990 two important Decrees aiming to lower government intervention in the financial system
were adopted: 1-Decree on the State Bank of Vietnam (SBV), 2-Decree on Banks, Credit
cooperative and financial companies.
 Central bank of Vietnam becomes the State Bank of Vietnam (SBV).
 The number of state-owned commercial banks (SOB) in Vietnam is 5 SOB-s.
 The number of operating joint-stock commercial banks (JSB) is 39 in Vietnam.
 The number of foreign financial institutions (banks) in Vietnam is 45 branches.
 Capital mobilized through the banking sector was around 1,800 trillion VND ($84.6 billion) during
the 1995-2010 period.
 Present inflation rate of the VND is about 6.8%.
 One stock exchange, established in July 2000 in Ho Chi Minh City.
 Present exchange rates in the country on VND-USD axis fluctuate between 0.7% - 1.3% on average.
 Present interest rate in the country is about 7.54 % on average.

4. POWER SECTOR
4.1. Sources of power generation in Vietnam- future plans:
Vietnam relies on hydropower as its main source of power generation. Until 2012
hydropower covered 50.2% of the total electricity production. However, hydropower is a relatively
expensive form of renewable energy. Additionally, during the dry months hydropower exploitation
cannot guarantee electricity security for the industries and the households. Those costs and the
environmental issues involved led the government to focus on coal imports as an alternative cheaper
source of power generation. By 2030 coal is expected to provide more than 50% of the power
generation (World Bank; 2014).
Generation mix until 2012
Generation investments as per PMP 7 in 2011-2030

4.2. Structure of the Vietnamese power sector:
When analyzing Vietnam‘s power sector there are key institutions one has to keep in mind.
First, it is the DGE (Directorate General of Energy), under the Ministry of Industry and Trade
(MoIT), a body which is responsible for the overall energy planning, but not for the implementation
and management. Second, ERAV (Electricity Regulatory Authority of Vietnam) is the agency
which supervises the power market according to DGE‘s power planning. Finally, the EVN is the
state owned monopoly that is responsible for the whole chain of electricity production,
transportation and distribution (Tuan, N. A., 2012).
More details on how the government institutions in the power sector operate:
 Government: the socialist government of Vietnam is the asset owner that approves the
electricity tariffs, sets the legal framework and controls the development plans, the energy
deposits and the nuclear facility (Tuan, N. A., 2012).
 MoIT: approves the regional development plans and the hydro development plan and it is
responsible to submit to the government the Power Development Plan, which is part of the
national strategic objectives under the Master Plan VI (Tuan, N. A., 2012).
 DGE: is responsible for the management of power BOT contracts (the nature of which will
be later explained in detail) and submits the plan (location-policy- manpower) on nuclear
power facility to MoIT (Tuan, N. A., 2012).
 ERAV: is responsible for providing the licenses, regulating the competitive power market
and the electricity tariffs and rates (Tuan, N. A., 2012).
4.3. Issues of inefficiency, affordability, governance and lack of investment:
In the first place, any discussion concerning the energy sector in Vietnam should point out
the inefficient amount of the power supply, which is, after all, indispensable for the economic
growth of the country. In the last decade Vietnam‘s economy has been growing at the rate of 4-5%
annually (World Bank; 2014).
Strong Electricity Demand Growth (source World Bank):
To support this growth the 834
state cannot rely solely on national 695
power production and is forced to
import electricity from the neighboring 362

330
countries of China and Laos (Thomas 194 210
87 87
et.al; 2013). This heavy dependency
on imports and the slow pace of the 2010 2015

Minimum
2020
Maximum
2030
planned projects (like nuclear power plants and the oil and gas exploitations) undermine the energy
security of the country (Vietnam Review; 2014). The implications of the energy risk hurt not only
financially Vietnam - with the investors remaining skeptical despite the booming economy - but
also economically and socially. World Bank predicts electricity shortage in 2020 (World Bank;
2014) while some mountainous areas of the country have not yet benefited from electricity
(Vietnam Review; 2014).
The case for the state officials becomes even more complicated when the low tariffs on
energy prices are to be considered. Vietnam as a socialist country has an interest in keeping the
electricity prices low and affordable to everyone. However the prices are 60% lower than the world
market prices for electricity (Thomas et. al.; 2013), which makes the environment unattractive for
investors and government‘s act to subsidize (by buying the difference from the imported electricity)
financially dangerous - especially at a time when dong (the national currency) is devaluated and
sensitive to the fluctuations of the exchange rate.

The average price of electricity and the slow increase rate (source World Bank; 2014):
Average electricity price

No. Date of Effectiveness Increasing Rate (%)
(VNĐ/kWh)
1 01/3/2009 948,5 -
2 01/3/2010 1.058 11,5%
3 01/3/2011 1.242 17,3%
4 20/12/2011 1.304 4,99%
5 01/7/2012 1.369 4,98%
6 22/12/2012 1.437 4,96%
Despite the pressure exerted by international organizations like the World Bank, IMF etc,
Vietnamese government holds the monopoly in electricity production, transmission and distribution,
with EVN -the state owned electricity company- as the monopoly and key entity. The company is
controlled by the Ministry of Industry and Trade (MoIT).
So far there is no foreign or domestic project working independently and competitively to
EVN in any of the power generation, transmission, and distribution sectors. If one also takes into
consideration that the capital of the company, since its management is linked to the MoIT, can be
invested also in projects other than directly those of power sector, for social and political reasons
(road constructions, transportation etc), it follows that the company can hardly cover the costs of
imports and production. Thus, reforms towards a competitive open market were rather inevitable for
the Vietnamese government.
4.4. Legislative reforms and the Power Master Plan VI:
In November 2004 the National Assembly of Vietnam passed the electricity law, in an effort
to reform the power sector. The law came into effect in 2005 and its main aspect, other than
restructuring the power market and creating the necessary infrastructures within MoIT, was the
three stage transition towards full power market liberalization (Harris J., et. al., 2009). At the first
stage, it is foreseen that power generating entities (local or international) compete to sell to a
wholesale single buyer EVN. This stage should have been completed by 2014, and what was
supposed to be happening now (second stage planned to come into effect in 2014) was that
producers compete to sell to multiple buyers or large companies-customers (Harris J., et. al., 2009).
The third stage, meaning the transition to a retail competitive market for power, is yet too far to be
realized.
Phase 1 Phase 2 Phase 3

VCGM VWCM Competitive Retail Market
Pilot Full Pilot Full Pilot Full
2012 2015 2017 2022 2024

The law provisions (source World Bank):
As mentioned above the ‗electricity law‘ is an effort by the government to deal with the
energy security and the markets‘ pressure. It is part of the Master Plan VI, and the Power Master
Development Plan 7 (PDP 7), in other words, the government‘s vision for the power sector, where
competition and capital investment are welcomed and supported.
This legal framework proposes strategic openness to free markets within a socialist
governance. From its inception the model has several challenges to overcome. According to the
microeconomic rules, the requirements for the perfect competition are:
 Consumers and producers to be price takers
 Perfect Information
 Free entry and exit from the market
 Production of a homogenous product
 No large economies of scale

In Vietnam‘s power sector though, even with the adjustments in the electricity law and the
ambitious Master Plan, several of those priorities are not yet accomplished and the system needs
way too long distance to cover to come closer to the practices of the market economy.
For the purposes of our analysis what needs to be highlighted as an identified risk is the
transaction cost for penetration to the Vietnamese power market, which is very high and requires
long negotiations and complex administrative procedures.
4.5. Equitisation of EVN-owned generation capacity; Investment regulation: IPPs & BOT:
A key priority for the success of the reforms is the transformation of the state-owned
monopoly EVN into a ‗Shareholding Company‘, separate from the government, in order to increase
efficiency. The way that typically this process is realized goes as following: Private investors can
purchase IPO (initial public offerings) in Hanoi‘s or HCMC stock exchanges; These new joint –
stock power companies enter into power purchase agreements (PPAs ) with EVN to sell their
generated power to the retail (now wholesale) market (Harris J., et. al., 2009). Nevertheless, the law
still stipulates that EVN must retain the 51% of the joint stock power companies (EVN; 2014).
The foreign entities interested, can invest in one of the BOT (Build, Operate, Transfer)
domains, which are supported by the government6 , by signing a contract with the MoIT (Harris J.,
et. al., 2009). Shares on investments under a BOT contract are also possible for domestic investor
companies.
BOT contracts are implemented through a fully-owned foreign enterprise. Alternatively,
the enterprise can sign for a joint venture with a Vietnamese entity; the purchase of shares (private
IPP holding power assets) is the last way of investment in power sector (Vietnam Chamber Of
Commerce; 2014).
6
Usually there are tender forms released directed to bidders, but this is not always the case.
Specifically, in the BOT contracts, the Government set in 2007 the regulations concerning
investments in infrastructures, including in roads, rail, air and sea ports, water and waste plants,
power plants and transmission networks. According to our interviews, there are various incentives
for investors undertaking a BOT project, such as:
 exemption from applicable land use fees,
 exemption from import duties on goods necessary for the project,
 tax holidays
It is also possible for the investors to further negotiate exemptions. However, there are also
downsides: The government delays the amendments to the BOT degree (Harris J., et. al., 2009).
Furthermore, the information concerning law and regulations is not always very clear and available
(Vietnam Review; 2014).
Key provisions for a BOT contract, according to an official report at the Pacific Energy Summit in
2012 (Tuan, N. A., 2012) are:
 internationals and no domestic tenders are supported by the state
 direct selection is also permitted, when the investor proposes a project from the beginning
 10-30% of the total capital is the minimum share requirement
 Step in rights remain subject to approval by government.
EVN‘s participation in large joint venture IPPs often creates conflicts of interest. It is not secret
that the transition to a wholesale competitive market is not perfectly institutionalized.

Legislation and Contract enforcemet model:

Entities, contracts, and clients model:
Owners of installed power capacity (SOE, IPP’s and BOTs):
With the introduction of electricity law and the PDP 7, EVN‘s monopoly has been
challenged by other state owned enterprises (SOE), such as PetroVietnam, Vinacomin (Vietnam
National Coal and Mineral Industries), (PetroVietnam; 2014). According to the interviews we
conducted with the latter, they represent the 15% of total installed capacity and BOTs and IPPs
contracts. Nowadays, according to data presented by EVN during our discussion, 55% of its
installed capacity is limited to power transmission, national strategic power plants and power
distributions. A 30% is left to the potential private investors (EVN, 2014).

Pilot Competitive Power Market:
MoIT decided to implement the pilot competitive market in 2011. In this phase 48 of the 73
power plants with installed capacity greater than 30 MW were available to tenders at the market
(Harris J., et. al., 2009). 61% of the total installed capacity of the power system is available to be
controlled by the potential investors (Harris J., et. al., 2009). BOT plants ( like Phu My 3 and Phu
My 2.2, that we will later review) were negotiated by the power purchase company, which was to
ensure the completion of the payment (Harris J., et. al., 2009). Nevertheless the hydroelectric plants
which have national strategic importance and are located in the regions of Son La, Hoa Binh and
Ialy are not negotiable in the market (Harris J., et. al., 2009). Those are used by the government to
pursue its social projects. In all, hydropower contributes the 37% of the total power capacity in the
country (Harris J., et. al., 2009). Other sources of power are: gas turbines for electricity generation
(15%), coal fired plants (11%) and (5%) oil fired and diesel fired plants (Nguyen Anh Tuan, 2012).
That leaves the import share, with BOT and IPP‘s agreements, at the level of 32%. This 32% equals
the capacity of 6.269 MW (Tuan, N. A., 2012). According to the interview with the EVN officials,
among the current objectives of EVN is to rely more on IPP‘s for the development of thermal power
plants (EVN; 2014).
4.6. Review of some IPP investments - lessons learned7:
The two thermal power plants, developed by foreign investors at Phu My in Vietnam, can be
analyzed as a model of the way IPPs operate. Phu My is the name of a village in Ba Ria Vung Tau
Province where the power plant network is located. Two of the projects (Phu My 2.2 and Phu My 3)
are foreign owned, operating under BOT agreements.
Phu My 2.2: With a capacity of 715MW this power plant was developed under a 20 year
BOT contract among MoIT and the Chinese company MECO (Mekong Energy Company).
7
In this section case studies are extracted from Harris J., et. al., 2009.
Sponsors of this project are the EDF (Electricite de France) and the Tokyo Electric Power
Company. The invested capital reached the 340 million USD, with direct loans provided by the
Asian Development Bank, JBIC and Proparco. The financing process was completed in 12 months.
ADB additionally provided Sovereign Risk Insurance to cover its guarantee of 25million USD for
political risk. Commercial banks (ANZ, SMBC and Societe General) also loaned the project. Phu
My 2.2 is known as the first closed BOT project with a significant financing package (Lovells LLP,
2009).
Phu My 3: The 412 million USD BOT project operated in 2004 and has been known as the
first IPP to operate in Vietnam. The sponsorship was made by Kyuden International Corporation
and Sojitz, BP, and SempCorp Utilities Pte Ltd. The involved commercial banks (for almost 14
years) were: The Bank of Tokyo-Mitsubishi Ltd, Credit Lyonnais and Mizuho & Fortis Bank
S.A/N.V. JBIC, ADB, and World Bank with its insurance body MIGA provided financial assistance
and country risk coverage. The construction began in 2001 with the turbines and generators
provided by Siemens. The sponsors met the deadlines of the project construction and delivery. The
PPA between the investing company and EVN is for 20 years offtake term and the BOT contract
with MoIT is 23 years term (Harris J., et. al., 2009).
What was perceived as a major success of the project, though, was the tying up of all of the
Vietnamese parties (State Bank, EVN, Vietcombank and the Provincial People‘s Committee) to one
and the same agreement. Based on this experience the International Banks and developers showed
more trust to the business environment in Vietnam and the country has since been upgraded in the
eyes of foreign investors (Harris J., et. al., 2009).
Nowadays all eyes are on Nghi Son 2 project, which is located in Thanh Hoa Province, in
North Central Vietnam (Harris J., et. al., 2009). During our interviews we have been informed that
the project is developed on BOT arrangements, with a 20 year PPA with EVN (World Bank; 2014).
The partners include Chinese, Japanese and Thai companies. The highlight of this project is whether
and from which entity the investors will be provided with guarantees for the sovereign risk. If a
standard procedure will be developed, the credibility of the country will be further restored.
According to World Bank projections, the project is expected to be completed in 2030.
Chart With Other Ongoing Energy Investment Projects (source World Bank):
Planned Energy Investment Projects (Source World Bank):
Ongoing Analytical and Advisory Activities (source World Bank):

Plants to be constructed by 2030 (source World Bank):
Investments (US$
PSP Project MW Operational
million)
North Vietnam
Dong Phu Yen 1,200 1,200 2021
Moc Chau 900 800 2026
South Vietnam
Bac Ai 1,200 800 2026
Don Duong 1,200 900 2024
Ninh Son 1,200 1,000 2030

4.7. SWOT Analysis
Vietnam‘s booming economy, the government‘s intention to open up to the world‘s market-
with the adopted Master Plan and its regulatory reforms- as well as, the success of fully or partially
completed foreign investment projects, place Vietnam among the most promising countries for
investment worldwide. However, issues like the reduced transparency in the procedure of the
foreign invested IPPs, the delay in the legislation amendments that would further enable the
transition to wholesale power market on time (according to the time scheduled foreseen in the PDP
7), a conflict of interest with the state monopoly EVN on power projects and the latter‘s poor
management quality, and finally, the lack of infrastructure due to poor investment incentives and the
non-beneficial economies of scale, are factors that raise the risk of a foreign investment in the
power sector considerably.

In particular, in the case of Azerbaijan the question should be whether Azerenerji should act
as a ‗risk lover‘ or not. It is likely that before any type of investment, the political ties between the
two countries need to be further developed with the signature of bilateral agreements that would
help to overcome the so called ―invisible trade barriers‖. From our visit and discussions with the
major players in Vietnam‘s economy and power sector, we may conclude that there is a positive
image of Azerbaijan as a partner and friendly country which raises the chances for fruitful
negotiations that could lead to successful long term agreements. In other words, closer political ties
between the two countries would facilitate the undertaking of projects in the Vietnamese energy
sector by Azenerji with lower risk.
Conclusions – Recommendations
As an emerging market with its rapidly growing economy and with the recent reforms
transforming the country from a centrally planned economy to socialist oriented market economy,
Vietnam is one of the major attractive places for investment in the world. Since life is becoming
more expensive in the neighboring countries, especially in China, which was the major destination
of foreign investors, the trend is changing, with foreign companies today, outsourcing to other
countries, and especially to Vietnam, because of the low-cost workforce and tax incentives. The
reforms and new amendments in the regulations, specifically in the Law on the Foreign Investment
which is expected to be approved by the end of 2014 ensure significant improvements in the
recognition of the rights of the foreign investors.
Nevertheless, despite the fact that there is noticeable progress in all spheres of life in
Vietnam, especially in the business sector, the Vietnamese business people complain of arrogant
government regulations imposed by the one party, speculations in the stock market and in real
estate, failed state-owned enterprises, stagnant economy and a worsening corruption problem.
Therefore some crucial points - recommendations should be taken into account by the potential
investors in Vietnam:
 Even if Vietnam has disputes with some neighbors, there is still not any actual danger for
doing business there.
 Starting, operating and closing a business are subject to a number of regulations. It takes 34
days and 10 procedures to start a business, according to World Bank data.
 The Vietnamese Ministry of Planning and Investment (MPI) is in charge of
recommendations on sectors and regions requiring investment. Investing in Vietnam for the
first time, foreign investors must have investment project(s) and follow the formal procedure
in order to be granted a Certificate of investment registration.
 It is highly recommended to find the right local partner (local accounting or legal firms) to
facilitate the investment procedures and obtain appropriate certificates.
 Encouraged sectors for investment:
- Areas with difficult socio-economic conditions; areas with especially difficult socio-
economic conditions.
- Industrial zones, export processing zones, high-tech zones and economic zones.
 Some conditions for FDI‘s are not clearly defined in the laws of the country. So, conditions
are sometimes unclear. Moreover, Vietnamese courts are only partially independent. The
judicial authorities of the country are subordinate to the Central Party of Vietnam, which
controls courts at all levels. Objective trials are almost impossible as the judicial system is
marred by political influence and corruption. So, building and keeping strong and positive
ties with the local government, senior-level government officials and community is very
essential.
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CONTACT LIST:
TRAN HONG KY
Senior Energy Specialist
The World Bank
Tel: (84-4)39378388
Fax: (84-4) 39346597
Email: ktran2@worldbank.org
NGUYEN THI BICH HUE (M.A)

Deputy Director General
Ministry Of Construction
International Cooperation Department
Tel: (84-4) 39760271/119
Email: bichhue@moc.gov.vn
CU VIET HUNG
International Relations Department
Vietnam Chamber of Commerce & Industry
Tel: (84-4)35742162
Email: hungcv@vcci.com.vn
HANG ANH MINH

Deputy General Manager
Investment and Development Division
PetroVietnam
Tel: 84 (4) 3825 2526 (ext: 7331)
Email: minhha@pvn.vn

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Capstone Project

energy market constitute the pillar of this report.

2.3.2. Membership to international organizations 23

2.3.3. Diplomatic Relations between Azerbaijan and Vietnam 24

3.1. Macroeconomic Analysis 26

subsections, a SWOT Analysis and, finally, the Conclusion-Recommendations.

Keywords: Vietnam, Power Sector, Investment, Business, FDI, Investment Regulations

conclusions concerning Vietnam‘s business and investment opportunities.

1.1.1. Position on the map

One of the basic background information,

before moving on to more detailed presentation

of the Vietnamese business environment,

includes a general overview of the country.

Vietnam has S-shape, bordering with China in

the north and the Gulf of Thailand in the south.

In the center, the East (or South China) Sea is

Vietnam occupies about 331,211.6 square

border with Laos and Cambodia.

1.1.2. Climate and natural resources

central and northern Vietnam are at risk for seasonal

flooding, due to the heavy rains and typhoons, between

July and November. Two major rivers, the Red River

in flood control measures, because of those severe natural

phenomena. However, in cases when those measures fail

all directions (Ashwill M., 2005)

1.1.3. Major cities1

Bai), but limited port facilities.

2005). The port is one of the largest in

Southeast Asia and it supports national

commercial activities. Nevertheless, this

port cannot meet the needs of the

increasing cargo volumes, thus the

government is currently planning to

upgrade the northern region of Vietnam as

one of the international distributions center

container vessels‖ (Ministry of Constructions,

2014). There are plans for further development of

the city with the construction of the biggest

international airport in the northern Vietnam,

situated in Tien Lang district of Haiphong, since

currently there are one international airport in

Haiphong, ―Cat Bi‖ and a domestic ―Kien An‖

(Ashwill M., 2005).

name ―Long Thanh‖.3

Finally Da Nang City, in central Vietnam is

also an industrial center with a modern airport (Da

Nang International Airport) and a seaport which

serves as a port of entry for the Central Vietnam (3-

4 million tons of cargo annually). (Ashwill M.,

Additionally there are ten

seaports and six container

terminals in the country. The

Vietnamese railway network

has a total length of 2,600

kilometers, with most

significant being the 1,726

kilometers North – South

Railway connecting Hanoi and

Ho Chi Minh City. There are

also International railway links

with China (Yunnan- Vietnam

Railway) and there are projects