CUTS Centre for Competition, Investment &
Economic Regulation (C-CIER)
Advocacy and Capacity Building on Competition Policy and Law in Asia
CUTS Centre for Competition, Investment & Economic Regulation (C-CIER) is implementing a two-year project entitled ‘Advocacy and Capacity Building on Competition Policy and Law in Asia’ (7Up2), supported by the State Secretariat for Economic Affairs, Switzerland (SECO), the Swiss Competition Commission (COMCO) and the Department for International Development (DFID), UK. The project endeavours to accelerate the process towards a functional competition policy and law for selected countries (Cambodia, Lao PDR, and Vietnam in Southeast Asia, and Bangladesh, Nepal, and India in South Asia), and advance an enabling environment for the law and policy to be better enforced.
The project is undertaken in partnership with renowned institutions in each of the project countries. Details of the project are available at http://www.cuts-international.org/7up2.htm
Project News
PROJECT FINAL REVIEW CONFERENCE – THE BEGINNING OF A NEW CHAPTER
After two years of implementation, the 7Up2 project was finally concluded by an international outreach conference in Bangkok, Thailand on June 27-28, 2006. Apart from the project partners representing leading civil society organisations, research institutions and consumer associations from the six project countries, the conference also drew renowned experts on competition, representatives of inter-governmental organisations such as UNCTAD, UNESCAP and ADB, and representatives of competition authorities. It was inaugurated by Dr. Siripol Yodmuangchareon, Director General of the Department of Internal Trade and Chairman of the Trade Competition Bureau of Thailand.
The research findings on the competition scenario of the six project countries were presented by partners in the context of their own countries’ strategies for economic development, poverty reduction and international integration. This was also synchronised by more generic remarks by experts regarding the relationships between competition policy and law and development, and between competition and regional trade agreements.
The overall progress of the project was presented and discussed in an evaluation workshop on the 2nd day of the conference, during which partners and advisors, as well as associated experts also gave comments and suggestions about the way forward for the same. The project was thought to be quite successful and received a lot of demands and requests from partners to continue in the immediate future.
Apart from the main agenda of the meetings, partners also participated in a fringe meeting of the International Network of Civil Society Organisations on Competition (INCSOC) for Asia to discuss strategies and methodologies for undertaking rigorous advocacy activities on competition in their respective countries. A donor fringe meeting was also organised on the sideline for the Project Coordination & Management Unit (PCMU) to draw donors’ comments and suggestions about the way forward.
PROJECT DELIVERABLES AVAILABLE FOR ALL STAKEHOLDERS – PROMOTING SELF-INITIATED ADVOCACY EFFORTS
All the project deliverables, which include various country advocacy documents, monographs and briefing papers, and a comprehensive research volume entitled “Fairplay Please!”, are now available, for widespread distribution, in print, CD or pdf formats. The research volume “Fairplay Please!” in particular, which comprises of the Project Synthesis Report, and six country reports, is expected to be the main advocacy tool for long-term sustainability and development of the project.
The PCMU at CUTS is preparing an Outreach Strategy Note, aimed at bringing to the fore all the project research findings and recommendations. All stakeholders, within and across borders, are expected to join hands in making this happen.
TRAINING WORKSHOP ON CARTEL ENFORCEMENT FOR VIETNAM COMPETITION OFFICIALS
A third training workshop for the competition authority officials of Vietnam on Cartel enforcement, which has the same format as the other two training workshops on M&As and Abuse of Dominance was organised on 19-20 May 2006 in Lao Cai, Vietnam, by CUTS C-CIER in collaboration with the Vietnam Competition Administration Department (VCAD) and the Taiwan Fair Trade Commission (TFTC). The workshop was attended by 25 VCAD officials and 5 officials from the Trade Department of Lao Cai province, and inaugurated by Dr. Dinh Thi My Loan, Head of VCAD.
Further details of all the above-mentioned events, along with the presentations, and all project deliverables can be found/downloaded at the Project web page at http://www.cuts-international.org/7up2.htm
News Brief from Project Countries
Bangladesh
Reduced connection fee, call-rate push up number of cell-phone users
Besides, the connection and call charges of both the state-owned and private cellular phone operators have shown a sharp decline during the same period. The number of the country’s mobile phone subscribers has currently reached nearly 15 million (1.5 crore), of which GrameenPhone (GP) has 8.5 million subscribers, AKTEL 3.5 million, Banglalink more than 2.0 million, CityCell 0.5 million and Teletalk 0.4 million.
This sharp rise in the number of subscribers has also been possible, as the mobile phone companies are offering various promotional offers time to time including lower tariff, lower connection fee etc. However, the market sources said, smuggled mobile phone sets are frequently being sold at lower prices and a stiff competition is also compelling the importers to sell their products at relatively low prices. Besides, many branded handsets are now being manufactured in India and some other neighbouring countries, which is also contributing to reduction of the prices.
Recently, the Bangladesh Telegraph and Telephone Board (BTTB) has reduced the connection fee of its land-phone by 40 per cent to stay in the competition. The connection charge is now Tk 6,000 for Dhaka and Chittagong metropolitan areas, Tk 4,000 for other district areas and Tk 2,500 for thana areas. Even the state-owned mobile phone company Teletalk has lso reduced its connection charge to Tk 1,200 from its previous price of Tk 2,700, though only for the subscribers staying outside the areas of Dhaka and Chittagong metropolitan cities, Savar and Gazipur district.
Teletalk Managing Director Obaidullah said, very soon the company will offer new packages and reduced tariff rates for the customers to stay in the competition.
Over the years the mobile phones’ connection charge has virtually come down to zero. A year ago almost all mobile phone operators sold one prepaid SIM at above Tk 1,000, which is now being sold only at Tk 100-150. In addition to that, some companies are also recharging the subscribers’ account with more than Tk 100.
GP is selling its prepaid SIM at Tk 150, AKTEL Tk 120, Banglalink Tk 150 and CityCell at Tk 1,600 (along with handset).
All the five mobile phone companies are now offering a number of promotional offers including reduced tariff rate for some selected numbers. Both GP and AKTEL have launched their promotional offers of talking at Tk 0.92 per minute that will continue up to September next, CityCell’s offer up to October next and Teletalk has set a special calling charge of Tk 0.86 for next ten years.
(The Financial Express, 03.08.06)
Prices of rice mark substantial rise in the wholesale markets Although the harvesting of Irri-Boro was just over, the prices of rice in the wholesale and kitchen markets marked a substantial rise in late June, reports Bangladesh News.
Price of a sack of rice of different varieties has gone up by Tk 15 to Tk 30, especially medium quality Najirshal was being sold at much higher price than others.
On the spot visits to Babu Bazar, Krishi Bazar of Mohammadpur and Karwan Bazar wholesale market revealed that cost of low quality Swarna, Pari and BR rice increased by Tk 0.30 a kg then compared to the previous week while high and medium quality Najirshal by Tk 0.08 and Tk 1.00 a kg.
Market experts have expressed their concern over the present rising trend of prices of rice and said every year prices of rice begin to go down towards the end of the month of Ashar in the wholesale markets due to abundant supply of rice contrary to the trend of the current year.
Wholesalers said farmers are selling paddy at higher prices although the supply of rice to the market is adequate resulting in the rise in the prices of rice.
They said that bumper production of rice could be achieved in the current season. But the production cost was much higher as the prices of fuel and fertilizer remained high.
“That’s why the farmers are trying to sell rice at higher prices,” they added.
Mohammad Ali, a retailer of Krishi market said the prices of all types of rice are witnessing an upward trend while price of Najirshal marked the highest increase.
Wholesale rice traders in Dhaka said the newly harvested rice did not have nay impact on the price of rice. Though the government announced to lower duties on the import of some essentials in the proposed budget for the next fiscal year, it doesn’t seem to have any impact on the prices of essentials.
(The Bangladesh Observer, 25.06.06)
Cambodia
Cambodia’s Flourishing Mobile Market Passed the One Million-Subscriber Milestone in Late 2005 Continuing to overshadow the fixed-line segment of the market, Cambodia’s flourishing mobile market passed the one million-subscriber milestone in late 2005 and was continuing to grow at a healthy annual rate of 25% into 2006. In the meantime, fixed-lines languished at around 40,000 subscribers. Given the booming mobile market, it is surprising to find other sectors of the market in the doldrums. Internet penetration remains particularly low, with the services on offer being notably expensive in comparison to other countries in the region.
As its efforts are directed towards building up its telecommunications infrastructure, the country continues to struggle with the legacy resulting from years of civil war and instability. Ongoing political problems in the period since the end of the war have made it hard to put the necessary administrative institutions in place. This has had a major impact on the telecom sector, which remains in need of serious regulatory reform and a general strengthening of the regulatory role.
For a period, the absence of a properly functioning government saw all infrastructure projects involving international aid suspended and government funded projects were also constrained, with a corresponding impact on foreign investor confidence. This had a negative effect on the telecom sector.
(Business Wire – 11.05.06)
Welcome to the home mortgage
Cambodia’s nascent financial services industry will take a step forward in August with the launch of home loan mortgages from ANZ Royal Bank.
Beginning next month, customers of the bank will be able to borrow up to 60 percent of the purchase price of their home and spread the repayments over a period of up to 15 years. This, according to its Chief Executive, Dean Cleland, will bring home ownership to those that could only have dreamt about it before.
When we opened our doors in September last year we did so with the promise that we would bring new and innovative products and solutions to the market,” Cleland said. “By launching a range of home loan products with an ability to spread repayments over a term of up to 15 years we believe we are keeping to our promises.”
Other banks operating in Cambodia do provide home loans but they are either tied to in-house property developments or are of a short tenor and have to be repaid over a much quicker period, making repayments often unaffordable. With initial interest rates set at 9.9 percent per annum variable rate, ANZ Royal aims to expand options for buying a home.
The bank’s criteria stipulate that borrowers must have been in continuous employment for a period of two years and that repayments do not exceed more than 35 percent of their monthly gross salary. Land must be registered by the local Cadastral Office, responsible for issuing registered land certificates. The bank will not lend against unregistered properties.
Cleland concedes that the lack of registered land titles in Cambodia will hamper the efforts to provide home loan mortgages.
“We have little choice, since the land title is the only document which provides proof of ownership and this is a must if we are to safely lend into this market,” he said “That said, the number of registered land titles is growing daily and there’s nothing to stop sellers applying for a land certificate at any time to help them sell their home to an ANZ Royal customer.”
The bank currently pays 4 percent interest on a 12-month term deposit. The bank says its interest rates are linked to US Federal Reserve rates (currently 5 percent for overnight cash). Cleland says this means interest rates can go up as well as down – something his front-line sales staff will be required to communicate to applicants.
“As a responsible bank with an international parent [ANZ Banking Group] we have no wish to find ourselves with the unenviable task of having to sell someone’s home because they are unable to afford to make repayments,” he said. “For this reason we are at pains to make sure that an increase in global interest rates isn’t going to cause too much discomfort to our borrowers.”
The availability of long-term mortgages could well give an added boost to what is already viewed by some as an overheating housing market. But Cleland disagrees.
“By spreading home ownership across a much wider market we believe that this is likely to bring more realistic and sustainable values to the housing market. At present home ownership is restricted to a very few wealthy Cambodians – we’re simply giving everyone else an opportunity to build a stake in their future too.”
ANZ Royal Bank is 55 percent owned by ANZ Banking Group and 45 percent by the well known locally incorporated Royal Group headed by Okhna Kith Meng.
The bank has four branches in Phnom Penh and two in Siem Reap. Next month will see the opening of its Sihanoukville branch office, which is to be followed by a further branch in Battambang scheduled to open before the end of the year.
(Phnom Penh Post, 28.07.06 –10.08.06)
India
Indian companies go in for large-sized global buys
| Premium deals | ||
| Tata Coffee | Eight O’Clock | US$220mn |
| Aban Loyd | Sinvest ASA | US$446mn |
| Punj Lloyd | SembCorp | S$1bn |
| Subex Systems | Azure Solutions | US$140mn |
| GHCL | Rosebys | US$40mn |
| BILT | Sabah Forest |
US$262mn |
India Inc is not only scaling up the size of its overseas acquisitions but there have been several instances of Indian firms buying out companies abroad that are larger in size compared to them. Tata Coffee’s buyout of the third largest coffee chain in the US, Eight O’Clock (EOC), at an estimated US$220mn (Rs 1,019.4 crore) is a case in point. In calendar 2005, EOC’s net sales of US$109mn (Rs 504.8 crore) was more than two folds higher than Tata Coffee’s revenues of Rs 190 crore for fiscal 2006. Oil drilling major Aban Loyd, which had a turnover of Rs 505.42 crore in 2005-06, acquired a 33.76 per cent stake in Norwegian drilling company Sinvest ASA for US$446mn (around Rs 2,050 crore).
Engineering major Punj Lloyd Ltd, which had a consolidated income of Rs 1,717 crore last fiscal, acquired Singapore-based engineering firm SembCorp — valued around Rs 2,933 crore (Singapore $1bn). Subex Systems Ltd, in April this year, acquired UK-based Azure Solutions Ltd, the world’s largest revenue-assurance company, in a stock-plus-cash deal exceeding US$140mn (Rs 629 crore). Subex’s revenue for the year ended March 31, 2006 stood at Rs 181.22 crore (US$40.28mn).
Commenting on the trend, KPMG’s Chief Operating Officer, Mr Richard Rekhy, said: “This is not a one off thing; even for deals within India the size has gone up… this is definitely a trend.” On the sustainability of the trend whereby firms are buying out players bigger than them, Mr Rekhy said that ultimately, it is the acquirer that brings in the management skills and technology. “They are basically paying a premium for acquiring the market share of the target firm,” he added.
For instance, Tata Coffee, though its acquisition of EOC gets access to a hundred-year-old American brand and one of the major coffee retailing firms of the US. Punj Lloyd’s acquisition of SembCorp provides it single point engineering, procurement and construction solutions for all business segments in which the group is present and also provides offshoring opportunities from SembCorp as it shifts its high cost activities to India. Aban Loyd’s 33.76 per cent stake in Sinvest made it the largest shareholder in the company, with control over 26 drilling assets, catapulting it up as Asia’s largest drilling company and the ninth biggest in the world.
Other major deals include GHCL’s takeover of UK’s largest home textiles retail chain Rosebys for US$40mn, paper major BILT’s acquisition of a 77.8 per cent stake in Malaysia-based Sabah Forest Industries for US$261mn and Aditya Birla Nuvo’s US$125mn open offer for Canada-based BPO firm Minacs Worldwide.
Mr Rekhy said the funding of M&A deals is increasingly being done through means beyond just internal accruals and hence the ability to fund larger deals. “Institutions are showing a readiness to fund large deals and this is a clear indication that that there is confidence in the Indian promoter,” he said.
The value of overseas buyouts by Indian companies, which increased 164 per cent from US$1.7bn in 2004 to US$4.5bn in 2005, has clocked close to US$5bn through the 75-odd deals that have already taken place between January and June 2006. Also, there is a clear preference for European firms, with nearly 50 per cent of the total M&A activity involving Indian firms happening in EU in the first half of this year.
Anil Sasi, The Hindu Business Line, 09.07.06)
Farm growth via market regulation
In a recent meeting on electricity regulation, Bhupinder Singh Mann, the chief of the formidable Bharatiya Kisan Union, said that any subsidies or free power to farmers are actually a subsidy to the consumer, because the prices which farmers get does not cover the whole production cost.
Alas, Mann and majority of farmers in India do not realise the fact that not only the subsidies, but also the bulk of the surplus, are captured by intermediate trade and are not passed on to the consumer. They also seem to be ignorant of the amendments to the Agriculture Produce and Marketing Act, which if implemented, can lead to better price recoveries by farmers.
The amended Act has been passed by the Centre but agriculture being a state subject, it is up to the states to implement it. The amended provisions enable farmers to short-circuit the intermediate trade and sell directly to consumers.
The amended law also allows contract farming and this has raised the hackles of activists like Mann and they are more involved in debating contract-farming than in helping farmers get better prices for their produce.
According to an independent study by IIM-Bangalore, the price obtained by a farmer for his produce varies from 24% to 58% of the actual price paid by consumer. For every Rs 10 the consumer spends on buying one kg of tomatoes, on an average only Rs 3 goes to the farmer. It gets worse in the case of specialty farm goods, such as gnocchi mushrooms.
Under another study, Towards a Functional Competition Policy for India, made by CUTS, a comparative analysis was done for price received by farmers for cotton from sale to various agencies.
Price realised from sale to the village merchant, trader or commission agent ranged between Rs 700-710 per quintal, and the realisation was much higher, between Rs 785-795, when sold to the Cotton Corporation of India or to millers.
Thus, the situation can be improved by providing alternative marketing avenues through cooperative marketing agencies and public agencies that reduce structural concentration of traders.
Certain innovative marketing mechanisms have been developed in some states to enhance competition at the retail level and to benefit both producers and consumers. These include Apni Mandi in Punjab and Haryana, Rythu Bazar in Andhra Pradesh, and Uzavaar Sandies in Tamil Nadu.
Under these arrangements, farmers are allowed to sell directly to consumers on selected days and time. Alas, their scale is small and mainly farmers from nearby areas to the cities can take advantage of this marketing channel.
(The Economic Times, 22.07.06)
Lao PDR
Laos Economy Grows More Than 7 Percent
Laos’ economy has grown more than 7 percent in the first half of fiscal 2006, state media reported, fuelled by the exports and foreign investment to the impoverished Southeast Asian country.
The economy grew between 7.3 and 7.5 percent in the September to February period, the Vientiane Times reported, citing data from the prime minister’s office in the capital Vientiane.
Laos – a poor, Southeast Asian country of about 6.2 million people – is one of five remaining communist countries in the world. Its government has partially liberalised the economy to encourage development, but has kept a tight grip on political power.
The value of exports shot up by more than 73 percent compared to last year, the report said. It said foreign investment during the period was US$2.5bn, of which US$446.4mn was real capital for direct investment.
The agriculture and forestry sector grew by 3.2 percent, industry by 13.2 percent and services by 7.4 percent, the report said. The Lao kip currency is stable, with the dollar dropping to less than 10,000 kip for the first time in several years.
The government said future economic priorities include safeguarding intellectual property rights, promoting domestic fuel sources and constructing sports facilities for the Southeast Asia Games competition in 2009, the Vientiane Times reported.
A World Bank report in March reported that foreign investment in mining and hydropower lifted the economy of Laos to 7 percent in 2005 compared to 6.4 percent the previous year. The bank estimated Laos’ gross domestic product at US$2.83bn (€2.35bn) in 2005 and projected steady 6-7 percent growth in the future.
The World Bank also noted that poverty in the communist nation has fallen from 46 percent of its people in the early 1990s to 33.5 percent a decade later.
(AP, 22.05.06)
Carlsberg Faces Tough Competition in Laos
The stage has been set for another foreign beer battle in Southeast Asia. This time around, Laos is the battlefield of choice for Asia Pacific Breweries (APB) – partly owned by Heineken – as they plan to mount a serious challenge to the Danish beer giant Carlsberg.
APB, which already own 26 Asian breweries, have announced that they plan to build a brand-new brewery in Laos. This specific expansion move is part of APB’s ambitions to become the leading brewery in the entire Asia Pacific region. Their most famous brand is the beer “Tiger”, which is sold in more than 60 countries.
With this newly-announced competition, Carlsberg will soon find out if their strong dominance on Laos’ foreign beer market is strong enough to resist such an attack. The Danish brewery group owns 50 per cent of the shares in Lao Brewery Company, while the national government owns the other half. The overall beer consumption in Laos makes up about 15 litres per person each year. In Denmark, the number is 90 litres per person.
(ScandAsia News, 08.06.06)
Nepal
Determinants of Business Environment Status of Nepal
In any country, the government, with its power to regulate the economy through the implementation of fiscal, monetary, industrial, agricultural, trade, aid and other policies and development plans, plays an important role in promoting economic and business activities. Such a role is always crucial for the country’s overall development, including poverty reduction efforts. However, the role of the private sector too cannot be undermined. A vibrant and innovative private sector with firms and entrepreneurs engaged in making investments decisions is equally vital in creating jobs and improving productivity that promotes growth and expands opportunities for poor people.
Governments in most countries have implemented a wide range of reform programmes, including macro-stabilisation programmes, privatisation, trade and price liberalisation, to create a vibrant and innovative private sector. Nepal is not an exception. The country started wide ranging reform initiatives in the mid 1980s, which gained momentum after the restoration of multiparty democratic system in 1990. There have been some improvements during the reform period but entrepreneurial activity still remains limited, poverty is rampant, and growth is stagnant. Despite various reform measures taken for the promotion of the private sector, an enabling environment for conducting economic and business activities is still lacking.
Many factors determine the business environment. The most important determinants include, among others, economic policies (fiscal, monetary, industrial, trade); political conditions (stability, corruption, rule of law and governance, including business laws and regulations); resources (natural and human); infrastructure (transportation, communication); and institutions (government and non-government).
Various indicators of business environment have been developed by different organisations. These organisations are engaged in producing and periodically updating indicators on business environment. The most important indicators of business environment include country risk, economic freedom, business regulations and international competitiveness among others.
Although macro policies are unquestionably important, there is a growing consensus that the quality of business regulation and the strength of institutions that enforce them are major determinants of private sectors’ progress, and consequently the overall prosperity of the country. The cross-country indicators presented in the box provides a very useful insight to a country’s overall business environment, but surprisingly, none of these assess the specific laws and regulations that enhance or hinder business activity. Moreover, only a few indicators focus on the poorest countries, and most of them are designed to inform foreign investors. But, in developing countries local firms are mostly responsible for conducting economic and business activities.
Business environment: The role of law and regulations
Many economic and political factors have been used by investors, researchers and policymakers to explain the condition of the business environment across the world. The economic factors generally used in this regard include records of overall wealth, production, consumption, wages, trade and investment, among others. However, there are many other important determinants that give a clearer picture of the business environment. Business laws and regulations are among them. To start, operate and grow their business; firms and entrepreneurs need business friendly laws and regulations. To create new business, productive jobs, and wealth, companies need to adjust to new market conditions and seize opportunities for growth. But all too frequently this flexibility is taken away by cumbersome rules and regulations. Productive business thrives where government focuses on protection of property rights. But where the government regulates every aspect of business activity heavily, business operates in the informal economy.
The World Bank with other partner organisations has produced a series of ‘Doing Business Report’ that on the one hand explains the role of laws and regulations in the business environment and on the other hand compiles and presents various laws and regulations related indicators of the business environment. The first report Understanding regulations was published in 2004. The report covers five fundamental aspects of a firm’s life cycle, which are starting a business, hiring and firing of workers, enforcing contracts, getting credit, and closing a business. The second report, published in 2005, added three new topics: registering private property, dealing with government licenses, and protecting investors. The last in the series Doing Business in 2006 added three more topics: paying taxes, trading across borders and improving law and order.
Business environment in Nepal: How it can be improved?
According to the Doing Business in 2006 report, New Zealand has the most business-friendly regulation in the world. Singapore is the second and the United States ranks third. Nepal is at 55, which is a comparatively good position in South Asia. Among SAARC countries, only Maldives has better position than Nepal. Maldives ranks at 31, while Pakistan ranks at 60, Bangladesh at 65, Sri Lanka at 75, Bhutan at 104, India at 116 and China at 91.
But, this ranking on the ease of doing business does not tell the whole story. The indicator is limited in scope. Many determinants of business environment are not included in the index. For example, it does not take into account a country’s proximity to large markets, quality of infrastructure services, political climate and corruption, security of property from theft and looting, macroeconomic policies and conditions or the underlying strength of institutions, among others. Thus while Nepal ranks above Italy (at 70) and India (at 116) on the ease of doing business, this does not mean that business are better off operating in Kathmandu rather than in Rome or Delhi.
A high ranking on the ease of doing business does definitely mean that the Nepal government has created a regulatory environment conducive for the operation of business. However, efforts from the government, political forces, civil society organisations, media, academia and private sector are still needed to improve Nepal’s business environment. The problems that should be addressed urgently are basically related to infrastructure, political and policy stability, law and order condition, financial ease (availability of credit at good terms and conditions to run a business), human resource development (establishment of institutions that helps develop skills of entrepreneurs and labour), capacity building of government officials and policymaking institutions, among others. If not addressed properly, all of these would make Nepal a less attractive destination for investment, both foreign as well as domestic. A multi-actor and multi-factor approach is needed to follow the private path of prosperity and poverty reduction.
Economic Outlook Improves
With hope for peaceful days ahead, Nepal’s economic outlook has improved significantly; if one goes by how the Central Bureau of Statistics (CBS) has forecast economic growth.
In its latest forecast, CBS has said the economy is likely to grow by 2.3 per cent in the current fiscal year that ends mid-July. In the previous forecast made by Nepal Rastra Bank during the royal rule, the economy was expected to grow only by 1.8 per cent this year. The royal government had targeted a 4 per cent growth when it brought the budget for the current fiscal year in mid-July last year.
The additional growth is to come from non-agricultural sectors, mainly tourism, as agricultural products have been harvested and taken into account in the January forecast. Though the non-agricultural sectors are still not operating in full swing, the outlook for them has improved significantly after the Maoists sat for peace negotiations with the new government repeatedly announcing that they no longer want to go back to the jungles. The highest growth rate (5.5 per cent) is expected in electricity, gas and water. In agriculture, the highest growth is expected in cash crops (8.85 per cent) and fishery (7.74 per cent) sub-sectors. As a whole, the agriculture growth forecast is a mere 1.69 per cent due to negative growth in the main food crops (paddy, wheat and barley).
(New Business Age, June 2006)
Vietnam
Competitors push for Viettel ‘market control’ rating
After Viettel announced its four millionth mobile phone subscriber, the Vietnam Post and Telecommunications Group (VNPT) immediately lodged a document with the Ministry of Post and Telematics (MPT) seeking amendment too regulations on connection fees for Viettel, claiming the firm now has acquired a controlling market share.
However, the MPT said that it would announce the names of companies that it has assessed as holding controlling market share on an annual basis, based on turnover, not the number of subscribers.
VNPT Deputy General Director Nguyen Ba Thuoc said the mobile phone market currently has 12 million subscribers, and with 4 million of those, Viettel claims a third of the market share. According to Mr Thuoc Viettel must now be considered to hold a controlling market share.
“We are compiling a dispatch to send to the MPT asking the ministry to adjust connection fees when Viettel Mobile becomes a business of control market share. And at that time, VNPT would have to pay VND750/minute for calls made from VNPT’s networks to Viettel’s network,” Mr Thuoc said.
The current connection fees that VNPT has to pay to companies that don’t have control market shares is VND900 per minute while they have to pay only VND750 per minute for VNPT, Mr Thuoc said.
Ho Cong Viet, Head of the Business Department of VinaPhone, said that Viettel Mobile has been able to develop quickly due to preferential policies offered to businesses that do not have a controlling market share. But when it reaches the controlling market share ratio, it will have to fall in line with the MPT charge management schedule to ensure equality with other mobile phone networks.
CDMA-based mobile phone networks had no public comment on the matter. However, experts said that if Viettel Mobile is considered as a business holding a controlling market shares, it will no longer enjoy preferential policies and its charges will be monitored by the MPT, Thus, CDMA-based network will be more ‘comfortable’ when all three GSM networks are listed as businesses with controlling market share.
Nguyen Minh Son, Deputy Director of the MPT’s Finance Plan Department, said that the ministry would announce the names of businesses with controlling market shares on an annual basis. The most important data for compiling such rankings is turnover, not the number of subscribers, he said.
According to experts, the turnover/subscriber ratio for Viettel is lower than that of VinaPhone and MobiFone, and therefore – even if its number of subscriber base is comparable to VinaPhone and MobiFone, its turnover is still lower.
Tong Viet Trung, Director of Viettel Mobile, said that it is necessary to standardize the means of calculating subscriber bases.
“If the MPT ranks Viettel Mobile in the list of businesses with control market shares, we will have to accept it. However, I do not think that Viettel Mobile’s strong development is thanks to preferential policies and we do not consider it as an advantage for competition,” Mr Trung said.
(VietnamNet, 01.08.06)
State monopolies need to loosen their grip
The issue of unfair competition has reared its ugly head in the dispute between two major State-owned corporations, Viet Nam Post and Telecommunications Group (VNPT) and the fledging mobile phone service provider EVN Telecom, a subsidiary of Electricity of Viet Nam Corporation (EVN).
Pham Chi Lan, a member of the Prime Minister’s Research Council, expressed worries that unfair competition practices would hinder the enterprises’ ability to build on their own strengths at a time when Vietnam is opening up to the global economy.
* Why are connection disputes still arising between mobile phone service providers despite ministry arbitration efforts and clear regulations on the matter?
VNPT has been in an exclusive monopoly position for years so it wasn’t easy for it to give up this privilege and face competition. Government policy now rejects monopoly, but many economic players still attempt to benefit from their formerly privileged monopoly positions.
And it’s not only fledging enterprises like EVN Telecom that are facing difficulties. The same thing is happening to enterprises that have been in business for a long time. What does this mean? Rejecting monopoly is not easy, especially when VNPT itself does not realise that it’s not a monopoly that makes it stronger, it is competition. It does not realise that monopoly is something it is granted, not something built up by talent.
* What do you think about the future of our telecommunications market if unhealthy competition still exists?
I think that all units in the sector as well as the Ministry of Posts and Telematics are fully aware that we are going to join WTO and open our telecommunications market. If the situation cannot be improved, we could be in for serious consequences.
First of all, our telecommunications sector cannot grow stronger if our enterprises are busy undercutting each other. We are opening to the world, so it is likely that we will be put at a disadvantage when we have to compete with stronger competitors.
By rejecting monopoly in some sectors, the Government is striving for healthy competitive environment in which our enterprises can grow stronger together and cope with competition from outside.
Secondly, we are now in the process of integration so foreign telecommunications enterprises will be authorised to operate in Vietnam in the near future. Disputes would have to be settled at the World Trade Organisation (WTO), and our prestige could suffer seriously.
* In relations between mobile service providers, it is a fact that new enterprises are dependent on VNPT’s network. Are these enterprises forced to grin-and-bear-it in cases of disputes with VNPT?
They should not have to. It is no good if there is no order or fairness for all enterprises on the market. If they accept the situation, compromise or make concessions, competition in our telecommunications market could be distorted. That’s no good for VNPT, either.
* Is an arbitrator necessary?
The Ministry of Posts and Telematics must issue forceful and clear decisions on matters relating to connections and give more support to new enterprises, not favour their own child, VNPT. If the ministry does not do that, it loses credibility.
* It’s easy to find unhealthy competition in other sectors, isn’t it?
Yes. In the airlines sector, I could mention the dispute between Vietnam Airlines and Pacific Airlines. The electricity sector has also made many difficulties for consumers for a long time due to its monopoly, although EVN Telecom is now having trouble competing with other exclusive units.
Competition is a useful tool for economic development. The Government should not let some enterprises hold monopolies and become entrenched.
In the future, we will need some giants in each sector instead of only one giant like today because our giants are much smaller than those from the outside.
If our giants learn to associate with others in their field, then they will be strong enough to compete with foreign enterprises when Vietnam joins the WTO.
* The Competition Administration Department is one of the units authorised to supervise markets. What is the department’s role as an arbitrator?
The department of the Ministry of Trade plays an important part in establishing order in competition. In the future, national law will not always apply when disputes arise. The department must be well-prepared for that right now.
(VietNamNet, 27.07.06)
Vietnam’s banks: A wild new world
As Vietnam inches toward World Trade Organisation membership, local speculation in banking shares is running hot and heavy here on expectations that big foreign banks will buy into smaller local state-owned commercial banks toward the end of the year.
Local investors are paying three to four times more than bank shares’ face value, and many have reportedly borrowed from the same banks to purchase their shares on the open market. Many have even mortgaged those shares to access further bank loans to buy even more shares, market insiders say.
Welcome to the wild new world of Vietnam’s fast-racing capitalist economy, where centrally controlled, state-owned commercial banks have perhaps surprisingly become the country’s hottest asset class. Vietnam’s banking sector is dominated by four big stodgy state-owned commercial banks, which account for roughly 80% of the total assets in Vietnam’s financial system.
Bank shares are without a doubt a good proxy for getting exposure to Vietnam’s economy, which expanded at a blazing 8.4% last year. Communist planners have helped to orchestrate Vietnam’s boom by directing state-owned commercial banks to bump up their credit growth by 20% to 30%. Opaque state-owned enterprises remain the main recipients of bank credit, typically borrowing on an unsecured basis at concessionary interest rates.
The bottom line and underlying profitability is not what is motivating investors, however. It’s speculation that they will soon be able to sell their shares at five to six times face value to foreign investors once ownership limits are lifted. Some local analysts believe that the recent ramping up of share prices has exceeded the underlying value of most Vietnamese banks and that even the biggest foreign banks might balk at current asking prices.
Under-banked, under-regulated
If all this sounds like risky business, it’s because it is. Much of the credit extended by state-owned commercial banks is less than viable in commercial terms with a growing risk of default, contend some Hanoi-based financial analysts that requested anonymity. Heaps of cash have recently been funnelled into extravagant property developments based on particularly rosy projections of future domestic demand and international business growth.
While local investors pour into banking shares, there are concerns internationally about the lack of effective governance mechanisms. In theory, Vietnam’s banks have been encouraged to adopt banking and business practices in line with best international practices. New regulations require banks to establish controlling committees and internal audit functions. But because of the cosy relationship between the state-owned commercial banks and the government, in practice prudent practices are not always the rule.
The true level of non-performing and under-performing loans in Vietnam’s financial system is difficult to gauge due to the enduring lack of transparency and poor public disclosure. As part of the banking reform effort – aimed at nudging the financial sector toward international norms – new rules for the classification of non-performing loans were issued in 2001. Yet state secrecy laws still cloak much of the industry’s information, while meaningful financial sector and individual institution data is largely not available.
What is clear is that Vietnam remains one of Asia’s most under-banked economies. Vietnam continues to operate largely as a cash economy with an estimated 45% of money existing as cash and over 50% of local business transactions conducted outside of the banking system. At present, there are only around 1.3 million individual bank accounts for a population of over 82 million.
Supported by the International Monetary Fund and World Bank, significant reforms have recently been implemented in the structure, regulation and operations of state-owned commercial banks. Since 2001, Vietnam’s banks have slowly but surely evolved from their status as pure policy lending vehicles into institutions that operate on a more capitalist, commercially oriented basis.
For instance, deposit insurance was instituted in 2000, where banks pay a premium on all dong deposits placed by individual depositors. However, the maximum amount insured was a mere 30 million dong (about US$2,000), and there are questions as to whether local banks are actually paying the insurance premiums. Because no Vietnamese bank has failed since the inception of the scheme, its viability remains wholly untested.
Vietnamese banks are currently not ranked by the Bank for International Settlement (BIS), nor have they adopted the Basel capital accord – meaning details of risk-adjusted assets and risk-adjusted capital ratios are either not calculated or not publicly disclosed. Yet the government has issued a number of new guidelines for state-owned commercial banks’ operations, including specific financial targets which must be met in order to receive phased re-capitalisation funds.
Moreover, a new draft decree on banking governance has recently been lodged for comment and notably aims to strengthen the existing banking system by encouraging mergers and acquisitions. It also reportedly aims to limit lending to affiliates of large shareholders and their relatives. Most significantly, perhaps, the government is now considering lifting the percentage of shares that any single institution can hold in a joint stock bank from the current 10% to 49% – a market murmur that has raised speculation about the possibility of future foreign buy-ins.
Foreigners in the wings
Foreign banks play a minimal role in Vietnam’s economy, but this is expected to change after accession to the World Trade Organisation and the anticipated opening up of the equity market. For those foreign banks that already have a local presence, business is booming.
HSBC, Standard Chartered and ANZ Bank all have in recent years taken stakes in local banks, albeit limited by the 10% foreign ownership cap. Citigroup is now implementing a technical assistance project with the Joint Stock Military Bank – a step that the incumbent foreign banks all took before putting their money down – and is on a short list to participate in the equitisation of the state-owned Bank for Foreign Trade of Vietnam, known locally as Vietcombank.
Total assets of foreign financial institutions in Vietnam stood at US$6.2bn in 2005, 25% higher than in 2004, and total pre-tax revenues grew a whopping 45% year-on-year. As of the end of 2005, total outstanding loans at foreign bank branches increased 30% year-on-year. More significantly, perhaps, foreign banks’ non-performing loans accounted for just 0.06% of total loans, although this figure came from the banks themselves.
Joint venture banks profits were up on average 15% in 2005, while the pre-tax profits of foreign-invested financial leasing companies were up more than US$1.25mn year-on-year. William Gemmel, Standard Chartered Bank’s Vietnam-based chief executive officer, said his institution’s retail accounts in Ho Chi Minh City have nearly doubled since February 2004, with 10,000 new account openings per month. ATM installations grew by more than 270% between 2003 and 2004, albeit from a very low base.
HSBC took a 10% stake in the Technological and Commercial Joint Stock Bank, Vietnam’s third largest with total assets of $482mn as of the end of 2004. If the government lifts the ownership cap, HSBC senior executives say they intend to increase that share. At first HSBC focused on financial services for expatriates and their companies but is now focused more on Vietnam’s private sector, particularly those areas of the economy involved in import-export activities. They are also in the growing business of providing home mortgages and car loans to up-and-coming local entrepreneurs.
It’s still a difficult market to assess, according to Alain Cany, HSBC’s Vietnam-based president and chief executive officer. A staggering 700 to 800 new enterprises are formed each week in Vietnam, with an average of US$100,000 in start-up capital. “HSBC does loan money to individuals but [it] is difficult to assess the credit risk factor when the official salary levels are so low. We look at successful businesses in the furniture, distribution, energy and telecom sectors. We are not keen on the property and construction sectors,” said Cany in a recent interview with Asia Times Online.
The breakneck entrepreneurial expansion means there are potentially as many risks as opportunities for bankers. The government has enacted a number of new laws recently aimed at levelling the competitive playing field, in particular the Unified Enterprise Law and Common Investment Law, which will come into effect in July and remove the current two-tier price system that discriminates against foreign investors. New intellectual property rights and bankruptcy laws, as well as measures to streamline contract enforcement and reduce registration costs, are also in the pipeline.
A new decree issued earlier this year dealing with the operations of foreign-owned banks extended the maximum duration of bank licenses from 20 to 99 years, a notable concession to foreign demands. In order to establish a foreign bank branch, you’ve got to be big, with global assets equivalent to US$20bn the year before applying. For a joint venture, total assets must be equivalent to US$10bn.
Still, foreign banks like HSBC say that they feel restricted. “The tight regulations do not allow foreign banks to develop enough … Large international banks interested in operating in Vietnam should have little difficulty meeting such asset and risk criteria. The main problem [preventing] foreign banks [from participating] in the state sector is a lack of transparency.”
Although accession to the WTO is a foregone conclusion, Vietnamese officials are currently in negotiations with the US over a few fine points related to its bid. All eyes are on the Communist Party Congress, which starts on April 18, for indications that the next generation of leaders will stay the reform course, particularly for the financial sector.
Hopes are running high among local and foreign businesses that Vietnam will formally accede to the WTO before the country hosts the Asia Pacific Economic Cooperation forum meeting this November – so that the globally attended event can serve as a showcase for Vietnam’s successful transition from a centrally planned command to a rules-based market economy. But for a true measure of Vietnam’s progress towards a healthy market economy, keep a close eye on the banks.
(Karl D John, Asia Times Online, 19.04.06)
Cause of sky-high car prices debated
High state protection has prompted local automobile manufacturers to exploit ‘price transfer’ loopholes in order to raise declared input expenses and sales prices.
Examination of calculations for prices for imported automotive parts declared by auto-manufacturers, a locally made car would be three times as expensive as a foreign manufactured car of the same make and model.
Yet local automobile joint ventures are definitely not being overcharged on their purchases, as components are all imported from parent companies abroad.
Automobile prices in Vietnam are the highest in the region, if not worldwide. Vietnam’s production costs are the highest among the four regional that produce automobiles, alongside Malaysia, the Philippines and Thailand.
Malaysian firms tell the story of an unsuccessful national auto development strategy. Yet the nation ranks second in terms of expense on production cost. Production costs in the Philippines are just half of what they are in Vietnam. And compared to Thailand, Vietnam’s production costs are 48% higher.
It is obvious that high component prices have led to high production costs, and therefore high selling prices (the expense of auto parts accounts for around 56% of sale price), but why are automotive component prices so high?
Experts believe that the high level of state protection is to blame, having prompted domestic manufacturers to declare falsified receipts for imported parts – an act dubbed ‘price transfer’ – in order to increase unit selling prices to a level far higher than actual value. Vietnam has 11 automotive joint ventures, which explains why manufacturers can easily engage in price transfer without intervention from any Vietnamese management authority.
Experts also pointed out that Vietnam’s strategy for automotive industry development has been spoilt. One or two joint ventures would be enough to provide cars to the market, yet a total of 11 automotive joint ventures are operating in the country.
High import duties and other local taxes are also fingered as the main reasons for high car prices. Luxury tax on locally made cars has been gradually increased from 5% in 2003, to 80% in 2007. The tax increase is justified by taxation authorities as aiming to ensure equality between imported and locally made products.
However, the move has played a major role in pushing already expensive car prices sky high, while wiping any effort by manufacturers to cut overheads.
The Government continues to assert that it is foreign manufacturers who are guilty of maintaining high car prices through low localisation ratio, despite long term protection from government policy. Meanwhile, manufacturers argue that profits brought about by preferential treatment did little to make up for the impact of high taxes. They said that the high tax rates have resulted in smaller demand, thus the market remains immature.
(VietnamNet, 13.04.06)