Vietnam Telecom Brief By Ken Zita ietnam has entered a period of remarkable economic Contents transformation. After decades of inward-looking V Political and Economic Brief 3 self-reliance, the government has embraced market Economy 4 liberalization of the communications sector to speed Telecom Policy Environment 5 infrastructure expansion, stimulate the economy, and Regulation 6 deepen strategic partnerships with international firms. E-Government 8 The initial fruits of doi moi, Telecom Market Environment 9 VNPT 10 Vietnam’s version of perestroika, are abundant. In recent Mobile Market 12 years the telecom sector grew 24 percent annually, the International Services and VoIP 14 second fastest in Asia. Meaningful competition was only Internet 14 introduced in 2003 when two state-owned entities led by Satellite 15 the military (Viettel) and the electrical utilities sector (VP Telecom) received licenses to compete with the national monopoly, Vietnam Posts & Telecommunications Corp. (VNPT). The market is now poised for accelerated take-up of mobile services driven by increased pricing competition and a more prominent role for foreign strategic investors. Broad-based ICT adoption, led by e-Government initiatives, is set to follow. Vietnam signed a Bilateral Trade Agreement with the U.S. that went into force in December 2001, a major step in its bid to join the WTO. The BTA put in motion a schedule for private ownership of telecommunications networks and services. Thus far foreigners have been prevented from making direct investments in operating companies. Instead, Business Cooperation Contracts, or BCCs, have served as a transitional investment vehicle for revenue- sharing. The critical next phase involves the conversion of the BCCs into equity joint ventures, Key Indicators enabling foreign management control in network Socialist Republic of Vietnam services companies. Population 82.7 million GDP $204 billion Today five mobile operators are active but the two (2003) GDP real growth* 7.2 percent market leaders, Vinafone and Mobifone, are controlled (2003) by VNPT and account for 90 percent of subscribers. GDP per capita $2,500 Each operator has ambitious network expansion plans Literacy 90.3 percent for 2005 Phone lines 10 million+ Ken Zita is President of Network Dynamics and local Telephone density 12.06 Associates (www.ndaventures.com), a technology banks are Mobile phones 5.3 million consulting firm active in nearly 40 countries. Dr. providing Mobile density 6.6 John Ure, an NDA senior consultant, contributed Sources: CIA Factbook, US Department of State, to this brief. generous Network Dynamics Associates access to Network Dynamics Associates LLC www.ndaventures.com Vietnam 2 investment capital. Mobile phone density is only 6.6 percent, compared to 9 percent for fixed, an anomaly for a country at this stage of income development. Hutchison recently made a bold $656 million winning bid for a 3G license and is clearly gambling on robust growth and an improved investment climate. The structure of competition in Vietnam’s communications sector is still evolving, unlike the other large economies in Southeast Asia, offering potentially significant opportunities for investors. Political and Economic Brief After the fall of Saigon in 1975 – renamed Ho Chi Minh City, in honor of the revolution’s political mastermind – Vietnam collectivized farms, nationalized factories, seized private assets, and ran a centrally planned economy. A new Constitution was adopted in 1992, enshrining the principle of economic innovation or doi moi (its own version of perestroika). With substantial aid from the World Bank and the Asian Development Bank (ADB), Vietnam began a major opening of the country to foreign investment and an encouragement to greater domestic competitiveness. Vietnam1 is a one-party state, ruled and controlled by the Communist Party of Vietnam (CPV). Though it remains a one-party state, adherence to ideological orthodoxy has become less important than economic development as a national priority. The party’s constitutionally mandated leading role and the occupancy of all senior government positions by party members has ensured the primacy of the Politburo guidelines and enabled the party to set the broad parameters of national policy. In addition to the CPV, the most important powers in the Vietnamese Government are the offices of the president and the prime minister. The Vietnamese President, presently Tran Duc Luong, functions as head of state but also serves as the nominal commander of the armed forces and chairman of the Council on National Defense and Security. The Prime Minister of Vietnam, presently Phan Van Khai, heads a cabinet currently composed of three deputy prime ministers and the heads of 26 ministries and commissions, all confirmed by the National Assembly. In recent years, the CPV has gradually reduced its formal involvement in government operations and allowed the Government to exercise significant discretion in setting and implementing policy. Notwithstanding the 1992 constitution's reaffirmation of the central role of the Party, the National Assembly is the highest representative body of the people and the only organization with legislative powers. It has a broad mandate to oversee all government functions. Once seen as little 1 This section excerpted from U.S. Department of State documents: Background Note: Vietnam (http://www.state.gov/r/pa/ei/bgn/4130.htm) and 2004 Country Reports on Human Rights Practices (http://www.state.gov/g/drl/rls/hrrpt/2004/41665.htm). Network Dynamics Associates LLC www.ndaventures.com Vietnam 3 more than a rubber stamp, the National Assembly has become more vocal and assertive in exercising its authority over lawmaking, particularly in recent years. However, the National Assembly is still subject to party direction. More than 80% of the deputies in the National Assembly are party members. The assembly meets twice yearly for 7-10 weeks each time; elections for members are held every 5 years, although its Standing Committee meets monthly and there are now over 100 "full-time" deputies who function on various committees. There is a separate judicial branch, but it is still relatively weak. Overall, there are few lawyers and trial procedures are rudimentary. Economy Vietnam is undergoing rapid transition from a wholly central planned economy to a "socialist-oriented market economy." In 1986, the Sixth Party Congress approved a broad economic reform package called "Doi Moi" (renovation), that introduced market reforms and dramatically improved Vietnam's business climate. Vietnam became one of the fastest-growing economies in the world, averaging around 8 percent annual GDP growth from 1990 to 1997 and 6.5 percent from 1998- Picture: AFP from Economist.com 2003. During the first 6 months of 2004, growth was approximately 7 percent. Vietnam's inflation rate – which soared to over 300% in the mid 1980s – has been below 4 percent since 1997, but reached 7.2 percent in the first half of 2004. Since the reforms began agricultural production has doubled, transforming Vietnam from a net food importer to the world's second-largest exporter of rice. Agriculture, forestry, and fishery sectors employ about 60 percent of the labor force and account for 21.1 percent of total economic output. Foreign trade and foreign direct investment have improved significantly. The shift toward a more market-oriented economic model improved the quality of life for many Vietnamese. Per capita income has risen from $220 in 1994 to $483 by 2003. However, average income is widely disparate: $483 for all of Vietnam but as high as $1,640 in Ho Chi Minh City and much lower than average in poorer provinces of the central and northern highlands. Many regions remain affected by acute poverty. Vietnam was impacted by the Asian financial crisis but growth has returned, primarily as the result of ongoing economic and trade liberalization. The country’s economic response to the crisis was first to emphasize macroeconomic stability and only then shift focus toward growth. The Government continues to hold a tight rein over major sectors of the economy, such as the banking system and primary utilities such as telecommunications and electrical power. The government has plans for reforming key sectors and privatizing state-owned enterprises, but implementation has been slow. Greater emphasis on private sector development is critical for job creation. Urban unemployment has been rising in recent years, and rural unemployment, estimated to be between 25% and 35% during non-harvest periods, is already at critical levels. Layoffs in the state sector and foreign-invested enterprises combined with the lasting effects of an earlier military demobilization further exacerbate the unemployment situation. The December 10, 2001 Bilateral Trade Agreement (BTA) between the U.S. and Vietnam is a significant milestone for Vietnam's economy and for normalization of U.S.-Vietnam relations. Network Dynamics Associates LLC www.ndaventures.com Vietnam 4 Implementation of this agreement, which includes provisions on trade in goods, trade in services, enforcement of intellectual property rights, protection for investments, and transparency, is fundamentally changing Vietnam’s trade regime and helping liberalize its economy. The BTA gave normal trade relations (NTR) status to Vietnamese imports in the U.S. market. Bilateral trade between the two countries has expanded dramatically, reaching $5.88 billion in 2003. Telecom Policy Environment As a country in transition, Vietnam has moved cautiously in the process of reforming its model of state-owned infrastructure. It has as a result been trapped in the classic dilemma faced by many socialist economies: desperately needing new investment in basic infrastructure while trying just as desperately to avoid private, and especially foreign, ownership of what it perceives as strategic assets. Early change came in 1988 when Vietnam signed its first revenue-sharing “Business Cooperation Contract” (BCC) with OTC, now part of Telstra, to build satellite earth stations for international traffic. A BCC is a form of revenue-sharing concession that enables restricted market entry for a fixed period of time.