Telecoms Take Off

Silk painting remains the traditional trade of Van Phuc village, found at the end of a dusty road about 40 minutes west of Hanoi. There, one year ago in a search for roles that the rapidly changing telecommunications industry play in everyday lives, The VBJ visited the home of 15-year-old Nu Kim Lien and her family. At that time they were running a small shop that specialized in charging fellow villagers 700 dong (about five cents) to make a local call.

"People know they can come here any time, day or night," said Lien, explaining her shop's selling point in a village of about 500 families. Now, just one year later, nearly every village family has a phone, which brings into question whether Lien's business niche has come to an end. Has it? Did the telecom family of Van Phuc invest in a fax machine or E-mail computer? Not a chance. Instead, they replaced the ancient, Russian-made rotary phone with a new plastic Siemens model, sold at the local Post and Telecommunications office at about 200,000 dong ($24). Why? A new plastics factory that opened a bit further down the village road, now well-paved, brings hundreds of new customers past her shop each day, and their nickel calls to Hanoi make business for Lien's family better than ever.

The quick evolution of Lien's shop illustrates the intense market demand that continues to make basic telecom services perhaps Vietnam's most dynamic industry, in terms of risk and potential.

Making the telecom playing field visible was the Communist Party's goal when it announced at last year's Party Congress that by the year 2000 six out of every 100 people in Vietnam should have a phone. (By comparison, Hong Kong currently has 60 phone lines per 100 people; Malaysia, 30.) This would require usage to triple in five years time. It would also require the immediate and widespread participation of foreign companies.

Taking into account the fact that the price of phone-line installation averages around $1,000 per-line globally, and the fact that Vietnam has the world's twelfth largest population (78 million), it is easy to see why the country is seen by the world's leading telecom operators as one of the most important markets in the world.

There are currently 14 foreign direct-investment telecommunication projects potentially representing $741 million, including manufacturing projects. Respected manufacturers and products playing integral roles include Bosch, NEC, Alcatel, Motorola, and others.

The atmosphere of the telecom market has been ignited by a set of broad, long-term projects resulting from years of negotiations. A few formal operating ventures include Korea Telecom's $40 million business cooperation contract (BCC) to upgrade Haiphong's fixed line network, and Telstra's legendary exclusive international call profit-sharing BCC with Vietnam Posts and Telecommunications (VNPT), the state-owned telecom monopoly. Two years ago, Marconi and Pirelli installed digital optical-fiber cables connecting the North and the South. This network has since been upgraded to 2.5 gigabits per second, and every province now has digital exchanges.

To the surprise of many in the industry, in late June official media reported that VNPT simultaneously signed or will sign four BCC contracts for line installation over the next three years representing about $860 million in foreign investment. The foreign partners had each been negotiating and competing for several years for what is one of the world's biggest telecom deals this year. It is also one of the biggest boosts to domestic foreign investment, which comes at a time when overall foreign direct-investment numbers have dropped dramatically.

The four deals include: France Telecom, Japan's Nippon Telegraph and Telephone (NTT), England's Cable and Wireless, and Australian Telstra, which has yet to sign. Terms include a 15-year $194 million upgrade of Hanoi's north and east quarters by NTT for 240,000 lines; a 15-year $204 million upgrade of Hanoi's west and south quarters by Cable and Wireless for 250,000 new lines; and in HCMC, a 15-year agreement with France Telecom to spend $467 million on 500,000 lines. Telstra's invitation is to upgrade $300 million in HCMC's lines. If completed in the next three years, the deal will account for more than half of the government's proposed goal of 6% telephone saturation.

Terms of financing, profit-sharing, rate of return, exact technologies, and other key issues have not been disclosed. While contracts were made with VNPT, they still require separate approvals from the MPI and the Prime Minister's Office. Industry officials hope that all negotiations and approvals are resolved by year's end.

A representative for a manufacturer of switches who is closely following the winners is excited, as are his colleagues.

"At this point people are just rejoicing that this finally happened," he said. "It is an unbelievable amount of land lines representing an unbelievable amount of money, and there simply aren't that many deals of this size in the world."

Indeed, while foreign or domestic telecom officials refused to discuss many particulars of the deal, it was revealed to The VBJ that enough issues remain outstanding and the proposed framework of the deal being consorted by the different foreign players is large enough that Hanoi and HCMC bankers, accountants, attorneys, consultants and other professional service companies have switched into gear. For the first time in years, principals are receiving cold calls from important firms that don't even have offices or projects in Vietnam.

"Right now everyone is jumping at this deal, partly because there are different pieces for everyone, and the structure looks as if it will be a consortium of many players. This way they won't be competing with each other, so there's plenty of work to go around for all of the active telecom firms for years," said one source who includes himself as an active prospector.

"These projects will be arranged in different portions, financed by banks rather than self-financed," he said. "There's the financing on-shore, financing off-shore, buying equipment. Then there are financing and security arrangements with VNPT. "On top of it, there will probably be a consortium of telecom firms that cooperate, and perhaps a syndication of financing. Right now Hanoi is abuzz with various firms hustling for the business."

The consortium notion could make financing simpler and cheaper for the telecoms, and increase negotiating clout with the state-owned monopoly.

Generally, self-financing is out of the question, say industry sources, although the parent companies would become fourth or fifth level guarantors. While Telstra self-financed its highly profitable international service 10 years ago, which required satellites and other expenses, the firm, currently undergoing privatization and facing different circumstances in this deal, is more likely to work with banks. Currently only NTT is said to have backing from Japanese trading firms, including Nissho Iwai, Sumitomo and perhaps even Japanese government guarantees, although this was not confirmable as of press time.

In regard to financing, some perceive at least several outstanding issues, perhaps even dramatically so. While one banker said that the players involved are extremely attractive to lend to, risks are relatively high and that will affect lending rates. For example, what will the terms of revenue-sharing be? And is there a reasonable guaranteed minimum, as foreign firms prefer?

In response to these questions, the VNPT's director of international cooperation, Lam Hoang Vinh, said, "Foreign partners are allowed to be involved in revenue sharing, but first we need to wait and see how much per year we profit together."

But telecom firms trying to assemble nearly a billion dollars in fixed investments are seeking to reduce wait-and-see clauses.

Another variable may affect potential rates. A movement initiated in Europe is now being aggressively pursued by the U.S. Government to force foreign telephone carriers to slash tariffs on international calls. Most telecom companies, including VNPT, have agreements with their foreign counterparts to share profits of all overseas calls-often 50%, and in hard currency-based on the fact that both nations' telecom infrastructures were used to complete the call. But if VNPT's prices, among the highest in the world, were lowered, it would jeopardize profit potential.

Even more pressing is the issue of foreign exchange, partly because there is confusion regarding guarantees made by the Law on Foreign Investment, which outlines the rights and obligations of foreign investors. VNPT is expected to provide all or a percentage of the foreign sides' profit-sharing in dollars according to contracts being drawn. But in light of recent convertibility problems, which center on the fact that Vietnam's foreign-currency reserves are quite low and the demands on reserves by these projects would be high, the issue is by no means cut and dry.

The 125-year-old UK-based telecom consortium, Cable and Wireless, which specializes in network operations rather than manufacture, has operated a representative office in Hanoi since July 1994. Roger Barlow, C & W's country director, said in a recent interview that seeking fixed network investment opportunities with VNPT has been its major goal, and the recently awarded BCC contract with VNPT will become the company's focus for the next five years or more.

C & W is responsible for helping to install 250,000 fixed land lines in the west and south of Hanoi, a plum 15-year contract requiring $204 million in investment.

Like his counterparts, Barlow is optimistic. In fact, he pointed out, that if you place Vietnam's recent fiscal behavior against those of its neighbors, most notably Thailand, Vietnam actually seems to have avoided the instability that of other markets in the region.

"Vietnam fits into our Asia Strategy," said Barlow. "The reforms have generated many successes, and things are relatively stable so we're relatively comfortable in investing."

For example, a BCC, while an obvious risk for Barlow compared to a proper joint-venture, is an acceptable one. While this form of cooperation would seem to provide less incentive (or ability) for a foreign company to transfer training and know-how than an equity-based partnership or even Build-Operate-Transfer (BOT), since it is cash-oriented, Barlow, like others, emphasizes long-term training programs. In the case of C & W, Vietnamese workers will have the opportunity to learn from staff trained at their Asia-oriented training facility designed for a C & W BOT-style project in Indonesia, despite C & W's lack of Vietnamese equity.

NTT's General Manager Tsuneo Hoshi spoke to the issue with The VBJ along similar lines, saying "Vietnam's market is undergoing rapid development. VNPT has big potential toward meeting the goal of five or six phones per 100 inhabitants since they have highly qualified personnel. However, telecom infrastructure requires huge finance, therefore they need foreign investment and ODA." He also agreed that changes in foreign investment policies would expand NTT's activities in Vietnam. But Hoshi, too, expressed enthusiasm toward his imminent BCC.

BCCs in general are such loose agreements that they make some fundamental banking, legal, and profit projection exercise all but impossible, which could especially influence the deals VNPT announced, so it is worth reviewing them a bit in the context of the imminent fixed-line contracts.

A BCC agreement basically requires the foreign off-shore partner to supply and fund a network operation in exchange for sharing revenue collected by the domestic operator. Foreign telecom firms capable of operating networks admit they would prefer equity joint-ventures rather than BCCs. This would enable them to monitor and control how money is budgeted and spent, how staff is managed, and how the systems develop over time. This would also enable them to greatly increase their off-shore profits. However, telecommunications is ruled to be an industry of "state security," and BCCs are the only vehicles available to foreign companies.

"It's pointless to push for anything else," said one principal operator in Hanoi, seemingly without regret. According to one would-be operator, Vietnam is one of the few countries in the world that has BCCs.

Why not allow foreign telecoms to become joint-venture partners, rather than engage in these loose agreements? "Look at the difference between joint venture and BCC and you will understand why VNPT chooses the latter," advised the VNPT's Lam Hoang Vinh. "The foreign telecom companies are just explorers associated with VNPT to build up a network," said Vinh. "They don't provide equipment or training or operation. They are committed to providing capital, upgrading installation, and consulting. Equipment will be bid for separately."

The director of the Ministry of Planning and Investment's Foreign Investment Department, Nguyen Xuan Trung, works closely with telecom firms: "Foreign companies who want to join BCCs in Vietnam must be well-known in the world," he said, "and all executive management operations must be run by its Vietnamese counterpart."

But one foreign partner grumbled at that notion. "Vietnam needs experienced people. Allowing experienced foreigners to come in and organize projects also lets the telecom borrow more cheaply from foreign banks."

Another important element-and possible sticking point-is that within the BCC revenue-sharing structure, the foreign participant does not work directly with the books, since VNPT retains all management and accounting roles. Depending on the agreement, an accountant retained by the foreign partner can review accounting books several times a year, but this factor could be a cause for hesitation, especially if profits become lower than expected or spending higher, due to unforeseen factors.

Regarding both foreign exchange and accountability, VNPT recently received some criticism in the Vietnamese press for retaining a reserve fund of around $70 million. State-owned companies are entitled to keep $1 million in reserve, with the rest turned over to the State Bank or reinvested. This was uncovered in the State Bank's effort to reel in its foreign-exchange reserves.

Even if the signed deals are licensed and begin operation by the beginning of next year, as expected, VNPT's BCCs still will not meet the mandate line increases. However, as of two years ago, several operators aside from VNPT also exist, at least on paper.

The most active of these is Saigon Post and Telecommunication Service Joint Stock Company, or Saigon Postel, which was licensed to operate in April 1997. Saigon Postel is licensed to deliver mail as well as telecom services nationwide, including pagers and cellular phones. "The operation of a second company with the same services will enhance and make the services better," said Mr. Trinh Dinh Khuong, general director of Saigon Postel. [Prices are set by the government and are not a point of competition.]

All equity of Saigon Postel is owned by SOEs, and in fact Ms. Tran Ngoc Binh, Chairwoman of the Board of Management, also sits on the Board of VNPT, which owns 18% of Saigon Postel. "We are thinking of who we can make joint ventures with over the next five years," said Khuong. "We aim to raise $450 million."

Another operating license was issued three years ago to the military, which established a company now called "METC" and before that "Sigelco." By 1995 its director had attracted suitors that included some of the world's most prestigious banks and operators, as well as consultants, who thought they smelled privatization of the brand they were witnessing elsewhere. But projects collapsed in late 1995 when Sigelco announced it was to be a direct competitor to VNPT in an article on the front page of the MPI-run Vietnam Investment Review. The next week's article was a refutation of that announcement written by DGPT, which oversees and owns VNPT.

METC has since been restructured and is still alive; its primary activity being "Viettel," a factory being built in Ha Tay province as a venture between the military and NewTel, the telecom interest of NY-based Goldman Sachs, which had desired equity in Sigelco's future as an operator. The rapid rise to power in the central government of military figure Le Kha Phieu makes METC a stronger bet, although not necessarily in the manufacture-for-export area, Viettel's present focus. But both the military company and Saigon Postel are expected to become active in the 100,000-customer-strong cellular phone market.

More interesting is a notion that sprung to life just months ago with the passage of a law that for the first time allows Viet Kieu to obtain business licenses that qualify them as domestic, rather than foreign, enabling them to theoretically apply as domestic BCC partners.

Thang Nguyen, HCMC-based managing director of Dong Nam Associates, of Hong Kong, has long been selling telecom equipment and computers in Vietnam, bidding against some of the largest telecom firms and distributors and sometimes winning bids from the post office, among other clients. His brother, engineer Thieu Nguyen, is a Viet Kieu from France who took advantage of that law and recently bought a HCMC-based telecom distributing company, "NTT" (no relation to the Japanese company). They've already been invited by DGPT to become an Internet service provider, Nguyen said. Now, even higher ambitions could be pursued "if the law allows us to be [a local telecom BCC] partner, then yes." According to Nguyen, a well-known foreign would-be investors has already expressed interest in this idea.

In the first half of 1997, it was reported that VNPT collected $363 million in revenue, 28% higher than revenue from a year earlier. In talking with telecom companies foreign and local, an underlying theme is concern over VNPT's monopoly, however competent it may be, and that its mother organization, DGPT, is the telecom regulator.

"In general, we would be very concerned about the role of the state as owner of the asset, manager of the asset, and regulator of the asset, said former World Bank Vietnam Chief Bradley Babson. "The person delivering the service should not be setting the prices."

Curiously, this issue has erupted among Vietnamese consumers into hot debate, even more so, it seems, than in markets where several operators exist.

"The telecom sector collects a huge profit day by day," wrote the state-controlled Thanh Nien newspaper. "Yet a paradox exists, causing prices to rise and monthly fees to be too high to be logical or honest."

Another article criticizing VMS, VNPT's partner to Comvik, reads, "What is the ability of the superprofit business? Is it appropriate for money for infrastructure investment, equipment purchase and production facilities of one production base to be contributed by the customers? Consider the following example: a soft drink company makes a condition that if anyone wants to buy its product (price 5000 dong per can), he has to hand in a sum of money worth several billion dong in advance as a kind of investment fee to buy production chain and build up distribution network. This would be ridiculous, but it could happen if firm X is the only one who has the authority to produce soft drinks for Vietnam. Can we say that the 'network installation' of the Vietnam Post and Telecommunications is failing in this case? Is it right to say that because of the telecommunications monopoly the VNPT is able to apply a similar fee or impose a no-choice situation on its customers?"

The foreign telecom company which might be tempted to root for fair competition should remind itself that its BCCs are valuable partly because they are part of a powerful monopoly. As with other industries, consumers seem to be getting accustomed to crisp overseas connections, working mobile phones, and now might even want to see a battle in the arena of price.

by JOSHUA JAKE LEVINE - Vietnam Business Journal 9/1997

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