Chapter 1

Introduction and Methodology

1.1 Introduction 1.1.1 General background
Many economic changes have been introduced in Vietnam in the last ten years. The centrally planned economy dominated for more than 40 years, but had not helped improve the nation's welfare. Since !"#, certain economic reforms have been launched and have put the economy in an encouraging position. The mar$et oriented economic model is increasingly accepted by Vietnamese citi%ens from different social classes. The changes in the economic structure have had a significant impact on the operating environment of business which influences decisions on investment pro&ects due to the presence of ris$ and uncertainty. 'ncertainty and ris$ accompany many forms of investment. They are inevitable and sometimes re(uire complicated analysis before the decisions are made. The return on pro&ects has to be carefully analy%ed ta$ing into considerations the ris$ characteristics of the pro&ect.

1.1.2 Objectives of the study

The overall objective of this study is) To highlight the main traits in the operating environment of business in Vietnam, while focusing on financial aspects in analyzing risk and return in project financing. To achieve this, the specific objectives are as follows. . *arry out a literature review with a view towards developing a conceptual model for ris$ and return as well as methods dealing with ris$. +. ,ased on secondary data collected from various sources, prepare a brief on the situation of pro&ect financing in Vietnam. -. ,ased on findings, compare theoretical procedures with real practice and attempt to develop a model for ris$.return analyses in pro&ect financing 4. /raw conclusions and ma$e recommendation.

1.2. Methodology

The researcher aims first to conduct a review of the literature in order to highlight the following issues)
v Project financing - oncept and definition v !ifferent kind of risks in project financing v "ethods of dealing with risk

0n analytical framewor$ for ris$ and return analyses will be presented to support methodology as guideline for ne1t sections. The researcher also e1amined secondary data through in order to describe the operating environment of business in Vietnam with respect to ris$s associated to and return on investment pro&ects. Some ma&or points are named below.
v #egal infrastructure and investment situation v $anking systems and financial institutions %briefly& v Project financing in the Vietnamese conte't

2ne of the main parts of this research is to study two cases typical for the housing business, with the focus on private sector. The direct interview is supported by a set of (uestions developed in form of a (uestionnaire. The case studies rely mainly on the materials collected on individual pro&ect. The first case study is conducted on the Service 0partments /evelopment pro&ect where the ma&or capital contribution comes from foreign investors. The second case will loo$ at an 2ffice ,uilding /evelopment pro&ect, where the funds come only from Vietnamese investors. The author carried out the in.depth interviews concerning + pro&ects in order to find out problems associated with pro&ect financing, regarding)
v Parties involved( v )unding structure( v *eturns e'pected in relation to risk.

3nterview of some financial institutions, concerning)

v #ending conditions( v +nterest rate priority and repayment terms( v *isk and return considerations.

,ased on 4 5 literature review, 4+5 secondary data about operating environment of business, 4-5 case studies on selected pro&ects, and 445 personal interviews made with some financial institutions, a model is proposed as a guideline for ris$.return analyses in pro&ect financing in Vietnam.

The scope of the study

Secondary data which are used to highlight main traits of operating environment of business in Vietnam were collected in Vietnam. /ata collection relating the financing of two hotel pro&ects was carried out in 6anoi city.

Organization of the study

This report begins with the introduction and ob&ectives of the research study in Chapter 1, then it presents the methodology for research planning and implementation. This chapter also presents the organi%ation of the research report in form of organi%ation chart. 7eviewing literature is carried out in Chapter 2, which provides an overview on) 4a5 8arties involved in pro&ect financing, 4b5 /ifferent $inds of ris$s in pro&ect financing, and 4c5 Some methods dealing with ris$s. Some main traits of operating environment of business in Vietnam are highlighted in Chapter 3. The basis for conducting this part is secondary data derived from &ournals, maga%ines, reports and other sources. Two case studies are presented in Chapter 4 and Chapter . 2ne is concerned with service apartments pro&ect financed mainly by foreign investors. The other is office building pro&ect funded by local investors. Chapter ! ma$es a comparison between theoretical and practical aspects regarding pro&ect financing in Vietnamese conte1t and attempts to develop a model for ris$ and return analyses in pro&ect financing within operating environment of business in Vietnam. This chapter also suggests an brea$down structure of stages in pro&ect lifecycle to be used in combination with the model. *onclusions and recommendations are made in Chapter ", which also figures out the limitation of this research study and provides some suggestions for further considerations in this topic. 0ppendices and references are listed at the end of the report.

Organization chart of the report

The organi%ation of this report, summari%ed in the section above, is presented in form of organi%ation chart 4figure 5.

INTRODUCTION

METHODOLOGY

LITERATURE REVIEW (Conceptual)

SECONDARY DATA (Situational)

CASE STUDIES

CONCE TUAL !RAMEWOR"

CONCLUSIONS AND RECOMMENDATION

Figure 1 - The Organization Chart of Research Study Report

Chapter 2

iterature Re!ie" Consideration of the ris# and return In pro$ect financing

2.1. %ro$ect financing - Concept and definition 2.1.1. &efinition of pro$ect financing
,Project financing is a financing of a particular economic unit in which a lender is satisfied to look initially to the cash flows and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan,. 9:evitt, !"-;

2.1.2. Interested parties

%ro$ect sponsors. They ta$e e(uity ris$ in the pro&ect and normally have the highest portion of profit or loss. They are a group of companies and organi%ations which identify the mar$et opportunities, then organi%e and negotiate with other parties to appraise, invest, subcontract, operate and monitor the pro&ect. 9:evitt, !"-;
v <irst group) *orporations, 3nvestment ,an$s v Second group) =overnment agencies, The >orld ,an$ 4>,5, regional

/evelopment ,an$ 4/,5, =overnment ,an$s Creditors. They ta$e debt ris$ in the pro&ect and have priority in claim against the pro&ect in the case of default. *reditors can be categori%ed as senior debtors and subordinated debtors. They include)
v *ommercial ban$s, v 3nstitutional 3nvestors, v 8ublic 3nvestors.

Supplier. The profitability of the pro&ect is strongly influenced by the price of feedstoc$ for pro&ect. 7elevant uncertainties will be relieved if pro&ect gets a long.term supply contract within certain price limits with supplier. The pro&ect.supplier relationship secures mutual benefit since pro&ect is normally a big potential customer for the supplier. 'uyer. <or the pro&ect this is potential customer, whose promise to buy output of the pro&ect can greatly enhance the credit of the pro&ect. The pro&ect.buyer relationship also secure their mutual benefit because the buyer can be sure about the future supply to itself.

Contractors. They could be construction contractors or operating contractors. Their ability to complete construction on time and the ability to operate the pro&ect effectively are two of the ma&or concerns of creditors. Multilateral agencies are government agencies and international organi%ations which provide their support to some large pro&ects specially important for the social. economic development of a country. The form of this support could be providing of e(uity capital, guarantees, concessions, low interest loans, subsidies, and local service, roads, water, sewers, and police protection.

2.1.(. The process of pro$ect financing 8reliminary feasibility study

The purpose of this stage is to determine whether the pro&ect has sufficient merit to warrant further e1penditure of time and effort to bring it about. :ormally, independent engineering, legal and financial consulting firms are invited to conduct a preliminary feasibility study, since their &udgments are considered sub&ective and could be easily accepted by both sponsors and lenders. 0 preliminary feasibility study will determine the ob&ectives of the sponsors? review the plan of the sponsors to see whether the pro&ect is both technically and financially feasible? raise (uestions and issues which must be answered? and suggest alternatives ways to accomplish the sponsors' ob&ectives.

8lanning
3n this stage, different scenarios for the financing will)
v be derived based on the preliminary feasibility study and assumptions about

term structure of interest rate, currency e1change ris$, inflation ris$, debt@e(uity ratio, anticipated cash flow, completion ris$, political ris$, etc. v be tested and compared to get one optimum funding plan.

0rranging the financing

0n information memorandum is prepared and presented to prospective lenders with the following)
v The sponsors and promoters of the pro&ect are identified. v Third party guarantors to the pro&ect 4suppliers, buyers, contractors, etc.5 are v v v v

identified. Aocation of the pro&ect. The estimate of construction cost. The financial plan The proposed terms for financing 4amounts, maturities, and timing5.

Monitoring and administering the financing

*ost over.runs and completion delays are the ma&or concerns while monitoring the pro&ect during the construction period. /ebt must be ta$en down to match the financial plan and construction schedule, and estimates to completion must be prepared from time to time. 0dministration of the loan agreements when implementing financing plans involves monitoring the actual operating cost and economics against the financial plan and production goals 4mar$et, sales revenues5.

2.1.). Sources of funds

The main sources of funds are lenders and sponsors)

*ommercial lenders include

v v v v v v v

,an$s? 3nstitutional investors? *ommercial finance companies? Aeasing companies? 3ndividuals? 3nvestment management companies? Money mar$et funds.

*ommercial sponsors are

v *ompanies re(uiring products or services? v *ompanies supplying a product or material to the pro&ect? v 3nternational agencies 4>,, /,5.

2.2. &ifferent #inds of ris# in pro$ect financing

7is$s related to pro&ect financing can be identified separately during various phases of pro&ect lifecycle 4Table +. 5.

Ta*le 2.1. %ro$ect financing ris#s during !arious phases of pro$ect lifecycle &e!elop+ent phase Construction phase Operating phase

9 v v v v

,id ris$ *redit ris$ Technological ris$ Mar$et ris$

v v v v v

8olitical ris$ B1change ris$ 8erformance ris$ *ost over.run ris$ *ompletion ris$

v v v v v v

8olitical ris$ B1change ris$ 8erformance ris$ *ost over.run ris$ Aiability ris$ 2ff.ta$e ris$

#evelop$ent phase
'id ris#. ,ecause the lenders are not willing to participate in development phase, sponsors have to provide e(uity. 3f the pro&ect proposal does not get the approval for its implementation, the sponsors would loose the money spent in preparing the bid, this is referred as bid ris$. Similarly, financial advisers would have to write off their costs if pro&ect proposal is not accepted. 9:evitt, !"-; Credit ris#. This ris$ refers to sponsors' creditworthiness, which would be supported by letters of credit from ban$s. The (uestions of whether a credit ris$ or an e(uity ris$ is involved usually arises in connection with the ade(uacy of the underlying e(uity investment in the pro&ect, and the ris$s assumed by the sponsors and third parties. 9:evitt, !"-; Technological ris#. This ris$ is considered when a new technology is used in a pro&ect. Aenders always try to avoid financing a pro&ect using new and untested technologies on a nonrecourse basis, unless the technological ris$s can be fully absorbed by some other parties. The reason is that new technology would increase the completion ris$, cost over.run ris$ and even the ris$ of failure of the pro&ect. Mar#et ris#. This ris$ refers to the mar$etability of a product or service produced from pro&ect operation, and must be considered at the beginning in form of mar$et survey and research. *ompeting products, estimated price and volume of the product, future cash flows, and completion from suppliers closer to the mar$ets, or with less e1pensive sources of raw materials, feedstoc$s or energy are involved in a careful mar$et study. 9:evitt, !"-;

Construction phase
%olitical ris# refers to the occurrence of li$elihood that a firm will suffer losses because of political or macroeconomic developments 4political ris$ has the same meaning as country ris$5. This ris$ is difficult to ensure against, although there are various strategies to avoid it 4such as &oint agreement with a public partner5. ,-change ris#. The ma&or concern for international investors is currency and foreign e1change ris$ when cash inflows and cash outflows are reali%ed in more than one currency. 8otential losses may occur due to currency fluctuation. %erfor+ance ris#. <inal responsibility for a pro&ect's performance lies with the sponsors, who may provide performance guarantees. 9:evitt, !"-;

10

Cost o!er-run ris#. *ost over.run plagues many pro&ects, and usually have a stand by facility which is based on the guarantees from sponsors and the additional capital from sponsors in the form of subordinated loans or through fi1ed price contractors. Co+pletion ris# involves both contractors and suppliers at construction phase. To achieve the completion of the pro&ect by a certain date, sponsors often provide performance incentives and guarantees.

Operating phase
Most of the ris$s at the operational phase can be covered through agreements with the relevant parties. 2perating ris$s can be ta$en by the operating and maintenance contractors through a performance guarantees? cost over.run by the sponsors through fi1ed price contractors? off.ta$e ris$ through ta$e.or.pay agreements or advance payments? and liability ris$ can be covered through insurance. 8olitical ris$s can be classified into two group) e1tra.legal versus legal.government ris$ and macro versus micro ris$. Since political ris$s refer to the probability of occurrence of the events 4which will cause losses to the firm5 in the non.mar$et 4political, economic, and social5 environment of business, they are difficult to avoid.

2.(. Methods of dealing "ith ris#

2.(.1. Sensiti!ity analysis , -ensitivity analysis is a risk analysis techni.ue in which key variables are changed and the resulting changes in the net present value %/PV& and the rate of return are observed., 9,righam, !!+; 3t is clear that many of the variables which determine a pro&ect's cash flows are based on a probability distribution rather than being $nown with certainty. 3f a $ey input variable, such as units sold, changes, the pro&ect's :8V will also change. Sensitivity analysis can indicate e1actly how much the :8V will change in response to a given change in a input variable, other things held constant. The analysis techni(ue begins with the so.called base case situation, which is developed using the e1pected values for each input. Then the table describing the deviation from base level of considered variables will be developed. The values used to develop the table, including units sales, sales price, fi1ed cost, and variable cost, are most li$ely, or base case, values, and the resulting pro&ect's :8V is called base case :8V. /eviation from base level is usually) . 0C? D 0C? .+0C? D+0C? etc. 0ll :8Vs will be used to construct the graphs. The slopes of the lines in the graphs shows how sensitive :8V is to changes in each of the inputs. Sensitivity analysis is probably the most widely used ris$ analysis techni(ue, however it has limitation due to not considering the range of li$ely values of $ey variables as reflected in their probability distributions.

11

2.(.2 Scenario analysis .%ro*a*ility analysis/ ,-cenario analysis is a risk analysis techni.ue in which ,bad, and ,good, sets of financial circumstances are compared with a most likely, or base case, situation., 9,righam, !!+; Scenario analysis considers both) 4 5 the sensitivity of pro&ect's :8V to changes in $ey variables and 4+5 the range of li$ely values of these variables as reflected in their probability distributions. 3n scenario analysis, all of input variables are set for three cases) 4a5 at their worst reasonably forecasted values 4e.g. worst case scenario5? 4b5 at their best reasonably forecasted values 4e.g. best case scenario5? and 4c5 at their most li$ely values 4e.g. base case5. The worst case variable values are used to obtain the worst case :8V and the best case variable values to obtain the best case :8V. The e1pected :8V can the be determined based on estimate of the probabilities of occurrence of the three scenarios, the pi values, as follows. B1pected :8V E p 4:8V 5 D p+4:8V+5 D p-4:8V-5 >here) inde1 F F denotes worst case? inde1 F+F denotes base case? inde1 F-F denotes best case.

The standard deviation of :8V 4:8V5 and the coefficient of variation 4*V :8V5 are determined based on e1pected :8V and :8V i. Scenario analysis can provide good information about pro&ect's stand.alone ris$. There is however, a limitation of this techni(ue in that it only a few discrete outcomes 4:8Vs5 are considered for the pro&ect, even though there really are an infinite number of possibilities. 2.(.(. Monte Carlo Si+ulation ,"onte arlo -imulation is a risk analysis techni.ue in which probable future events are simulated on a computer, generating estimated rates of return and risk inde'es., 9,righam, !!+; To prepare a computer simulation, the probability distribution of each uncertain cash flow variable must be specified first. 2nce this has been done, the simulation follows the following steps) . The computer chooses at random a value for each uncertain variable based on the variable's specified probability distribution.

12

+. The value selected for each uncertain variable, along with values for fi1ed factors such as the ta1 rate and depreciation charges, are then used by the model to determine the net cash flows for each year, and these cash flows are then used to determine the pro&ect's :8V in the first run. -. Steps and + are repeated many time, say G00, resulting in G00 :8Vs, which ma$e up a probability distribution. The resulting :8V distribution is graphed to determine the e1pected :8V, :8V, and *V:8V for any set of assumptions. The primary advantage of simulation is that it show the range of possible outcomes along with their attached probabilities, rather than merely a point estimate of the :8V. 6owever, this techni(ue has not been widely used in industry. 2ne of the ma&or problems is specifying the correlation among the uncertain cash flow variables.

2.(.). 0tility theory

,The utility of a sum of money can be defined as its relative degree of usefulness or desirability to the decision maker,. 9Merrett, !H#; 'tility theory suggest a way of not having to rely on the long.term averages, but still retaining a probabilistic framewor$ of the analysis in the face of ris$s which are large relative to the ris$.ta$er's resources. 'tility theory attempts to provide a formal framewor$ for measuring the sub&ective value of sum of money in a given situation. 3t is not the e1pected monetary value of a decision that the ma$er should be trying to ma1imi%e, but rather e1pected value to him@her, that is its e1pected utility value. B1periments have shown that the individual's own utility function is li$ely to reflect his@her own ris$ hori%on based on the sum of money he@she is accustomed to deal with for his@her firm. 0n e1ecutive who often settles issues involving hundreds of thousands of dollars is li$ely to have a linear function in the low hundreds of thousands, with the curve flattening and dipping above and below the positive and negative ends of such range. 6is superior, who deals in millions, usually has the same shaped function but his linear range covers the low millions. The chief e1ecutive of this multi.million dollar firm may thin$ of a two to one on gamble for plus or minus I 0 million acceptable, but applies much heavier weights against losses and gains above and below that mar$. 'tility theory applies mainly to the few relatively large pro&ects which by definition have uni(ue features. <urther, utility curves can be drawn up only for relatively simple gambling situations, and these fail to reflect the many comple1ities

2.(.1. &ecision trees

,The decision trees is a network diagram approach to analyzing the value of information, particularly applicable to investments characterized by high uncertainty and re.uiring a se.uence of related decisions to be made over a period of time,. 9Merrett, !H#;

13

3t is possible to ta$e the decision with the information which already e1ists, but if the decision ma$er can obtain more information, he@she may possibly to reduce the degree of ris$ attaching to the decision such as pro&ect financing. 0 problem is whether or not to purchase information about the li$ely outcome of an investment proposal before finally committing to one course of action or another. 3t is clear that information is rarely free and available. 3t generally costs both money and time to obtain. There is unli$ely to be certainty that after paying for the additional information, it will reduce the ris$. So the decision ma$er is faced with an e1pensive delay resulting in an uncertain decrease in uncertainty. This delay will only been &ustified if it causes him@her to change the decision he@she was going to ma$e anyway into a better one. 3t is possible to display the comple1ities of such a decision with an information flow diagram . the so.called decision tree4s5. This diagram is applicable to investments characteri%ed by high uncertainty and re(uiring a se(uence of interrelated decisions to be made over a certain period of time. The more comple1 the chain, the more essential becomes the use of such techni(ue. The concept of the networ$ diagram is also used where the se(uential decisions which are mapped out do not necessarily involve the purchase of further information. This display techni(ue helps to outline the options open to a decision ma$er and the li$ely logical action to ta$e at each decision point. 0n e1tension of the decision tree approach to include continuous probability distribution is a further refinement well worth considering for ma&or pro&ects of a comple1 nature. 3f a decision tree is used as a master plan in outline for the control of the analysis of a comple1 problem, it can be well worth the trouble of its construction. 0lso its role as a visual aid to the e1planation of a comple1 plan of action to top management &ustifies its use by the planer.

2.(.2. 3a+e theory

,0ame theory is intended to provide a logical framework for the study of the strategies open to the decision maker in the face of total uncertainty. Various objectives can be still studied with an advantage even under these conditions, such as the minimization of the risk of loss, the ma'imization of the chance of gain, or the minimization of the regret the decision maker may suffer from having not chosen the outcome the turned out to be the best, . 9Merrett, !H#; 8rimarily, game theory is concerned with the conditions of limited information which apply in game situations and is concerned to provide rules for decision ta$ing in situations in which probability theory is not applicable due to absence of probabilistic information. The principle of game theory can be e1plained in following e1ample.

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0n investor is faced with a number of possibilities 0 , 0+, 0-, 04, 0G, etc., and there are a number of states of the world possible S , S+, S-, S4, etc., whose affect on each outcome, as measured by an :8V, can be calculated. >here) D 0 , 0+, 0-, 04, 0G are the alternatives as different si%ed hotels proposed to build? D S , S+, S-, S4 are the different socio.economic situations when the hotels come in service. These possibilities could be arranged in the form of a matri1 4Table +.+5. There are some criteria for selecting the si%e of the hotel) 4 5 Minima1, 4+5 Ma1ima1, and 4-5 Minimi%ation of the regret. Ta*le 2.2 4%5 under !arious situations .6i7Si/ %ossi*ilitie s 61 62 6( 6) 61 S1 ST6T,S OF T8, 9OR & S2 S( S) !0 "0 +G0 + 0 0 "0 #0 +40 400 - 0 H0 G0 !0 -"0 4#0

00 +00 H0 0 4#05

Minimi%ation of the ris$ of loss 4Minima15

The investor should choose the FbestF worst case. 0rraying the worst cases for each alternative he gets 0- which is clearly the best choice on this criterion 4Table +.-5. Ta*le 2.( 4%5 in the :*est: "orst case ST6T,S OF T8, 9OR & %ossi*ilitie S1 S2 S( S) s 61 H0 62 G0 6( 1;< 6) 0 61 4#05

Ma1imi%ation of the chance of gain 4Ma1ima15

Ma1ima1 means selecting the most favourable case among the best available ones. Ta*le 2.) 4%5 in the :*est: *est case ST6T,S OF T8, 9OR &

15

%ossi*ilitie s 61 62 6( 6) 61

S1 00 +00

S2

S(

S)

+G0 400 )2<

This would lead to the selection of 0G, since the ma1imal :8V is 4#0.

Minimi%ation of the regret

The measure of this regret is defined for each entry in the matri1 as the difference between that alternative and the best result for that same state of the world. Ta*le 2.1 &ifferential 4%5 under each alternati!e .6i/ %ossi*ilities S1 61 62 6( 6) 61 00 0 -0 !0 +#0 ST6T,S OF T8, 9OR & S2 S( S) #0 -+0 -!0 H0 +40 - 0 0 #0 +H0 40 0 "0 40 !0 0

The investor wishes to select the alternative which is li$ely to result in the least regret whatever the state of the world may turn out to be. 6e should therefore array the largest measures of regret for each alternative and select the alternative with the smallest of such measures Ta*le 2.2 The largest 4%5 difference under each alternati!e .6i/ %ossi*ilities S1 61 62 6( 6) 61 ST6T,S OF T8, 9OR & S2 S( S) -!0 - 0 +H0

1=< +#0

04 is the best choice on the basis of this criterion. 3f for some good reason the investor was to remove 0 G from the possible choices open to him, he must rearrange the arraying and the best choice would be changed 40-5.

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3t is possible to combine the game theory approach with limited use of sub&ective probabilities and this may prove to be a more fruitful line of attac$. Suppose there are two states of the world) s ) s+ ) probability of occurrence of depression period S probability of occurrence of boom period S + 4where) s+ E

.s 5

0nd there are two alternatives open to the investor) 0 , and 0+. 6e has calculated the outcomes possible under S and S+ and e1pressed as discounted cashflow 4/*<5 yield 4or :8V's5. Thus) Ta*le 2.; %ossi*le outco+es in !arious cases .&CF yield/ ST6T,S OF T8, 9OR S &2 %ossi*ilities S1 61 62 1utcomes GC GC #C +C

<irst the investor tries to find out the indifferent point when both alternatives will appear e(ually attractive. The matri1 shows that B1pected /*< yield40 5 E a E Gs D Gs+ B1pected /*< yield40+5 E a+ E #s D +s+ Then the condition for indifference is a E a+ Gs D Gs+ E #s D +s+ Since the sum of the probabilities are e(ual to s E -s+

4e.g. s D s+ E 5, therefore)

s E -@4 or 0.HG and s+ E @4 or 0.+G the e1pected outcome of both alternatives are) a E a+ E 4G 1 0.HG5 D 4 G 1 0.+G5 E H.G C To choose between 0 and 0+ the investor only has to decide whether, in his view, S+ has a greater or lesser chance of turning out to be the true state of the world than +GC. :ow if he bets the chance of a boom is more than +GC li$ely, his problem is solved. 0 must be the better alternative, because any increase in the multiplier 0.+G in the calculation above will increase the e1pected value of 0 and reduce that of 0+. The advantage of this techni(ue is that it provides a statement of what the probabilities have to be mar$ the logical brea$.even point between one choice of action and another.

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2.). 6nalytical fra+e"or# for analyzing ris# > return in pro$ect financing
Through the reviewing of literature, an analytical framewor$ is suggested to be used in analy%ing the theoretical issues, possible application, and practical problems associated with the process of pro&ect financing 4<igure +5.

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LITERRATURE REVIEW

ARTIES INVOLVED IN RO#ECT !INANCING

"INDS O! RIS" IN RO#ECT !INANCING

METHODS DEALING WITH RIS"S

CONCE TUAL MODEL !OR RIS" AND RETURN

CASE STUDY $ (!o%ei&n in'e(t)ent)

CASE STUDY * (Do)e(tic in'e(t)ent)

ERSONAL INTERVIEW (!inancial In(titution()

SECONDARY DATA Main t%ait( o+ Ope%atin& En'i%on)ent o+ ,u(ine((

Figure 2 - 6nalytical fra+e"or# for ris#-return analysis in pro$ect financing

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Chapter (
%&CO'#()* #(T(

Main traits of operating en!iron+ent of *usiness in 5ietna+

(.1. Introduction
'nder the centrally planned economy, all types of businesses were public and were theoretically considered as ris$less. 7is$ and uncertainty arise automatically when the free mar$et economy has been introduced since !"#. The concept of ris$ is not familiar to most local managers of both state.owned and private enterprises. 3n contrary, foreign investors carefully study political, social and economic situation to classify the country ris$s or any $inds of ris$ possibly related to their business in Vietnam. =enerally, they are concerned with the country's legal infrastructure, especially laws on foreign investment and land. They also cautiously study the ban$ing system, which has certain effects on the financing of their investment pro&ects. These points are reviewed to highlight some features of business environment.

(.2. Situational description of operating en!iron+ent of *usiness in 5ietna+

(.2.1. egal infrastructure and foreign in!est+ent status

egal Infrastructure

Many foreign investors found the overall framewor$ for business transactions and relations somewhat unclear. 6owever, they need to understand the country's legal infrastructure, if they wish to benefit from their business. =eneral recognition is that the legal framewor$ for the commercial transactions and contractual relations, essential to the effective functioning of the mar$et system, is improving)
v v v v

0 commercial code is being prepared, and e1pected to be passed in !!G? Aegislation of contract law already e1ists? *ompany law for private firms has been enacted? and ,an$ruptcy law, passed on /ec. !!-, was implemented since July !!4.

,ehind the tas$ of preparing all these economic laws is larger and more difficult tas$ . the wor$ of developing well.functioning institutions to implement the laws, including building up the legal profession. 9':/8, !!-; #egal +nstitutions2

The word "public" was used to refer all State-ow ed e terprises u der ce trall! pla

ed eco o"!#

20

Aegal institutions at several levels are involved in the formulation, issuance, and implementation of the laws necessary for the reform of the economic system. These include the 4ational 6sse+*ly 4:05, the country's legislature? the Standing Co++ittee 4S*5 of the :ational 0ssembly, which e1ercises the legislative powers entrusted to it by the :ational 0ssembly? the 3o!ern+ent 4=5, which is the highest e1ecutive organ? the Ministry of ?ustice 4M2J5 and other ministries 4M5 and agencies which are charged with the preparation of legislative and governmental acts? the Courts 4*5? the State ,cono+ic 6r*itration 4SB05+, which have ban$ruptcy powers under the new legislation? and the %rocuracy 485, which supervises the e1ecutive in its implementation of laws.
Law proposal

Law

ro osing bodies !G"M"C #

@ Draft Committee @ MO J @ O ther ministries

Draft View

Government

Reviewed Draft

Authorize

National Assembly

N.A. Law Committee

Report, View

N.A. Standing Committee

APPROVAL

Figure (.1 egislati!e process

State $co o"ic %rbitratio was trasfor"ed i to $co o"ic &ourts si ce 1993#

21

#egislative process2 ,nact+ent of la"s and ordinances. The :0 decides on a list of laws and ordinances to be prepared for enactment at its two sessions in each year, as well as those to be formulated for consideration the following year. Aegislative process for any law approval follows the procedure presented in figure -. . Issuance of go!ern+ent decrees and +inisterial orders. =overnment decrees and ministerial orders are also prepared by the responsible ministries, and should be reviewed by the M2J and Aegal /epartment of the 2ffice of the =overnment, among others. +mplementation and !isputes *esolution2 Bven if all the laws necessary for the mar$et development are enacted promptly, their effect would be minimi%ed if no mechanism e1isted for private parties to enforce their rights and for the government regulators to protect the public interest. Since the *ivil *ode is still under preparation, the system for dispute resolution is not yet comprehensive, but enforcement mechanism do e1ist. Three main avenues for enforcement can be found currently) the court system, arbitration, and administrative orders. #aws for Private $usinesses2 >hile the formal recognition of broader private ownership came only in the !!+ constitution, two important laws were enacted by the :0 in /ecember !!0 that provided the structure for legal entities outside state or collective ownership) the Aaw on 8rivate ,usiness and the Aaw on *ompanies. These laws laid the groundwor$ for individuals and legal entities to invest their resources in various $inds of economic activity. 6ssurance of the la"s. These laws offered assurance to investors that private investment was acceptable and encouraged. <or those who would then wish to invest, the two laws also provide similar protection for the business operated under them)
v 0 recognition of their long.term e1istence and development? v Aawful generation of profits? v <reedom to carry out business and ma$e business decisions independently?

and
v 8rotection of the right of the owners, such as to own means of production and

inherit capital and assets. Type of enterprises. These two laws and decrees implementing them created the legal rules for the establishment, operation, and state regulation of three new forms of enterprises)
v 8rivate business 4similar to sole proprietorship5? v Aimited liability company, v Shareholding company 4at least seven shareholders5.

22

3o!ern+ental role. There are still e1tensive re(uirements for government approval and intervention in establishing, operating and dissolving processes. 'nder this framewor$, a business registration is also re(uired at the time of establishment or changes in operations. Future de!elop+ent. The increasing registrations for establishment of enterprises has been reflecting the effect of this legal framewor$ for private business and companies. The acceleration in registrations can be partly attributed to the increase in economic arbitration offices, from in !! to -# in !!+ and to more than G0 in !!4. 2f course, it is difficult to attribute these registrations entirely to the introduction of a legal framewor$ or to determine whether more enterprises would have been established if the legal framewor$ had been improved. *ertain improvement could be e1pected to support a fuller development of the economy, such as the reduction on government approval and intervention in the areas of establishment, permissible fields of investment, and dissolution. 9':/8, !!-; ommercial framework2 Most relevant for the commercial legal framewor$ are econo+ic contracts. 'nder the 2rdinance on Bconomic *ontracts, economic contracts are only such agreements entered into between two legal entities or between a legal entity and an individual with business registration under the law. This would include an individual registered as a private business under the Aaw on 8rivate ,usiness and any other types of individuals having business registration. 3n practice, the application of the 2rdinance has been e1panded to include contracts between individuals. 8rotection of Intellectual property rights is another aspect of commercial activity which re(uires an effective legal framewor$ in a mar$et conte1t. The patent and trademar$ protection was introduced under the 2rdinance on the 8rotection of 3ndustrial 8roperty 7ights, and copyright protection under the /ecree on *opyright. The 8rovisions specifically directed at the transfer of technology already e1ist. Co+petition a". 0n important part of the transition to a mar$et economy is the creation and subse(uent preservation of a competitive environment for all economic entities, regardless of ownership. That goal is fre(uently met by a competition law or a set of laws, which does not yet e1ist. 'an#ruptcy la". 0s a part of the reform program, a draft ban$ruptcy law, prepared by the government, considered by the :0, finally was passed on /ec. !!- and started its implementation since July , !!4.

and issues

and use right. The movement towards strengthening property rights accelerated in !"", where a Aand Aaw was enacted. >hile state ownership of land was maintained under this law, private land use rights granted by the state were also recogni%ed. These land use rights could be recorded on a cadastral survey and evidenced by a certificate issued by the government. The lac$ of transferability means that land use rights cannot be pledged as collateral for a loan. 6owever, as the

23

economy has surged ahead the high value of land use rights in both rural and urban areas has reportedly engendered a significant number of de factor sales of land use rights. and !alue. 3n the last several years, land allocation has begun to be viewed as a ma&or source of potential revenue. 'rban governments are e1perimenting with various methods of valuing and charging for land use rights 4including auctions5 and even rural areas are moving towards charging for further allocations of land from remaining areas in communal control. There is discussion of see$ing rental payment from users such as state enterprises who received free allocations in the past. Such charges already e1ist for land contributed to a &oint venture 4JV5 with foreign party. and for Foreign In!est+ent. The difference between regulation and the reality of the mar$etplace for land, combined with the unclear situation with regard to land at the level of state.owned enterprises, state agencies, and local governments, as well as the general scarcity of completely clear title to privately controlled land, ma$e it difficult to foreign investors, especially large.scale ones, to operate in Vietnam. The only holders of large urban land with clear title are the state entities, so they must be brought into a JV. 9':/8.>,, !!-; 0nother ma&or concern of foreign investors is a right to mortgage land use rights. The restriction on the term of the transfer of land use rights to JVs of only +0 years was e1tended to H0 years at the end of !!+, e1ceeding the useful life of most investments. 3n order to encourage the development of the mar$et economy and to regulari%e and ta1 the burgeoning trade in land use rights, a ma&or revision of the !"" Aand Aaw was drafted during !!+. !!- and finally approved in !!4. 3mportant provisions of the amended Aand Aaw are) 4 5 the right to sell or lease land use rights in a free mar$et and 4+5 the right to mortgage land use rights. There was ma&or improvement in the framewor$ for land use and it was very important that these proposals in fact got enacted before the law has been passed. 2ther important aspects of the proposed legal basis for land use include rights of inheritance and compensation for recovery of the land by the government.

Foreign In!est+ent
)oreign +nvestment #aws2 0 legal framewor$ for foreign investment was put into practice in !"H, in parallel with but separate from the national legal framewor$ for the domestic mar$et.oriented economy. There is clear constitutional protection both for Vietnamese enterprises to enter JVs and partnerships with Vietnamese and foreign investors, foreign organi%ations and individuals. The constitution e1pressly provides that foreign invested enterprises shall not be nationali%ed. For+s of In!est+ent. The foreign investment legislation has grown to encompass not only a foreign investment law and regulations for its implementation, but also detailed rules in many areas of foreign economic activity, such as labour, currency, and technology transfer. The legislation provides for four types of investment)

24

v v v v

,usiness co.operation 4a contractual, non.e(uity &oint venture5, Vietnamese.foreign &oint venture, >holly foreign.owned enterprises, ,uild.operation.transfer facilities.

In!est+ent process. 3n general, the legislation has adopted a case.by.case approach in which the foreign investor has to apply for admission and obtain prior approval of the application and import licenses, and the foreign investment is admitted only after fulfilling certain conditions under a specific procedure. 'sually S**3 -, in some cases even other governmental departments are involved in the approving process. Treat+ent standards. The basis standard is that all foreign investors shall be treated fairly and e(uitably. More detailed provisions on treatment are on the whole favourable to the foreign investors. 3uarantees. The <oreign 3nvestment Aaw prohibits the re(uisition or e1propriation of invested capital and assets for compensation. 6owever, S**3 retains the power to suspend or cancel a foreign investor's business licence or even dissolve a JV if there is a breach of law or deviation from the investment ob&ectives or incorporation conditions. &ispute Settle+ent. /isputes arising out of foreign investments will, if they cannot be settled by negotiation or conciliation, be referred to such &udicial or arbitrate forum 4 as will have been agreed by the parties at the time of admission of the investment. )oreign +nvestment status2 <oreign direct investment 4</35 has increased rapidly since !! . <ollowing the !!0 revision that clarified several provisions in the original version of the </3 law, the amount of foreign investment approved for !! double that of the previous year. The increasing trend continued in !!+ at a slower rate, but pic$ed up again in !!-.!4 4<igure -.+5.

3 4

State &o""ittee for &ooperatio a d ' (est"e t# &urre tl!) i ter atio al arbitratio facilities are a(ailable u der the &ha"ber of &o""erce a d ' dustr! of *iet a"#

25

4,000 -,G00 -,000 Million US+,G00 +,000 ,G00 ,000 G00 0

.// 0.1 $2*33 01/ $21.1 *24*3 .245.

!""

!"!

!!0

!!

!!+

!!-

!!4

Source) S**3, !!4 Figure (.2 in!est+ent *y years7 1=@@-1==) .in +illion 0SA/ <oreign investors are most active in hotels K tourism industry and light industry 4<igure -.-5. 0bout + C of the approved investments are in hotels K tourism sector. Tourism activities are visible in larger cities where some large hotels and hotel.resort comple1 are being built.
Teleco) 6 o(t Cultu%e2 Healt9 6 E:ucation 3= le(( t9an $= Con(t%uction 3= A?uap%o:uct( *= ,an>in& 6 !inance $= Hea'8 In:u(t%8 $.= A&%o7!o%e(t%8 0=

Se%'ice $<= Hotel( 6 Tou%i() *$=

Oil 6 Ga( $.=

E ; .=

Li&9t In:u(t%8 $4=

Source) S**3, !!4. Figure (.( In!est+ent *y sector7 fro+ ?an 1=@@ to &ec. 17 1==) The e1port.oriented pro&ects using low.cost local labour in light industry are in garments and footwear where foreign investors from Taiwan, 6ong Long, and South Lorea bring in e(uipment and materials to produce final goods for e1port? they are also in the food industry where seafood processing for e1port is the main activity. Taiwan and 6ong Long are the top leaders, followed by Singapore and South Lorea 4<igure -.45.

26

2)000 1)500 1)000 500 0

' (est"e t / of pro0ects

Million US-

Taiwa

+o , -o ,

Si ,apore

South -orea

.apa

Source) S**3, !!4 Figure (.) Top fi!e largest in!estors .1B1B@@-1B12B=)/ The ma&ority of foreign investment pro&ects are JVs 4figure -.G5, mostly with state. owned enterprises or state agencies who often contribute their capital in the form of land use. The </3 law allows private companies to enter JV with foreign investors. 3t also allows for 00C foreign.owned pro&ects, but relatively few of the approved pro&ects are of this type.

-*20<< -*2<<< US- )i l li on -$20<<

-*25.0

-$2<<< -0<< -< #oint Ventu%e $<<= !o%ei&n7o@ne:

130 -534 5*0 -$/5

$1

,u(ine(( Coope%ation

In'e(t)ent capital

A o+ p%oBect(

Source) S**3, !!4 Figure (.1 In!est+ent *y license type7 ?anuary 1==) to &ece+*er 17 1==)

27

(.2.2. 'an#ing syste+ and financial institutions Some important steps has ta$en in the last few years in developing a more mar$et. oriented financial system. The State ,an$ of Vietnam G 4S,V5 has succeeded in mar$edly slowing inflation, interest rates have been allowed to ad&ust with inflation, and the S,V has been active in reforming its methods for formulating and implementing monetary policy and ban$ supervision. Mo!e+ent Bntry into the ban$ing system has increased? =reater discretion has been given to the ban$s in ma$ing credit decisions? The problem of bad debts has been addressed by the government? The ban$ internal system has been moderni%ed? 3mprovement of the payment system is supported by new.created inter.ban$ mar$et. v *urrency B1change has been facilitated by new.established <oreign B1change Trading *enters.
v v v v v

%ro*le+ The ban$ing sector is highly ta1ed by international standards, is significantly undercapitali%ed and has a staff for the most part only marginally familiar with international ban$ing methods and standards. The ban$ing system consists of a number of individual ban$ing units with little interaction between one another. Structure 2ne of the most impressive developments in the last four years is the increase in entry into the ban$ing sector. 0t the end of !!4 this sector included)
v The four state.owned ban$s 4The 3ndustrial and *ommercial ,an$ 43*,5, the

v v v v v

Vietnam ,an$ for 0griculture 4V,05, the <oreign Trade ,an$ 4<T,5, and the ,an$ for 3nvestment and /evelopment 4,3/55? :ine foreign ban$ branches 4Table ,+ in appendi1 ,5? <our JV ban$s? <ifty three representative offices of over 40 ban$s from G countries? More than +4 local &oint.stoc$ ban$s, with varied ownership, including private and public firms, cooperatives, 8eoples' *ommittees and individuals. 0bout H,G00 very small rural and urban cooperatives, one state.run insurance company, and two very small finance companies. ending

The *ommercial ,an$ 2rdinance, enacted in !!0, specifies the general limits on deposit mobili%ation and loan and e(uity allocations 4e1posure5. 6owever, there is also no upper limit to unsecured credit compared to secured credit, nor, are there regulations with regard to asset distribution. ,an$s are allowed to trade in gold,
5

State 1a 2 of *iet a" acts as ce tral ba 2 u der "ar2et eco o"!#

28

precious metals, and stones, generally considered e1tremely ris$y operations, without any (uantitative limitation. B1cept for the ,3/, most of the ban$s have been engaging in predominating short. term lending. Vietnam did not have one savings ban$ charged with deposit mobili%ation, so its ban$s are not characteri%ed by the unbalanced balance sheets found there. The state ban$s are now authori%ed to act as full service FuniversalF ban$s. Bffectively, this means that these ban$s will be able to lend to all sectors of the economy, and there are no longer any preferred interest rates outside the program funded from the budget. Super!ision ,an$s are supervised by the S,V and by the Ministry of <inance 4M2<5 which has an oversight role over the S,V. The supervision unit of the S,V gathers data monthly, (uarterly, and annually from the ban$s, and will perform on.site supervision. Ta-ation ,an$s and other intermediaries are sub&ect to a variety of ta1es on their operations. Most unfavorable and (uite rare is the sub&ecting of ban$ing to turnover ta1es of 4C to "C. 3n addition, ban$s pay profit ta1es of G0C of their net income, before any deductions are ta$en for specific or general provisions #. These practices . both high ta1 rate and the non.deductibility of provisions . discourage ban$s from acting promptly to identify and provision against potentially unprofitable loans. (.2.(. %rospects of do+estic Stoc# ,-change +ar#et Many investors are calling for a (uic$ opening of Vietnam's stoc$ mar$et, the benefits of which are clear)
v <oreign investors will gain the all.important e1it strategy? v 3nvestments will be li(uid? and v Aarge institutional investors will more comfortable

in a public mar$et

environment. The only (uestion is to be seriously considered) are there ade(uate conditions for the establishment of stoc$ mar$et in VietnamM To continue stimulating the high economic growth rates that have been witnessed over past four years, economic policy ma$ers will need to carefully address four essential areas, among some of the most urgent re(uirements in the coming years)
v Macroeconomic stability? v <oreign trade and investment? v /evelopment of capital mar$ets? and
6

*urrently, Vietcomban$ pays 40C on the ban$'s net profit and -0C on turnover for credit service. 3ndustrial K *ommercial ,an$, &oint venture ban$s, and foreign ban$ branches pay GC on similar service #

29 v <uture strengthening of the legal framewor$.

The development of capital mar$ets will contribute to the e1pected achievement of ma&or economic targets of) ! . 0C =/8 growth? - . 4C industrial output growth? and 4.G . G.0C agricultural output growth. The =overnment estimates that capital re(uirement for such ambitious targets is between -0 and 40C of gross domestic product 4=/85 in domestic and foreign sources. 6owever, capital mar$ets are inade(uately developed and raising this amount of capital 4somewhere between 'SI 4.H and 'SI #.+ billion based on !!4's =/8 of 'SI G.G billion5 will pose a serious challenge to economic ma$ers with providing the environment of attracting capital. 9Vietnam +nvestment *eview , Jan !!G; *urrently, there are three main sources of capital) 4 5 /omestic savings and investment? 4+5 2fficial development assistance 42/05? and 4-5 <oreign direct investment. There also are problems in mobili%ing capital to satisfy the financial needs)
v Aocal credits are principally short.term ones because people do not yet have

confidence in the ban$ing system needed to ma$e long.term deposits?

v Aong.term borrowing from foreign countries is not used due to constant

fluctuation of commercial soft.interest loans and high fees of ban$ing?

v Massive increase in </3 does not cover the large difference between approved

investments and actual investments?

v 3n addition, some 'SI G00 million in multilateral funds has been raised offshore

for investment in private e(uity or listed e(uity for only when stoc$ mar$et ta$es off. The need for stoc$ mar$et is clear, since it will resolve the problem of long.term mobili%ation and will attract much more foreign direct investments. 0s conse(uence, this will effectively influence the satisfaction of capital re(uirement for the nation's economic development. 'p to now, some measures has been ta$en to improve the situation. 0 number of important policies facilitating capital mar$ets development were pushed through in !!4)
v /omestic investment law? v /ecree permitting the establishment of a bond and stoc$ mar$et.

This will encourage the mobili%ation of domestic capital and will allow ban$s and state and private companies to raise debt and e(uity capital. State ,an$ is now applying some policies and measures as preparing steps towards the opening of stoc$ mar$et)
v 0llowing commercial ban$s to sell long.term bonds and issue credit cards? v 0ssisting the =overnment, together with M2< in the sale of stoc$s and shares? v The S,V and M2<, on behalf of the =overnment, will issue stoc$s and shares

in foreign countries?
v *reating conditions for certain enterprises to sell stoc$s and shares.

30

The opening of stoc$ mar$et should be handled correctly, otherwise it could fail. The current conditions are not yet ade(uate to support an economic environment involving company shares and the sale of shares and bonds. To promote such an environment, a system of economic civil and commercial laws must first be in place. This includes a code of by.laws laying out the regulations and the guarantees to buyers and sellers, none of which are presently available. The managing staff, including the organ of national management of securities, the office of transactions, companies for accountancy and mediation must be formed in parallel if Vietnam aspires to host a viable stoc$ mar$et. 7egarding the establishment of stoc$ mar$et, the S,V has decided to move forward slowly and carefully. Too much focus on the stoc$ mar$et could become a huge drain on talent from other areas in the financial sector that are e(ually important to the country's economic development. 0s noted by 3ugene 4. "atthews, President of 4shta +nternational , the S,V has been correct in avoiding the mista$es that other countries in Southeast 0sia and Bastern Burope made by rushing the opening of public mar$ets to satisfy outside investors. (.2.). Macroecono+ic sta*ility 3t is believed that the correct mi1 of socio.economic development policies put in place during !!4 is the driving force behind the latest success. Testimony to the effect of the policy implementation is the surge in =/8 growth, leaping ahead by "."C and underpinned by strong sectoral growth performances in the construction 4 !.4C5, industrial 4 +.!C5, and service 4 0.+C5 sectors. 9 Vietnam +nvestment *eview , !!G; This favourable developments will encourage more foreign investments, but will not ensure that foreign investors would not assume country ris$ when ma$ing investment decision. Macroeconomic situation has been stable during last four years. Therefore, low macro ris$ would be assumed if this trend still continue. 0nd to maintain macroeconomic stability, it is essential for policy ma$ers to provide a policy framewor$ that is conductive to economic restructuring and sustaining economic growth . not only for !!G but well into the ne1t century. The challenge for Vietnam is to strengthen its fiscal system. 3n turn, this re(uires improving the ta1 collection system without arbitrarily ta1ing productive sectors of the economy, which is li$ely to enhance e1ternal trade and domestic growth. 0nother re(uirement would be to phase out subsidies to State.owned enterprises which continue to drain scare public resources and hamper efforts to effectively manage the budget. This way, Vietnam is li$ely to maintain economic stability and from the foreign investors' eyes to reduce ris$ inherent in business environment. (.2.1. The a!aila*ility and relia*ility of the infor+ation 3n the conte1t of pro&ect financing, the most important information is information related to financial data. =eneral recognition is that most Vietnamese companies have accounts, but they rarely reflect the company's true financial position. 2ne of the reasons indicates undeveloped accounting system. 0nother problem is lac$ of mar$et

31

information. This can be e1plained from statistical figures where some data are less accurate. The first users of such information are ban$ers. ,efore granting loans to any business unit, the ban$s have to evaluate its activity and business performance. *redit ris$ assessment by number crunching is still difficult when there are so few reliable numbers to crunch. The ban$s have to rely on other mean. They try to conduct mar$et research, which is helpful, of course, but time consuming. The company's assets evaluation is also facing problems in e(uiti%ation pro&ects due to limited financial reportage and poorly used accounting methods. 6istorical data are not reliable because they were FestablishedF on the non.mar$et basis. The e(uiti%ation pro&ect's sponsors have been attempted pilot steps to apply internationally recogni%ed accounting standards in selected enterprises. 2nce successful, this will be a sample for other e(uiti%ation pro&ects to follow. The third group of information users are foreign non.ban$ing investors. Many of them have been researching the mar$et directly or through local mar$et researchers to get such type of information which is available in their home country, but not in Vietnam such as product mar$et share, mar$et si%e etc. Aimited financial data of both state. owned and private enterprises give foreign investors less choices in selecting local partner to enter JV with. /ue to less available information, consultant firms, lawyers, and accounting@auditing companies played an important role in helping foreign investors start up their business in Vietnam. 6owever, legal system has been improving, and laws have become more specific, they 9consultant units; are being less important compared to !!0.!+ period when consulting ability strongly relied on local connections.

(.(. %ro$ect financing in the 5ietna+ese conte-t

There is a big gap between financing state.invested and privately invested pro&ects, in term of both si%e and access to funding. Aarge investment pro&ects such as roads, ports, utilities, telecommunication, etc. are usually funded from budget programs? medium.scale pro&ects such as construction, production infrastructure, moderni%ation of strategic sectors etc. are supported in form of soft.interest loans from state.owned ban$s. Bven small.si%ed public pro&ects can find out the interest of local government which then provides guarantee to get ban$ loan with favourable terms. 0t the meantime, private sector investment in most cases falls into small.si%e category and it is not easy for the investors to get loan from state ban$s. 3n fact, registration of private companies has been increasing, however the main sources of funds for starting up business are family members, relatives, and friends, definitely not the ban$s. 3f private companies are growing, if they gain certain mar$et position, they may consider the possibility of ban$ loans. Many private business investors have practically mobili%ed capital among individuals. They are capable to mobili%e large capital up to billions of V: !ongs 4some hundreds of 'S !ollars5 if they $eep the schedule of interest payments as well as principal refunding.

32

>hile the State commercial and stoc$ ban$s and the Vietnam 3ndustrial and *ommercial ,an$ have been carrying out the program to loan private sector, other ban$s remain wary of loans to private businesses, citing sha$y laws on mortgage and the lac$ of a system to evaluate private assets as the main deterrents. 3n the event of a loan default, these ban$s have few avenues by which to recover their loss. This is unfortunately the fact. Aoaning to the private sector is not easy because Vietnam has no mortgage law. The e1isting laws do not stand on the side of the ban$ if any ris$s occur in loaning. 8rincipally, houses and land can be mortgaged. 6owever, this issue is confused when attempting to appraise the value of assets. The state has yet to legitimi%e the value of estate property, which causes difficulty for the ban$s in case they have to sell off assets if loans go into default. This matter has discourage many ban$s from loaning to the private sector. 6ppendices Table 0-. 3nvestment by country, Jan , !!4 to /ec , !!4 Table 0-.+ 3nvestment by country, Jan , !"" to /ec , !!4 <igure , . 3nvestment by sector 4January , !!4 to /ecember , !!45 <igure ,+ . <oreign ban$ branches 4by Jan !!G5 <igure ,- . The leaders 4investment by country, @ @ !"". @ +@ !!45

33

Chapter )
C(%& %T+#* 1, 9,ST 6C, R,3,4CD

Ser!ice 6part+ent pro$ect

% Project financed mainly by foreign investors&

).1. Introduction
5est #ake - a lake full of legends. *enowned for its size and beauty at dawn and dusk, it was traditionally known as !am !am or ,The "isty #ake,. Then, under the influence of the hinese in the 67th century, it was renamed 5est #ake. #egend has it that the 788-hectare lake was created by the 0olden $uffalo from hina, who rushed south on hearing its mother9s call. 4ctually, it was a sound made by :hong #o, a Vietnamese $uddhist monk. +n its frenzy, the $uffalo dug up a huge crater which formed a lake the famous 5est #ake of ;anoi.

).2. %u*lic hotels7 property *usiness and the Touris+ Industry in 8anoi
<oreign investors have been rushing to 6anoi since !!-. >hile a few years ago an investment pro&ect worth some hundred thousand 'S dollars was notable, recently a pro&ect worth tens of million of 'S dollars is commonplace. Tourism and services are the areas attracting most foreign investment, amounting to !G pro&ects. The =eneral Tourism /epartment estimates that more than one million tourists will come to 6anoi in !!G. 3n order to meet this re(uirement, G,000 rooms of international standard will be needed for !!G, and 4,000 rooms for the year +000. This estimates may e1plain the F6otel building feverF in 6anoi. ,esides the minihotels which have mushroomed in the capital city, larger hotels and shopping centers worth tens of millions of 'S dollars are now under construction not only in downtown 6anoi, but also in suburban areas such as :ghi Tam, :hat Tan, and Nuang ,a. 2ne of the efforts to improve the tourism industry in 6anoi is the >est Aa$e Masterplan. 3n !"0, Soviet urban planners chose >est Aa$e as the centerpiece of 6anoi development plan. <ree.mar$et reforms in late !"0s have added to development pressure. 0 masterplan for 6anoi's rapidly developing >est Aa$e /istrict has been approved, resolving one of the most sensitive urban planning issues in the capital. >est Aa$e is destined to be a center for tourism as well as trade, and building construction and design will come under close scrutiny. The area has been divided into five %ones.
v The south of >est Aa$e lin$ing 6anoi to :oi ,ai international airport will be a

trading center?

34 v 6otels and high.rises will have priority to the west of the la$e? v The north and the east is reserved for par$s and tourist facilities? v The la$e itself will be dedicated to recreation.

So far, some 'SI +00 million in development has either been completed or proposed around the la$e.

).(. The pro$ect

).(.1. Structure of the pro$ect >est Aa$e 7egency 4>A75 is a service apartment pro&ect established in form of a JV company, called >est Aa$e /evelopment *o. Atd. 4>A/*5. This is JV between 873M0>BAA 3nvestments 8te Atd. Singapore, and 6anoi 6ousing and 7enovation /evelopment *ompany 467/*5. 2f the total legal investment of 'SI -, 0 ,4+", Vietnamese party holds -0C and the foreign party holds H0C. 'nder the JV agreement, ,oard of Management has five members representing two from Vietnamese party and three from foreign party H. There were some changes in ,oard of Management during the construction phase, the pro&ect organi%ation, however, remains as set up at the beginning 4<igure 4. 5. Since many parties are involved in the pro&ect financing and implementation, the board of management has designed clear communication channels 4<igure 04. in appendi15 to be implemented for pro&ect and construction management. ).(.2. Funding structure %tructure of o-nership The sponsors of >est Aa$e Service 0partments /evelopment 4>AS0/5 8ro&ect provide e(uity fund amounting 'SI -, 0 ,4+". The fund, according to initial feasibility study, could be used to finance two.fl oor to three.floor buildings with -+ apartments. This plan would not re(uire any amount of loan. Such investment falls into small.si%ed categor

>hen JV had decided to increase investment capital, the Aoan 0greement then re(uires JV to increase the numbers of ,oard of Management from five to si1 #

<igure 4.

>BST A0LB /BVBA28MB:T *2M80:O 27=0:3P0T32: *607

'O6R& 'O6R&OF OF M6463,M,4T M6463,M,4T

> > > > >

"r !inh "r uong "dm 0oh Poh ?o !ebbie #ee heah -heau #a

3,4,R6 3,4,R6 M6463,M,4T M6463,M,4T >%RO?,CT >%RO?,CT COOR&I46TIO4 COOR&I46TIO4

3 0dministrative Q Aegal 3 <inance Q 0ccounting

* -tephen 4ng > heah -heau #a

864OI 6&MI4 OFFIC, .6t &oi Can/

3 4w ers5 6ep (Mr Sam) 3 Secretar!7Tra slator (Mrs Binh)

S,R5IC, 6%6RTM,4T M6463,M,4T > M6RC,TI43

3 Aiang *ourt 7egency %4llan Tan&

6CCO04TI437 60&ITI43 > T6E6TIO4

3 L8M= K V0*2 % hoy Tuck #eong)

%RO?,CT > CO4STR0CTIO4 M6463,M,4T

3 Aiang *ourt.Veldon %-imon #ee&

-+T3 1))+ 3
3 A*V Site Manage %"r #ow&

1/-<#T4/T- = 1/T*4 T1*-

-+T3 -<PP1*T
3 A*V *onstruction Superintendent %"r Teh& Q A*V Structural Bngr % handra& Q Vietnamese Structural Bngr %"r Tuan& > Secretary@Translator

36

2nly after careful study of 6anoi's 0rchitecture and *onstruction Masterplan and >est Aa$e /evelopment Masterplan, the board of directors of >A/* decided to increase their investment in selected site. The pro&ect piece of land is assessed as one of the most beautiful place of the >est Aa$e area. ,y increasing the investment, >A/* e1pects greater effectiveness and efficiency of the pro&ect. 6igher investment does not change structure of capital contribution 4Table 4. 5. Vietnamese party still holds -0C of legal capital, contributed in form of land use right. Singaporian party contributes H0C of legal capital in form of cash and materials@e(uipment imported from foreign countries. This way of sharing investment capital is very popular under Vietnam Aaw on <oreign 3nvestments, particularly for investment on hotels, commercial office buildings, service apartments or the hotel. office.resort comple1. Ta*le ).1 ,Fuity structure .0SA/ Shareholders 0 , 6anoi 6ousing 7enovation K /evelopment *ompany 873M0>BAA 3nvestments 8te Atd. . Singapore Total %tructure of debt 0fter evaluating the (uotations of 4 5 2verseas 'nion ,an$, 4+5 0:P ,an$ and 4-5 'nited 2verseas ,an$ of Singapore, the Joint Venture *ompany be authori%ed to borrow up to 'SI # million from the 'nited 2verseas ,an$ 4'2,5 for the purpose of funding the increased construction cost and to provide additional wor$ing capital for the pro&ect. Ta*le ).2 oan structure .0SA/ enders 'nited 2verseas ,an$ of Singapore Total Type of loan 6+ount granted 4'SI5 #,000,000 27<<<7<<< Interest ter+ 4C5 H.G0 Maturity 4Oears5 G For+ of capital Aand use right *ash, imported materials@e(uipment ,Fuity 6+ount 4'SI5 !-0,4+" +, H ,000 (71<17)2@ %ercentage G -0 C H0 C 1<< G

Simple interest

3t is necessary to notice that the chairman of the JV company is authori%ed to e1ecute the <acility Aetter and any formal or ancillary documentation to allow the JV company to receive and fully use the loan in accordance with the <acility Aetter. The S**3, the S,V, and other relevant authorities are involved in this process. 3t is

37

proposed that Vietnamese party or S,V " will provide a guarantee in such form as '2, may re(uire in accordance with the <acility Aetter. <oreign party also provides a guarantee to the '2,, so that the JV company will be authori%ed to borrow the loan it needs for the pro&ect construction. The S,V will give its written approval for the principal and the interest under the loan provided by '2, to be remitted to '2, in Singapore in accordance with the <acility Aetter. The figure 4.+ presents various partners involved in the financing of >AS0/ pro&ect. The scheme loo$s somewhat complicated, however it reflects the reality of e1isting procedures for investment and ban$ing activity associated with pro&ect financing. ).(.( %ro$ect description

1verview
Au1ury apartments developed by >A/* are constructed in the area of G,G00 m +, situated at :o. +G4/ Thuy Lhe St., ,a /inh dist. of 6anoi city. <our bloc$s with different types of apartments are designed in very nice space. Total surface of construction floors is !,040 m+, composing from +0 apartments type 0 with a si%e of !" m+ 4two.bedroom5? +G type , apartments having si%e of !# m+ 4Two.bedroom5? and G type * apartments with a si%e of #- m + 42ne.bedroom5. There is sport room, laundry, room safes, business center, restaurant, swimming pool, tennis court and children's playground.

/atural conditions
The G,G00.m+ piece of land in +G4/ Thuy Lhe street is located in the ban$ of the >est Aa$e. There are some main features of the climate in the >est Aa$e area) 4 5 summer lasts long, temperature is not high? 4+5 winter usually brings very cold weather due to north.east winds, humidity is high? 4-5 rainy season lasts from 0pril to 0ugust with annual rainfall of ,#00 mm. Sometime, 6anoi hits storms, but they are wea$en when passing long distance from off.shore.

!esign and construction

Since Vietnamese party is a construction company, it was selected to ta$e charge in designing the whole pro&ect from planning to construction designs. 3t was also as$ed to consult with architects appointed by Singaporian party during designing process. 3t also too$ the responsiblity to deal with entire procedures to get construction permit appropriate with regulations issued by the government of Vietnam and 6anoi authorities.

The =overnment of Vietnam authori%es the Ministry of <inance to provide guarantee to government organisations, and State ,an$ to provide guarantee to non.government organisations.

!i&u%e 5C* WESTLA"E SERVICE A ARTMENTS RO#ECT !INANCING

36

Mini(t%8 o+ !inance (MO!)

State Co))ittee +o% Coope%ation 6 In'e(t)ent( (SCCI)

State Ean> o+ Vietna) (S,V)

S,V Hanoi ,%anc9 eopleD( Co))ittee o+ Hanoi

3 6e,ulatio s of :46$@ >a a,ee" t 3 6e,ulatio s of 1orrowi , ? 6epa!"e t to forei, 1a 2s 3 %ll other ,uida ce docu"e ts

' (est"e t 9ise ce 9aw o :orei, i (est"e t i *;

8uara tee %ppro(al for i terest a d pri cipal

6eport

6i,ht of la d use

LIANG COURT 7 Ho(pitalit8 Se%'ice( 7 Sin&apo%e

4peratio >a a,e"e t ? >ar2eti ,

Joint-Venture Company We(t La>e De'elop)ent CoC Lt:C WESTLA"E SERVICE A ARTMENTS RO#ECT

$<uit! 30=

Hou(in& Reno'ation 6 De'elop)ent CoC o+ Hanoi (HRDC)

&o tracts

' troductio

Hou(in& 6 Lan: Depa%t)ent o+ Hanoi

6eco""e datio

LIANG COURT Vel:on teC Lt:C 7 Sin&apo%e

9oa

Vietna)e(e( Cont%acto%(
%ppoi t"e t $<uit! 70=

AN; ,an> Hanoi ,%anc9 (AN;)

%ccou t

&o tracts 9oa %,ree"e t 6eport

RIMAWELL In'e(t)ent( teC Lt: 7 Sin&apo%e

%ccou t

Unite: O'e%(ea ,an> o+ Sin&apo%e (UO,)

!o%ei&n Cont%acto%(

Depa%t)ent +o% +o%ei&n econo)c a++ai%e( 7 Hanoi

6eco""e datio #oint Ventu%e7A&%ee)ent

39

).). %arties in!ol!ed

-ponsors2 4 5 6anoi 67/* was established in !! under the city's 6ousing and Aand /epartment. ,efore it has &oined the JV, the G,G00 m+ land in +G4/ Thuy Lhe St. was used for the production of construction materials under its control. 3t has the right to use this land for whatever purpose li$e other State.owned enterprises. ,ut when it &oined the JV with foreign partner, its land use right must be officially approved by the city's 8eople's *ommittee. This procedure is necessary for evaluation of the value of this right as a category for ta1ing of the land. The 67/*'s financing is worth 'SI !-0,4+" and is considered ris$less. 4+5 873M0>BAA 3nvestments 8te Atd. of Singapore had to be concerned with its investment carefully. Since >A7 is its first pro&ect ! in Vietnam, it has loo$ed for different possibilities to start up business in 6anoi. The >est Aa$e area was selected due to e1pected tourism potential of the la$e through the approval for the la$e development masterplan. The JV establishment process was administered by ,urton Bngineering 4Singapore5 8te Atd. . its subsidiary . as negotiator on behalf of 873M0>BAA. 3t contributed cash and imported materials@e(uipment needed for the pro&ect development and construction. #enders2 '2, was selected as sole lender providing the loan up to 'SI #,000,000. 'nder the loan agreement, the loan can be fully and should be effectively used for the right purpose as mentioned above. The agreement also re(uires that the cash needed will be transferred to the JV's account in 0:P 0 ban$ or be used to purchase materials and e(uipment outside Vietnam. -uppliers2 Suppliers participated only during construction phase. 3n most of the contracts, the contractors at the same time are suppliers. <or e1ample, construction contractor is responsible for (uality and (uantity of all $inds of construction materials as well as its wor$ing facilities. 0nother e1ample is air.conditioning system contractor which was provided fund to import air.conditioning units directly from Japan. ontractors2 4 5 Aiang *ourt . Veldon 8te Atd. of Singapore is a company speciali%ed in 8ro&ect and *onstruction Management. 3t participated in >A7 pro&ect as construction manager. The company plays the role of supervisor@monitor over the construction wor$s
9

The second pro&ect sponsored by 873M0>BAA 3nvestments 8te Atd. is being under construction in 6o *hi Minh *ity, and the third one has &ust opened groundbrea$ing ceremony in the site of former 6oa Ao prison in 6anoi. 10 0ustralian and :ew%eland =roup

40

administered by Vietnamese contractor. 3t is also responsible for the delivery of imported materials@e(uipment to Vietnamese port. 4+5 Aiang *ourt . 6ospitality Services was appointed as pro&ect operator . the manager of the pro&ect in operational phase. 4-5 Aocal construction contract for foundation wor$ was carried out by the JV between 67/* and *onstruction *ompany :o. + under Ministry of *onstruction 4M2*5. This JV was active only during foundation wor$. 2nce this wor$ had been completed and paid off, the JV terminated. *ontractor for main contract wor$s is the *onstruction =roup :o. under the M2*. There are various construction units under control of this =roup, which were responsible for certain construction activities of the construction contract. 445 *ontractors for mechanical and electrical wor$s were also selected through the tender li$e contractor for main contract wor$. They mostly are small companies, involved in installing air.conditioning system, power and water system, and fire.alarm system, etc. 4G5 B1pected customers are e1patriate tenants who come to Vietnam for long.time business. Some have signed the lease contracts &ust in Singapore or in countries where the foreign sponsor has its establishments. The other have contacted >A7 only after had come to 6anoi. 1thers2 S**3 is involved in improving investment license to &oint venture company. S,V provides guarantee to &oint venture company for loan granted by '2,. S,V 6anoi ,ranch involved in coordination under S,V. 6anoi 8eople's *ommittee involved in approving land use right to JV company. 6anoi 3nternational Bconomic 7elations /epartment involved in coordination under S**3 to ensure the legal operation of JV company. v 6anoi 6ousing and Aand /epartment provides guarantee to 67/* for its legal title. v 0:P ,an$ plays an Frepresentative roleF for '2, in facilitating the granted loan.
v v v v v

).1. Financing 6nalysis

).1.1. Cost esti+ation =enerally, large.si%ed pro&ect cost is estimated according to various items instead of implementation phases. The Vietnamese partner contributed to the legal capital of the pro&ect in form of land use rights 4-0C5, therefore, in the following session only costs covered by foreign partner and granted loan are included 4Table 4.-05. Ta*le ).(6 %ro$ect Cost ,sti+ation .su++ary/

41

Ite+s &escription 8re.pro&ect Singapore office 6anoi >est.la$e office *onsultancy <ieldwor$ office *onstruction B(uipment 8re.inauguration TOT6

0SA 40G,000 #+,000 -!,000 40H,000 -0,000 4,0G+,000 ,G++,000 +!#,000 ;7<1(7<<<

%ercentage G.HHC +.- C 0.G#C G."0C ."GC GH.H"C + .H0C 4.++C 1<<.<<G

+ 4 G # H "

0s re(uired by S,V, >A/* has to $eep a balance of 0C of the loan granted by overseas ban$ in order to get guarantee. The loan will be granted up to 'SI # million, so 'SI #00,000 cash balance should be deposited in S,V's account. Total estimated investment capital including value of land use right and refundable balance would reach 'SI !, 0 ,4+". <or the development of !,040 m+ construction surface, there will be re(uired 'SI HHG.HH per s(. meter. The details on the pro&ect cost estimation can seen in the master budget for the pro&ect development 4Table 04. 5. ).1.2. Financing plan The pro&ect was scheduled to be in operation in ++.+4 months. /evelopment phase ta$es 0 to + months and construction phase must be completed within 0. + months. The development phase ta$es long time because both partners had to negotiate all the conditions for the establishment of their JV company. The time needed for license approval, preliminary designs, construction permit and land clearance was also long. a5 /uring negotiation phase 4scheduled from 4@4@!+ to @ 0@!+5 both partners have discussed to establish their JV company which will be responsible for the whole pro&ect development. 3t is agreed that foreign partner will provide 'SI #G,000 to its counterpart for the feasibility study and preliminary designs. Vietnamese partner will be given 'SI -0,000 immediately after the signing of JV 0greement. The rest, 'SI -G,000 will be provided when feasibility study and basic drawings are completed and submitted to the S**3 along with relevant documents in order to get investment license. b5 8re.construction phase 4 @ 0@!+ . -0@ @!+5 was scheduled as below.

v 0n amount of 'SI !0,000 is re(uired for land clearing, soil testing in the first two

months. To accelerate the land clearance process, Vietnamese partner will need 'SI !0,000 in the first month. 0n additional 'SI 00,000 should be paid off ne1t month.

42 v This period will ta$e another 'SI

G0,000 spent on renting office and apartments, transportation and brea$ing ceremony etc.

c5 *onstruction phase 4 @ +@!+ . -0@!@!-5 was divided into smaller steps as)
v 3n the third and the forth month 4 @ +@!+ . - @ @!-5, 'SI -00,000 should be

v v v

v v

provided for buying construction materials and partial payment for foundation wor$s. 3n the fifth month 4 @0+@!- . +"@0+@!-5, ne1t 'SI -00,000 is needed to pay off for the foundation wor$s and to prepare for the main contract wor$s. <rom the si1th month 4 @0-@!- . - @0G@!-5, 'SI + million is re(uired to finance main contract wor$ and imported materials@e(uipment, including administrative e1penses. <rom the ninth month 4 @0#@!- . - @0H@!-5, an additional 'SI + million is needed for main contract wor$s completion and for carrying out mechanical and electrical wor$s and to continue import final materials@e(uipment, including administrative e1penses. 3n the eleventh month 4 @0"@!- . - @0"@!-5, 'SI + million is used to pay final wor$s. 3n the twelfth month 4 @0!@!- . -0@0!@!-5, 'SI -+,000 is paid for chec$ing construction and installation wor$s, testing e(uipment and finali%ing the payment of contracts. 0dvertisement should be held in this period.

d5 8reparation for inauguration 4scheduled 2ct. !!-5 needs an amount of 'SI +!-,000 for financing telephone lines installation, accounting system establishment, employees' training etc. e5 <irst year of operation 4scheduled 2ctober !!- . 2ctober !!45 re(uires about 'SI G00,000 cash balance in the ban$ to be available for getting the pro&ect in operation at the beginning of :ovember !!-. f5 :ote that the pro&ect has delayed almost one year. The reason was) 4 5 the foreign partner changed the architect design of all four bloc$s so that ad&usted construction permit had to be approved again, 4+5 investment license was ad&usted due to change in the si%e of investment. 3nitial investment of 'SI -, 0 ,4+" increased up to 'SI !, 0 ,4+" and 4-5 land clearing process too$ longer time than what was initially planned. 0lthough the pro&ect starting date has been delayed, the duration of the pro&ect remained unchanged. Starting on st 0ugust !!-, preparation wor$s, construction wor$s and other wor$s have been completed in September !!4. The pro&ect started its operation from 2ctober !!4.

).2. %ro$ect e!aluation

).2.1. Ser!ice apart+ents de!elop+ent analysis

43 v Au1ury service apartments with high international standard should be developed to

v v v v v

meet increasing demand by foreign businessmen, government officials, high.level managers, etc. The cost of construction floor m+ is 'SI HH0, acceptable compared to other pro&ects of the same $ind. The success of the pro&ect will be valuable for assessment of other pro&ects, help various authorities set the standards for housing business. The pro&ect itself could attract high.(uality foreign investments since it can offer comfortable accommodation in 6anoi. ,y increasing the investment from 'SI - million up to 'SI ! million, the pro&ect increases its mar$etability, hence insures the success of the pro&ect. More comfortable apartments will generate more rental revenue, so that higher earning will be divided to both parties, and at the same time the government of Vietnam will get better balance from ta1 collection. The reali%ed e1penses are about 0.GC higher than estimate 4Table 4.-,5.

Ta*le ).(' %ro$ect cost .su++ary/

Ite+s description 8re.pro&ect Singapore office 6anoi >est.la$e office *onsultancy <ieldwor$ office *onstruction B(uipment 8re.inauguration TOT(.

0SA G ,000 #+,000 -!,000 G-4,000 -0,000 -,!+G,000 ,4G+,000 +!#,000 ;7<)=7<<<

%ercentage H.+GC +.-0C 0.GGC H.G"C ."4C GG.#"C +0.#0C 4.+0C 1<<.<<G

+ 4 G # H "

The cost over.run ris$ was avoided. This is probably due to relatively small scale of pro&ect compared to that of the same type. 0ctual /ebt@B(uity ratio was .!-. The details of different e1penses occurred for the pro&ect development and construction are presented in the table 04.+ 4in appendi15. ).2.2. Fees and Re!enues >est Aa$e 7egency e1pects revenue from two sources) 4 5 revenue from leasing apartments? 4+5 revenue from services such as restaurant, dancing hall, business center, etc.. Si1ty lu1ury apartments of different types are offered to lessees. Monthly rates are much higher than what were estimated in the feasibility study. <or the comparison, the following table gives the figures for both cases.

44

Ta*le ).) Rental rates .+onthly/

6part+ent Type 0 4two.bedroom, !" m s(.5 , 4two.bedroom, !# m s(.5 * 4one.bedroom, #- m s(.5 6!erage

4o. +0 +G G

,sti+ated rental 4,G00.00 #,000.00 #,-00.00

6ctual rental G,!00.00 H,!00.00 ",+00.00

&iscount 2<G 4,H+0.00 #,-+0.00 #,G#0.00

171;1.<<

;7(<@.((

17@)2.2;

2ther services, based on e1perience, may generate as many as +GC of revenue from lease. This is entirely an estimate, however can be used for conducting pro&ected income statement. 3n its proposal, the management of >A/* proposed a profit ta1 of "C, ta1 e1emption period of first + years, ta1 reduction by half in the ne1t two years, remittance ta1 of GC. The final decision of S**3 upon these items was as following)
v v v v

8rofit ta1) Ta1 e1emption period) Ta1 reduction period) 7emittance ta1)

!C year none HC

/uring the construction phase, >A/* buys insurance from Vietnam 3nsurance *ompany 4,02V3BT5. The title of contract is F<oundation wor$s of Townhouse for e1patriates' tenantsF. The sum insured reached 'SI -!",000. >A/* e1pects to increase rentals about GC annually, considering an increase in demand for the service apartments. The estimated occupancy rate is G0C in the first year and would bring 0C more in every ne1t year up to !0C which would be $ept unchanged until last year of pro&ect life. ).2.(. Financial 6nalysis B1pected earnings after deduction of GC for the company's internal fund will be divided as profit to each party. <or simplification, this cash flow is called as dividend 4/5. The JV pays ta1 of !C on its profit. 7eal income to Vietnamese party e(uals -0C of the dividend after deduction of the rent on the land. <oreign party pays remittance ta1 of HC for their H0C of dividend if is to be remitted to their home country. Ta*le ).1 ,sti+ated Inco+e State+ent .su++ary/

45

Ite+s 7 B =8 T8 07B & /V: 3V: /<7 T7 3<7 =3 f *< **< Total Re!enue Total ,-penses =ross profit Ta1es 4 !C5 0ddition to 7B &i!idends To V: party Real inco+e to 54 party To foreign party 7emittance ta1 4HC5 Real inco+e to F. party 3o!ern+ent Inco+e /ividends@B1penses /ividends D /epreciation *umulative *ash flow

Dear 1 +,GH#,+G0 +,+G ,"-G -+4,4 G 0 #,++ (<@71=) !+,4G" GG,!H + G,H-# G, 0+ +00,#-4 G ,G"! -.#!C "GG,-## "GG,-##

Dear 2 -,+4#,0HG +,GG ,+4H #!4,"+" -+,0 H -4,H4 12@7<2= G",4+ + ,!-4 -#!,#4! +G,"HG -4-,HH!4,-"0 +0.H0C ,0HG,+4 ,!-0,#0#

Dear ( -,!H#,44+ +,"HH,H+ ,0!",H+ +0",HGH G4,!-# @(17<2@ +G0,G0" + 4,0+ G"4,G+0 40,! # G4-,#0+"#, #0 +!.0+C ,-"+, !! -,- +,"0#

Dear ) 4,HH ,H-0 -,+--,+ G ,G-",G G +!+,- " H#,!+# 1712=72;2 -G0,H"+ - 4,+!G " ",4!0 GH,+!4 H# , !# -"#,0!! -#. #C ,H #,44G,0+!,+4!

Bstimated income statement is conducted for +G years of pro&ect life 4Table 04.- in appendi15. 0nother estimated income statement is also conducted, based on actual rental charged to clients 4Table 04.4 in appendi15. *urrently, >A7 management offers a discount of +0C. The discounted rental prices loo$ somewhat similar as estimated rental rates presented in feasibility study. The estimated value of rental is therefore used in further analysis. ).2.). Sensiti!ity 6nalysis Since the pro&ect revenue come mainly from service apartments, any changes in rental prices will strongly influence the pro&ect cash flow. 0s presented in the table 4.#, the flow of dividend will increase by half if rental rates change by D+0C. This is descending trend over the pro&ect life. 0lthough rental price should be fi1ed within a year, but it can be reviewed and change every year to fit the mar$et. Ta*le ).2 Sensiti!ity of &i!idend in relation to change in rentals Dear 1 ,0"+,4+ ! 4!C H+H," H Dear 2 ,-0",4! " -"C !G ,0G0 Dear ( ,H! ,0G -+C ,-G-, H ! Dear ) Dear 1 +,- #,G0 +,""H,!+H + +!C +HC ,H! ,0G +,+#H,+4 -

/ 47ental change D+0C5 *hange in / / 47ental base5

46

,ase case / 47ental change .+0C5 *hange in /

0C -H-,+0# .4!C

0C G!-,#0 .-"C

0C ! G,-0G .-+C

0C ,+#G,#0 4 .+!C

0C ,#4#,GG4 .+HC

:egative change in rental prices has as strong effects as in previous case but under opposite direction. 3f for some reason, the rental price must be changed so much 4.+0C or .-0C5, the pro&ect may produce low cash flow that could result in causing longer period for capital recovery. ,ased on the estimate of increasing demand for service apartments, rental rates are e1pected to increase GC annually. 8ossible rise in rentals, however, will has less impact on the flow of earnings 4Table 4.H5. Aess than GC change in the flow of dividend may occur in first G years, considered important for capital recovery. Ta*le ).; Sensiti!ity of &i!idend in relation to change in rental rise Dear 1 H+H," H 0C H+H," H 0C H+H," H 0C Dear 2 !#",0H +C !G ,0G0 0C !-4,0+" .+C Dear ( ,-!G,0" 0 -C ,-G-, H ! 0C ,,#H G .-C Dear ) Dear 1 ,"##,"- +,-"H, ## 4 4C GC ,H! ,0G +,+#H,+4 0C 0C ,H #,H0 +, G0,#!.4C .GC

/ 47ental rise change D +0C5 *hange in / / 47ental rise base E GC5 ,ase case / 47ental rise change . +0C5 *hange in /

*urrently, the rents in 6anoi are said e1pensive compared to that in the region. This rental rise, therefore is e1pected to face negative change, resulting in slightly negative change in dividend flow. The most important variable associated with the profitability of the pro&ect is, of course occupancy rates. These can not be set fi1ed or planned. 2ccupancy rates may change during the year, month. The impact of occupancy rate change on dividend flows is also visible 4Table 4."5. Ta*le ).@ Sensiti!ity of &i!idend in relation to change in occupancy rates Dear 1 ,0"+,4+ ! 4!C H+H," H 0C Dear 2 ,+4",!+ - C !G ,0G0 0C Dear ( ,##G,!4 # +-C ,-G-, H ! 0C Dear ) Dear 1 +, !,4G +,+#H,+4 " "C 0C ,H! ,0G +,+#H,+4 0C 0C

/ 42ccupancy changeD+0C5 *hange in / / 42ccupancy base E G0C5 ,ase case

47

/ 42ccupancy change .+0C5 *hange in /

-H-,+0# .4!C

#G-, H# .- C

,040,4 + .+-C

,4#+,#4 H . "C

,!++,4 G . GC

0lthough the occupancy rate of G0C is e1pected in the first year of operation, this figure is (uite uncertain since the rental price is set rather high compared to that in 6anoi. 2f course, >A7 offers lu1ury apartments so it can charge higher price. ).2.1. ,cono+ic 6nalysis The method used in feasibility study to calculate return on investment is paybac$ period. The reason why the sponsors did not provide the opportunity cost of their capital was not mentioned in provided documents. To Vietnamese side, opportunity cost was not necessarily considered, since the land use right was given freely. To foreign party, the pro&ect ris$ could not be assumed as e(uivalent as of any pro&ect sponsored outside Vietnam. 3n what they are interested, is capital recovery period. <or that case, paybac$ period seems to be more appropriate than other analysis techni(ue. Ta*le ).= 4et Cash Flo" o!er first 2 years Dear < 4!, 0 ,4+"5 Dear 1 "GG,-## Dear 2 ,0HG,+4 Dear ( ,-"+, !! Dear ) ,H #,44Dear 1 +,0H!,!-Dear 2 +,G-+,!GH

2f the total pro&ect life of +# years, including one year for construction, paybac$ period of # years 4Table 4.!5 is (uite good for their investment. The si1.year cumulative cash flow was estimated at 'SI !,#4+, -! which is around #C higher than initial investment. This means that they can e1pect ! years to gather profit without any e1penses.

).2.2. %ro$ect ris#s and e-pected returns .in relation to ris#/ 'id ris#. ,ecause capital contribution of Vietnamese party is only in form of land use right, the money spent in feasibility study and preliminary designs, essential to pro&ect proposal, was borne by foreign party. 3f the S**3 would not approve by not issuing investment license for the 4at that time5 proposed JV company, foreign party would loose 'SI #G,000 spent in preparing the bid. 3n the case of >A7 pro&ect, bid ris$ was assumed as low ris$, since the investment of the same $ind 4hotels K tourism5 is easy to be licensed for its implementation. Credit ris#. 3nitially, the pro&ect sponsors had in mind 00C e(uity investment. This meant that there would be no re(uirement for loan, and credit ris$ would not be ta$en in consideration any more. Bven when the sponsors have decided to increase investment

48

capital by borrowing up to 'SI # million, credit ris$ was so low that there were three commercial ban$s who offered loan to the JV company. These ban$s might foresee the profitability of the pro&ect. They therefore, did not hesitate to provide their (uotations to the pro&ect sponsors. <inally, one of those ban$s . '2, . was selected as the sole lender to the pro&ect. Technological ris#. ,ecause no new technology was used, the pro&ect can be classified as technologically ris$less. 0ctually, some $inds of e(uipment such as single split air.conditioning units, electricity transformer, satellite dishes, pumpset K pressure vessels, hosereel system, and fire.alarm system, etc. were installed. They are commonly used in lots of pro&ects, thereby are not involved in pro&ect ris$ assumption. Mar#et ris#. >A7 pro&ect offers services to its potential customers who plan long. time stay in Vietnam. 'p to now, >A7 is largest pro&ect by si%e which was already put in operation in 6anoi. Some larger pro&ects of the same $ind are in waiting for investment license or &ust opened groundbrea$ing ceremony and still waiting for capital offshore. The mar$etability of service apartments is clear 4section G.+.5. 6ow high is mar$et ris$ now depends only on the JV company's mar$eting capability and the rental price acceptance by potential occupiers. %olitical ris# .country ris#/. Ai$e other foreign investors, 873M0>BAA 3nvestments 8te Atd. of Singapore follows the strategy to avoid political ris$ by &oining its venture agreement with local public partner, 6anoi 67/*. The country ris$ was, to a certain e1tent, reduced by the assurance of the <oreign 3nvestment Aaw and favourable political and macroeconomic developments. ,-change ris#. /uring last four years, e1change rates have been relatively stable. This trend still continues. The establishment of <oreign B1change Trading *enters and the creation of inter.ban$ mar$et is important element supporting the currency e1change stability, therefore reducing the e1change ris$ assumed by foreign investors. %erfor+ance ris# and co+pletion ris#. 0lthough starting date of the construction had been delayed, the duration of construction wor$s was $ept within scheduled limits. The sponsors were not $een to ensure the completion of the pro&ect through performance incentives as commonly used in many pro&ects. 0ll contractors had to follow a clause in agreement, under which they would be materially punished by certain amount of cash per day for any delay. ,y this way, the pro&ect sponsors reduced the performance ris$ and completion ris$ at minimum. Cost o!er-run ris#. 7elative short duration of construction phase allowed the sponsors to apply fi1ed price contracts for all contractual items. *ost over.runs therefore were completely avoided. The costs re(uired by the tenderers and reali%ed costs are not different. Operating ris#s. The operation of service apartments is somewhat simple, compared to that of pro&ects in other sectors. Success of operational phase relies mainly on occupancy rates. ,ased on its e1periences, the foreign sponsor has commitment to mar$eting in foreign countries in order to get lease contracts outside Vietnam's border. 3t provides a performance guarantee to operating contractor which is its subsidiary speciali%ed in pro&ect operation 4Aiang *ourt 6ospitality Services of

49

Singapore5. 0 part of operating ris$s was ta$en by maintenance contractors through performance guarantee. 3n addition, the country ris$ can be reviewed from points described in chapter 4. Aess developed legal infrastructure and financial system causes the foreign investors to assume country ris$. 6owever, favourable reforms and well.observed stability of political and social situation encourage foreign investors ma$ing investment decisions. ,-pected return in relation to ris# . 0lthough the foreign sponsor did not provide the opportunity cost of their investment capital, some ris$ analysis techni(ues can be used to calculate the return on investment. The two most commonly used discounted cashflow techni(ues 4/*<5 are)
v the net present value 4:8V5 techni(ue? v the internal rate of return 43775 techni(ue.

0t present, the S,V sets the ma1imum limit of interest rates on loan on foreign currency not higher than !C per annee. *onsidering the country ris$s and other ris$s possibly related to pro&ect financing, assume the e1pected rate of return of +0C, then the calculated :8V will be 'SI ! 4,4!# 4Table 4. 05

Ta*le ).1< 4et %resent 5alue .0SA/ and Internal Rate of Return .G/ Dear < 4!, 0 ,4+ "5 Dear 1 "GG,-## Dear 2 ,0HG,+4 Dear ( ,-"+, !! Dear ) ,H #,44Dear 1 +,0H!,!--

:et *ash <low

:*<

Dear 2 Dear ; Dear @ Dear = +,G-+,!GH +,#GH,-+H +,H"H,! # +,!+G,0-4

Dear 1< -,0#!,00"

:*<

Dear 11 Dear 12 Dear 1( Dear 1) -,+ +,0 4 -,-H0,H4G -,G-H,4 - -,H +,4 4

Dear 11 -,"!#, #G

50

:*<

Dear 12 4,0"0, +

Dear 1; Dear 1@ Dear 1= 4,+"+,H0H 4,4!G,4++ 4,H ",HH-

Dear 2< 4,!G-,+!

:*<

Dear 21 Dear 22 Dear 2( G, 00,G-0 G,-G!,0"H G,#-0,GH

Dear 2) G,! G,#+!

Dear 21 #,+ 4,!4

4%5 4$E+0C5 IRR

=1)7)=2 21.;1G

*ommercial profitability of the pro&ect can also be indicated through internal rate of return 43775. 3n the case of >A7 pro&ect, cash outflow occurred only at the beginning of the pro&ect life, and cash inflows through +G years. Then pro&ect 377 is + .H C which can be seen favourable. 6ppendices <igure 04. *ommunication channels 4of >A75 Table 04. Master ,udget for >est Aa$e Service 0partments /evelopment 8ro&ect Table 04.+ B1penses in >est Aa$e Service 0partments /evelopment 8ro&ect. Table 04.- 8ro&ected 3ncome Statement 4conducted in feasibility study5 Table 04.4 Bstimated 3ncome Statement 4conducted &ust before starting operation5

51

Chpater 1
C(%& %T+#* 2,

Thuy Tien Office *uilding pro$ects

% Project financed by local investors&

1.1 Introduction
Bconomic reforms allow Vietnamese citi%ens move their business into areas which were monopolies in the hand of State.run economic units. 2ne of these is housing business. ,efore !!0, private houses could be renovated, used for rent and@or for sale only among local citi%ens. Small profits generated by domestic real estate mar$et inconsiderably contributed to the 6anoi housing development. /uring the last few years, 6anoi housing mar$et has been e1panding. 0 greater number of houses can now go up for rent to foreigners in 6anoi, according to the city's 8eople's *ommittee decision that allows more citi%ens to offer their homes to foreign tenants. The number of private hotels and houses for rent has been increasingly built in the city's sites, both downtown and suburban.

1.2 %ri!ate hotels7 ser!ice apart+ents and houses for rent in 8anoi
Tourists coming to 6anoi choose private hotels or guest houses to satisfy the accommodation during their stay in the city. 6anoi hotels and guest houses are very cheap but most are below international standard. Some foreign tourists, therefore, are heritant to return for the second visit. /espite this, over million tourists had come to Vietnam in !!4 and more than one million mar$ is e1pected the ne1t year. <or many foreigners, their business re(uires longer time to stay. They then prefer service apartments or houses available for lease. /ecision 40-@N/',, issued # July !!4 by 6anoi's 8eople's *ommittee stated that Vietnamese organi%ations and individuals renting houses from the city's Aand and 6ousing /epartment are now permitted to renovate and re.rent them to foreigners. This encourages new form of housing business) renovate original houses or build new ones, then lease them to foreign tenants. 7ecently, more than G+0 private houses have been leased by foreigners living in 6anoi. 0lmost all houses for rent are located in four urban districts of 6anoi city. The largest number of rented houses, villas is seen in 6oan Liem /istrict 4above +00 houses5, followed by 6ai ,a Trung, ,a /inh, and /ong /a district. 0mong suburban areas, Tu Aiem has been emerging as the most attractive area for foreigners to loo$ at when considering leasing house. 3t is estimated that hundreds houses, villas are being

52

under construction or soon completed in the area surrounding >est Aa$e with the purpose of leasing to e1patriate tenants. 6ousing businesses promise (uic$ paybac$ period. 3n average, this is five to si1 years. 0n e1ample, a business unit of 6anoi Tourism and Service *ompany 46anoi Toserco5 is ,S *ompany 4,S*5 which speciali%es on housing service business. ,S* has offered around 00 apartments, some houses and villas to foreigners for rent. 3ts monthly rental rates range from 'SIHG0 to 'SI ,#00. 3n !!4 ,S* generated rental revenue of 'SI H00,000 accounting for #0C of the total revenue of 6anoi Toserco. /ue to insufficient traffic infrastructure perhaps, foreigners prefer apartments, houses or villas situated in central area of the city. To meet this tendency, hundreds villas <rench style, built in early this century, are being renovated with the only purpose of renting to foreign companies who will probably use such villas for their offices. To attract foreigners, many housing investors try to imitate the old <rench style in developing their villas in >est Aa$e area. >hile placing more houses up for rent, the city's people's committee decision is not e1pected to lower prices on 6anoi's rental mar$et. Most foreigners say the rentals in 6anoi are high compared to that in some neighbouring countries. The average rental is around 'SI+G . 'SI-G per s(uare meter per month. The rents may $eep going up as the demand for houses in 6anoi will continue to increase more rapidly than supply. 7ental rates vary more than so much. These depend on location and (uality as well as comfort of the house. Some apartments are renovated, divided into smaller single rooms available for foreign students. The monthly rental for this $ind of accommodation is only 'SI H0, meanwhile owners of villas may charge 'SI H,000 per month. 3t is estimated that in the coming years, housing rental service will e1pand more rapidly than previously due to increase in foreign investments, improvement in trading and other international relations between Vietnam and the rest of the >orld.

1.(. The pro$ect

1.(.1. Structure of the pro$ect Thuy Tien office building is situated in a (uite short street, but very near the city's center. The family members 4composing of parents, a daughter and her husband, and a son5 well understand the advantage of their house location. They have sei%ed opportunity to invest in high.profit business sector by developing an office building for rent. 0lthough all family members share the needed capital contribution, they authori%ed the family son.in.law to deal with all procedures for the pro&ect development. Mr. 6iep was responsible for supervising day.to.day matters related to all contractors. 6e acted as pro&ect proposal writer, financing planner, pro&ect manager, and construction supervisor. The whole pro&ect management loo$s simple, since Mr. 6iep was the only

53

decision ma$er during construction. 6e was the only one who carried out the pro&ect implementation. 6is spouse . Mrs. Thanh . was responsible for chec$ing the time schedule to be $ept, for dealing with any delay in sub.activities, such as time of materials delivery form suppliers, time for completion of construction sub.wor$s, etc. and caring of financial needs to be covered as soon as possible. ,ased on has long.time relationship, the parents had to be available at any time to resolve any complaint raised from their neighbours. 3n fact, they have discussed many time with the owners of neighbouring houses to negotiate an appropriate compensation when clearing the construction surface, digging ground, and carrying out the foundation wor$s, which may cause a damage to houses ne1t to the construction site. The fifth, the last member of Ffamily board of directorsF is Mr. Minh. 6e is busy scientist, hence has no time for loo$ing at Thuy Tien pro&ect implementation process. 0ll he did was providing an amount of V:/ "0 million 4about 'SI H,+H-5. 1.(.2. Funding structure Since the pro&ect development costs were estimated to be around V:/ "40 million 4 'SI H#,4+05, the family self.financing could cover less than G0C of the total non. land investment. This financial needs are satisfied by borrowing from outside sources. %tructure of o-nership Thuy Tien pro&ect is financed by family members. ,efore they decided to develop the building, the whole land and the house in it belongs to the parents . Mr. ,inh and Mrs. Toan. 2fficially, the land can not be sold, but the house built on it could be. Therefore the land has certain value which is called land use right. Mr. ,inh and Mrs. Toan value the piece of land of !0 m + for V:/ +40 million 4about 'SI + ," "5. This is mar$et price they can offer if they sell the house on the land of that si%e and in that location. Mr. 6iep is the initiator of the building development plan. 6is wife and he actually managed all pro&ect implementation steps. They contributed half of the e(uity capital. The rest of the total e(uity fund is provided by Mr. Minh . Mr. ,inh's son 4table G. 5.

Ta*le 1.1 ,Fuity structure .54&/ Co-o"ners For+ of capital 6+ount 4V:/5 6+ount 4'SI5 %ercentage holding

54

Mr. ,inh K Mrs. Toan %Parents& Mrs. Thanh K Mr. 6iep %!aughter = her husband& Mr. Minh %-on& Total

Aand use right *ash

+ ," " +40,000,00 0 +!,0! -+0,000,00 0

-H.G C

G0.0 C

*ash ,Fuity

"0,000,000 2)<7<<<7<< <

H,+H1@71@2

+.G C 1<< G

<rom total e(uity of V:/ #40 million, only V:/ 400 million 4'SI -#,-#45 was available in cash. :ote that many private investors do not open their account in a ban$, if they do not run any business registered with relevant authorities. Thuy Tien investors provided e(uity capital from their own savings stored in form of local ban$ notes, 'S dollars, and gold. %tructure of .oans 3n general, private investors can apply for the loans from state.owned ban$, which usually re(uires collateral as condition for granting loan. The ban$'s procedures always ta$e much time, so Thuy Tien sponsors decided to loo$ for loans from their relatives and friends. This form of loan is informal, since the lenders escape income ta1. 8rivate investors prefer this way of borrowing money, because it ta$es short time to obtain the loan needed. 3n the table G.+, common si%e of private loans with interest terms depending on maturities is clearly presented. Ta*le 1.2 oans structure .54&/ enders 0 , * / B < = 6 3 Total Type of loan Simple interest S3 S3 S3 S3 S3 S3 S3 S3 6+ount 4V:/ million5 00 "0 H0 G0 G0 G0 G0 G0 G0 11< 6+ount 4'SI5 !,0! H,+H#,-#4 4,G4G 4,G4G 4,G4G 4,G4G 4,G4G 4,G4G 1<7<<< Ter+s 4C, monthly5 .G0 .HG +.+G .G0 .G0 +.00 +.+G +.G0 +.G0 Maturity 4months5 -0 " # +0 " + # -

The interest rates set by private financial investors are not fi1ed. Monthly rates are usually used to determine the terms of loans, and these vary from lender to lender. The pro&ect developers, if do not $eep any contact with lenders, would be introduced to

55

them through friends or relatives 4as intermediate dealers5. The si%e of loan and its terms, to a large e1tent, depend on credibility of the borrower or on the confidence the lender has on the intermediate dealer. Aoo$ing at the funding structure, estimated /ebt@B(uity ratio was 4#@G4 which insures the confidence to the lenders that the borrowers will be able to refund the loans together with interest payments. 3n other cases, that ratio may be (uite low, since the pro&ect developers are reluctant in using loans, and prefer self.investment which covers the ma&ority of the total financial needs. /inancing sche$e The scheme 4<igure G. 5 of financing Thuy Tien pro&ect may e1plain the relationship between different partners involved in the financing process with regard to sources of funds and main uses of these funds. 0lthough the needed funds come from the pro&ect sponsors 4family members5 and the financial investors 4lenders5, the pro&ect contractors in fact have participated in financing process. This point will be discussed in the session G.4. 1.(.( %ro$ect description The parents are the tenants living very long time in the house situated in :o. G4 Tue Tinh street, 6ai ,a Trung district of 6anoi city. The si%e of the land they are using is +00 m+. 0fter many discussions within the family, they accepted the idea of their son. in.law as well as his plan to develop the office building for rent. They decided to divide the land into three parts)
v Street.front part having si%e of !0 m+ is used to develop the office building, v :e1t sub.area having si%e of 40 m+ is reserved for family daily use, v 3nside sub.area of H0 m+ is used for the family's accommodation.

'nder the construction plan, proposed office building has 4 floors. =round floor has largest wor$ing room and a coffee room with coo$ing facilities. <irst, second and third floors have similar design, composing of two wor$ing rooms, one bedroom and two bathrooms with toilettes.

1.). %arties in!ol!ed

Co-o"ners. /ue to small si%e of the investment with hundred percent e(uity within a family, there is no distinguish between sponsors, owners, managers and stoc$holders. The family members share the profit and ownership of the Thuy Tien building.

39

!i&u%e 0C$ THUY TIEN O!!ICE ,UILDING RO#ECT !INANCING

%,re"e ts

Hanoi eopleD( Co))ittee

54 Tue Tin M%(C THANH 6 M%C HIE T9e :au&9te% 6 9e% 9u(Ean:

Hanoi Hou(in& 6 Lan: Depa%t)ent

6eport

$<uit! 50#0=

6eport

Hanoi Tou%i() Depa%t)ent

&o tracts

Vietna)e(e Cont%acto%(

5" Tue Tin #ri$ate %ui&'in( THUY TIEN O!!ICE ,UILDING RO#ECT

6e,istratio

9oa s

!anoi RELATIVES 6 !RIENDS

$<uit! 37#5=

$<uit! 12#5=

54 Tue Tin M%C ,INH 6 M%C TOAN T9e pa%ent(

)5 !oa *a M%C MINH T9e (on

39

enders. 8rivate lenders are operating their business without any registration. Such blac$ financial mar$ets are popular in Vietnam. Many years ago these mar$ets had strong power and could decide the price of hard currencies such 'S dollars, =ermany mar$s and <rench francs. 7ecently, state ban$s successfully control financial system to insure state enterprises with respect to their financing. 8rivate money mar$ets, however, still e1ist and facilitate private sector, particularly small family businesses. Thuy Tien pro&ect developers managed to obtain various loans as they need, mostly from relatives and friends. 3nterest and repayment terms are negotiable based on relationship and reliability. Contractors. *onstruction contractor is the most important player for the building development. Mutual understanding is necessary when ma$ing construction agreement. 0lmost all private houses in 6anoi are built by private construction units and Thuy Tien building is not e1ception. Second contractor is responsible for water supply system including pipe wor$ and relevant facility installation. Third contractor ta$es care of power supply system including wiring and lighting. The forth contractor has to install air.condition units, chec$ and put them in operation. Suppliers. The supply of construction materials, materials for waterpiping wor$, wiring, air.condition units and other materials@e(uipment is satisfied by various suppliers which are normally specialists in certain fields. 3n the case of Thuy Tien pro&ect, there are also four main suppliers different from four contractors. This is the way the owners use to control the (uantity and (uality of the materials and e(uipment they buy, and to increase their bargaining power. Custo+ers. The owners of Thuy Tien pro&ect offer their office building only to foreigners. <oreign businessmen see$ing investment opportunity usually loo$ for the building that is comfortable for their wor$ and meets the standard they get familiar in their home country.

1.1. Financing 6nalysis

1.1.1. Cost esti+ation The pro&ect was scheduled to be completed in nine months. The costs for the pro&ect development were estimated 4Table G.-05 to be financed in four phases. Total cost estimation was 54& @)<.2 +illion 4about 'SI H#,4 "5. This estimate does not consist of the value of land use right accounting for V:/ +40 million 4about 'SI + ," "5. 'nder the land law of Vietnam Socialist 7epublic, land belongs to people. 3t means private ownership of land does not e1ist. The land use right is accepted by 8eople's *ommittee of local government and can be transferred from one to another.

40

Ta*le 1.(6 %ro$ect costs esti+ation .su++ary/

Ite+s &escription . +. -. 4. 8re.construction >or$s Main *onstruction >or$s Mechanical and Blectrical >or$s 2thers Total

Cost 4'SI5 4,#-#.-# G ,++H.+H #,4#-.#4 4,0!0.! ;27)1@.1@

Cost 4V:/5 G ,000,000 G#-,G00,000 " , 00,000 4G,000,000 @)<72<<7<<<

The total investment including land use right therefore was estimated to V:/ ,0"0.# million 4about 'SI !",+-#5. /etails on the pro&ect cost estimation are presented in the table 0G. 4in appendi15. Bstimated /ebt@B(uity ratio was 0."#. 1.1.2. Financing plan 4a5 Two months before construction) <rom 0pril !!4 to - May !!G

Total fund needed for this period amounts to V:/ GG million 4about 'SI G,0005 and is covered by self.financing. 4b5 <or the third month of pro&ect development
v Ma$ing agreement with relatives and friends on proposed loans to be used for the

pro&ect funding. The interest terms and repayment schedules were made in this period. v <und for the building foundation wor$) V:/ 00 million 40 @G@!4 . 0 @#@!45 v 8rovision) V:/ 0 million 40 @G@!4 . 0 @#@!45 Total fund for this period reaches up to V:/ financed by the owners. 4c5 <or the forth month Two months from st June !!4 to -0 June !!4 were scheduled for the construction of the first two floors. That is ground floor and first floor. <or this period the owners have to provide appro1imately V:/ +00 million 4about 'SI ",0005 which comes from their own source. 4d5 <or the fifth month The construction of the last two floors 4the second and the third5 re(uires ne1t V:/ +00 million 4'SI ",0005 in the two.month period from st 0ug. !!4 to -0th Sep !!4. 0 million 4about 'SI 0,0005

41

There can be found only V:/ -G million 4'SI -, 005 from the owner's source, e1cluding V:/ G million as provision for the case of contingency. Aoans are granted as follow.
v <irst loan) Three.month V:/ G0 million with monthly interest of +.G0 C? v Second loan) Si1.month V:/ G0 million with interest rate of +.+G C monthly? v Third loan) Si1.month V:/ H0 million with monthly interest of +.+G C.

4e5 The si1th month

v <orth loan) Three.month V:/ G0 million with monthly interest of +.G0 C? v <ifth loan) Twenty.month V:/ G0 million with interest rate of .G0 C per month?

4f5 The seventh and the eighth month

v Si1th loan) Bighteen.month V:/ "0 million with interest rate of .HG C per month? v Seventh loan) Thirty.month V:/ 00 million with monthly interest of .G0 C? v Bighth loan) Twelve.month V:/ G0 million with interest rate of +.00 C per month?

4g5 The ninth . the last month

v :inth loan) Bighteen.month V:/ G0 million with monthly interest of .G0 C.

1.2. %ro$ect e!aluation

1.2.1. Office *uilding de!elop+ent analysis *urrently, private investors consider three ma&or forms of property business) 4 5 Single.rooms hotels, 4+5 Service apartments, and 4-5 2ffice buildings. The first $ind of this business may produce highest profit, but the rental revenue is mostly fluctuated and dependent on the flow of tourists. 6igh profit can be generated during tourism season li$e summer, spring and it could be low in the rest of the year. /oing business with hotel re(uires day.to.day management. ,eside this, the hotel owners sometime have to offer tourists illegal services to attract their customers. Service apartments are very common among private investors who are still wor$ing for government organi%ations, non.profit institutions, state.owned enterprises. Their salary is rather low, however they don't want to (uit their &ob. 3nvesting money into service apartments for rent will generate good income for their living. The development of office buildings has been increasing in the last few years. 3nvestors come from various social classes, economic sectors. The office buildings developers normally invest on four. or five.floor buildings with ten to twenty rooms. The fund needed to develop the building is not very large? the construction permit and relevant procedures are easier to get? the si%e of the office spaces is suitable for many foreign businessmen who come to Vietnam to see$ business opportunities starting by

42

setting up their representative offices in 6anoi or @and 6ochiminh city. 0fter arranging the lease agreement with the foreign lessee, the local owner of the building gets certain amount of money to invest on another business. Aoo$ing bac$ on Thuy Tien pro&ect, reali%ed pro&ect cost was V:/ "G0 million, about .-C higher than estimation 4Table G.-,5. The details of e1penses are then presented in the appendi1 4Table 0G.+5. 0ctual /ebt@B(uity ratio was 0.H0. Ta*le 1.(' Realized cost of the office *uilding de!elop+ent .su++ary/

Ite+s &escription . +. -. 4. 8re.construction >or$s Main *onstruction >or$s Mechanical and Blectrical >or$s 2thers TOT6

Total .0SA/ 4,H+H.+H G0,!+H.+H #,H0!.0! 4,!0!.0! ;;72;2.;(

Total .54&/ G+,000,000 G#0,+00,000 "-,"00,000 G4,000,000 @1<7<<<7<<<

Thuy Tien pro&ect developers have been granted loans of total V:/ GG0 million 4'SI G0,0005. 6owever, to increase the efficiency of loans use, they planned the financing schedule in the way that loans were used only there was a financial need. This approach was supported through suppliers' credit, since the purchases were paid off with a delays as agreed by suppliers. Therefore, three loans totaling V:/ 00 million were refunded during construction phase. These loans were used only for very short.term financing. >hen the building construction had been completed, net loans were only of V:/ 4G0 million. The actual /ebt@B(uity went down to 4 @G!, about ++C lower than estimation. 1.2.2. Fees and Re!enues 0s the city's 8eople's *ommittee /ecision was in action, those who offer their houses for rent have to pay ta1 under the ta1 regulations. The authority in this case does not collect income ta1. 3nstead the ta1 levels are set on the rental basis and vary according to the land use right and construction situation. 2riginal tenants have to pay a ta1 accounting +0 C of the rent negotiated with in their foreigner lease. Those who e1pand their houses have to pay an additional G C of the rent. Aeases must be approved by the city's 6ousing ,usiness *ompany under 6anoi's Aand and 6ousing /epartment, which stic$s an additional # C surcharge on rents as service fees. 8rior to this decision, tenants of the Aand and 6ousing /epartment could still re.rent their homes to foreigners but their contracts have to be considered on a case.by.case basis. >hen the Thuy Tien owners put their pro&ect in operation, they will have to pay for the electricity, water consumption? for telephones use? salary to a security guard and two cleaners. ,ut the ta1 must be paid as - C of rental revenue, before all e1penses.

43

3nitially, thet planned to rent four floors as four different offices. Monthly rentals were pro&ected as follow. =round floor would be charged by) 'SI ,400 . ,G00? <irst floor can be offered with) 'SI , 00 . ,+00? Second floor will ta$e the lessee) 'SI ,000 . , 00? Third floor may be leased with the offer of ) 'SI !00 . ,000. They prefer the lease pac$age, so that the whole building would be leased to only one party, the lessee. The lease pac$age was pro&ected to be 'SI 4,000 . G,000. 3n fact, an understanding agreement was reached before the building construction has been completed. 2fficial lease agreement was signed in 4th Jan. !!G and the office building has been used from Gth Jan. !!G, a day after the signature date. Aease agreement was signed for three.year period and the lease payments are made on (uarterly basis. Aease agreement will be e1tended in the last (uarter of the third leasing year. <urther period will be negotiated after three years. 0greed monthly rental is 'SI 4,000 for the first + months, and will be renegotiated for every ne1t + months. The lease payments for the first # months were paid immediately after signing. Thuy Tien manager hires three people for the cleaning and security of the office building. Salary for security guard is V:/ #00,000 4'SI GG5 and that for each cleaner is V:/ 400,000 4'SI -H5 per month. >ages are e1pected to increase 0 C annually. 1.2.(. Financial 6nalysis ,ased on information provided by Thuy Tien investors, pro&ected income statement can be constructed for five years starting Gth Jan. !!G 4Table G.45. /uring the construction period 4Oear 05 the office building developer has to pay interest for the loans, but the pro&ect had not generated any cash inflow yet. The income statement was conducted for five years, while first year of operation starts on Jan. G, !!4 and ends on Jan. 4, !!G.

44

Ta*le 1.) Su++ary of ,sti+ated Inco+e State+ent .in 0SA/ Ite+s Monthly rental 7ental 7evenue 7ental Ta1 4- C5 Total e1penses /epreciation 3nterest 'et 0nco$e Dear 1 4,000.00 4",000.00 4,""0.00 ,#!+.-# #,!H!.0! #,0!0.! @7(1;.2) Dear 2 4,+00.00 G0,400.00 G,#+4.00 ,!+-.#4 #,!H!.0! +," G.! 1(7<1;.(2 Dear ( 4,4 0.00 G+,!+0.00 #,40G.+0 +, H!.-0 #,!H!.0! G4G.4G 127@1<.=1 Dear ) 4,#-0.G0 GG,G##.00 H,++G.4# +,4#+. + #,!H!.0! 0.00 1@7@==.(( Dear 1 4,"#+.0G",-44.-0 ",0"#.H+,HHG. H #,!H!.0! 0.00 2<71<(.(1

'nder lease agreement, the lessor pays an agreed amount for electricity, water consumption, telephones use as appears in the estimated income statement. 0ny e1cess due to over.use will be covered by the lessee. The owners of Thuy Tien ,uilding are responsible for the maintenance and salary paid to their employees. 1.2.). Sensiti!ity 6nalysis The only source of revenue is rental payments from lessee. 7ental price will be renewed annually, it is therefore sub&ect to change and will affect the owners' income mostly. 0lthough rental for the first year was fi1ed, the calculation of the net income sensitivity is conducted as it was before lease agreement. Ta*le 1.1 Sensiti!ity of net inco+e in relation to change in rental price :3 47ental by D 0C5 *hange in :3 :3 47ental base5 *hange in :3 :3 47ental by . 0C5 *hange in :3 Dear 1 ,H 0.00 -"C ",4!4.00 0C G,+H".00 .-"C Dear 2 #,4!0.!" +#C -, 4. " 0C !,H-H.-" .+#C Dear ( +0,-G#.G! + C #," 0.!G 0C -,+#G..+ C Dear ) ++,#++.+G +0C ","!!.-0C G, H#.4 .+0C Dear 1 +4,4 +.-H !C +0,G0-.0C #,G!4.+4 . !C

:et income is very sensitive with changes in rental rate 4Table G.G5. 0verage change in net income during first five years is D+GC due to an increase in rentals of 0C. 0 decrease arises by the same proportion but with negative effect. 7ental price is pro&ected to increase GC annually in the first five years of operation. This increase responds to the increase in demand for office buildings. The following table shows the sensitivity of :3 in relation to changes in rental rise. Ta*le 1.2 Sensiti!ity of 4I in relation to change in annual rental rise

45

:3 47ental rise by D+0C5 *hange in :3 :3 4,ase case5 *hange in :3 :3 47ental rise by .+0C5 *hange in :3

Dear 1 ",4!4.00 0C ",4!4.00 0C ",4!4.00 0C

Dear 2 -,4-G.H" +C -, 4. " 0C +,H!+.G" .+C

Dear ( H,4"!.G4C #," 0.!G 0C #, -"." .4C

Dear ) !,!H-. "

Dear 1 ++,0 -.""

#C HC ","!!.-- +0,G0-.0C 0C H,"4G.H4 !,0-G.+" .#C .HC

The net income does not change significantly when large changes in annual rental rise are observed 4Table G.#5. This means that any fluctuation from annual basic GC will have little impact on net income. Such fluctuation is therefore ignored. 1.2.1. ,cono+ic 6nalysis There would be three viewpoints to loo$ at the profitability of the pro&ect.
v <irstly the owners are interested in when all loans will be entirely repaid. They

usually ignore the value of land use right, since they are original tenants. They don't have to pay for the land, so they normally e1pect the return on their investment based on actual e1penditures occurred during the development and construction phase. Their own funds account for 4+C of actual investment. Aoo$ing at the following table, the owners could repay all the loans in two and half years of operation. This is promising, because the private lenders rarely e1tend the maturity beyond that limit without special agreement. Ta*le 1.; Schedule for repay+ent of loans .0SA/ '0 /epreciation *< 7epayment CCF Dear 1 ",4!4.00 #,!H!.0! G,4H-.0! 4 G,4G4.GG 5 1@.11 Dear 2 -, 4. " #,!H!.0! +0,0!-.+H 4 #,-#-.#4 5 (7;)@.1@ Dear ( #," 0.!G #,!H!.0! +-,H!0.04 4!,0!0.! 5 1@7));.(2 Dear ) ","!!.-#,!H!.0! +G,"H".4+ 0.00 ))7(21.;) Dear 1 +0,G0-.#,!H!.0! +H,4"+.40 0.00 ;17@<@.1(

:ote) :et loans E 'SI 40,!0! 4V:/ 4G0 million5

v Second point of view is to loo$ at the paybac$ period. 0ctual investment of 'SI

"#,-#4 would be paid bac$ in four years 4Table G."5, in which, repayment of loans ta$es +.G years, and in the forth year total self.capital is recovered.

46

Ta*le 1.@ Schedule for repay+ent of loans and pay*ac# self-in!est+ent .0SA/ Dear 1 *< 7epayment of loans 8aybac$ self. investment CCF Dear 2 Dear ( Dear ) Dear 1

G,4H-.0! +0,0!-.+H +-,H!0.04 +G,"H".4+ +H,4"+.40 4 G,4G4.GG 4 #,-#-.#4 4!,0!0.! 5 5 5 0.00 4-,H00.005 4 4,H00.00 4 H,!#-.#4 5 5 1@.11 )@.1@ );.(2 ;7=22.1< (17))).1<

:ote) Self.investment E 'SI -#,-#4 4V:/ 400 million5

v <or many investors, doing property business means buying land, developing the

house or any $ind of building for rent. Therefore, their investment re(uires much larger financing. 3n the case of Thuy Tien, if land use right is ta$en in consideration upon the return on investment, the paybac$ period would be four and half years accounting from first year of operation 4Table G.!5. Ta*le 1.= Schedule for repay+ent of total in!est+ent including land !alue .0SA/ *< 7epayment of loans 8aybac$ self. investment Aand use right CCF Dear 1 Dear 2 Dear ( Dear ) Dear 1 G,4H-.0! +0,0!-.+H +-,H!0.04 +G,"H".4+ +H,4"+.40 4 G,4G4.GG 4 #,-#-.#4 4!,0!0.! 5 5 5 0.00 4-,H00.005 4 4,H00.00 4 H,!#-.#4 5 5 4H,!00.005 4 -,! ". " 5 1@.11 )@.1@ );.(2 22.1< 1(7222.(2

:ote) Aand use right E 'SI + ," " 4V:/ +40 million5 1.2.2. %ro$ect ris#s and e-pected returns .in relation to ris#/ /ue to small si%e of the investment, some $inds of ris$ as generally clarified in chapter + can be completely ignored in the case of Thuy Tien pro&ect. These are bid ris$, credit ris$ and technological ris$, political and e1change ris$ during all phases of pro&ect lifecycle. The availability of too many construction builders allows the investor to select the right construction contractor who proves to meet his e1pectation without considering the tender. 'sually, private investor li$e Mr. 6iep spent much time and effort to study mar$et demand for office buildings, architecture style, and the costs for developing similar building. The information he needs comes from various sources, however mostly from his friends. ,ased on obtained information, the investor can easily select contractors for construction wor$s as well as mechanical and electrical wor$s.

47

0lthough the owners of Thuy Tien ,uilding come from a family, their capital contribution has to be clear among family members. Mutual understanding is a basis for any discussion about funding of the pro&ect. 2f course, financial position of any of family members is disclosure to the family. The credit ris$ hence is not ta$en in consideration any more. Thuy Tien pro&ect developers do not use any $ind of technology, e1cept the air. conditioners installed to facilitate the living condition during summer. This $ind of machines can be used for relatively long period of time of at least ten years before they may be replaced by more modern units. Therefore, technological ris$ is impractical issue in this case. 8olitical ris$ is unavoidable, but it can be ignored , since the government recogni%es the private ownership of land use rights, and private investor is Vietnamese citi%en. 7egarding the currency e1change, Thuy Tien owners may re(uire the rental payments in local currency as well as 'S dollars. Bven if they get 'S dollar payments, they can easily e1change three.month rental of 'SI +,000 in blac$ e1change mar$et. >hat Mr. 6iep has been concerned most was mar$et ris$, completion ris$ and cost over.run ris$. 0lthough the mar$et demand was carefully studied before starting development wor$, the ris$ of having the building unoccupied by customers is very high. 0t the same place in Tue Tinh street, there is a building of the same $ind and with the same purpose of offering to foreigners remains deserted more than " months since completion. To private investors, one year and half is too long for an amount of V:/ billion which does not produce any cash flow. Mr. 6iep is a luc$y investor as he obtained lease contract draft before the construction has completed. The first day after it had been done, his customers has already moved in to use the whole building. To minimi%e the cost over.run ris$, the pro&ect investors have set strict schedule for all steps during the implementation of construction plan as well as financing plan. 6e has e1perienced many changes in materials price by the time. The possibility of changes in price forced him to $eep schedule reali%ed e1actly, otherwise any delay may increase the cost over.run ris$. ,y setting up the rewarding.punishing mechanism in contracts, the cost over.run and completion ris$ was avoided, while actual date of completion was two wee$s before scheduled date. 8erformance ris$ is influenced by the length of the lease period. The lease contract between Mr. 6iep and his customer will last three years, sufficient enough to refund all the loans including interest payments. Theoretically, the lease contract might be dissolved due to an unpredictable reason, but this ris$ is so small that Mr. 6iep can avoid it by $eeping closer relationship with his client. ,-pected return in relation to ris#. The owners are not familiar with the concept of ris$. 6is thin$ing, however, is driven by a set of (uestions) what if this occursM 8rincipally, his self.(uestions refer to the ris$s of possible outcomes which may cause him a loss. 'nder the application of two ris$ analysis techni(ues . :8V and 377 techni(ues . the e1pected return can be calculated 4Table G. 05. Ta*le 1.1< 4et %resent 5alue .0SA/ and Internal Rate of Return

48

*<

Dear < 4!!,0!0.! 5

Dear 1 G,4H-.0! Dear 2 +!, 4".GG Dear 11 -",4-#.#" Dear 12 4!,+!-.# Dear 21 # ,-!+.44

Dear 2 +0,0!-.+H Dear ; -0,"HH."+ Dear 12 40,4"#.HDear 1; G ,#--.-H Dear 22 #-,"! .04

Dear ( +-,H!0.04 Dear @ -+,#H0.!G Dear 1( 4+,G!!.4Dear 1@ G4,0 !.!0 Dear 2( ##,-!0."+

Dear ) +G,"H".4+ Dear = -4,G+".4 Dear 1) 44,HH-. 4 Dear 1= G#,44H. Dear 2) #","H#.!"

Dear 1 +H,4"+.40 Dear 1< -#,4G0.-" Dear 11 4H,00G.G# Dear 2< G",!0H.G! Dear 21 H ,--+.++

*<

*<

*<

*< 4%5 IRR )71().1; 22.<2G

The first /*< techni(ue produces :8V e(ual to 'SI 4, -G by assuming that e1pected rate of return on investment is +GC. Second techni(ue shows 377 e(ual to +#.0+C. The value of 377 indicates (uite high profitability of Thuy Tien pro&ect. 6ppendices Table 0G. 8ro&ect cost estimation Table 0G.+ B1penses for pro&ect development and construction Table 0G.- Bstimated 3ncome Statement

49

Chapter 2
1O#&.

%roposed ris# H return analysis +odel in pro$ect financing in 5ietna+

2.1. %roposed ris#-return analysis +odel

3n general, it should be recogni%ed that pro&ects do not occur in isolation. 0n investor coming to a country other than his home country as the case of 873M0>BAA 3nvestments 8te Atd., must reali%e that the pro&ects conse(uently must be considered in relation to the prevailing environment. This is a starting point for a model, applicable for ris$.return analyses in pro&ect financing. The bac$ground environment is specific to the country, year, location, pro&ect type, industry etc. 0ny changes that occur will probably be due to agencies outside the pro&ect, and will cause a ris$ of serious disruption to the pro&ect. These changes may be in regulations, government policy, mar$ets, technological innovation etc. 3n the last ten years, foreign investors have observed many changes in the economic structure, legal system, as well as many other reform policies. The second point in the ris$.return analysis model is selecting the best strategy to reduce the country ris$s and any other possible ris$s that may be related to the pro&ect due to changing environment. This report focuses on the housing business, particularly on hotel pro&ects, office building and service apartment pro&ects. 0n appropriate strategy for foreign investors is to enter a &oint venture with Vietnamese partner. 6aving a local counterpart in pro&ect, a foreign investor will benefit from their familiarity with the country and its system. <irst benefit is reducing bid ris$ to a minimum, since the local partner understands how to get pro&ect proposal approved in the complicated process for pro&ect appraisal. 0nother benefit is obtaining land use rights. 3f foreign investors try to go it alone, they run into difficulty of renting land for their pro&ects. The ne1t point in the model is to highlight the ob&ectives of all parties involved in pro&ect financing and implementation, which illustrates the demands of the pro&ect. B1cept for national or government pro&ects in which a public need is the demand 4roads, schools, hospitals5, a property pro&ect arises as a commercial proposition from which first clients . the pro&ect sponsors . hope to ma$e money. 0s discussed in *hapter +, many parties may be involved in pro&ect, e.g. sponsors, funding ban$, venture capitalist, developer, purchaser on completion, the tenant, and the occupier. Bach of these, and consultants, contractors and sub.contractors too, have different e1pectations. 8rofit is a common desire. B1pected profit will encourage them to bear some of the pro&ect ris$s.

50

<ourth, pro&ect sponsors and managers are faced with various choices for the pro&ect implementation. F*hoiceF usually means ma$ing value &udgments between high initial costs and long.term savings. 0t that point, pro&ect ris$s are allocated to different parties, normally the contractors, though the contract conditions or terms of appointment. 3n >est Aa$e 7egency pro&ect, all contractors were supposed to bear completion ris$ through the contract condition under which delay would be an additional cost to contractors. 0nother aspect of the model is to ensure the availability of sources of funds, and both e(uity and debt. Joint venture ban$s and foreign ban$ branches operating in Vietnam are hesitant to provide long.term borrowing. These ban$s grant loans with maturity less than one year, and mostly to importing public enterprises, since these enterprises have foreign currency and are considered low.ris$. 3n other cases, foreign ban$s have provided indirect loans to Vietnamese enterprises through Vietnamese ban$s. Aocal ban$s face difficulty of long.term mobili%ation and usually operate by short.term credits. There may be, though rarely, long.term construction loans, production infrastructure loans etc., but the maturity is only two or three years. 3n the meantime, local enterprises, once they enter &oint venture with foreign investor, contribute capital only in form of land use rights. Therefore, actual investment for the pro&ect entirely comes from foreign party, and any debt proportion should be arranged overseas and before financing decision. The last two points in the model are to study different $inds of ris$, possibly related to pro&ect and to use appropriate techni(ues in analy%ing pro&ect ris$s. 3n general, a commercial profitability analysis is conducted. There are various indicators of commercial profitability. The two most commonly used /*< techni(ues are the :8V and 377 techni(ues. These two techni(ues ta$e in account the relative timings of cost and revenue flows by translating future values into their present worth by applying discount factors that reflect the diminishing value of a given amount of money in the future. 3n both case studies, the pro&ect sponsors are satisfied with e1pected paybac$ period. 3n addition, the :8V and 377, calculated by the author, proved to be good indicators of commercial profitability. The model suggests these two techni(ues can be used together with paybac$ period method. The proposed model for ris$.return analyses is graphically illustrated in <igure #. below.

51

!i&u%e /C$

R#"$%RE&'R( A(AL)"#" *ODEL

Feasibility Enterin! "trate!y Environ ent Actions

De)an:( o+ %oBect
F Spon(o%(G oEBecti'e( F Ti)e F Co(t F Hualit8 F %o+itaEilit8

#oint Ventu%e

Con(t%aint(

C9oice(

F a%tne% (election F Ne&otiation F Capital cont%iEution F %oBect li+e F %oBect )ana&e%

F Le&al (8(te) F !inancial (8(te) F La@ on !C in'e(t)ent F Li)itation( F Re&ulation( F O%&Gl policie( F Re(ouce(

F T8pe o+ p%oBect F Ho@ to @o%> F Se?uencin& 6 Ti)in& F Cont%acto%( F T8pe o+ cont%act( F T8pe o+ ten:e%

!INANCING DECISION Sou%ce( o+ !un:(

F A'ailaEilit8 o+ :eEt F Co(t o+ DeEt F Matu%it8 F EIpecte: %etu%n on E?uit8

Ri(>( I:enti+ication
F Di++e%ent >in:( o+ %i(>

Ri(> Anal8(i( Tec9ni?ue(

F N V tec9ni?ue F IRR tec9ni?ue F Ot9e% tec9ni?ue(

Figure 2.1 Ris#-return 6nalyses Model

52

2.2. Suggested stage *rea#do"n of pro$ect lifecycle

Since the ma&ority of foreign investment pro&ects are &oint venture, it is useful for both Vietnamese and foreign investors to plan elementary steps in pro&ect lifecycle.

/egotiation and settlement stage

Many intended pro&ects are not implemented because the negotiators failed to come to an agreement for establishing &oint venture. 0t this stage, the benefit for both parties is balanced on capital funding structure and on competitive advantages they bring to the pro&ect. 0ny suggested scheme is viewed by the pro&ect sponsors from the viewpoint of ma$ing money.

onceptual and feasibility stage

Small group of e1perts is appointed by both parties to study and evaluate the suggested scheme. They are concerned with investment laws, economic laws, inflation, e1change rates, interest rates, grants, ta1ation, regulations etc. They can use various techni(ues in assessing economic feasibility with related ris$s. Suggested techni(ues which need to be tailored to public or private applications are) the net present value techni(ue and the internal rate of return techni(ue.

-cheme design stage

Some alternative designs are suggested and evaluated by a design group including e1perts of conceptual group, accountant, consultant, architect etc. 0 list of criteria for acceptable solution is used in assessing preliminary designs. 8ossible criteria are initial cost, operating cost, architectural style, comfort etc.

!etail design stage

The most suitable design is sufficiently detailed to provide a sound basis for receiving tenders. 3t includes the final detailed design drawings, a specification, the listings of pro&ect wor$s, time estimates, and contract documents. Some commercial ris$s are allocated to contractors and sub.contractors in form of contract clauses.

Procurement stage
0 number of appropriate contractors are invited to submit tenders. The most important factor is price. The time re(uired to complete the wor$ and the schedule of basic rates of materials are also provided.

onstruction stage

The success of the pro&ect depends entirely on ade(uate planning, direction, scheduling prior to construction, and monitoring and control during construction. The role of pro&ect and construction management is critical at this phase. 0 good e1ample is

53

Aiang *ourt Veldon 8te Atd. who was appointed by >A7 sponsors to ta$e responsibility as pro&ect and construction manager.

-tart-up and operational stage

8ro&ect start.up is usually characteri%ed by strong advertising activities through various public media, not only in Vietnam but also abroad in an efforts of both &oint venture's partners to attract potential occupiers. >est Aa$e 7egency is being operated by Aiang *ourt 6ospitality Services, a subsidiary of Aiang *ourt =roup. The appointment of a speciali%ed pro&ect operator reflects the increasing trend to re.allocate ris$s in the operational phase. 3n some cases, pro&ect sponsors may hire an outsider to monitor construction phase and another one to operate pro&ect since start.up point. 3n summary, the combination of the ris$.return analysis model and pro&ect lifecycle stage brea$down helps the pro&ect sponsors, lenders, etc. minimi%e ris$s and hence ma1imi%e benefits before and after ma$ing financing decisions.

54

Chapter ;

Conclusions and Reco++endations

;.1. Conclusions *isk-return analyses in project financing focus on the position of the sponsors,
particularly Vietnamese sponsors. The relative advantages of State.owned enterprises are)

clear legal title, advantage in obtaining land use right, easy access to government agencies, get loans from State.owned ban$s, lower ris$.

0t the meantime, ma&or concerns related to private sector are)

small scale, sometime unclear title, large investment capital re(uirement, loans from &ointstoc$ ban$s or individuals, limited financial reportage, higher ris$.

*isk-return analyses are taken into consideration together with the business
environment. 8roblems with legal infrastructure include)

wea$ structure, many changes, unclear application.

8roblems with the ban$ing system are)

lac$ of confidence from people, difficulty of long.term mobili%ation, poor facilities, difficulty in assessing credit ris$.

*isk-return analyses are conducted mainly by foreign investors, foreign bank

branches and joint venture banks. <oreign non.ban$ing investors recogni%e that)

strategy used to avoid or reduce certain ris$s is to enter &oint venture with local counterpart,

55

tender is good tool for selecting the best choices, good contacts are guarantees to avoid conflict and reduce ris$ of failure.

/ue to difficulty in assessing credit ris$, foreign ban$ branches)

provide loans mostly to foreign investors operating in Vietnam, provide loans to local corporate clients through local ban$s, play Frepresentative roleF for other ban$ overseas.

Joint venture ban$s are ma$ing benefits by)

combining international ban$ing e1pertise with their partners's local e1perience and contacts, providing loans to private sector and State.owned enterprises, assessing credit ris$ through mar$et research.

*isk-*eturn analyses are conducted to ma'imize the sponsors9 benefit

Vietnamese sponsors get more benefit from the success of the pro&ect. 3f the pro&ect proves to be less profitable, they loose nothing, since they did not spend any dollars, e1cept for the land use rights which were also provided freely if they do not stay in any &oint venture with a foreign investor. <oreign sponsors benefit only when their pro&ect is successful. They identify ris$s to implement the best allocation of ris$s to parties involved in the pro&ect. That way they can reduce the ris$ of failure and at the same time increase the chance of the pro&ect success.

;.2. Reco++endations v The ris$.return analysis model developed in this research should be
systematically applied by investors who are loo$ing for investment opprtunities in Vietnam.

v The legal framewor$ should be carefully tailored to accommodate the

development of an emerging business and financial environment, as well as to ensure a civil and e(uitable legal system.

v The ambiguity, inconsistency and fre(uent changes to the <oreign 3nvestment

Aaw is an issue that needs to be addressed in an effort to encourage investors, many of whom are reluctant to enter such a volatile mar$et due to high ris$ assumptions.

v The ban$ing system should be reformed in order to allow commercial and

savings ban$s to have a reasonable degree of autonomy in attracting savings and lending capital. This is important for mobili%ing funds domestically for the pro&ect and reduces the cost of financing.

56

v 0ccounting systems should be developed by applying internationally recogni%ed

standards as soon as possible to facilitate ban$s assessing credit ris$s.

v The procedures in the processing of license applications should be streamlined

to shorten the long time delay which increases the opportunity cost of investment.

;.(. Suggestions for further study v *omparative studies on ris$.return analyses in financing different types of
pro&ects in Vietnam, particularly in 6anoi or 6o *hi Minh city.

v 8roblems with state.owned enterprises and private companies in applying and

following international.standard accounting system as a base for ban$ing credit ris$ assessment.

v *ommon and specific features in ris$s analysis, ris$s management, and ris$s
allocation to ma1imi%e benefits of all parties involved in pro&ect financing.

;.). i+itations of the research v ,oth cases selected for this research are concerned with property businesses,
and the results cannot be generali%ed to other pro&ects of a different type. 6owever, in the field of hotel, office buildings, and service apartment pro&ects or the combination of all of these, the research proposed a good model for ris$. return analysis.

v The two cases have different characteristics of ownership and different features
of investment, therefore there is a difference in ris$ assumption and e1pected return in relation to ris$.

v ,oth two cases are located in 6anoi which is seen to be in a different phase of
mar$et cycle compared to 6o *hi Minh city. The result of analysis hence can be more specific from financing of the same type of pro&ects.