Vietnam refuses Taiwanese steel firm's hardball compensation proposal amid rising national security concerns

By An Dien, Thanh Nien News

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  Laborers work at a construction site in Hanoi. Whilst foreign direct investment is important to economic growth and development of any country, a government cannot be held hostage to any one company, analysts say. Photo credit: Bloomberg Laborers work at a construction site in Hanoi. Whilst foreign direct investment is important to economic growth and development of any country, a government cannot be held hostage to any one company, analysts say. Photo credit: Bloomberg
The Formosa Plastics Group submitted a series of “unprecedented” requests for special treatment in the wake of Vietnam's anti-China riots, leaving the government caught between a rock and a hard place
At an inconvenient juncture for both sides, the Vietnamese government has rejected a controversial request from Taiwan's Formosa Plastics Group for its own special economic zone in a north-central province where the site of its future steel plant was beset by a deadly anti-China riot two months ago.
Vietnam’s current regulations do not allow such special treatment for foreign investors so “the government will not approve this proposal”, Nguyen Van Nen, Minister and Chairman of the Government Office, said during a press briefing Tuesday.
The rejection came at a time when the government is making great strides in restoring foreign investor confidence after riots shut down three industrial parks in mid-May.
China’s deployment of a giant US$-1billion oil rig into Vietnamese waters on May 2 triggered peaceful anti-China protests that erupted into violence in central and southern Vietnam two weeks later. Rioters torched, looted and vandalized hundreds of foreign-owned factories. 
The violence racked up millions of dollars in losses and claimed the lives of three Chinese nationals.
Taiwanese businesses, mistaken for being Chinese, suffered most. Taipei claims at least 200 factories were looted or burned down in the riots. Around 3,000 Chinese workers subsequently fled Vietnam.
The Formosa Ha Tinh Steel Corporation, a unit of Formosa Plastics Group, was in the process of building a huge steel complex in the Vung Ang Economic Zone in the north-central province of Ha Tinh when the deadly riot broke out.
The Formosa plant is to be the largest steel mill in Southeast Asia once the construction is completed. It is also one of the biggest foreign direct investment projects in Vietnam.
Lin Hsin-I, chairman of the parent company, was quoted by The Wall Street Journal as saying in May that the plant would sustain a loss of US$10 million for each day that construction was delayed, in addition to the equipment damages, which he estimated to be over US$3 million.
During the press briefing Tuesday, Minister Nen said progress on construction of the steel plant would not be largely affected by the riots.
But last month Formosa put forth an ambitious proposal that asked that the government grant it “special policies” to lure more investors.
Repayment through policy revisions
In addition to asking for its own exclusive economic zone under the direct control of the central government, Formosa also called for a raft of safeguard measures for the steel sector and waivers on import duties for equipment and raw materials.
On top of that, the Taiwanese firm asked that the government grant it land-use rights to a large area of the Vung Ang Economic Zone so it can build infrastructure and housing facilities to accommodate its 15,000-strong staff and their relatives, most of whom are Chinese.

A view of the housing facility built for Formosa staff in the Vung Ang Economic Zone in the north-central province of Ha Tinh. The Vietnamese government has rejected a controversial proposal by Formosa Plastics Group to set up a special economic zone but remains vague on whether it will approve other requests submitted by the Taiwanese group. Photo: Nguyen Dung

Vietnam does not technically allow land ownership but grants land-use rights, which confer the same rights as freehold property. 

Independent analysts have cringed at such proposals, dismissing them as "extremely unusual". 

“Formosa has put forth proposals that are beyond the scope of international standards and Vietnamese law. They are unprecedented in the history of foreign investment in Vietnam”, Le Dang Doanh, an economist and former government advisor, told
Thanh Nien News.
Doanh said the Vietnamese government has already offered a lot of preferential policies to Formosa. The Taiwanese firm has been allowed to build dormitories and apartments inside the Vung Ang Economic Zone. 

The company can sell or lease these 
facilities to their employees.
But it would be "unacceptable" if Formosa wanted to sell the land-usage rights (which grant virtual ownership of the physical land, not merely a building) to foreigners, something Vietnamese laws still do not allow, he said.
In Vietnam, all economic zones are managed by provincial governments. Given that, "I cannot see any strictly 'economic' benefits to these proposals other than perhaps that Formosa wants to bypass dealing with provincial officials on account of their being corrupt," said Suiwah Leung, associate professor of economics at Australian National University and an expert on Vietnam. 

"However, if that were to be the case, the Vietnamese government needs to deal with this sort of allegations openly," Leung said.
'Not a normal' request
Doanh said the proposal was made in the context of Vietnam's outpouring of goodwill and begs the question of why Formosa wants such extravagant privileges.
He noted that, prior to the building of the plant, the Vietnamese government and Formosa's negotiators engaged in a long series of talks during which the company won a number of preferential policies and other enticements. 
"Why do they want more after the riot?" he asked.
After the violence, Prime Minister Nguyen Tan Dung asked cities and provinces to compensate affected foreign companies to ensure their continued operations.
Dung asked them to offer those companies up to two-year tax extensions and reduced export and import taxes. He also ordered customs offices to clear items held up by unpaid taxes and called on local governments to reduce or withhold land rental fees for affected companies.
Over 1,000 people have been arrested for their alleged involvement in the rioting. Several have been tried and received jail terms of up to three years--the rest suffered administrative fines. 
Others are still being tried.
Provincial authorities have also offered around $12 million in tax refunds as well as advances on insurance payouts to foreign companies hit by the riots.
Given that, analysts say the request made by Formosa cannot be considered “normal” under any circumstance.
“If Formosa is requesting compensation for damages caused by the riots, then there should be legal avenues for this, and compensation is usually paid in financial terms, not in terms of public policy,” Leung said.
Trojan horse jitters
Meanwhile, analysts warn that the proposal on land-usage rights could be “highly problematic” given a number of theories about Ha Tinh Province's strategic location. 
Doanh said he was aware of a scenario in which China would attack Vietnam in 32 days and an area stretching from Quang Tri Province in the north-central region to Ha Tinh would be a main target.
“I’m sure Formosa’s proposal will grab a lot of attention from Vietnamese politicians and military tacticians,” Doanh said.
In July 2009, the Ministry of Public Security shocked the country by announcing that 35,000 Chinese workers were in Vietnam. The ministry did not say how many of them were working illegally and has provided no further information on the matter.
Thousands of illegal foreign workers are employed at Vietnam's construction sites, according to most recent government reports.
The reports did not dwell on the nationalities of the "foreign workers" but stressed that many of the construction projects are being implemented by Chinese contractors.

Chinese state-owned construction companies are winning bids all over the world to build power plants, factories, railroads, highways, subway lines, and stadiums. Vietnam, China's immediate neighbor, has been no exception.
Prior to the riot, Vietnamese lawmakers were aggressively pursuing the long-festering problem of unskilled foreign workers taking local jobs--ratcheting up work permit requirements.
Vietnam has already agreed to loosen its work permit rules so Formosa can quickly replace lost foreign workers who had been tasked with overseeing the plant's construction.
“I understand that even though Formosa is a Taiwanese-owned company, it has large numbers of workers from mainland China working in Vietnam on tourist visas,” Leung said.
"That would be illegal under the laws of most countries, including those of Australia," she said. 

"In fact, some Chinese investors in Australian real estate projects have recently requested that Chinese workers be permitted to come and work on the sites. I cannot see the Australian government agreeing to that."
If Formosa is requesting compensation for damages caused by the riots, then there should be legal avenues for this, and compensation is usually paid in financial terms, not in terms of public policy," -- Suiwah Leung, associate professor of economics at Australian National University and an expert on Vietnam.
Mutual hostage situation
Vietnam has long considered foreign investment the backbone of its economy.
Industrial parks have been a major driver of the country's economic growth, accounting for more than 30 percent of Vietnam's exports and attracting around $110 billion in foreign direct investment, according to a Reuters report.
Setting up shop in one of the 200-odd parks across the country saves foreign companies the bureaucratic headache of obtaining land on their own, as well as giving them easy access to electricity, water supplies and worker accommodation, the report said.
Vietnam received an estimated $5.75 billion in foreign direct investment (FDI) during the first half of 2014, up 0.9 percent from a year ago, according to the Foreign Investment Department under the Ministry of Planning and Investment. But new investment pledges during the first six months fell 6.8 percent from a year ago to $4.86 billion, the agency said.
Prime Minister Nguyen Tan Dung said at a meeting between the government and representatives of foreign investors in Ho Chi Minh City last month that foreign investment and trade continued to improve despite difficult situations in the past year.
“More favorable circumstances will be created to further attract foreign investors to the country’s competitive environment,” Dung said.
Samsung Electronics Co. has continued to ramp up investment in Vietnam after the riot and recently received the go-ahead to build a $1 billion factory for displays used in smart-phones and tablets in the northern province of Bac Ninh. The South Korean technology giant has already set up two major factories in the country.
Taiwan and Vietnam could hold their second mediation session as soon as this week to tackle the issue of compensation for damages for affected Taiwanese businesses, news site Focus Taiwan quoted a Taiwan official as saying Sunday.

The session is slated to take place in Vietnam, the official from the Ministry of Economic Affairs said on condition of anonymity.
So far, Formosa’s request for its own special economic zone is the only one Vietnam has turned down. The government has stopped short of explaining whether it would approve or reject other aspects of the proposal.
Minister Nen, from the government office, said Deputy Prime Minister Hoang Trung Hai, to whom Formosa directly sent its proposal, has instructed various government agencies to address Formosa's other requests “in accordance with the law.” 
In the interview with The Wall Street Journal, Formosa's chairman said that leaving Vietnam “is not an option”.
But in what was apparently a concession, the Ha Tinh provincial government allowed Formosa to build a shrine inside the Vung Ang Economic Zone on Thursday. The small shrine will allow employees to pray to “the wandering souls whose graves were lost”, the provincial government said it a statement.
In Vietnamese and Chinese culture, individuals who are killed far from home (particularly those who die violent deaths) have a tendency to wander among the living rather than pass into the spirit world. These ghosts are called 'hungry souls' because it is believed that they do not enjoy regular offerings of food and other amenities traditionally laid out on family alters in the home.
The big dilemma
Analysts point out that the Vietnamese government faces a dilemma: it still desperately needs foreign investment to boost growth but at the same time must be careful not to hand over too much power to businesses.
While foreign direct investment is important to economic growth and development in any country, these analysts say no government can allow itself to be held hostage by any one company.
“As for concessions to investors, be it Formosa or any others, the government should not look at companies but at industries,” said Thomas Jandl, an East Asia expert at the Washington-based American University who has published on Vietnam's development models.
“Are there reasonable grievances by firms that show that things need to be reformed to keep that particular sector happy in Vietnam? If so, implement reforms for the same of business climate,” he said.
“But no, there shouldn't be concessions to one company.”

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