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Vietnam Pins Hope for Future Economic Direction on Three New SEZs

New legislation paves way for expanded Special Economic Zones as part of reboot of inward investment programme.

Photo: Can new Phu Quoc SEZ help keep Vietnam’s economy off the rocks? (Shutterstock.com)
Can new Phu Quoc SEZ help keep Vietnam's economy off the rocks?
Photo: Can new Phu Quoc SEZ help keep Vietnam’s economy off the rocks? (Shutterstock.com)
Can new Phu Quoc SEZ help keep Vietnam's economy off the rocks?

In February 2017, Vietnam's Ministry of Planning and Investment published a draft Law on Special Economic Zones, also known as the Law on Special Administrative-Economic Units. Expected to be approved by the National Assembly later this year, the new law has been designed to reboot Vietnam's inbound investment environment, attract foreign capital in higher value-added sectors and inject a degree of diversity into an economy that looks sluggish compared with many of its ASEAN rivals.

Although its economy is actually still expanding – official GDP growth was 6.21% in 2016, with the Asian Development Bank forecasting 6.5% growth in 2017, and 6.7% in 2018 – Vietnam is hoping to jump-start a new phase of innovation throughout the value chain. To date, its economic growth has primarily been powered by manufacturing, construction, wholesale/retail trade, banking and tourism. In the very near future, manufacturing exports should get an added fillip from a new free-trade agreement with the European Union, expected to come into force in 2018.

Vietnam, however, also wants to improve the links between foreign investors and domestic suppliers as a way of raising the competitiveness of local businesses. Currently, only about 14% of commodities and services used by foreign investors in Vietnam are supplied by privately owned domestic businesses, with the majority sourced from abroad. Consequently, the government is keen close the gap between Vietnamese businesses and their overseas counterparts with regards to technology, engineering and ancillary service capabilities.

In order to tackle this, the proposed new legislation lays the groundwork for the establishment of three new Special Economic Zones across the country. At present, the three designated locations are the northern coastal district of Van Don in Quang Ninh province, Bac Van Phong in central Khanh Hoa province, and Phu Quoc island, part of the southern Kien Giang province. While Vietnam already operates 18 SEZs and 325 investment zones (IZs), this new generation will be larger in scale and ambition, while also offering overseas investors an enhanced package of incentives.

Vietnam hopes to increase trade flows between foreign investors and local businesses by incentivising advanced technology companies to establish a presence in the new SEZs. It believes this policy will also speed up the process of technology transfer and allow domestic firms to move up the value chain. Generating revenues and creating jobs are also key considerations. All told, the Vietnamese government has set itself a target of securing US$10 billion per annum of foreign direct investment (FDI) over the next five years. It will also be prioritising bigger investment initiatives on the part of high-tech and clean-energy businesses over low-cost manufacturing projects.

To date, though, all attempts to makes this investment model a reality have been both slow and drawn out. The three proposed new SEZs, for instance, were first mooted in the period 2012-15, a time when the government first started to look for a new direction for the country's economy, one that better reflected the commercial realities prevailing in Asia and across the world. Although, five years later, the first draft of the Law on Special Economic Zones has finally been published, it is now expected that separate legal and operating frameworks will need to be drafted and approved for each of the three proposed SEZs.

These will also have to take into account the raft of new investment incentives that has been mooted, including tax exemptions for up to four years, as well as a subsequent 10% preferential tax rate for up to 30 years. It has also been proposed that the tax levied on income from investments in SEZ real-estate projects could be as low as 17%. In an additional move, foreign investors in the three SEZs may also be allowed to settle transactions in currencies other than Vietnamese Dong.

As the competition to attract new investment intensifies across the ASEAN bloc, Vietnam has clearly set itself ambitious goals. Van Don, alone, is expected to generate US$9 billion in terms of taxes and fees by 2030, as well as an additional $2.1 billion in land charges. In the case of Bac Van Phong, its target is $1.2 billion in taxes and fees and a further $1 billion in land revenues. Phu Quoc, meanwhile, an island that is already established as a popular tourism destination, is budgeted to deliver $3.3 billion in taxes and fees, together with a massive $19 billion in land revenues.

Geoff de Freitas, Special Correspondent, Hanoi

Content provided by Picture: HKTDC Research
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