(Dzung Trieu Law firm)_ Mr Pham Chi Cuong, VSA Chairman, spoke about the massive foreign investment in steel projects over recent years.

Some are of the opinion that foreign investors avail themselves of the cheaper power price in Vietnam to build steel projects in the country. Do you agree with this sentiment?

A steel project consumes as much electricity as a district or even some provinces. But I don’t believe that foreign investors come to Vietnam simply to enjoy cheaper power prices, because it only accounts for 5 to 6 per cent of the steel price. 

The recent increases in the power price resulted in a rise of just 0.5 per cent in the steel price, which is insignificant. Vietnam’s power price is now 5 cents per kWh, while it is 7 cents per kWh in many countries around the world. 

So Vietnam must have a roadmap for power price increases, for it to catch up to world prices. But this will be gradual. And in order to save power, we welcome the power industry’s decision to cut power for steel projects out of its master plan.

It’s also not the case that foreign investors are here because of the power price because large-scale projects must build power plants within their own boundaries.  

Why do many steel projects use outdated technologies, if not for the cheaper power price?

I think the main reason is that local authorities “broke” their own master plans. When they worked to attract foreign investors to their locality, and found that some were interested in the steel industry, they were overly eager to invite them in and did not think about related issues carefully. The licensing of the Lion-Vinashin Steel joint venture, which was then revoked by the Prime Minister, is typical of this.

Additionally, the decentralisation mechanism, which allows local authorities to grant licenses to projects with capital of less than VND1,500 billion, led to massive levels of investment, many of which were in steel projects.

A few years ago many steel projects were discovered to have been licensed outside of the master plan, and the Ministry of Industry and Trade (MoIT) asked that they cease operations. But this was ignored, and as a result the total designed capacity of the industry was double demand. 2011 should see an additional 2 million tons of building steel, raising total output to around 10 million tons, whereas demand stands at just 5.5 million tons.   

Apart from this under-the-table licensing, resulting in an oversupply of steel projects, local authorities also regard having steel projects as an indicator of success in their economic restructuring.

Many projects are economically inefficient but have managed to survive and wish to continue. The reason why is quite simple. Steel projects in Bac Kan and Cao Bang provinces barely earn a profit from steel production but can mine ore for sale rather than using it themselves. I know for certain that the Vietnam National Mineral Corporation (Vimico) under the Vietnam National Coal-Mineral Industries Group (Vinacomin) incurs losses from steel production but earns profits from the sale of ore. 

Why are so many foreign investors interested in building steel projects in Vietnam?

It is true that most steel projects are totally foreign invested and this is a matter of concern. Given the fact that capacity in the industry is expected to reach 15 million tons a year over the next few years, Vietnam will be the largest steel producer in Southeast Asia. If steel projects are under foreign control, Vietnam will find it difficult to take the initiative in regulating steel production and distribution in the country.

So I think that we must select investors carefully and hold a certain stake in each project so that we can control their operations. It should be borne in mind that China also welcomes foreign companies to invest in the steel industry but never allows them to hold more than 30 per cent in a project.

Moreover, they require that foreign investors bring in advanced technologies still unavailable in China. But it seems that attracting foreign invested projects is viewed as a success in Vietnam, regardless of efficiency. This is a problem for Vietnam.   

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