Vietnam Sugar Market

Table of Content

Vietnam sugar program Where next? Prepared for the World Bank Centre for International Economics Canberra & Sydney December 2001 The Centre for International Economics is a private economic research agency that provides professional, independent and timely analysis of international and domestic events and policies. The CIE’s professional staff arrange, undertake and publish commissioned economic research and analysis for industry, corporations, governments, international agencies and individuals. Its focus is on international events and policies that affect us all.

The CIE is fully self–supporting and is funded by its commissioned studies, economic consultations provided and sales of publications. The CIE is based in Canberra and has an office in Sydney. © Centre for International Economics 2003 This work is copyright. Persons wishing to reproduce this material should contact the Centre for International Economics at one of the following addresses. Canberra Centre for International Economics Ian Potter House, Cnr Marcus Clarke Street & Edinburgh Avenue Canberra ACT GPO Box 2203 Canberra ACT Australia 2601 Telephone +61 2 6248 6699 Facsimile +61 2 6247 7484 Email cie@intecon. om. au Website www. intecon. com. au Sydney Centre for International Economics Level 8, 50 Margaret Street Sydney NSW GPO Box 397 Sydney NSW Australia 1043 Telephone +61 2 9262 6655 Facsimile +61 2 9262 6651 Email ciesyd@intecon. com. au Website www. intecon. com. au iii Contents Preface Summary Concerns about the industry’s international competitiveness Better policies could deliver higher productivity Vietnamese policy makers must choose Policy changes to realise the productivity potential and international competitiveness of the industry ii viii viii x xiv xv 1 Why this study? Investment in the sugar industry has been rapid and large Questions are emerging about sugar’s competitiveness Objective Our approach 1 1 2 2 3 2 The main structural elements of the industry The industry is distributed widely throughout the country Mill sizes vary considerably Consumption can be segmented by product, buyer and region Patterns of production, consumption and imports 5 5 8 10 10 3 Policies affecting the sugar industry

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The one-million-tonne sugar program Objectives of the program Instruments of the policy 15 16 16 18 4 Effects of policy Economic effects of trade policies Economic effects of government controls over milling Economic effects of subsidies Strong market intervention discourages efficient investment 31 31 33 37 37 VIETNAM SUGAR PROGRAM iv CONTENTS 5 Economic performance Competitiveness of sugar production Sugar’s contribution to the Vietnam economy 40 40 54 6 Future competitiveness

Future consumption growth The impact of subsidies on the industry and wider economy The impact of trade restrictions on the industry and economy The impact of higher productivity on the industry and economy Emerging principles 62 62 64 68 72 82 7 Policy challenges Policies to realise the productivity potential of the industry Choosing the high–subsidy option 84 85 95 APPENDICES A Organisations consulted as part of this project B Model of the Vietnamese sugar industry C Comments and responses to the seminar on this report References Boxes, charts and tables 2. 2. 2 2. 3 2. 4 2. 5 2. 6 2. 7 4. 1 4. 2 4. 3 4. 4 5. 1 Sectors and regions represented in the model Vietnam — sugar mills Average annual cane crush for varying sized mills Distribution of production Sugarcane production growth has been strongest in the Centre Per person and total consumption of sugar products Growth in production, consumption and imports Economic impacts of trade restrictions There are distinct economies of scale in milling Economic impacts of small mills and high costs Economic impacts of subsidies International benchmarks 97 98 99 105 119 7 9 11 12 13 14 32 34 38 39 42 VIETNAM SUGAR PROGRAM v CONTENTS 5. 2 5. 3 5. 4 5. 5 5. 6 5. 7 5. 8 5. 9 Technical performance of farms and mills by region and size (1999–2000) Throughput of Australian and Vietnam mills Tonnes of cane required for 1 tonne of sugar and mill size (Australia and Vietnam) World prices Relative amount received by producers for sweeteners at the wholesale level in 1997 Domestic wholesale and import parity prices of sugar Returns to labour, land and management from cane production Relative profitability of competing crops in the Lam Son mill area 3 43 44 46 47 48 49 50 51 52 53 54 56 56 60 61 63 65 66 67 69 73 75 75 76 77 78 5. 10 Average farmgate cane prices 5. 11 Average unit costs, revenue, profit and loss for various classes of mills 5. 12 Summary information from financial mills model 5. 13 Indicative cashflow breakeven point for mills 5. 14 Distribution of costs and revenues 5. 15 Costs and revenues with cane infrastructure costs 5. 16 Payments to fixed factors 5. 17 Breakdown of $81. 5 million subsidy 6. 1 6. 2 6. 3 6. 4 6. 5 6. 6 6. 7 6. 8 6. Simulation results Simulation results: effect of subsidies Losses are passed to farmers mostly The number of small mills operating depends on the level of subsidy Simulation results: effects of trade restrictions Indicative increases in farm productivity over the next five to ten years: effects on profitability Indicative increases in mill productivity over the next five to ten years: effects on a large mill’s profitability Indicative increases in mill productivity over the next five to ten years: effects on a medium sized mill’s profitability Cane yield improvements take time to achieve . 10 Productivity increases by 2005 6. 11 Simulation results: impact of productivity growth VIETNAM SUGAR PROGRAM vi CONTENTS 6. 12 Simulation results: productivity growth without trade restrictions 6. 13 Optimistic productivity increases (% increase) 6. 14 Simulation results: optimistic productivity growth A. 1 B. 1 B. 2 B. 3 B. 4 B. 5 C. 1 C. 2 C. 3 Organisations consulted as part of this project.

Inputs to sugar production and final demands Commodities produced by each industry Price elasticities of household and industry demands Income expenditure elasticities Critical supply elasticities Seminar program General comments from seminar participants Specific comments from seminar participants 79 80 81 98 102 102 103 103 103 106 115 116 VIETNAM SUGAR PROGRAM vii Preface This study was commissioned by the World Bank and funded by AusAID. MARD provided substantial support for the study through the provision of background material and data, in arranging and participating in the field visits and in organising the various seminars involved.

VIETNAM SUGAR PROGRAM viii Summary Since 1995, Vietnam has undertaken a massive investment in its sugar sector. Over US$1 billion has been spent on milling capacity and infrastructure in sugar-growing regions. The investment took place under easy, government-backed credit terms, infrastructure subsidies and high tariff and non-tariff trade barriers. Over most of the period of investment, domestic prices were between 50 and 70 per cent above the import parity price of sugar.

However, the surge in production toward the end of the investment period has made Vietnam close to self-sufficient in sugar production, and a combination of smuggling and market saturation has caused prices to fall to the import parity price in 1999–2000. Many mills struggled financially in 1999–2000. They were unable to meet their interest repayments, some required additional borrowings to remain financially solvent and most were forced to offer a lower price for cane. Since their completion some mills have struggled to attract enough cane to be viable.

Concerns about the industry’s international competitiveness The Vietnam Government is concerned about the efficiency of its sugar program. In this study we use a specially constructed economic model of the industry to assess its international competitiveness, its contribution to the Vietnamese economy and its prospects under alternative policies. The data used to build the model are based on MARD data, other published data, international benchmarks and a field visit to various mill areas. The industry appears to be imposing big costs on the economy A main finding is that the industry is not making a net contribution to the Vietnamese economy.

Rather, it is imposing a net cost on the economy of around US$80 to 120 million a year. The industry is not covering the costs of the capital it has invested in milling. This is particularly true for small mills. The costs to the economy may be imposed in several forms depending on market conditions. In years when domestic prices exceed world prices (due to import barriers), these costs are imposed on VIETNAM SUGAR PROGRAM ix SUMMARY Vietnamese sugar consumers by forcing them to pay more than the import price. This lowers consumer spending power and so lowers their real incomes.

In years when Vietnamese prices are close to the import price, costs are imposed on the Government, state banks or financiers who must make direct financial injections or forgo collecting interest owed. Continuation of current policies is likely to see these costs at least continue and possibly get worse. Small mills are a big part of the problem There are 28 small mills, nine medium sized mills and six large mills. Large mills crush over a third of the cane for sugar production, medium mills crush about a third and small mills in aggregate crush a bit less than a third.

Because there are strongly defined economies of scale in milling, size of mills is an important determinant of milling costs and economic performance. Although Vietnam has six relatively large mills, the others are very small by world standards. Costs are high, utilisation of capacity is low and extraction rates are low. As well as achieving strong economies of scale and scope, larger mills found in leading cane producing countries are profitable enough to attract good management and the capital needed for efficient extraction.

Larger mills also have the resources to more closely integrate with growing regions and help farmers raise the sugar content of cane and yields of sugarcane per hectare. Small mills cannot do this. Yields are low partly due to the predominance of small mills By world standards, Vietnamese cane and sugar yields are low. Yields of cane appear to be only about 60 per cent of leading cane producers, whereas yields of sugar appear to be about half. Vietnam is using nearly twice as much cane to produce one tonne of sugar as Australia.

Inferior varieties, poor irrigation strategies, small-scale production, incorrect applications of fertiliser and pesticides and poor harvesting coordination all place Vietnam at an international disadvantage. Policy has a large bearing on the industry’s competitiveness The nature of Vietnamese sugar policies has the potential to have a large impact on the efficiency of resource use in the industry. There appears to be little reliance on open, free and competitive markets to allocate resources. Instead, resources are allocated centrally by people not directly affected by VIETNAM SUGAR PROGRAM x SUMMARY the economic outcomes of their decisions.

Strong government intervention and influence in markets encourages political and other objectives to be pursued in place of commercial objectives. Commercial disciplines that strive to lower costs and find productivity-raising solutions are undermined. The more intervention and control, the more bureaucratic and administrative discretion is created, and the less predictable policy implementation becomes. This raises risks and costs and creates a less attractive investment environment. The more constraints and restrictions the less room entrepreneurs and innovators have to pursue world’s best practice solutions.

Yet to succeed in a highly competitive world market, business dynamism is needed. This means attracting the best capital and best management from around the world, neither of which will be attracted if constrained markets limit opportunities. Trade protection that raises domestic prices, and effective Government underwriting of the debts of state-owned mills, reduce the pressure to choose optimal sized mills. State ownership of mills and Government’s implied underwriting of their financial failures has also greatly reduced competitive pressures between different sized mills.

Without support, small mills would feel the full competitive forces of large efficient mills and would be unable to continue operating. This would create two benefits. Costs of milling would fall as large low cost mills displaced small high cost mills, and large mills would get larger, achieving even better economies of scale. Better policies could deliver higher productivity The considerable variation in technical performance of sugar enterprises in Vietnam and the industry’s comparative international performance suggests there is substantial scope for productivity increases.

Over the next five years Vietnam is likely to achieve productivity gains on farm and in mills. Moreover, the greater the concentration of milling in medium and large mills, the greater the likelihood of such gains being achieved. Farm level productivity gains could come from: implementing proven agronomic practices: – – better application of fertiliser; basic controls of various cane diseases and pests; VIETNAM SUGAR PROGRAM xi SUMMARY – better control of soil moisture through drainage, irrigation, growth of cane in larger more concentrated continuous areas and scheduling of harvesting; better cultivation; the selection of better cane varieties; growing more ratoon crops without yield declines; and growing cane in more concentrated areas and closer to mills to reduce transport costs and achieve various agronomic economies of scale. At mills the potential for achieving productivity increases is probably less. Unlike in farming where sugar yields per hectare could, at the extreme, be nearly doubled, in milling there are more defined limits: extraction rates can be raised perhaps 12 per cent, and capacity utilisation perhaps 30 to 40 per cent.

However, increases in sugar content on-farm also provide a boost to productivity in the mill. Larger mills will be better able financially than small mills to undertake changes necessary to achieve productivity increases. Indeed, small mills are unlikely to be able to afford the sorts of changes needed, which are likely to be expensive because of the sort of technology they have installed. Productivity gains will show a distinct bias toward large mills.

Productivity gains are likely to arise from: installing better equipment as inter-season repairs and maintenance is conducted, such as better shredders that macerate the cane more fully so less sugar is trapped in fibre; operating machinery more efficiently using more automation so correct milling pressures are applied to ensure higher extraction rates; better monitoring of equipment performance to anticipate breakdowns so stoppages can be minimised; better scheduling of cane through the mill to avoid stoppages and to ensure the freshness of cane and preservation of sugar content; better scheduling of growing and harvesting of various varieties of cane to help extend season length while preserving sugar content of cane; and removing bottlenecks in the processing chain as equipment is upgraded during annual maintenance work, to expand capacity at minimal cost. VIETNAM SUGAR PROGRAM xii SUMMARY

Scope for productivity gains over the next five years The rate at which productivity gains will be achieved is difficult to determine. Much will depend on the policy environment in which they take place and on the various cultural, political and economic impediments that stand in the way. Historical data on what has been achieved in other countries suggests what might be achieved will be slow. Australia (a leading cane sugar producer), achieved a slow but fairly steady rate of increase of less than 1. 0 per cent a year over the past 100 years. With current policies Vietnam has the potential to achieve productivity gains more quickly than Australia by adopting existing practices and varieties.

Nonetheless, despite other countries’ efforts to catch up to Australia, few have. Achieving technological catch-up is possible but not easily achieved. Often it is not until efforts are made to achieve gains that various cultural, climatic, agronomic or other social, political, technical and economic impediments are discovered. Invariably technological catch-up looks easier than it is. It is probably reasonable to assume that, even under current policy settings, Vietnam could maintain historical growth rates for some time and achieve twice the rate that Australia was able to achieve on-farm. That is, it might sustain productivity growth of around 2. 0 per cent on-farm over the next five years.

At mills the potential for achieving productivity increases may be realised more quickly because the mills are under more direct control than farms are. However, as mentioned, the scope for achieving productivity gains is probably less. A 1. 0 per cent annual productivity gain may be achieved. But these productivity gains are likely to be concentrated in the larger mills and in the farm areas supplying larger mills. Model results suggest such productivity growth could lower the annual costs of the sugar program by nearly 25 per cent. With better policies In a more competitive policy and market environment a strong argument can be made for achieving higher productivity growth.

With completely free trade, without subsidies and therefore strong competition among mills, and with the concentration of milling toward the most efficient enterprises, mill managers and cane farmers would face strong incentives to pursue productivity gains. The judgement of the study team is that with strong competitive forces at work, it would be feasible to achieve annual productivity gains of over 4 VIETNAM SUGAR PROGRAM xiii SUMMARY per cent on-farm and around 4 per cent in mills over a five year period. This would imply that by around 2005 the industry would be achieving average cane yields of around 65 tonnes per hectare compared with 50 tonnes per hectare now.

It would also imply milling costs were around 20 per cent lower than now. This is not beyond the realms of possibility but it is optimistic. Model results suggest that under such a scenario sugar production would increase an estimated 28 per cent from a 6 per cent increase in cane production. Rising sugar content of cane, higher extraction rates and some switching of cane from alternative uses would be sufficient to underpin these sugar increases under this scenario. With much higher yields, cane farmers could sustain price decreases yet still increase their incomes. The lower cane price would help raise the profitability of milling and underpin major expansions of mills.

Large mills in the central area would become 150 per cent larger than now and medium sized mills in the South would become 60 per cent larger. All small mills would close. They would be unable to compete with medium and large mills. Even if we assume that small mills achieve the same productivity gains as large mills (which seems highly unlikely) they cannot compete for cane against medium and large mills. Under this scenario, the cost the industry is currently imposing on the economy could be largely eliminated and on a current cost basis, the industry would contribute $69. 4 million a year to the Vietnamese economy. Other findings emerging from model results

Small mills are highly inefficient by world standards, but are also uncompetitive with medium and large mills in Vietnam. Keeping them in operation will be costly to the economy. Only with continued subsidies are small mills likely to be able to continue in operation. But subsidies are extremely costly; they are onbudget, visible and likely to be politically and economically unsustainable. The closure of small mills could eliminate over half of the on-going cost of the sugar program. – However, it seems that an annualised cost of capital of an estimated US$38. 1 million associated with small mills would need to be written off. The cost of this would fall on the State budget and therefore on taxpayers and the wider economy. –

VIETNAM SUGAR PROGRAM xiv SUMMARY – This cost seems to be inevitable. Either it is paid as a price of closing small mills, or a much larger cost will need to be paid to keep them open. Trade protection could be used to fund some of the on-going costs of the sugar program. However, this would: – – – increase the costs of the program to the economy by transferring much of the cost to consumers; not keep small mills open; not avoid the minimum annualised cost of US$38. 1 million that would need to be written off. Achieving productivity growth, without subsidies and without trade protection, minimises the on-going costs of the program to the economy.

Such an environment would: – – – – enhance competition among mills and cane growing areas; concentrate and expand milling and cane growing among the most efficient enterprises; provide strong incentives to quickly pursue productivity growth; achieve economies of scale and scope in research, development and extension undertaken by the mills to help hasten productivity growth; encourage efficient resource use; provide the greatest benefit from mill closures by encouraging the transfer of cane currently supplied to small mills to more efficient mills in the South and Centre; increase the efficiency of remaining mills by increasing their throughput; minimise the costs of mill closures; and create the possibility that the industry could become internationally competitive enough to meet all domestic needs for sugar without subsidies or protection. – – – – – Vietnamese policy makers must choose

Our findings reveal stark policy choices that need to be made. Vietnam is currently trying to pursue two policy objectives: to realise the industry’s productivity potential and international competitiveness; and VIETNAM SUGAR PROGRAM xv SUMMARY to industrially develop and modernise backward regions by establishing and financially supporting small mills suited to the scale of particular areas. Our findings suggest Vietnam must choose between these objectives. It can not achieve both. Pursuing the second objective will be extremely costly to the economy, but could keep small inefficient mills operating, at least while subsidies last. This choice would largely involve a continuation of existing policies.

The main policy challenges would be finding the money to subsidise mills and politically and economically justifying continuing to do so. Moreover, pursuing this objective would require trade protection by trade restrictions or subsidies, which would be inconsistent with the Vietnamese Government’s objective to open its markets to international trade and to become more integrated with the global economy. This does not appear to be a viable option. Pursuing the first objective is good for the economy as a whole, but will probably involve the closure of 28 small and non-viable mills. Politically this is likely to be unpopular in those regions with recently constructed small mills.

However, it would be consistent with the Government’s objective of further integration with the world economy, it would allow the country to meet its international obligations under AFTA and WTO, and it would maximise the efficiency of resource use, so promoting economic growth and a rise in living standards. However, it would represent a new policy challenge and would require considerable policy change. Policy changes to realise the productivity potential and international competitiveness of the industry The overwhelming requirement to put the Vietnamese sugar industry on a strong growth path, is to make it highly competitive domestically and internationally.

In practical terms, competitiveness requires achieving economies of scale in milling, competition for cane and competition for land. Competition encourages those who are able to use resources most efficiently to excel, which also provides a model for others to follow. It also discourages those who use resources wastefully from continuing their inefficient practices. More efficient resource use means resources can be used to produce more and so provide more income. To increase competition would require changes to subsidies, regulatory controls, ownership structures, mill governance, trade restrictions and research, development and extension. VIETNAM SUGAR PROGRAM xvi SUMMARY Promoting domestic competitiveness

To ensure strong competitive pressures in an industry, three major requirements must be met: no enterprise within the industry should be given an unfair advantage or disadvantage by Government policy; those making investment decisions need to stand responsible for any losses made, and profits earned; and there should be few if any restrictions to entry of an enterprise to the industry. Removing unfair advantages and disadvantages The Vietnamese Government favours state-owned mills over private or joint venture mills by underwriting their debt and losses, and providing concessional credit. The Government also tends to favour small lossmaking state-owned mills over larger more efficient state-owned mills. This prevents small inefficient mills closing and larger more efficient mills expanding.

To promote competition between mills and to encourage efficiency, direct and indirect Government subsidies to small state-owned mills should cease. Strengthening responsibility for profits and losses Private ownership structures place powerful incentives on a company’s management to be as efficient as possible in its use of resources. Managers and boards of directors of state-owned mills do not face the same powerful commercial incentives and disciplines. At a minimum, governance of stateowned mills need to be restructured to resemble that of private mills. Equitisation of mills is an important route to this end and a precedent has been set in this area. Three mills have been equitised. If equitisation cannot be achieved easily, as an interim measure, the following changes would help.

Establish a target rate of return on capital (a dividend rate) and other commercial performance benchmarks to ensure that state-owned mills aim to perform in accordance with normal business expectations. Specify clear and non-conflicting commercial objectives for stateowned mills built around this target rate. Appoint boards of directors with the commercial skills to ensure these objectives are met. VIETNAM SUGAR PROGRAM xvii SUMMARY Reward mill managers and boards of directors according to commercial performance. Ensure mills pay taxes on the same basis as private mills and eliminate any other investment privileges relating to reductions in corporate and land taxes.

Separate non-commercial objectives and seek to achieve these independently through separate funding, or fund these in an open and transparent fashion out of after-tax profits. Eliminate non-commercial lending by banks. Removing restrictions on entry Encouraging the flow of technology and management expertise from abroad may be very important. Already foreign investment has played a big role in ensuring the establishment of several relatively efficient mills. Ensuring that the commercial environment remains attractive to foreign investment is likely to be important. For the best type of foreign investment, an attractive commercial environment is one that is benign.

This is an environment that: does not discriminate against or favour one mill over another; does not place restrictions on: – – – mill managers’ options to choose what combination of inputs and technology to use; what scale to produce at; where to operate or how to market the output; and is predictable and transparent in terms of implementation and administration of any regulations. To achieve optimal industry structures, mill sizes and international best practices, mill managers and owners need more freedom and less threat of intervention from Government than now. Implications of more domestic competition Allowing more domestic competition is likely to see extensive changes in the structure and behaviour of the industry. Various policy implications will follow. VIETNAM SUGAR PROGRAM xviii SUMMARY Closure of small mills Eliminating subsidies to non-viable small mills is likely to leave them bankrupt.

Government and Provincial Peoples’ Parties as owners, or banks as lenders, would need to resume responsibility for the debt and to close the mills. Assets could be sold off to the highest bidder. Medium and large mills may find value in some of the assets. Any funds recovered through the sale of these assets could be used to offset debt. However, in all likelihood these assets will not be valued highly, reflecting their loss-making status and old technology. Need for social safety-nets for mill workers Closure of small mills will displace mill workers. Social safety-nets may need to be established to assist affected mill workers. For cane farmers, mill closures will have mixed effects.

In the North where all mills are small and are likely to close, closures will require conversion to crops previously grown or new crops. Some assistance may be required to facilitate their reestablishment. Most cane farmers will benefit from supplying larger mills Distances between mills range from 30 to 100 kilometres and it is not uncommon for cane to be transported these sorts of distances. By world standards, cane transport costs are not high. With mill closures many growers in the Centre and South would still have access to an alternative larger mill. To better utilise their equipment and to gain other economies of scale, medium and large mills are likely to be keen to take such cane.

The economies of scale they achieve will also enable them to pay for higher transport costs. In addition, larger mills are likely to be able to better help farmers to achieve higher yields through more targeted extension programs. Higher yields will also help defray higher transport costs. Mills’ bargaining power Some people worry that the closure of small mills will place remaining mills in a strong regional bargaining position, allowing them to drive down cane prices. However, model results suggest mills will face incentives to keep cane prices as high as possible subject to keeping themselves viable. Mills will need to compete with cane farmers’ ability to grow alternative crops.

If they fail to pay a sufficient profit margin over and above what can be earned from alternative crops, they will lose throughput. And the VIETNAM SUGAR PROGRAM xix SUMMARY economies of scale are such that losses of throughput will raise their unit costs of milling, placing mills in a precarious financial position. Promoting international competitiveness Promoting domestic competitiveness will do much to promote international competitiveness indirectly. But open trade will provide the ultimate incentive to adopt best practices as quickly as possible. Only by matching best practice will mills be viable in the long-term and internationally competitive.

To achieve more open trade, Vietnam needs to: replace quantitative import restrictions, and procedures to manage trade, with specified tariffs; and then progressively reduce the tariff to low levels to reflect the long-run import parity price; and remove blanket industry-wide subsidies such as tax concessions, concessional financing for sugar and stocks and grants to encourage exports. Enhancing international competitiveness through RD&E It appears that the Vietnamese sugar industry has considerable potential to achieve productivity improvements. A strong argument exists to transfer some money currently used for various subsidies to fund RD&E instead.

An industry-oriented funding entity should be established to administer and allocate funding. The entity should have strong grower and miller representation and mills should be encouraged to take the lead role, at least initially. Strong consideration should be given to attracting international expertise in sugarcane RD&E to get the entity established and running smoothly. VIETNAM SUGAR PROGRAM 1 1 Why this study? To continue its rapid economic development Vietnam will require rapid rates of investment. But perhaps even more importantly, it will require that such investments be of a high quality so they deliver high rates of productivity growth and international competitiveness.

Investment in the sugar industry has been rapid and large Since 1995, Vietnam has undertaken a massive investment in its sugar sector. Thirty-two new sugar mills have been built, bringing the total number of mills to 44. Sugarcane crushing capacity has expanded from around 10 000 tonnes a day to 78 000. The area sown to sugarcane has expanded from around 150 000 hectares to 350 000. At the same time the production of handicraft sugar (a rudimentary, labour intensive, small scale activity) has continued to absorb cane from around 100 000 hectares. Total sugarcane production has increased from around 10 million tonnes for the 1994–95 season to 17. 8 million in 1999–2000.

Sugar production has increased from around 100 000 tonnes to its high in 1999–2000 of around 750 000, while handicraft sugar has maintained its output of about 250 000 tonnes. Over US$750 million has been spent on milling capacity and more (perhaps as much as US$350 million) has been spent on infrastructure and capital in sugar growing regions. The investment took place under easy, government backed credit terms, infrastructure subsidies and behind high tariff and non-tariff trade barriers. It also took place under the expressed government target of achieving one million tonnes of sugar output by the year 2000 – the ‘One-Million-Tonne Sugar Program’. Over most of the period of investment, domestic prices were between 50 and 70 per cent above the import parity price of sugar.

However, the surge in production toward the end of the investment period has made Vietnam close to self-sufficient in sugar production, and the combination of smuggling and market saturation caused prices to fall close toward world prices in 1999–2000. VIETNAM SUGAR PROGRAM 2 1 WHY THIS STUDY? Questions are emerging about sugar’s competitiveness The sudden fall in price has revealed much about the productivity and international competitiveness of Vietnam’s sugar investments. Many mills struggled financially in 1999–2000. They were unable to meet their interest repayments, some required additional borrowings to remain financially solvent and most were forced to lower prices for cane.

Low prices for cane raise doubts about whether adequate supplies will be achieved in the future to maintain mill throughput. As it is, since their completion some mills have struggled to attract enough cane to be viable. Import barriers might become more effective again if strong domestic sugar demand growth quickly absorbs the surge in production. This might help restore financial viability for many mills, and indeed, since their low of 1999–2000, prices have increased again to be 50 to 60 per cent above the world price on the expectation of a smaller crop in 2000–2001. Still, the Government of Vietnam remains concerned about the international competitiveness of its sugar investment program.

Understandably, it wants the highest possible economic and social return from this investment and that requires being international competitive. Otherwise, in its simplest terms, Vietnam would be better off importing and using its resources in activities that it is internationally competitive at. Moreover, the Government is aware of emerging pressures to conform to AFTA and upcoming WTO commitments to lowering of trade barriers. Objective The overall objective of this study is to assist the Government of Vietnam to form an objective view about the competitiveness and outlook for the industry and the policies needed to realise its potential and optimise resource use.

Part of the motivation for this is to help develop trade policies towards sugar that are consistent with the aim of achieving deeper economic integration with the region and the rest of the world. In particular, the study advises on a strategy for phasing out non-tariff barriers protecting the industry and on complementary policies required to boost productivity growth and facilitates adjustment. To this end, the study: identifies the policy, institutional, regulatory and technical issues in the Vietnamese sugar industry (sugarcane, sugar and by products) which impact on the efficient and sustainable development of the industry; VIETNAM SUGAR PROGRAM 3 1 WHY THIS STUDY ssesses prospects for the development of the industry, taking into account productivity potential and trends in the domestic and world sugar markets; and identifies options for future policy towards the industry, including treatment under AFTA and potential WTO agreements, given the government’s objective of further integration with the world economy and maximising the efficiency of resource utilisation to promote economic growth and rising living standards. The study assesses the following: production and market structures and organisation of the local sugar industry; determinants of competitiveness of sugarcane production; determinants of performance in processing of sugarcane; the situation of household consumers and industrial users and how they are affected by sugar policies; and the impact of current sugar policies on farmer, miller and consumer incomes. The assessment provides an evaluation of the implications of liberalising trade in sugar, and identifies complementary measures required to facilitate adjustment and improve efficiency in all components of the industry.

An important element of the study is to generate information that will assist policy makers and producers to assess the implications of policy alternatives, and to recognise the imperatives for change given the country’s plans for trade liberalisation and obligations under AFTA and WTO. Our approach To provide an objective framework to conduct this study we have built an economic model of the Vietnamese sugar industry and market. This provides us a basis by which to: identify and describe the essential structural and organisational elements of the industry; – – regional distribution; industry, farm and mill size; VIETNAM SUGAR PROGRAM 4 1 WHY THIS STUDY? – – – products produced; domestic demand for sugar and developments in the local market; policy influences; factors affecting likely escribe and assess the industry’s international competitiveness and resource use; describe and discuss key factors affecting international trends in world sugar production and competitiveness; describe and discuss Vietnam’s competitiveness along the production, processing and marketing chain, relative to international benchmarks; analyse the economic sustainability and development prospects of the industry by identifying; – – the key factors affecting productivity in Vietnam; potential increases in productivity and the potential value of the sugar industry to the Vietnam economy; analyse policy options to help Vietnam meet its international trade obligations and maximise the efficiency of resource use to promote economic growth and the value of the industry to Vietnam; assess the impacts of various policy options on the welfare of groups affected by the industry. The data used to build the model is based on MARD data, other published data, international benchmarks and a field visit to various mill areas – appendix A. VIETNAM SUGAR PROGRAM 5 2

The main structural elements of the industry The economic value chain model of the industry helps us represent the main economic dimensions of the Vietnam sugar sector. The main structural elements of our model are set out in chart 2. 1. More technical details are described in appendix B. The industry is distributed widely throughout the country Three main regions are identified in chart 2. 1 – North, Centre, South. Mainly these are identified according to climatic and agronomic differences that affect cane and sugar yields and season length. The three regions cover almost the entire country meaning that the industry is dispersed across several climatic zones – chart 2. 2.

Vietnam appears to have the natural resources required to grow cane reasonably efficiently. It has adequate relatively flat land, rainfall is generally good (1400 mm to 2000 mm a year), temperatures are reasonable, sunshine levels are adequate in the South but limit potential cane yields in the North, and supplementary irrigation is available in some areas. Within each region, there is considerable variability in technical performance of farms. But generally, farms supplying larger mills appear to perform better than farms supplying small mills due to better extension efforts conducted by the larger mills. This may also reflect agronomic conditions in each area. Areas well suited o growing cane in competition with other crops may have attracted larger mills to their areas. And, less suitable areas have attracted only small mills. We have therefore identified three classes of farms within each region according to what sized mills they are most likely to supply and called these small, medium and large farms. As shown in chart 2. 1, farms produce cane for processing, cane for chewing and drinks, seed cane for replanting and other farm products such as rice, VIETNAM SUGAR PROGRAM 6 2 THE MAIN STRUCTURAL ELEMENTS OF THE INDUSTRY 2. 1 Sectors and regions represented in the model Inputs Land, Labour, Capital, Other inputs, Subsidies Regions North, Centre, South Farms Large, Medium, Small

Intermediate outputs Cane for processing Seed cane Chewing cane Other Mills Large, Medium, Small, Handicraft Products Mill white sugar Raw sugar Refined sugar Handicraft sugar Molasses Ethanol Consumption Households North, Centre, South Industrial North, Centre, South Households North, Centre, South Trade Exports Trade barriers Exports Imports World market Rest of world trade Data source: CIE. VIETNAM SUGAR PROGRAM 7 2 THE MAIN STRUCTURAL ELEMENTS OF THE INDUSTRY 2. 2 Vietnam — sugar mills North Centre South Data source: MARD. cassava, sweet potatoes or peanuts. Farms use land, labour, capital and other inputs and may receive subsidies to produce these products.

Cane is typically produced by labour intensive means on small parcels of land without irrigation. Only eight per cent of the crop is irrigated. Only in a few areas is cane the dominant crop. It is typically grown in conjunction with one or more other crops. In some cases rice or a mixture of other crops completely surround small plots of cane. The lack of concentrated and specialised cane production areas may suggest that the competitiveness of sugarcane is not strong relative to other crops in many areas. Nonetheless, that cane is grown in tight competition for resources with other crops also confirms that its profitability must at least match that of other crops in many areas.

That said, substantial infrastructure, extension and direct subsidies have reportedly been paid to cane producers under the ‘one million tonne sugar program’ to encourage VIETNAM SUGAR PROGRAM 8 2 THE MAIN STRUCTURAL ELEMENTS OF THE INDUSTRY them to convert to cane. One estimate is that around US$345 million has been spent to achieve this or around US$1725 per hectare (MARD’s Evaluation Report of the Implementation of the Five Year Sugar Program). Another implication of the unconcentrated pattern of cane production is that there would appear to be few physical constraints to producing more cane. There is plenty of land and labour capable of growing cane.

Further expansion appears to be largely constrained by its price and perhaps the managerial expertise required to achieve higher yields. In economic terms, it appears that the supply of cane is likely to be fairly elastic, that is the level of production is likely to be fairly responsive to changes in the price and yield of cane relative to other crops. The scarcity of specialised sugarcane areas is also likely to add to transport costs. Many cane plots are as small as 0. 2 hectares. In some areas plots may be as large as five hectares such as in Tay Ninh, and there are some examples of relatively large capital intensive farms, over 30 hectares.

Because of its small scale and labour intensity, it appears that between 3 and 4 people a hectare are involved in cultivation, harvesting and loading work on farms. With around 350 000 hectares under cultivation, this suggests over a million people are involved in the industry on-farm. Mill sizes vary considerably Large, medium, small and handicraft mills in each region use primary inputs and cane for processing to produce three main products, namely mill white sugar, raw sugar or handicraft sugar. Mill white sugar is produced for human consumption. Chemical processes are used to remove most of the molasses and colour from the sugar. Some impurities remain which gives mill white sugar a slightly off-white appearance.

Raw sugar is not as fully treated as mill white and retains a higher percentage of molasses and impurities. This gives it a brown appearance. Typically it is produced to be refined into a pure white sugar with virtually no impurities and a brilliant white appearance, making it suitable for industrial applications. Handicraft sugar is the darkest of all in appearance because it contains many impurities. It can be thought of as only partially processed. However, it is a traditional type of sugar and is used for direct human and household consumption. The average annual crushing capacity and number of mills in each region is set out in chart 2. 3. In total there are 28 small mills, crushing less than 150 000 tonnes each per year.

There are nine medium sized mills crushing between 150 000 and 350 000 tonnes a year each, and six large mills with VIETNAM SUGAR PROGRAM 9 2 THE MAIN STRUCTURAL ELEMENTS OF THE INDUSTRY annual throughputs in excess of 350 000 tonnes. There are also several thousand handicraft mills crushing between 3000 and 10 000 tonnes of cane a year. In total, large mills crush over a third of the cane for sugar production, medium mills crush about a third and small mills in aggregate crush a bit less than a third. Mills also produce molasses and ethanol as byproducts and raw sugar typically goes on to be refined. At mills, typically around 400 people are employed, and with 42 mills, this suggest about 17 000 people are employed in milling.

Over nine million tonnes of cane is transported to mills over distances ranging up to 100 kilometres, and with each person able to transport about 4000 tonnes in a year using a 10 tonne truck, around 2000 people are involved in cane transport. At handicraft mills, each person produces around 10 tonnes of output a year, and with 250 000 tonnes of output, this suggests some 25 000 people are involved in this activity. 2. 3 Average annual cane crush for varying sized mills 700 000 600 000 500 000 Tonnes of cane 400 000 300 000 200 000 100 000 0 Small mill North Small mill Central Medium mill Central Large mill Central Small mill South Medium mill South Handicraft Large mill South Data source: CIE and MARD. The milling sector is highly capital intensive.

With daily crushing capacity costing an average of US$10 000 a tonne and around 78 000 tonnes of installed daily capacity, the total cost of milling capital is around three quarters of a billion US dollars. This is equal to about twice the normal annual investment in Vietnam agriculture and fisheries. An estimate of the value of investment in new factory capacity only, is 9505 billion VnD or US$701 million (excluding investment in cane growing areas). Of this, VIETNAM SUGAR PROGRAM 10 2 THE MAIN STRUCTURAL ELEMENTS OF THE INDUSTRY US$470 million (67 per cent) is foreign capital, representing one of the largest amounts of foreign capital mobilised for any program in Vietnam.

About 67 per cent of mill capacity is described as involving advanced technology and equipment of UK, French or Australian origin. Mostly this is in the medium to large mills. The remaining 33 per cent of capacity involves technology and equipment of Chinese or India origin. Mostly this is in the small mills (Evaluation Report of Implementation of the Five Year Sugar Program, 2000). Most mills are state owned enterprises (67 per cent), with 37 per of capacity (15 mills) being owned and controlled by the central government and 29 per cent (23 mills) being owned and controlled by local governments. That said, three of the government mills are described as fully equitised and therefore are joint concerns of Government, mill management, mill workers and cane farmers.

The remaining 33 per cent of capacity (six large mills) are either fully foreign owned (three) or joint ventures (three) between local government and foreign companies. Mostly, it is the small and medium sized mills that are state owned. Consumption can be segmented by product, buyer and region Households and industrial users in the North, Centre and South regions consume the various products of mills (mill white, raw sugar, refined, molasses or ethanol) or they can be exported. But households and industrial users may also import sugar products, trade barriers permitting. Households also consume the output of handicraft mills and chewing cane.

Industrial users do not use handicraft sugar and chewing cane and no international trade appears to take place in either of these products. Patterns of production, consumption and imports The distribution of production and consumption by regions and products is outlined in charts 2. 4. The South produces most cane but the Centre produces most sugar In chart 2. 4, the quantity of sugarcane production and its uses are summarised for the year 1999–2000. The South can be seen to be the largest producer of cane and the North the smallest with only about 7 per cent of production. However, in terms of cane used for sugar production, the VIETNAM SUGAR PROGRAM 11 THE MAIN STRUCTURAL ELEMENTS OF THE INDUSTRY 2. 4 Distribution of production Sugarcane sector production by region and product (million tonnes a year 2000) 17. 84 million tonnes of sugarcane Amounts Regions South (9. 8) Centre (6. 7) North (1. 3) Seed (0. 3) Sugar (0. 5) Ethanol 2. 3% Cane for sugar by region and product (quantity proportions) South 44% Centre 50% North 6% Cane for sugar Ethanol 1. 4% Distribution of revenues Total value of output Value of products $322 million Molasses 2% Data source: CIE and MARD. VIETNAM SUGAR PROGRAM Ethanol 1% Mill white 40% of value of output Refined 26% of value of output Handicraft 15% Raw 2% Types of sugar Molasses 2% 1

Chewing 8% Raw 7% Mill white 4% Mill white 14. 5% Refined 9. 5% Raw 5. 5% Molasses sales 9. 1% Mill white 24% Refined 9% Molasses sales 12. 7% Sugar 4% Sugar & molasses Molasses 2% Total sugar 29. 5% Molasses 10. 5% Total sugar 35% Molasses 15% Other (0. 9) Seed (0. 7) (1. 7) Chewing (0. 6) Products Sugar (3. 9) Handicraft (3. 7) Chewing Sugar (4. 5) Handi (1. 2) 12 2 THE MAIN STRUCTURAL ELEMENTS OF THE INDUSTRY Centre is the largest region and has achieved the most rapid rate of increase in cane production – chart 2. 5. The Centre mostly uses cane for sugar whereas in the South cane is used for sugar and handicraft purposes in about equal proportions.

In total slightly less than half of all cane is used for sugar production. Most of the rest is used for producing traditional products such as handicraft and chewing cane. The proportions in which each region produces various final products from cane used for sugar production are presented in chart 2. 4 in volume terms. Mill white is the main product. In value terms, the total value of output in 1999–2000 was US$322 million – chart 2. 4. Sales of mill white, refined and raw sugar contributed 73 per cent of this. Traditional products such as handicraft sugar and chewing cane contributed only 23 per cent and molasses and ethanol by-products contributed only 3 per cent.

The quality standards achieved for the various classes of sugar generally meet local and international requirements. However, sulphur levels in raw and mill white sugar could be an issues to some higher quality markets. 2. 5 Sugarcane production growth has been strongest in the Centre 20. 0 18. 0 16. 0 14. 0 Million tonnes/yr 12. 0 10. 0 8. 0 6. 0 4. 0 2. 0 0. 0 North Centre South 95/96 Data source: MARD. 96/97 97/98 Years 98/99 99/2000 Consumption is low by world standards but higher in the South Household survey data suggests that consumption of sugar products varies considerably throughout the country. Consumption per person is highest in VIETNAM SUGAR PROGRAM 13 2 THE MAIN STRUCTURAL ELEMENTS OF THE INDUSTRY the South where incomes are highest.

Consumption of sugar is around 10 kilograms per person per year on average for the entire country. Around 60 per cent of consumption is household consumption of mill white sugar. The other 40 per cent is consumed as fully refined sugar which mostly goes into food processing. About 44 per cent of consumption occurs in the South, 31 per cent in the North and 24 per cent in the Centre – table 2. 6. At 10 kilograms per year consumption is low by world standards. By comparison, Thailand has consumption per person of around 30 kilograms per year, Malaysia and Australia 50, India 15 and China 7. Vietnam has additional consumption of around 4. 4 kilograms per person of handicraft sugar and 33 kilograms of chewing cane.

With a sugar content of 10 per cent, chewing cane provides approximately 3. 3 kilograms of additional sugar consumption. Typically consumption of sugar rises rapidly as income rise from low levels, while consumption of handicraft sugars and chewing cane stagnate or decline. Consumption growth in Vietnam has been rapid in recent years, having approximately doubled in the past decade, implying an average 7 per cent per year growth rate. Estimates of handicraft sugar and chewing cane consumption are less reliable, however, based on cane production and deducting known sugar consumption, growth rates would appear to have been sluggish – chart 2. 7. 2. 6 Per person and total consumption of sugar products

North kg/person Chewing cane Mill white Refined sugar Handicraft Population (millions) Total sugar consumption (mt) Total handicraft consumption (mt) Source: CIE, Household Survey data. Centre kg/person 27. 7 5. 0 2. 8 2. 8 Centre 22. 1 0. 172 0. 062 South kg/person 43. 0 7. 8 4. 4 4. 4 South 26. 3 0. 310 0. 116 Average kg/person 32. 8 5. 9 3. 3 3. 3 Total 76. 3 0. 702 0. 252 27. 2 4. 9 2. 8 2. 8 North 27. 9 0. 215 0. 078 Production has grown more quickly than consumption displacing imports As seen in chart 2. 7, the growth in production has more than matched the growth in consumption causing imports to fall. Data on imports however are not reliable.

Considerable anecdotal evidence suggests that smuggling is rife. The incentive for this arises due to restrictions on imports that raise domestic prices above world prices. Since 1994, domestic prices have averaged 56 per cent higher than the equivalent free market import price. VIETNAM SUGAR PROGRAM 14 2 THE MAIN STRUCTURAL ELEMENTS OF THE INDUSTRY 2. 7 Growth in production, consumption and imports 1200 1000 800 600 400 200 0 kt Consumption (sugar + handicraft) Implied imports Handicraft production Sugar production 1996 1997 Years 1998 1999 2000 1995 Data source: Evaluation Report of Implementation of the Five Year Sugar Program, 2000. VIETNAM SUGAR PROGRAM 15 POLICIES AFFECTING THE SUGAR INDUSTRY 3 Policies affecting the sugar industry Farmers in Vietnam have a long tradition and extensive experience in producing sugarcane. Until the 1980s, the industry operated under the central planning policies of the Vietnamese economy. Land was cooperatively managed and markets played little role in the allocation of agricultural resources. Under this system 80 per cent of cane was used for handicraft sugar production, while the industrial production of centrifugal sugar was limited to four small state-owned mills using old technology. Old deteriorated varieties of cane were used which yielded poorly – 42 tonnes er hectare and as low as 32 tonnes per hectare on poor soils. Traditional cultivation and management techniques also resulted in poor quality cane with low sugar content. New varieties and better management allowed for double these yields in other countries. However, starting in 1981, agricultural policies generally began to change. Land management changed from being cooperatively managed to being managed by households and in 1988 these lands were allocated to individual households under long term tenure. Markets were allowed to play a bigger role in the allocation of resources as controls over pricing, wages, foreign exchange, domestic and international trade and interest rates were relaxed.

In response agricultural productivity, production and exports expanded strongly and across the economy per capita income grew rapidly. In the early 1980s, the area of sugarcane expanded, reaching 162,000 hectares in 1984, but then stagnated, although five new small mills were constructed through the 1980s. Although the agricultural markets were relaxed (decontrolled), industrial processing of sugar remained state-owned, and expansion was tightly controlled by the State. As consumption of sugar products increased with population and income growth in the 1980s and early 1990s, increasing quantities of imports were required to meet domestic demand. VIETNAM SUGAR PROGRAM 16 POLICIES AFFECTING THE SUGAR INDUSTRY The one-million-tonne sugar program Aware of the increasing demand for sugar imports, in late 1994, the former Ministry of Agriculture and Food Processing (now the Ministry of Agriculture and Rural Development – MARD) carried out a study titled “Overview of Sugarcane and Sugar Development to the Year 2000”. With trade restrictions already in place, domestic sugar prices were well above international prices. Benefit-to-cost analysis, based on high domestic prices, showed favourable returns from sugar production from various sized operations, especially where expected agronomic improvements were anticipated. Objectives of the program

The study culminated in the decision to set the target of producing one million tonnes of sugar by the year 2000. The program was implemented in early 1995. Stated objectives Objectives of the program were stated and adopted in the Resolution of the 8th National Conference of Vietnam Communist Party: ‘Produce one million tons of sugar by the year 2000 in order to fully satisfy demands of Vietnamese people and domestic processing industries which use sugar as raw material. To make intensive investment and expansion of existing sugar mills, build new mills of small to medium size in small material areas and build new mills with advanced technology in large material areas’.

The stated principles of the program are to: ensure high efficiency and effectiveness for farmers, mills and the State; develop in a quick but sustainable manner; develop according to a master-plan and sub-plans, especially raw material area plans; apply new, advanced technology, so as to ensure high quality, low cost and international competitiveness. It was stated in the plan that raw material areas should be built close to mills to ensure a 30 kilometres radius from mill; raw material areas should be concentrated ones with good infrastructure to ensure lowest transport costs; and new high yielding varieties should be introduced. VIETNAM SUGAR PROGRAM 17 3 POLICIES AFFECTING THE SUGAR INDUSTRY It was specified in the plan that mills of over 2000 tonnes a day should be built for concentrated raw material areas, and for other areas mills with capacities of between 1000–1500 tonnes a day would be built.

The aim was also to build mills with substantial local content — about 40–50 per cent of components and 30 per cent of the total value of equipment — so as to gradually manufacture complete mills locally. Implied objectives Implied objectives of the program appear to be to create employment, develop skills within various regional labour forces, make contributions to the reduction of hunger and poverty in rural areas, and to contribute toward the industrialisation of the rural economy. In the mid 1990s, the Vietnamese Communist Party embarked on an industrialisation and modernisation drive with the aim of helping Vietnam become a largely industrialised country by about 2020.

Part of this drive was to industrialise and modernise rural areas. These areas lagged behind cities and urban areas, especially during the earlier years of reform. An aim was to open these areas up to foreign investment. Sugar production was the first major coordinated program in the agriculture sector toward the Party’s rural modernisation agenda. It was seen as appropriate for that objective, because it could combine two major components: construction of industrial plants in rural areas; and development of concentrated raw material areas in remote, poor areas, which often required restructuring of subsistence food crops into marketable commercial crops. Other aims and targets

According to the “Overview of Sugarcane and Sugar Development to the Year 2000”, the program was aimed at developing 200,000 hectares of cane, over and above the 150 000 that already existed, creating jobs for 200,000 households, each of which would earn 15 million VnD (US$1034) per year. The import-substitution aim of the program was to save US$350 million a year from imports of sugar. The program was designed to give priority to development in poor areas in Central mountainous and Mekong delta regions, because cane growing can make use of hilly land and acidic soils where other crops are less competitive or cannot grow. By so doing, the program aimed to help farmers in those already poor regions. VIETNAM SUGAR PROGRAM 18 POLICIES AFFECTING THE SUGAR INDUSTRY Consistency of objectives The program has many objectives and there are no clear priorities between them. There are however clear conflicts between many of these objectives. To strive to achieve high levels of efficiency but place restrictions on the size of mills is one obvious conflict given the economies of scale involved in milling. To strive for large, technologically advanced and efficient mills in large, concentrated cane areas and small, technologically less advanced mills (read less efficiency) in small, non-concentrated areas, is to imply efficiency and competition are likely to be compromised. Instruments of the policy

The most critical instruments of Vietnam sugar policy are: its trade restrictions which protect the industry from world prices and on average raise domestic prices well above world prices; the role of government in raising, allocating, securing and distributing milling investment and working capital through Government’s: – – – – – use of state owned enterprises as vehicles of investment; controls and regulation of direct foreign investment and private investment; ownership and control of banking; investment licensing and approval procedures; land allocation procedures; the role of Government in supporting financially troubled mills; subsidies paid for infrastructure in cane growing regions including: – – – payment for roads, bridges and irrigation works; land development; research, development and extension Trade restrictions help raise the financial returns of sugar related investments.

Government controls over investment and the potential for these to be politically manipulated have the potential to have a big influence on the number, size, location, technology, operational performance and growth of mills. Similarly, Government’s role in supporting troubled mills affects the structure, conduct and performance of mills. All these measures affect the competition between mills, their VIETNAM SUGAR PROGRAM 19 3 POLICIES AFFECTING THE SUGAR INDUSTRY efficiency and international competitiveness. And government subsidies to cane growing help to divert agricultural resources away from competing activities to cane. Trade restrictions and interventions

The Government of Vietnam has long managed international trade through a system of central decisions, planning authorities, multiple exchange rates, quotas, prohibitions, targets, shipment licenses, trade subsidies and state trading monopolies. Decisions made about trade had a large bearing over the direction and speed of development of the economy. Although trade has been liberalised somewhat since the introduction of doi moi in 1986, still trade remains heavily managed especially for seven export items and 12 import commodities. Sugar is one such import commodity. Non-tariff barriers including variable quotas and temporary bans, as well as a 40 per cent tariff apply. The Ministry of Trade (MOT) in consultation with the Ministry of Planning and Investment (MPI), Ministry of Finance (MOF) and the Ministry of Agriculture and Rural Development (MARD) sets these.

The restrictions to trade are used to manage trade throughout the year with a view to ‘balancing the needs of producers and consumers’, but mostly they are used to protect chosen industries and to promote import replacement. In the case of sugar, they underpin the target of the ‘onemillion-tonne sugar program’ to protect and promote sugar production to meet rising domestic demand for sugar from domestic resources. However, various international trade obligations are likely to put pressure on Vietnam to reduce its import restrictions. The most pressing of these is the ASEAN Free Trade Agreement (AFTA). Currently under AFTA, sugar is on the list of sensitive-agriculture commodities.

Such status requires no member country to reduce its protection on sugar. However, this status shall only apply until 2010. After that, the agreement calls for all ASEAN countries to lower their tariff to no higher than 5 per cent. Potential membership of APEC and the WTO is also likely to see pressure applied to reduce sugar protection. There are small tariffs on fertilisers and machinery used for sugar milling. Exemptions were granted for imported machinery originally used to establish mills. The tariffs are so low that they are unlikely to be distortionary. VIETNAM SUGAR PROGRAM 20 3 POLICIES AFFECTING THE SUGAR INDUSTRY Controls and intervention in milling investment

It is through its power to provide approvals for mill construction and to influence state bank lending and foreign direct investments that the Government of Vietnam largely regulates the structure of the industry. Initiating investment proposals In the case of the one-million-tonne program, the Central Government announced its intentions to promote sugar production in various regions through its master plan and million tonne target. This signalled to local governments (Provincial People’s Committees), existing state-ownedenterprises and foreign investors the Central Government’s favourable predisposition to establish mills within specified guidelines.

Entities in a position to form further state-owned mills under the program appear to have been the two existing state-owned sugar corporations, General Sugar Corporation No. 1 and General Sugar Corporation No. 2 and Provincial People’s Committees. General Sugar Corporation No. 1 is a conglomeration of several northern mills while the other is a conglomeration of southern mills. However, in terms of the number of new mills, Provincial People’s Committees initiated the majority. Foreign investors also initiated the establishment of mills in the form of joint ventures or fully foreign owned enterprises. Approval procedures To seek approval, eligible entities are required to work through a two step process. First they need to prepare preliminary project proposals to submit to MARD.

The Steering Committee of the Sugar Program and other relevant departments of MARD appraise these. Based on their merits and suitability to fulfil program objectives, MARD then coordinates with the Ministry of Planning (MPI) and Ministry of Finance (MOF) to appraise and submit the projects to the Government for the Prime Minister’s final approval. Ultimate Prime Ministerial approval is required for all projects with a value of over 100 billion VnD. Projects with a lesser value may only require Ministerial or Provincial approval. The Ministry of Planning and Investment (MPI) coordinates with relevant ministries, branches and localities to approve and issue certificates of investment privileges to enterprises.

These privileges depend on whether the investments are in socially and economically difficult areas, but include reductions of 50–75 per cent of land use right fees, corporate income tax of 15–25 per cent compared with the normal rate of 35 per cent, and the possibility of other measures as well. VIETNAM SUGAR PROGRAM 21 3 POLICIES AFFECTING THE SUGAR INDUSTRY Since early 1995, MARD and People’s Committees of central provinces and cities have been in charge of planning sugar mills and raw material zones, and controlling land of each locality so that People’s Committees can have consistent decisions on cane development. Sugar mills are allocated or leased with land to build and expand their mills. Terms and conditions of loans and magnitude of investments Once accepted, the Government’s approvals serve as conditions for bankers and equipment suppliers to offer loans and equipment.

Although the Government does not officially guarantee loans, in reality, the Government’s ownership of the four state banks makes it liable for any defaults and capable of directing investments flows. The World Bank (2001) notes that lending to state-owned-enterprises is viewed more favourably than lending to the private sector. The Government’s control of the banking systems means it can also favour designated state-owned enterprises and therefore influence the allocation of investment funds across the economy. Superficially, the Board of Directors of a state-owned mill is responsible for its loans. However, if a mill faces a loss, it shall be underwritten by the State.

The State does not establish a separate fund for compensating losses of the sugar sector. When losses occur, the Board of Directors must report this situation to functional bodies and request for compensation. When such requests are approved, funds shall be provided. If not approved, the Government would ultimately bear responsibility for the loan through its ownership of the banking system. The average interest rates charged state-owned mills under the program are as follows: from 1995 to 1997: 1. 1 per cent a month, 13. 2 per cent a year from 1 January 1998 to 31 December 1999: 0. 81 per cent a month, 9. 7 per cent a year from 1 January 2000: 0. 5 per cent a month, 9. 0 per cent a year. The average rate for the whole period has been around 11 per cent a year. The total value of domestic loans to finance state-owned mills is reportedly 4,969 billion VnD (US$350 million). Mainly these are loans from the Bank for Investment and Development and VIETCOMBANK (HO 2000). As at 31 December 2000, the outstanding amount of these loans was 4,647 billion VnD, with 322 billion VnD (equal to 6. 45% of the total) having been repaid. The duration of these loans shall not exceed 12 years and includes a five years grace period. This leaves a seven-year period to repay principal. VIETNAM SUGAR PROGRAM 22 POLICIES AFFECTING THE SUGAR INDUSTRY In addition to these loans is an additional US$470 million of foreign capital (MARD’ Evaluation Report of Implementation of the Five Year Sugar Program, 2000). This is invested as foreign direct investment in stand-alone or joint ventures and foreign loans used to fund equipment purchases. Regulation of industry conduct Through its state-ownership the Vietnamese Government also regulates important aspects of how mills are managed. Potentially Government’s auditing, accounting, dividend and management policies have a big impact on the incentives facing mill managers and therefore on their operational performance.

As a general rule governance of state-owned-enterprises is not clear, which raises many questions about the their performance. In the case of sugar mills in particular, who mill managers are accountable to is not well defined. In principle a Board of Directors is responsible for maintaining the value of State capital and assets invested in a particular mill and for operating it efficiently. However, there is no clear penalty if they fail to do so, and no benchmark for their efficiency and performance. It also appears that mill management is partially accountable to several ministries as well as local government interests. This makes it unclear whether any single entity takes full responsibility for the mill’s performance.

Either MARD or a Provincial Peoples Committee are the official ‘owners’ of mills and mill managers report on the technical and financial performance of their mills to these entities. However, in reality it seems, full reports are not made to owners. There is reporting of financial performance to the Department of Enterprise Finance, at the Ministry of Finance (MOF). MOF is responsible for monitoring financial reports and debt repayment capability of state-owned-enterprises generally, undertaking financial analysis on financial problems, monitoring the management and use of State capital, and for making financial subsidies. At very least there is overlapping of lines of accountability. Governance functions appear to be fragmented and passive.

No single agency or entity seems to be actively involved in reviewing or being accountable for the operation and performance of a mill enterprise. And like other state-owned enterprises, sugar mills are not required to be independently audited, although they may be selectively audited by the State Audit Agency (SAGO). However, the number of state-ownedenterprises audited by SAGO has been very small, and most of them are either large, strategic state-owned-enterprises or troubled state-ownedenterprises that are put under special control. Lack of auditing VIETNAM SUGAR PROGRAM 23 3 POLICIES AFFECTING THE SUGAR INDUSTRY requirements lowers accounting standards and compliance. Moreover, the fragmented governance functions mean mill managers’ objectives are likely to

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