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Counting the costs of not playing with a straight bat   2010-09-11 - VIR

What is happening with Fortuna Hanoi Hotel?


The case serves as an example for other joint ventures in potential stake transfers

The Fortuna Hanoi Hotel joint venture was established on November 29, 1994 by Thang Loi Limited Company, now Thang Loi Investment Trade and Tourism One Member State Owned Limited Liability Company, and Singapore’s Chng Holdings PTE Ltd.


The 30-year joint venture was licenced by the State Committee for Cooperation and Investment (now the Ministry of Planning and Investment - MPI) on February 9, 1995, with total legal capital of $6 million. Of this amount, 60 per cent was contributed by the foreign party and 40 per cent was held by the local party in form of land use right over 4,250 square metres for a 30-year lifespan.


Both parties pledged in the joint venture licence, after 30 years of operation, the hotel would be transferred to the Central Council of Vietnamese Cooperative Alliance, now the Vietnam Cooperative Alliance (VCA), without any cost.


After some revisions to its investment licence, in November 2007, the joint venture was granted a new investment certificate by Hanoi Municipal People’s Committee, under which the joint venture was allowed to operate within 40 years, having total investment capital of $35 million with $18 million as chartered capital. With the new licence, the local party was committed to contribute 30 per cent worth $5.4 million in form of land use rights for 3,482sqm.


However, in the initial years, the joint venture hotel suffered from big losses, calculated at over $8.4 million by December 31, 2002. Thus, having advocated and approved by the VCA, in February 2008, the local party in the joint venture sent documents to the MPI asking for permission to sell all of its stakes in the joint venture to the foreign party. Also, in December 2009, the VCA sent similar documents to the Ministry of Finance (MoF) to seek for the ministerial guidelines.


However, the governmental inspectorate’s investigation conducted in May looked to shine light on the matter. Its first question was why the local party’s stake in the joint venture reduced from 40 per cent (in 1995) to 30 per cent (in 2007). The second was why the buyout of the foreign partner had been approved by the VCA even though this must have had to be approved by the competent state authorities.


Why was the local party’s stake reduced?


In the initial joint venture agreement of the Fortuna Hanoi Hotel, it was both agreed that the Thang Loi contributed 40 per cent of the joint venture’s legal capital in form of land use rights for 4,250sqm worth $2,380,000 over 35 years at a price of $16 per square metre per year.


However, under the MoF’s Decision No1417/TC/TCDT dated December 31, 1994 on issuing regulations on the rentals of land, water surface and sea surface applicable to foreign invested entities in Vietnam, the rent was capped at $13.6 per square metre per year.


Such regulations were among governmental incentive policies to draw in foreign direct investment inflows in Vietnam at that time. To make the matter worse, the hotel’s area was re-measured to stay at 3,892sqm instead of previously-announced 4,250sqm.


However, Hanoi’s Department of Finance determined the hotel land coverage of 3,482sqm and the rental of $13.6 per square metre per year. In total, the value of the Thang Loi’s contribution in the joint venture was $1.852 million, thus it needed another sum of $1.148 million to complete its committed 40 per cent stake in the signed joint venture agreement.


Thang Loi’s general director Nguyen Hai Giang said it was impossible for the company to mobilise the extra money even though it had applied for loans at domestic commercial banks which were being affected by the Asian financial crisis.


In a final attempt, on October 22, 1997, the VCA asked the MoF’s Investment and Development Department to ask for favourable loans. But, the Thang Loi was not an eligible candidate for such loans.


Facing the danger of having its investment licence revoked due to shortages of legal capital, the Thang Loi sought VCA’s permission to start negotiating with the foreign party so as to reduce the local party’s stake from 40 to 30 per cent. In addition to this, Chng Holdings agreed to help arrange a foreign loan of $398,000 to the Thang Loi so the local party would be able to fully cover a 30 per cent stake.


In October 1997, the VCA asked the MPI for revising the Thang Loi’s 30 per cent stake in joint venture hotel. In November, 1997, the MPI approved this plan, in which the local party contributed $2.25 million, or 30 per cent of the joint venture’s legal capital in form of land use rights over 3,892sqm for a 35-year lifespan.


Why the losses?


According to the governmental inspectorate’s allegation, by December 31, 2002, the Fortuna Hanoi Hotel suffered from an over $8.4 million loss due to the Asian financial crisis, high lending rates paid to the foreign loans and high management fees. The loss was a big problem because the joint venture hotel’s legal capital at that time was $9 million.


However, Fortuna Hanoi Hotel’s general manager Roger Chng attributed the company’s loss to the hotel’s high construction costs and sharp decline in foreign tourists in the aftermath of the Asian financial crisis and the SARS epidemic when the hotel opened.


In terms of lending rates, the governmental inspectorate said that the joint venture’s real lending rates were far higher than those registered with the State Bank, because the unpaid lending rates were added to the original debts and then the debts continue swelling.


As for high management costs, the joint venture in February 1998 clinched a 10-year hotel management contract with Key Hospitality Management PTE. Ltd, with management fees making up 3 and 10 per cent of the joint venture’s revenues and aggregated profits respectively.


According to the governmental inspectorate, these were the maximum fee levels prescribed in the inter-ministerial Circular No13/TTLB dated October 8, 1997 by the MPI and the MoF, which provided guidance for hiring of managerial organisations to manage business activities of foreign-invested enterprises.


However, both local and foreign parties defended that the hotel’s management fees agreed between the Fortuna Hanoi Hotel and Key Hospitality Management PTE. Ltd absolutely complied to the existing Vietnam’s law and was certified by competent authorities.


Unsuccessful equitisation


On April 15, 2003, the government issued the Decree No38/2003/ND-CP in relation to the conversion of a number of foreign-invested enterprises into shareholding companies on a trial basis.


The MPI and the MoF then issued an inter-ministerial circular guiding the implementation of this decree, which stated that equitisation of foreign-invested enterprises would be allowed if they met specific conditions such as capital requirements and business effectiveness.


In light of the new governmental move, the Fortuna Hanoi Hotel planned for its equitisation. To do that, the VCA asked the Thang Loi to negotiate with Chng Holdings.


After that, the two sides clinched an agreement on June 1, 2006, in which they agreed to remove the term of ‘transferring the foreign party’s assets to the VCA without any cost once the joint venture hotel becomes expired’ as outlined in its investment licence.


Then, the Fortuna Hanoi Hotel asked the MPI for permission of its equitisation plan in accordance to the Decree No38/2003/ND-CP. However, this proposal was rejected because the joint venture hotel had the term of ‘transferring the foreign party’s assets to the state without any cost once its licence ends’.


Under the inter-ministerial circular issued by the MPI and MoF, foreign-invested enterprises with commitments to transfer the foreign parties’ assets to the state without any cost were not allowed to be converted into shareholding companies.


Foreign party’s buyout


After failing to convert the joint venture hotel into a shareholding company, the foreign party proposed a ‘buy out’ plan to the local party, in order to turn the joint venture into a wholly foreign owned company.


On February 14, 2008, the Thang Loi asked the MPI for guidance of the procedures to turn the hotel into a wholly foreign-owned entity. The MPI replied in the Document No2288/BKH-PC that the Thang Loi could sell all of its stakes to the foreign party unless it complied to the Article 2, Clause 5 of the governmental Decree No 108/2006/ND-CP providing guidelines on the implementation of the Investment Law issued in 2005.


The Document No2288/BKH-PC stated that even once turning into a wholly foreign-owned entity, the Fortuna Hanoi Hotel would remain complying to all of its investment licence’s terms, including the term of ‘the transfer of the foreign side’s assets to the state without any cost one the hotel becomes expired’.


Explaining why the Thang Long’s desire and readiness to sell its 30 per cent stake to the foreign party, Giang said his company would not be able to afford the hotel’s increased investment capital at a time when it was seeking more fund to invest in the current facilities in order to enhance its competitiveness.


VCA vice chairman Nguyen Xuan Hien said the Thang Loi would spend the cash earned from selling its stake in the Fortuna Hanoi Hotel developing its own property projects such as high-rise buildings at 149, Giang Vo street in Hanoi.


On December 11, 2008, the VCA approved the Thang Loi’s plan to sell its stake to Chng Holdings and allowed the company to hire MoF’s appraisal and auditing units to evaluate its stake in the Fortuna Hanoi Hotel.


The evaluation stated the value of the local party’s 30 per cent stake was worth $8.44 million. Based on this evaluation, the VCA approved the price of $10 million to sell the Thang Loi’s stake to the foreign party.


But the governmental inspectorate alleged the offered price was not reasonable as the joint venture’s brand-name value and business advantages were neglected. Moreover, the value of land use right during the remaining 25 years of the joint venture hotel was not in line with the current property market.


On April 27, 2010, the MoF issued a document on the sale of the local party’s stake in the Fortuna Hanoi Hotel, stating that the Thang Loi could transfer its stake in the joint venture under the Investment and Enterprise twin laws 2005.


However, the important thing is that after the local party’s pull-out, the Fortuna Hanoi Hotel would remain complying to all terms of its valid investment certificate, including the term of ‘the transfer of the foreign side’s assets to the state without any cost once the hotel becomes expired’, as stressed in the MPI’s document No2288/BKH-PC.


As a consequence, the foreign party’s buy-out in the Fortuna Hanoi Hotel has gone nowhere.

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