|
|
|
|
EFFECTIVE IMPLEMENTATION:
the next step for the new Enterprise and Investment Laws?
The Enterprise Law and Investment Law, two key reforms which were
promulgated last November, came into effect this July. Major
objectives of these laws include expanding the freedom for people to
conduct business, promoting private investment, strengthening the
system that monitors business compliance, and creating a level
playing field for businesses across all economic sectors. To achieve
these ends, the government has recently issued implementing decrees
and set up a Taskforce to oversee their implementation.1
However, the business community continues to be concerned that, as
is often the case in Vietnam, the practical implementation of laws
and decrees can be inconsistent from the laws themselves. This
bulletin discusses a number of concerns that remains among the
business community, and discusses their recommendations on how the
government can more effectively implement the two laws to achieve
their objectives.
Business freedom
In principle, the two laws
aim to reduce restrictions on doing business in most sectors except
those that are prohibited or restricted. In practice, however, some
government agencies are still using licenses and conditions as state
management tools. While there have been several efforts in recent
years to streamline the business licensing regime, these have
continued. Business owners are concerned about the lack of clarity
regarding numbers and forms of licenses and conditions, which often
entail complicated and arbitrary administrative procedures.2
Both foreign and domestic businesses have been calling for a
stronger government mechanism to controls the quality and
implementation of business license regulations. Such a process would
include a frequent review of the current stock of business licenses
and also control the flow of new ones, thus ensuring that the
principle of business freedom would actually be respected. This
responsibility has now been assigned to the Taskforce; however, as
the experience from 1999 suggests, it may be hard for the Taskforce
to have much impact, as the issuing agencies (mainly Ministries)
hold more power and may resist cancellation of any of their
licenses.
Investor entry and
compliance
In theory, the new laws
should make investment easier, investment licenses are now required
only for large projects and the licensing process has been
decentralized to the provincial level. However, under Decree 108,
most new projects (both foreign and domestic) will now have to be
registered with the investment authorities.3 As it is
unclear how this new registration procedure will actually be
executed, some investors are concerned that this lack of clarity may
be a barrier to investment. In order to ensure that the process is
simple and transparent, they believe that more detailed guidelines
may be necessary. For the government, the additional registration
procedure may impose a burden of paperwork on the investment
authorities, and decentralization raises an urgent need to
strengthen the institutional capacity of the provincial agencies.
However, when it comes to
ensuring i) that investors in Vietnam comply with their commitments,
ii) monitoring project implementation, and iii) assessing business
performance, governmental agencies currently rely largely on
periodic reports from investors and businesses. There is clearly a
need for a stronger and more effective monitoring system especially
for projects that may have a strong social impact on communities.4
Encouraging private
investment
In recent years, the
Government has publicly encouraged private investment in many
different areas of infrastructure, but as there is no legal
framework for this type of investment, it is unclear how serious it
is.5 There have been some privately-funded projects in key sectors
such as power, ports, telecommunications, and oil and gas, mostly in
the form of build-operate-transfer (BOT) or business-cooperation
contracts (BCC); however only a few of these have been considered
successful. Even now, after the new Investment Law has taken effect,
investors are still unsure which sectors will allow private
participation and investment and which will not. A more effective
legal framework for private sector participation in infrastructure
would encourage more investment and activity in such projects.
Both local and foreign investors are currently hoping that the new
BOT decree will be the first of several steps towards a clearer
legal framework that promotes private funding of infrastructure
development. The decree aims to create a transparent bidding and
selection process and simplify bureaucratic BOT project startup
procedures across the national and provincial government levels,
thereby removing a number of key constraints to private investment
in this area.6,7 However, adjustments to other
regulations are still needed; for example, foreign banks are
currently prohibited from accepting land use rights as collateral,
which prevents them from lending to BOT investors. Also, because
banks and other financial institutions cannot exercise step-in
rights as a general rule and, as a result, often need to negotiate
with relevant government agencies on a case-by-case basis, they are
wary of financing infrastructure projects.8,9
A level playing field
for all businesses
In order to achieve a
level playing field for private and foreign businesses, under the
new Enterprise Law state-owned enterprises (SOEs) are in the process
of being either equitized or converted into the form of one-member
limited liability companies.10 Once transformed, SOEs are
expected to comply with the corporate governance principles laid out
in the Enterprise Law (e.g., shareholders should receive equitable
treatment, management boards should have sufficient authority to
guide and monitor company officials, and companies should follow
transparent disclosure policies). Whatever form the SOEs eventually
take, however, it may just be a case of “old wine in a new bottle”
if the legal framework does not clearly specify the rights and
responsibilities for owners and management and/or if managers of
SOEs lack autonomy regarding operations, fundraising, strategy
development, recruiting and human resources; under either of these
cases, the underlying business incentives for SOEs would not change
and, as a result, it would be unlikely that their performance would
improve.
Moreover, up until now,
SOEs have been protected from competition, enjoying a number of
privileges, including: direct subsidies (e.g., subsidies on
production inputs, easier or “soft” credit, favorable tax rates, and
lower administrative costs); preferential treatment by banks and
other financial institutions; and better access to government
agencies;11 it has often been said that the playing field
between SOEs and the private sector, both domestic and foreign, is
unfair. To ensure a fair and competitive environment across sectors,
especially as Vietnam joins WTO, such advantages must be eliminated
and SOEs will need to operate on a purely commercial basis.
(1) The Taskforce for the Enterprise
and Investment Laws was established by the Prime Minister on 25
September 2006.
(2) The number of business licenses has increased rapidly, from 194
in 2002 to 246 in 2003 and 298 by the end of 2004. Business licenses
and conditions exist in diverse forms such as professional
certificates, standard conformity certificates, registration
certificates, licenses, written approvals and certificates (such as
tour guide certificates). Sources: GTZ-CIEM, 6 years of Implementing
the Enterprise Law: Issues and Lessons Learnt, 2006 and ADB-GTZ-PMRC,
Business licensing: Current status and the way forward, 2006.
(3) See Law on Investment 2005 and Decree 108 guiding the
implementation of Investment Law, issued on 22 September 2006.
According to Decree 108, all foreign investment projects with
capital over VND 300 billion, and those that have below VND 300
billion and are in conditional sectors, projects below VND 300
billion and except for domestic projects below 15 billion that are
not in conditional sectors will have to be registered.
(4) The recent case of the SITC Training Centre demonstrates the
inefficiency of ex ante control (i.e., when the government tries to
regulate businesses before conditions arise) and the ineffectiveness
of the post-registration monitoring mechanism.
(5) Tony Foster, Private participation in Infrastructure, Vietnam
Business Forum 2005
(6) The Decree on Investment in the form of Build-Operate-Transfer (BOT),
Build-Transfer-Operate (BTO) and Build-Transfer (BT) Contracts, one
of the implementing decrees for the new Investment Law 2005, is
currently being drafted.
(7) Tony Foster, “Position paper of Infrastructure Working Group,”
Vietnam Business Forum, December 2005. The list of the main licenses
and permits required for a recent BOT power project consists is very
long, consisting of many pages. For more complicated projects,
especially those involving land issues, the lists can be even
longer.
(8) A step in right allows a party who has a financial interest in
the success of a project (such as a bank) to bypass the original
borrower and pay the contractor himself, to allow the project to
continue.
(9) Tony Foster, “Position paper of Infrastructure Working Group,”
Vietnam Business Forum, December 2005.
(10) According to Decree No. 95.CP-2006, which was issued on 8
September 2006.
(11) Huynh The Du, Relationship between the State, State-owned
Enterprises and State-owned Commercial Banks in Vietnam, 2005. |
