Vietnam’s investment reforms fall flat

Vietnam’s investment reforms fall flat
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Vietnam has amended several laws and issued decrees to encourage investment in the country. However, these measures may create more problems than they resolve.

During the past year, Vietnam has amended its law on public investment and issued a decree on Private Public Partnerships (PPP). While the law on public investment took effect on the 1st of January, the PPP decree will become effective on the 10th of April.

These pieces of legislation are central to Vietnam’s efforts to close the infrastructure gap that plagues the country. According to the World Bank, in the next five years Vietnam will need over $100 billion in infrastructure investment.

However, “the total amount of capital from the State budget, State-owned enterprises, official development assistance, and government bonds can meet only half of that amount.” Therefore, creating the right regulatory environment to encourage private investors is crucial to Vietnam’s development.

The pieces of legislation are closely related to one another: the law on public investment seeks to define the scope and approach of government-financed projects throughout the country while the PPP decree aims to provide a framework enabling private companies to invest in public projects.

The new amendments were desperately needed to ensure investor confidence. Since the previous PPP pilot program was implemented in 2011, few PPP projects were signed, leaving Vietnam severely lagging behind its regional neighbours.

The new amendments resolve several of the shortfalls that previous laws failed to address. For example, the new PPP directive now provides basic eligibility requirements to assist government agencies in the screening of projects. The previous law on public investments also had no directives for assessing the feasibility of projects, leading to an enormous waste of tax payer money.

Several cases were documented where projects substantially increased in cost or resulted in huge delays, with some projects continuing to receive annual disbursements despite being 10 years behind schedule. There were also instances of public contracts being procured to local companies simply by nature of their close relationship with government authorities.

However, upon a closer look at Vietnam’s legislation, it becomes apparent that lawmakers, while striving to improve the country’s business environment, have not considered the technicalities and consequences of the amendments.

The public investment law, in view of reducing corruption and increasing oversight, now stipulates that all projects funded by taxpayer money must be approved by the Fatherland Front which acts as a consultative assembly for all government matters in Vietnam.

Unfortunately, the Fatherland Front only meets twice a year and has to deal with an overloaded agenda. This means that the implementation of new public investment projects risks being delayed until official approval is granted.

The PPP law also suffers its own set-backs. The balance between keeping large financially unsound State Owned Enterprises (SOEs) afloat and pushing unemployment down has spurred much debate since the country opened up its economy.

However, the PPP decree now allows SOEs to bid on these contracts – nullifying the point of using PPPs to finance expensive infrastructure projects. Moreover, by allowing SOEs to bid on PPPs, the business relationships which underlay Vietnam’s economic system will inevitably lead SOEs to win the projects most of the time.

Unfortunately, this is not the first time Vietnam has issued legislation which had questionable effects. In a bid to encourage investment, Vietnam’s Land Law revised in 2013, authorised foreign ownership and set up property taxes collected by the Ministry of Finance rather than city governments. Therefore cities continue to have to rely on the State Budget rather than revenues generated by good policies and public investment. This is particularly relevant in Vietnam where government administration is highly decentralised.

Despite moderate progress, Vietnam’s legal reforms have for now come up short. Vietnam’s legislature needs to be more aware of these shortfalls if they are to properly encourage investment and close the infrastructure gap plaguing the country. Failure to do so will inevitably stall the country’s development.

Categories: Asia Pacific, Politics

About Author

Nicolas Jenny

Nicolas Jenny specialises in European and Asian political risk analysis. He has lived extensively throughout the region and speaks English, French and Mandarin. He holds a double master's from Sciences Po Paris and Fudan University and a BSc in politics from the University of Bristol.