BizCLIR

Certain cross-cutting themes emerged with respect to CLIR and trade in Vietnam. These themes include the following: a) the conflicts inherent in developing a private sector where SOEs often dominate; b) the urgency of judicial reform; c) the problem of corruption; and, on a more positive note, d) the many examples of success in these areas. It is important to evaluate and integrate these themes, but not necessarily through stand-alone initiatives. It would be prudent to address these themes within the context of other reforms, as further detailed below.

Conflicts Inherent in Developing a Private Sector where State-Owned Enterprises Often Dominate
Given Vietnam’s history of socialism and central planning, its economic and legal transition over the last two decades has been heavily influenced by the legacy of a strong state sector, especially the strong role of SOEs. Estimates of the current number of SOEs in Vietnam vary; figures cited over the course of this Diagnostic ranged from 4,500 to 5,600; we can say with confidence that less than half of the approximately 12,000 to 14,000 SOEs that operated in the late 1980s still exist today. This dramatically reduced number suggests that Vietnam has made significant progress in reducing the role of SOEs in the economy. However, many key sectors are still heavily influenced by SOEs. While some SOEs are profitable and reasonably efficient, the state is too involved in areas of commerce that would be better served by the private sector. The reduction, reorganization, and reform of SOEs has been a government priority since at least 1995, when Vietnam applied for membership in the WTO and established, for the first time, a Law on State-Owned Enterprises. A reduction in the number of SOEs will allow private enterprise to experience greater economic freedom and better access to markets, and will allow Vietnam to enjoy access to higher quality goods and services at better prices.

Before the recent reforms, Vietnam engaged in virtually 100 percent nationalization of industrial and commercial enterprises and invested heavily in its SOEs, subjecting them to the “direct control and management of line ministries of the central government or different departments of the local government.” This model, combined with central planning, resulted in a sustained lack of industrial growth and productivity and unrelenting poverty throughout Vietnam. Beginning in late 1986, through its doi moi initiative, Vietnam abandoned some elements of this approach and launched a gradual process of market-oriented reforms “with a socialist direction.” Although much has changed in 20 years, this model of state management of SOEs has remained largely in place until just the last several years.

As part of the WTO accession process and in line with domestic policy objectives, Vietnam is transforming many of its SOEs through an “equitization” process that dilutes state ownership and shifts them into joint-stock or limited liability companies subject to the Enterprise Law. SOEs have been categorized into three groups: those that would remain under 100 percent state ownership; those in which the state would retain a majority ownership interest; and enterprises in which the state would maintain a minority interest or completely divest ownership. As of 31 December 2005, 2,935 enterprises have been equitized. To further this process, the government promulgated Decree 109 (dated 26 June 2007) on Conversion of Enterprises with 100 Percent State-Owned Capital into Shareholding Companies. Although Vietnam has enacted other legal reforms much more rapidly than many would have expected just five years ago, in many respects it has not met expectations to rapidly rationalize SOEs. With new Vietnamese leadership in 2007, faster and deeper equitization of SOEs is expected over the next several years. This has important implications not only for economic efficiency but also for Vietnam’s stock market, which has greatly benefited from a steady increase in the public listing of viable, equitized joint-stock enterprises.

Despite these reforms, the lingering and not unsubstantial presence of SOEs continues to distort markets in several ways—

• SOEs are afforded many benefits, including some that are legislatively supported and some that are informal, that increase the difficulty of competing against them. For example, SOEs are obliged to pay a lower minimum wage than foreign-invested enterprises (FIEs). SOEs are often treated more favorably with respect to transporting goods through borders, can access capital much more easily, are rarely subjected to “excessive” red tape and inspection problems, and are likely to receive favorable treatment in court procedures that involve commercial disputes. SOEs also appear to be freer to engage in trademark and copyright infringement without significant government intervention.
• In the past, state-owned banks were usually not required to comply with the minimum deposit requirements demanded of domestic joint-stock and foreign-owned branches of banks. They were also allowed to borrow from state-owned banks without offering collateral, an enormous advantage over private companies. Reforms have eliminated these advantages, however. The 2004 amendments to the Law on Credit Institutions call for state-owned banks to operate as full-fledged commercial banks, and two “non-commercial policy banks” were created to handle policy lending. As part of these reforms, a Decision on Prudential Supervision was promulgated in 2005. These reforms call for state-owned banks to be supervised on the same basis as domestic private and foreign banks (largely in line with “BASEL I” criteria) after a phase-in period of a number of years. To date, the change has not occurred for any state-owned banking institutions. SOEs are also under less pressure to fully repay loans, compared to expectations for loans to private businesses.
• The new Law on Competition restricts comparative advertising, in effect denying private companies the important right to truthfully assert why their products may be preferable to those offered by SOEs.

Urgency of Judicial Reform
One of the most significant non-market risks for companies doing business in Vietnam is the lack of predictable, affordable enforcement in the event of a commercial dispute. The courts are both slow to issue judgments and notoriously influenced by factors that are unrelated to the evidence. When judgments are finally issued, they are often difficult to enforce, at least within a reasonable timeframe and at a reasonable cost. Without effective enforcement, commercial rights are no more than theories.

Virtually every substantive section of this Report—including contracts, secured transactions, real property, IPR, bankruptcy—identifies the inability of Vietnam’s court system to facilitate the prompt resolution of commercial disputes and the enforcement of judgments as a fundamental problem. Important aspects of this issue include a lack of public confidence in judges, the overall inefficiency and sluggishness of court processes, a lack of significant automation in the courts, and the difficulty of enforcing court decisions in a timely fashion. Examples include the following—

• Vietnamese judges are generally regarded as bureaucrats with no particular status. Historically, judges and courts have not reliably delivered justice. They have been seen as instruments or tools of the state that implement the will of rulers instead of impartial dispensers of reasoned decisions. Enhancing and modernizing the status and role of the judiciary remains a challenge.
• The courts are not operating effectively, especially with respect to resolving commercial contract disputes. Around 1,000 cases were actually brought to the economic court in 2004; roughly 80 percent were resolved. The public’s access to these decisions is limited. Data on how many of these decisions were enforced in practice are not widely available, but delays in enforcement of decisions are an endemic problem in Vietnam. Procedural oversight of the courts by prosecutors can further delay enforcement of decisions. These factors erode the ability of the court system to resolve commercial disputes.

Court users and court staff reported the following inadequacies in court administration:

• Poor quality of information management, as evidenced by inconsistent and occasionally duplicative methods of collecting and maintaining information about cases.
• Inconsistent court administration procedures and inconsistent forms.
• A lack of control over case records and security.
• An overall inability to generate useful statistics regarding the operation of the courts.
• Lack of clear, long-term strategies at the individual court and institutional levels to integrate automation processes into court administration.
• Transparency throughout the court process can be weak, and decisions are often poorly written and hard to obtain.
• The courts have limited ability to enforce attendance at civil or commercial proceedings.
• The courts have no institutional incentive to ensure that their judgments are enforced.
• Judges do not feel that they have adequate access to or understanding of the new commercial laws. For example, judges report significant gaps in understanding of both the various sources of contract law—including not only the major general sources, but also sources pertaining to property, employment, notaries, and other issues regularly faced by businesses—and the substance of those sources.
• Foreigners who try to discipline or dismiss employees, even for just cause, often find the courts unsupportive of these efforts.
• Vietnam’s Economic Courts lack capacity to deal with the challenges presented by the new Bankruptcy Law. Judges do not fully understand the principles behind swift and fair dissolution of insolvent businesses, and they lack facility with the new law. Other than limited guidelines reportedly issued by the Judicial Council, the Economic Courts have not yet received clear instructions regarding rehabilitation and liquidation.

In general, profound lack of public confidence in the courts may, in the long term, discourage sustained economic growth.

The Dangers of Official Corruption
While corruption continues to be an impediment to trade and investment in Vietnam, the government has been moving to address this issue, under pressure from foreign investors, trading partners, and the citizens of Vietnam to do so in a comprehensive way. The new Anti-Corruption Law that came into effect on July 1, 2006, was supported by multiple bilateral and multilateral donors. It calls for much greater disclosure of assets by public officials, and for the government to establish specialized groups to tackle corruption. In January 2006, the Government of Vietnam established the National Steering Committee for Anti-Corruption, which is led by the Prime Minister and includes the Office of the Government, the Ministry of Justice, the Government Inspectorate, the Ministry of Public Security, the Supreme People’s Court, the Supreme People’s Procuracy, and the Ministry of Defense. In early February 2006, the Government Inspectorate and the Ministry of Security each established Anti-Corruption Departments. Under an instruction from the Prime Minister, every line ministry and provincial People’s Committee will prepare an Action Plan for Anti-Corruption within its management area. However, the Anti-Corruption Law did not establish an Independent Anti-Corruption Commission, as many recommended, and its actual effects have yet to be seen.

In addition to the Anti-Corruption Law, Vietnam has undertaken reforms to improve transparency, due process, and accountability for administrative actions, all of which will eliminate opportunities for corrupt behavior by officials.

The Law on Complaints and Denunciations has been amended twice since 2004 to implement U.S.-Vietnam BTA and WTO requirements that stipulate that final administrative decisions can be reviewed by the courts. To further strengthen the right to seek court review of administrative determinations, this law is expected to be separated into two laws—one on complaints and one on denunciations—in 2008. The Ordinance on Procedures for Settling Administrative Cases was also amended to give the courts broader jurisdiction to hear appeals of administrative decisions. As a continuation of these reforms, Vietnam is currently drafting an Administrative Procedures Law and is debating the merits of establishing independent tribunals to hear appeals of administrative decisions.

The Law on the Promulgation of Legal Instruments (Law on Laws) was amended in 2002 to require that most legal instruments must be published for 15 days before taking effect, as required by the U.S.-Vietnam BTA. As a result, the number of issues of the Official Gazette published each month has gone from an average of four issues per month in 2002, to almost 20 issues per month in 2003, to nearly 50 issues per month in 2006, a more than 1,000 percent increase. Also, since the adoption of the new Law on the Promulgation of Legal Instruments of People’s Councils and People’s Committees (Law on Local Laws), 52 out of Vietnam’s 64 provinces have established local official gazettes that publish regulations promulgated at provincial and district levels. An electronic version of the Official Gazette is being developed by the Office of the Government.

Transparency International Corruption Perception Index (2006)
(63 countries ranked)
Source: www.transparency.org
Country World Ranking CPI Score (out of 10)
Singapore 5 9.4
Hong Kong 15 8.3
Japan 17 7.6
South Korea 42 5.1
Thailand 63 3.6
Laos 111 2.6
China 70 3.3
Vietnam 111 2.6
Cambodia 151 2.1
Indonesia 130 2.4

The Law on Laws requires that draft legislation be circulated for comment among relevant government agencies, but does not require that draft laws and regulations be published for public comment. In practice, however, a large number of government agencies do publish draft legislation on Web sites and in the mass media in order to solicit public comment. Many state agencies also organize public workshops to discuss draft laws and regulations, often with the support of international donors, including USAID/STAR-Vietnam. From 2002 to 2006, for example, USAID/STAR supported almost 300 such seminars.

Corruption-related complaints include customary “informal charges” for administrative services such as business registration or notarization of documents; bribes demanded (or expected) by judges to decide a case one way or the other; relentless inspections of enterprises, assuaged only through paying off inspectors; and even manipulation and misappropriation of donor funds by government representatives. In addition, rampant corruption in Vietnam’s Customs Agency was the primary complaint from the trade community and other Customs Agency customers.

Transparency International’s 2006 Corruption Perception Index, which examines perceptions of corruption in most countries throughout the world, ranks Vietnam in the bottom third. Vietnamese leaders recognize that corruption erodes public trust in the government and constrains competitiveness.

Some foreigners in Vietnam identified noticeable improvements with respect to corruption, noting that some Ministries are “not as corrupt” as others or as they have been in the past. Business processes in Ho Chi Minh City have significantly improved, for example.

The behavior of foreigners working in Vietnam has apparently had a positive influence. When foreigners refuse to participate in corrupt practices, local bureaucrats are forced to think beyond immediate payment and to do their jobs more effectively. Moreover, the Foreign Corrupt Practices Act in the United States, which criminalizes bribes made by U.S. companies or individuals in foreign states, deters corruption, and Americans avoid having to make many of the payments that other foreigners or Vietnamese must make.

Although Vietnamese leaders have acknowledged the harm caused by corruption and have taken positive steps to combat it, the reality is that businesses must still deal with corruption in all phases of operation. Specific suggestions that arose during the course of the Diagnostic (especially with respect to the “low-level,” everyday expectation of informal payments during the course of doing business) included the following—

• Government offices that charge fees for their services should clearly post their fees for each service provided, including any fees related to legitimately expediting the service.
• Customers should not pay bribes or other “informal charges.”
• Corruption hotlines should be established in each of the ministries.
• The media should receive training specifically in the area of corruption, including investigative techniques and the ability to recognize different charges of corruption such as scapegoating or political exercises to discredit someone.
• Anti-corruption “champions” should be identified and empowered, both by the state and the donor community.
• Public financial disclosure of the assets of high-level public employees, including judges, should be mandatory.
• Information technology should be introduced into all state functions where there is a chance for hiding information or obscuring financial transactions. This would allow charges to be tracked and eliminated some opportunities for corruption.
• Transparency should continue to be enhanced at all levels of government and government procurement, including consistent and timely publication of all laws, regulations, and court decisions, and reporting on regulatory procedures and decisions.
• An “Inspector General” position should be created in large public agencies, and be charged with investigating and, where necessary, referring to prosecution instances of waste, fraud, and abuse.

Many government officials have been implicated in corruption scandals in recent years. One illustrative case is that of Mai Van Dai, former Deputy Minister for Trade, who was jailed in 2005 on multiple charges and brought to trial in early 2007 for large-scale corruption in relation to textile quotas. Strong, resolute, and forward-looking leadership is urgently needed to counter the highly damaging state of affairs concerning corruption in Vietnam.

The Many Lessons of Success
Although this Report contains many suggestions for change and some direct criticism of the environment for commercial law and trade in Vietnam, these points should not obscure the many positive findings in this Diagnostic or the “bottom line” figures showing a sustained period of meaningful economic growth. Vietnam is doing many things right—

• The government listens to the private sector. Domestic and foreign representatives of the private sector confirm that numerous opportunities exist to become involved in the process of commercial law transformation in Vietnam. Government representatives, including members of the National Assembly, meet with the private sector to consider its reaction to draft laws and the submission of draft regulations to the Vietnam Chamber of Commerce and Industry (VCCI), as they are required to do by law. Legislative changes typically go through numerous drafts in order to incorporate the reactions and changes proposed by both private and public stakeholders.
• The government often moves quickly. Vietnam has invested significant energy into designing change processes that are collaborative, substantively strong, and swift. The challenge for the future lies in channeling the system of legislative responsiveness into efficient and relatively fast implementation of economic reforms.
• Access to information, though imperfect, is improving. Through use of the Internet, increased media freedom, and expanding public engagement in economic development policy, information about the true state of the Vietnamese economy, including specific policies that are of interest to outsiders, is rapidly and markedly improving. Vietnam boasts some unusually strong sources of information and support for businesses, including foreign organizations, the U.S.-Vietnam Trade Council, and several international chambers of commerce. Although the quality and access to legal information has improved substantially, many types of basic data on economic activity remain incomplete or unavailable. For example, the most fundamental data on Vietnam’s banking system and monetary sector are not publicly available.
• The government effectively manages the donor community. Vietnam deals with a vast number of international, bilateral and non-government institutions that provide technical assistance and funding for market-oriented reforms. This is no small challenge: often donors arrive with overlapping visions of where their support is needed, and in a few cases their visions conflict. Unlike some countries, which may refuse or undermine international assistance efforts, Vietnam has proven remarkably receptive to outside contributions toward the development of its “new” economy and effectively balanced the interests and agendas of its various partnering institutions.

This Report acknowledges specific actors in Vietnam for the high quality of their contributions to change. There is no doubt that the recent successes of Vietnam—including the policies and actions behind these successes—will serve as an important source of guidance in the region for years to come.