This paper critically discusses the Vietnamese Investment Regulations (VIRs) in the context of World Trade Organization (WTO) obligations of Vietnam.

Dr. Umut Turksen, Bristol Law School, University of the West of England, Bristol
Phuong M. Nguyen (LL.M.), Senior Legal Counsel of EP Legal
 

ABSTRACT

This paper critically discusses the Vietnamese Investment Regulations (VIRs) in the context of World Trade Organization (WTO) obligations of Vietnam. The VIRs prior to the Vietnamese accession to the WTO have proved to be favourable particularly to domestic investors. Apparently, the attraction of foreign direct investment has grown intensively following the liberalisation of trade policy and opening of market access pursuant to the Vietnamese WTO commitments. A wide spectrum of  initiatives have been taken by Vietnamese Government in order to adapt to the rules of the international trade regime; the VIRs are however continue to have a number of shortcomings especially in the most attractive business sectors such as distribution and banking services. The concept of “rule of law” is now revisited as recourse to this situation.

INTRODUCTION
The commencement of the World Trade Organization (WTO) membership of Vietnam on 11 January 2007 is a significant step forwards in regards to international trade integration policy of the Vietnamese Government. The accession of Vietnam to the WTO took nearly a decade which involved a number of concessions by Vietnam in bilateral as well as multilateral negotiations. Having ratified the WTO Agreement, Vietnam is now bound by the all the WTO covered agreements including market access in trade and services according to the predetermined schedules (e.g. Services Schedule). This has both pros and cons for Vietnam. On the one hand, flows of foreign capital are expected to increase significantly in the form of direct investment and indirect investment. On the other hand, with the incoming competition, domestic small and medium enterprises (SMEs) in sensitive industries become vulnerable. In other words, Vietnam is facing a dilemma whereby the attraction of foreign investment for economic development contrasts with the domestic protection against market gain by foreign investors. Therefore, a critical review of the Vietnamese adoption of the scheduled WTO commitments in regards to the foreign investment needs to be conducted.

This paper will focus on the investment regulations for the service sectors which are currently subject to the WTO commitments on trade in services. However, the paper’s focus is confined to certain service sectors such as distribution services and banking services which are of significant concern for foreign investors.

PRE-WTO – A HISTORICAL REVIEW OF FDI LEGISLATIONS

Vietnam’s FDI legislation overview

The WTO accession process for Vietnam has entailed a number hurdles, where Vietnam, as an acceding party, in the course of bilateral and multilateral negotiations, had to reach an agreement with all WTO members. A historical review of FDI legislations below explains the Vietnamese concessions and preparation in regards to market access in services.

Having realised the importance of foreign investment in the course of ‘Renovation’ (Doi Moi), the Vietnamese National Assembly adopted the landmark statute of Foreign Investment Law in 1987, which put the earlier Investment Regulations of 1977 onto a higher platform and signalled a change in trade policy. The Foreign Investment Law of 1987 enabled foreign investment in the form of 100% foreign owned enterprises (FOEs) for the very first time. This legislation was repealed by the Foreign Investment Law of 1996 which incorporated stipulations of the Foreign Investment Law of 1987 and all amendments and supplements provided thereto. However, the new regulations did not introduce considerable adjustments in connection with opening market access for foreign investment except it allowed FOEs to open branches in other provinces or cities with the similar scope of activities with their head offices.

Neither the Foreign Investment Law of 1987 nor the Foreign Investment Law of 1996 stipulated any limitations on market access for foreign investors. In principle, foreign investors may establish 100% FOEs to conduct business activities in all sectors provided that such activities do no harm to the national defence, national security, and values of history, culture and traditional habits and customs and ecological environment of Vietnam. Nevertheless, foreign investors remained hesitant investing in Vietnam due to discriminative treatment of foreign investors in practice. The investment license granted to foreign investors however is totally subject to case by case basis, which make the VIRs at that material time become dramatically uncertain. Furthermore, these legal instruments have not taken into account the legal binding effect of international conventions and treaties to which Vietnam is a signatory and which may prevail over domestic laws governing the same policy areas.
In contrast, the enactment of the Investment Law of 2005, applicable to both domestic and foreign investment, has remedied this shortcoming as part of Vietnam’s WTO accession efforts, and the Vietnamese government introduced a provision which recognised the overruling effect and supremacy of international legal instruments over national laws. In addition, for the harmonisation of investment regulations for domestic and foreign investors, the Vietnamese Government has endeavoured to provide a levelled playing field. However, the Vietnamese FDI environment has been subject to uncertainty and change because regulations tend to be tentative and require revision and fine tuning as the implications of legal and regulatory provisions are realized and tested. Hence, along with the Investment Law of 2005, the Vietnamese Government and its administrative bodies have also issued by-laws in the form of regulations for the implementation of the Investment Law of 2005. In fact, the Vietnamese Government has been continually drafting new legislation and amending current legislation in order to further harmonise national laws with its international commitments. Significantly, the amendments to the two critical by-law instruments, namely Decree 139/2007/ND-CP and Decree 108/2006/ND-CP for the implementation of the Enterprise Law and Investment Law of 2005, are currently been reviewed by the competent authorities to mitigate the legal uncertainties and inconsistency. Notably, under the draft of amendments, both procedural and substantial regulations are fine tuned with the international commitments in terms of foreign investment registration.

Vietnam’s negotiations on WTO accession

The Vietnam’s WTO delegation worked approximately 11 years after the submission of its membership application to the WTO and in the process it completed more than 200 bilateral and multilateral negotiation sessions (Ministry of Industry and Trade, 2007). In connection with market access in service sectors, the bilateral negotiations proved to be more challenging than the multilateral negotiations due to the fact that Vietnam had granted ‘Most Favoured Nation’ (MFN) status and national treatment status to some countries under bilateral agreements prior to WTO accession. Subsequently, virtually all the WTO Member States put pressure on Vietnam so as to invoke their right to the same favourable conditions which were granted to selected countries prior to Vietnam’s WTO membership.
In regards to distribution services, some WTO members raised their concerns about Vietnamese legislation which put restrictions on foreign participation in multi-level sales activities at the time in order to protect the domestic economic sectors especially small and medium enterprises (SMEs). In response, a representative of the Vietnamese delegation referred to the terms and conditions set forth in the Services Schedule to confirm that foreign equity limitations shall be governed by Vietnamese commitments therein. In practice, FOEs with 100% foreign capital contribution (100% FOEs) in distribution services have been licensed in Vietnam prior to WTO accession including Metro Cash & Carry, however, only on case by case basis. As a matter of fact, allowing market access to the distribution service sector in Vietnam according to the Services Schedule is viewed as a transitional step to codify the possibility of foreign investment in the said sector in a pre-determined schedule.

For banking services, the main obstacle in the accession negotiations was the existing commitments on financial services of Vietnam to the ASEAN member countries. Pursuant to these commitments, ‘only foreign bank branches, joint venture banks in Vietnam are to be permitted to carry out specific operations as specified in their operating licenses issued by the State Bank of Viet Nam’. In addition, foreign owned equity participation is capped at 30% of commercial banks’ charter capital. Therefore, apart from the question of the possibility to have commercial presence in Vietnam of a foreign credit institution, the Vietnamese Government has also been asked to remove the current cap of 30% of the registered capital of a Vietnamese joint stock commercial bank for the acquisition by foreign institutions and individuals. In response, a representative of the Vietnamese delegation explained that the 30% cap would be maintained for the time being unless otherwise permitted by Vietnamese laws or a competent authority.
 
The negotiations for Vietnam’s WTO membership have revealed that the Vietnamese Government is willing to provide market access for foreign investment in service sectors. With regards to the two service sectors examined in this paper, the Vietnamese Government was confident to respond to any queries raised by WTO members in multi-lateral and bilateral negotiation sessions and has diligently set forth a clear roadmap to remove restrictions as much as possible at the satisfaction of WTO members.

WTO COMMITMENTS – RULES OF THE GAME

The Services Schedule presents the agreements and covenants between the acceding party and WTO Members in regards to market access on trade in services, which comprises horizontal commitments and sectorial commitments. In this context, service sectors are classified by reference to the ‘Central Product Classification’ (CPC) published by the United Nations.
 
According to the Services Schedule, foreign investors are permitted to establish their commercial presence in Vietnam in the form of business co-operation contract, Joint Venture Company (JVC) or 100% FOEs. Alternatively, Foreign Service suppliers may also make capital contribution by way of share acquisition in Vietnamese enterprises. In particular, the Services Schedule imposes specific limitations on market access for each sub-sector differently:

Distribution services: this sector contains three sub-sectors, namely commission agents’ services, wholesale trade services and retailing services. The Vietnamese Government has taken prudent steps in opening market access in this area by initially permitting only joint ventures where foreign capital contribution did not exceed 49% to provide these services. Furthermore, the FOEs can supply certain products with exceptions as stipulated in the Services Schedule. The limitation of foreign capital contribution and scope of distribution are absolutely abolished as of 1 January 2009 and 11 January 2010 respectively. However, for retail services, a FOE is entitled to open only one outlet upon establishment. An ‘Economic Needs Test’ (ENT) shall be used to verify any application for the establishment of outlets for retail services beyond the first one.

Banking services: this sub-sector is classified as financial services in the sectorial commitments. Banking services include the provisions of twelve main activities (such as acceptance of deposits and other repayable funds from the public, lending of all types, financial leasing, etc.) (Annex on Financial Services to the GATS), of which the participation in issues of all kinds of securities is excluded in the Services Schedule.
Foreign credit institutions are permitted to established commercial presence in Vietnam in the form of a branch of foreign commercial bank or a commercial joint venture bank with foreign capital contribution not exceeding 50% of the chartered capital upon accession. The limitations were abolished as of 1 April 2007, which has meant that the establishment of 100% foreign invested banks can be authorised in Vietnam. Foreign credit institutions may also contribute capital by way of share acquisition in both privatised and Vietnamese state-owned banks or joint-stock commercial banks with a limitation of foreign capital proportion of 30% of the bank’s chartered capital, unless otherwise provided by the domestic laws.

In light of the above description of specific commitments in these service sectors, it is clear that the Vietnamese Government has procured a period of time for the implementation of each specific commitment before all limitations on market access can be abolished. This transitional timeframe is designed to enable Vietnam to harmonize its regulations in conformity with the specific commitments under the WTO legal regime. Accordingly, it is important to assess the extent of harmonisation and compliance of the legal framework for foreign investment in Vietnam since its accession to the WTO. However, any honeymoon must have an end; the grace period for Vietnam is now over.

WTO COMMITMENTS – THE HONEY MOON IS OVER

For years, the National Assembly of Vietnam - the legislative body and the Government as an executive body - has been reviewing the existing investment regulations for the WTO Law transposition and implementation. This section of the paper does not investigate a snapshot of VIRs at any specific time point but describes the legal evolution as a whole, especially in regards to distribution and banking services.

The compliance of Vietnamese investment laws with WTO commitments

From a bird’s eye view, Vietnamese FID legislations have achieved a significant level of compliance with WTO commitments pertaining to market access for services, foreign ownership in private domestic enterprises and the phase-in removal of market access barriers.

In principle, the ownership ratio of foreign investors in business services enterprises is determined in accordance with the specific commitments set forth in the Services Schedule. Subsequently, it is acknowledged that foreign investors may either contribute capital or acquire shareholding at an unrestricted level in an enterprise subject to the WTO commitments. This principle is also provided by Decree 139/2007/ND-CP, a by-law instrument which came into effect as a follow-up to the Investment Law of 2005. At the same time, the foreign ownership ratio is also governed by other laws such as the Law on Credit Institutions and the Law on Securities, which may overrule both of the Investment Law 2005 and the Decree 139/2007/ND-CP in the same aspects.

The three year review of the compliance of Vietnamese regulations, particularly the investment regulations, indicates a number of positive attempts by the Vietnamese Government. In spite of these efforts, however, the reforms are not comprehensive enough to avoid inconsistency and legal uncertainty in the course of implementation, interpretation and application of the commitments.


Distribution services

Prior to the WTO accession, FOEs, have been licensed to provide distribution services. However, apart from the Commercial Law of 2005, there was no legal instrument governing distribution activities of enterprises with foreign capital. As a result, the licensing of this domain was done on a case by case basis, reinforced by central guidelines such as Prime Minister’s and/or other executive’s decision as was the case of Lotte Vina Shopping.

Upon the accession to WTO, a number of new legislation have been promulgated to outline the conditions for foreign investment in this sector such as Decree 23/2007/ND-CP and Decree 72/2007/ND-CP regulating the purchase and sale of goods by FOEs and the organisation and operation of FOEs and branches of foreign traders respectively. Especially, Decision 10/2007/QD-BTM promulgated by the Ministry of Industry and Trade (MOIT) has laid out a list of goods to be permitted for distribution according to a roadmap in line with the WTO Commitments. By that virtue, FOEs have been allowed to conduct a distribution business in Vietnam without limitation on foreign ownership ratio as from 1 January 2009; however, they are restricted in terms of ‘goods categories’. Accordingly, some goods are not permitted to be distributed (e.g. husked rice, cane and beet sugar, cigarettes and cigars, etc.) and the others are permitted to be distributed pursuant to a specific schedule (e.g. wine and spirit, cement and clinker, fertilizer, tyres, paper, etc.). In addition, for the first time, the requirements of an ENT in connection with the establishment of retail sales outlets are specified in a legal document, including the current number of service providers within a geographical area, market stability and the size of the geographical area.

Banking services 

This service domain is selected for analysis within this paper due to the fact that the Services Schedule stipulates that ‘commitments with respect to banking [services]...are undertaken in accordance with relevant laws and regulations promulgated by competent authorities of Vietnam’. It means that domestic laws of Vietnam play a vital role in the implementation of these commitments. Furthermore, in the absence of an official definition of banking services, there are vague borderlines among functional activities of credit institutions including commercial banks, finance companies and finance leasing companies. With this vague regulatory regime in mind, the spectrum of analysis in this paper is limited to the investment regulations in banking services of commercial banks only.

As regulated by WTO commitments, foreign credit institutions have been able provide banking services in Vietnam under the form of 100% foreign invested commercial banks since 1 April 2007. However, due to insufficient and ineffective legal framework, none of the 100% foreign invested commercial banks were licensed for operation in Vietnam until September 2008 with the landmark licenses for HSBC and Standard Charter Bank (Government Web Portal, 2008).

The existing regulations in banking services at the time of WTO accession were in line with the Services Schedule commitments evidenced by Decree 22/2006/ND-CP, which enhanced the Law on Credit Institutions of 1997 (as amended in 2004) by providing substantive and procedural regulations for the establishment of all forms of commercial presence of foreign credit institutions in Vietnam. At the same time, it has required that foreign credit institutions must be qualified under strict conditions in order to establish commercial presence in Vietnam. These conditions consist of certain attributes such as having a good judicial record, high profile of experience, healthy financial position, supervision under a regulatory authority, minimum capital requirement, etc.
 
An alternative, and in fact the preferred practice of gaining access to the Vietnamese banking services domain is by share acquisition. To this end, Decree 69/2007/ND-CP has set out the highest ratio of foreign ownership in a shareholding commercial bank, which is 30% of the charter capital of such target bank. Especially, a foreign investor and its affiliates who are not a foreign credit institution are allowed to own up to 5% charter capital of a commercial bank in Vietnam while the ownership ratio of 10% is capped for a foreign credit institution and its affiliates. The exception whereby 15% or 20% charter capital may be acquired applies to a strategic foreign investor and its affiliates subject to the Prime Minister’s decision. Recently, the Vietnamese Government has promulgated Decree 59/2009/ND-CP so as to govern the organisation and operation of commercial banks in Vietnam. This is the first time when the operation and establishment of banks and credit institutions, including the foreign invested ones, are regulated at a comprehensive level. However, the legal effect of Decree 22/2006/ND-CP remains unchanged.
In general terms, the national investment regulations in banking services of Vietnam generally comply with the commitments set out in the Services Schedule in terms of foreign ownership ratio and share acquisition. Nevertheless, domestic regulations also set forth strict requirements for the participation of foreign investors in this domain, which invisibly becomes a barrier to the market access beyond the scope of WTO commitments of Vietnam. It can be asserted that this is a purposeful act by the Vietnamese authorities in order to provide protection against the full acquisition of capital and investment of domestic commercial banks by foreign investors. Consequently, even though the substantive regulations have complied with the international commitments in letter, the procedural domestic regulations indicate otherwise in practice.

EXISTING GAPS AND SHORTCOMINGS

Overlapping and conflicting regulations

In the course of law reform, the Vietnamese Government and its executive bodies have had to promulgate a vast number of legal normative documents pertaining to both general and specific investment regulations. It goes without saying that the number of new procedural and substantive business and trade legislation coming into existence in Vietnam has been increasing at an unprecedented rate. According to Mr. Nguyen Dinh Cung, the Chairman of Macro Economics Policy Research Department of the Central Institute of Economic Management (CIEM), a review of legal normative documents in 2008 shows that there approximately 134 documents with totally 3,471 pages in VIRs (The Saigon Times, April 10, 2008).

Subsequently, these overlapping and conflicting regulations produced by various legislative and executive authorities are causing a chaos in the implementation and enforcement of foreign investment law and policy. The cause of this problem can mainly be attributed to the lack of effective communication and coordination between these authorities.

It is argued that one of the effects of the WTO membership is the ‘serious constraints for the business community in general and for the absorption of committed foreign direct investment’ (Doanh & Nghia, 2009). It is a well established principle that a legal instrument with a higher legal effect and status shall repeal the others which govern the same legal issue. Arguably, it is imprudent when two state agencies promulgate two separate legal instruments governing the same policy area. However, this is a common practice in the legislative procedures in Vietnam.
For instance, foreign exchange regulations in connection with foreign investment are considered problematic, especially because of the current foreign currency crisis in Vietnam. According to the Enterprise Law of 2005, any payment for share acquisition can be made in Vietnamese dong, freely convertible foreign currency and other assets as the case may be. Conversely, Decision 88/2009/QD-TTg, which provides guidelines for the capital contribution and share acquisition of foreign investors in domestic companies, explicitly concludes that any amount remitted for the share acquisition and capital contribution shall be converted into local currency by a licensed commercial bank operating in Vietnam. The scenario of having two legal instruments adopted by two different state agencies in relation to the foreign exchange regulations have created different requirements and uncertainty in policy and practice for state agencies, commercial banks and foreign investors undertaking financial transactions.

Interestingly, in early 2008 possibility of share acquisition in foreign currency has been granted for the case of Morgan Stanley International Holdings Inc. which acquired shares in PetroVietnam Joint Stock Finance Corporation. Unsurprisingly, this was seen as a breakthrough for foreign investors. However, since Decision 88/2009/QD-TTg came into effect on 15 August 2009, the foreign investors are puzzled as to which foreign exchange regulations are supposed to apply.
Another concern arising out of the current investment legislation Vietnam is that official letters interchanged by a local agency and a central agency functions as a legal normative document rather than an administrative document. For quite a long time, an official definition of a FOE has been subject to an on-going debate among state agencies, FOEs and foreign investors. While it is important to implement WTO commitments effectively, in the absence of this definition, an enterprise with 1% of foreign capital contribution may be qualified as an FOE which results in a number of consequences. Firstly, such FOE will have limited market access to certain service sectors provided by the phase-in commitments. Secondly, by virtue of purchasing 1% of shares of the charter capital of a domestic company, the target company shall have to apply for the issuance of an investment certificate as required by the Investment Law of 2005. The administrative procedure of issuance of an investment certificate in practice could be an endless process without any results. Furthermore, if this is the case, every listed company and public company participating in the stock exchange market will be the first ones to be bound by this cumbersome procedure because foreign investors are allowed to engage in such practices. In such context, Decree 139/2007/ND-CP has lifted the veil by stipulating that any FOE with the foreign ownership exceeding 49% of the charter capital shall be required to register an investment project for the issuance of an investment certificate, otherwise, it shall comply with procedural regulations applied for a domestic investment project. In light of this regulation, it is interpreted that a FOE is defined by the threshold of 49% of the charter capital owned by the foreign party.

For that reason, listed companies and public companies of which stocks are purchased by foreign investors will be released from the burden of application for investment certificates as the same cap of 49% for foreign ownership is applied in such companies. In practice, local agencies have applied this rule until the issuance of Official Letter no. 1752/BKH-PC dated 18 March 2009 of the Ministry of Planning and Investment regarding the procedure to establish a joint venture with a less 49% of charter capital owned by a foreign party. Accordingly, any establishment of a joint venture with foreign capital not exceeding 49% of the charter capital is handled in the same way as an FOE whereby all procedures for registering an investment project and issuing an investment certificate apply. Subsequently, listed companies and public companies are advised to register as an investment project and apply for an investment certificate. This is yet another vivid example of the overruling nature of a lower level authority.

Lack of transparency: Implicit and explicit restrictions for market access

A number of implicit barriers for market access of foreign investment can be compared to the submerged part of an iceberg. This aspect of the investment regime has utmost importance for any foreign investor who wishes to start up business in Vietnam. Naturally, this is why transparency is one of the most prioritised and important commitments required from any country when joining the WTO. Despite this principle, it is evident that there are implicit restrictions not defined in the commitments but provided in domestic regulations or internal instructions interchanged among state agencies in the form of official letters. Some of these implicit barriers for market access are discussed below.

First, it has raised concerns as regards to the overuse of official letters by local agencies in the processing of application for the issuance of investment certificates since the implementation of WTO commitments. In processing the applications by foreign investors wanting to establish a commercial presence or contribute capital or purchase shareholding of domestic enterprises, the provincial departments of planning and investment have often consulted with the MOIT and other sectorial ministries as the case may be, in order to ask for opinions and guidelines related thereto. This informal procedure, which is not stipulated by law, has been a customary rule that dominates all final decisions by provincial authorities despite the domestic regulations and international commitments otherwise provide.

For instance, notwithstanding the very explicit stipulations in the Services Schedule that as of 1 January 2008, joint venture between domestic and foreign investors may engage in distribution services with no limitation on foreign ownership ratio, the local agency of Ho Chi Minh City still has to ask the MOIT for the its opinion. The MOIT, in response to such requests, issued Official Letter 6446-BCT-KH dated 25 July 2008 which states that the establishment of a joint venture where the foreign capital contribution proportion was 99% of the charter capital was not feasible. The only explanation addressed by the MOIT in this regard is that this capital structure “does not express the correct spirit of business co-operation”. Moreover, under the Vietnamese law, no limitation on the capital contribution ratio of a foreign investor in a joint venture can be found; hence, it is contended that a foreign investor is allowed to contribute up to 99% of the charter capital of a joint venture. For that reason, Official Letter 6446 cannot be considered as a guiding interpretation or explanation of regulations but as a new concept of law.
All the circulations of official letters engaged by both state agencies and foreign investors have formed a new legal regime in Vietnam which is driven by administrative documents other than legislation enacted by the central government. The status quo has caused much insecurity and doubt for foreign investors when they intend to submit applications to competent authorities.

It should be recalled that the Vietnamese representative, in the multilateral and bilateral negotiations between Vietnam and other WTO members, disregarded the legislative nature of such official letters and further emphasized that any official letter providing legal normative rules shall be deemed invalid.  Discontinuation of the adoption of official letters as legal normative instruments is a matter of transparency as prescribed by WTO commitments. In such view, the current misuse and lack of publicity of official letters by state authorities can be considered an act of non-compliance to WTO commitments of Vietnamese authorities which goes against the spirit of its membership.

Additionally, the decentralisation, whereby provincial authorities are entrusted to make assessments and decisions on applications submitted by foreign investors, has empowered the autonomy of local authorities without consultation with and/or authorisation by the higher level authorities except for some special cases as prescribed by law. On that basis, it could be argued that it is unnecessary to ask for opinions of central agencies in relations to cases of which the current stipulations are self-explanatory. It has been more than three years since the WTO accession; consequently, the lack of clarity or capacity in the interpretation of WTO commitments cannot be a justifiable excuse for local authorities in order to ask for instructions of central authorities. Notwithstanding, any correspondence for that purpose between local and central agencies must be open for public view as it serves the public good and implementation of WTO commitments as such.  

By all means, the circulation of official letters is not always such an undesirable act per se on the ground that there may be occasions when the law needs to be clearly explained and properly interpreted in the implementation stage. Nonetheless, the overuse and/or misuse of such practice must be avoided and such correspondences must be available for public’s perusal. In this sense, the Vietnamese Government ought to recall its commitments and explanations in regards to the transparency requirements and the proper use of official letters respectively. 
Second, restrictions for market access can be applied in one way or another irrespective of the rules of the international trade game. For instance, Decree 69/2007/ND-CP on purchase of shareholding in Vietnamese commercial banks by foreign investors has limited the foreign shareholding to 30% of the charter capital of the target commercial bank, however, discriminated in favour of a strategic investor. As a matter of principle, an ordinary foreign investor, not being a foreign credit institution is only able to acquire up to 5% of the charter capital. Even a foreign credit institution, not being a strategic investor, may only purchase up to 10% of the charter capital. Needless to say, some foreign banks including United Overseas Bank, HSBC and Deutsche Bank must have been disappointed at these new provisions because they had been eager to acquire 20% of a commercial bank in Vietnam. The requirement for the Prime Minister’s approval is an impossible hurdle for any strategic investor intending to acquire 20% of shareholding in a commercial bank. For better or worse, the recent Bill on Credit Institutions of the State Bank of Vietnam has removed all probabilities for a credit institution to purchase shareholding of another credit institution. As a result, the extent of eligible foreign investors for shareholding purchase is indeed very limited. It is not certain whether this is a backlash by the Vietnamese Government in the implementation of WTO commitments in connection with the increase of local foreign banks’ engagement in banking sector by way of shareholding purchase.
 
Another interesting example can be found in distribution services. It is indisputable that 100% ownership by the FOEs is permitted to operate in distribution services since 01 January 2009 in accordance with WTO commitments. At first glance, all Vietnamese legislation in place are in full compliance with this commitment. However, Decree 23/2007/ND-CP requires that a foreign invested company which is licensed to operate in the sector in question must obtain an approval from the MOIT. Accordingly, the MOIT or the Vietnamese Government may reserve the right to refuse any permit for distribution services without any valid justification.

Transposition time for domestic regulations

The timeframe during which the legislation and enforcement of all regulations in general and investment regulations in particular are supposed to come into force is also of great concern. This is a question of having all necessary domestic regulations in place as soon as international commitments come into effect. To this end, Vietnamese legislators have recognised this concern yet have not taken comprehensive steps to address the issue.

Firstly, Decree 139/2007/ND-CP, an important by-law instrument of the Enterprise Law of 2005, was published on 05 September 2007 and became effective on 05 October 2007. After the Enterprise Law 2005 came into force in 2006, the promulgation of this decree and the absence of a instructive circular more than a year have resulted in numerous delays in the licensing process by local authorities. It was argued that most of the registrars were not well equipped and/or clear on the correct application of the Enterprise Law 2005 or Decree 139/2007/ND-CP in the context of WTO commitments. According to Mr. Nguyen Phuong Bac, Vice Director of DPI of Bac Ninh Province; ‘the decentralisation of decision making on investment has given the provincial authority more accountability and responsibility in the investment appraisal and approval process. However [...] they tend to ask and wait for the “opinion from higher authorities” on all unclear of sensitive regulations’ (Vietnam Chammer of Commerce and Industry (VCCI), 2007). This is also the reason why an official letter functions as a legal normative document in the view of local officials.

Indeed, the research paper by the HCMC Institutes for Development Studies which assessed the level of awareness of local officers and agencies towards the upcoming WTO accession indicated that the Government, HCMC authorities, departments and district offices had very limited awareness and knowledge about what had been done and needs to be done in light of WTO commitments.
Secondly, Vietnam has been a member of the WTO for more than three years, yet there has not been an umbrella decree or another form of a normative instrument by the Vietnamese Government to incorporate and interpret WTO commitments in domestic regulations. The lack of such legal direction and authority, whether due to objective or subjective reasons, has resulted in obstacles on market access beyond those set forth by WTO commitments. In fact, it was contended by some foreign business associations that the WTO accession has, instead of opening a more favourable environment for foreign investors, created a more difficult environment which existed prior to WTO accession. Whilst waiting for the promulgation of a decree implementing the WTO commitments, provincial authorities are unclear about the interpretation of WTO commitments and in the meantime backlog or refuse any application for investment and/or establishment of FOEs in sensitive service sectors. For example, in distribution services, foreign investors may operate business in the form of joint venture companies from the accession into WTO. The MOIT, however, via an official letter has asserted that the ownership of Vietnamese party with one percent (1%) of the Charter capital does not define the true nature of a joint venture. As a result, applications for setting up joint ventures in distribution services with 99% of foreign ownership have been disregarded by local authorities.

In addition, pursuant to the Services Schedule, there are some service sectors of which limitations on market access are unbound. Many local authorities interpreted “unbound” to mean “not permitted”; as a result, they have decided to refuse all applications of foreign investors to operate businesses in such sectors. While such instruction is given in an official letter, it is not a normative document and is provided on a case by case basis. Accordingly, not all provincial authorities are bound or aware of the interpretation of WTO commitments. Therefore, an official decree transposing WTO commitments is needed so as to outline instructions for provincial agencies in regards to the correct interpretation of WTO commitments.

RECOMMENDATIONS

For years state agencies and various stake holders have proposed a number of recommendations for FDI regime in Vietnam so that effective compliance with international commitments can be realised. While some of the proposals provide sound and feasible solutions, others are considered weak and unlikely to be effective and improve compliance.
Firstly, some of the private stake holders have pinpointed the current gap between domestic law and international commitments thus made recommendations for reform. However, due to the fact that there is no binding effect or weighed voice in their proposals, the legislators may, at the end of the day, disregard all of these efforts. Secondly, the stake holders as such represent their respective interests instead of law reform as a whole. One of the most illustrative examples is the overuse of forums and conferences such as Vietnam Business Forum to spontaneously express opinions of foreign investors, law firms as well as individuals. Proposals put forward thereby reveal a desire for self-protection of interested parties and state agencies rather than for the overall integrity of the VIRs. Lastly, the severance of recommendation and the lack of a monitoring system have invisibly nipped the effects of such recommendations in the bud. Even though some proposals are helpful in practical terms, they cannot be enforced and/or do not accompany monitoring mechanisms for progress.

In light of these trends, it is evident that the implementation of international commitments requires a comprehensive strategy based on cooperation between all parties involved. Considering that the purpose of the law reform initiatives is not to pay a lip service but to establish a sustainable, effective and accountable investment regime in Vietnam, a macro solution based on “rule of law” principles become ever more important. The rule of law is definitely not a new concept and was imported in Vietnam since the 1920s (Nghia, 2000). It refers to inter alia ‘the principles of supremacy of law, equality before the law, accountability to the law, fairness in the application of the law, separation of powers, participation in decision-making, legal certainty, avoidance of arbitrariness and procedural and legal transparency’  (United Nations Secretary General, 2004 ). The adoption of the rule of law principles in relation to the harmonization of Vietnamese investment regulations and international commitments could resolve the problems of overlapping regulations and non-transparency. At the same time, actions should also be taken at micro level in order to enhance the substantive regulations. For example, a nationwide association consisting of lawmakers, state agencies, representatives from key WTO trading partners, professionals and other observers such as World Bank or IMF, academics, etc should be established so as to monitor and assist with the WTO commitments in specific sectors. Such an organization may plan a concrete schedule for the WTO compliance and supervise the implementation thereon. All the recommendations and responses made by the members of such an organisation should of course be recorded and transparent and open to public scrutiny for accountability. By marrying the wide spectrum expertise and interests, such an organization would have the potential to provide pragmatic solutions informed by sound theories in the drafting of new or amendment of existing VIRs.
CONCLUSION

It is now the fourth year of WTO membership of Vietnam. A review of the VIRs indicates a level of compliance with the WTO commitments in services. On the surface, general investment activities and sectorial investment in banking and distribution sectors are presently governed by a legal framework consisting of many instruments. However, this current system has a number of shortcomings in practice.

These inherent problems have resulted in uncertainty, inconsistency and ineffectiveness in Vietnamese investment regime in the eyes of both the foreign investors and the WTO members. Now that ‘foreign investors are jostling to increase their exposure in Vietnam’ (KPMG, 2007), it is not only an obligation but an urgent need to localise the WTO commitments in connection with market access in service sectors. The legal consequences for non-compliance under WTO rules are evident but the economic and political consequences of losing credit of foreign investors and WTO members are undoubtedly more harmful to the development of Vietnam in the long run.

Having realised the consequences of non-compliance with WTO commitments, stake holders including the government agencies have indeed taken steps to restrain the gap between international commitments and domestic regulations. Notably, the parties have proposed quite a number of recommendations at both macro and micro level for the said purpose; nonetheless, these proposals do not address the questions of VIRs in neither short nor long term. In that context, a comprehensive solution is suggested hereinabove which requires adherence to the rule of law principles and an establishment of an umbrella organisation with the aim of providing a forum of consultancy, synthesising all the proposed recommendations and assessing compliance. In the long term, these approaches could contribute to overall reform of the legal system at the macro level and help to establish a healthy legal environment with transparency and accountability in accordance with WTO agreement.


REFERENCES

Doanh, L. D., & Nghia, B. T. (2009, 4 8). The Impacts of Vietnam's WTO-Membership on Business Environment and FDI. Retrieved 3 17, 2010, http://www.nciec.gov.vn/index.nciec?1892.
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ACKNOWLEDGEMENT

Authors would like to thank Bristol Law School - Centre for Legal Research for their generous support.

BIOGRAPHY

Dr. Umut Turksen (BA (Hons.) International Law & Relations (Coventry), LLM International Law (UWE - Bristol), PhD (UWE - Bristol)) is a senior lecturer in International Economic Law at University of the West of England. Contact information: Bristol Law School. UWE, Bristol, Frenchay Campus, Coldharbour Lane, Bristol, United Kingdom, BS16 1QY. Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Phuong M. Nguyen (BA International Law (IIR-Hanoi), LLM International Trade Law (UWE – Bristol), MBA Finance Management (ULB-Brussels) is a senior legal counsel practising in EP Legal Firm (Vietnam). She can be contacted at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it