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Vietnam risk: Legal & regulatory risk
(RiskWire)COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT
RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentC57C57Legal & regulatory riskC53C53Note: E=most risky; 100=most risky.SUMMARY
The judiciary is not held in high esteem; there is no system of common law; and decisions are often arbitrary. Interference in the legal process and the bribing of judges to serve particular interests is common. Contractual arrangements are backed by the force of law but the legal system is complicated. Contractual disputes often involve a prolonged period of negotiation preceding any attempt to resolve the matter in court. Abuses of copyright and industrial property are widespread and enforcement is weak, although the government has been strengthening the legislative and regulatory framework to enforce intellectual property rights. The risk of foreign assets being expropriated is much reduced compared with earlier in the reform period.
SCENARIOS
The courts cannot be relied upon to rule fairly on contractual suits (High Risk)
Contracts in Vietnam are rooted in statute, but laws are complex, inconsistent and open to interpretation. Judges think little of contradicting themselves, or the rulings of other courts. Moreover, there is little in the way of historical case law to provide foreign investors fair warning of potential pitfalls. Contract negotiations can be lengthy and obtaining project approvals from the government is often delayed. Businesses are advised to include clauses in contracts that allow disputes to be dealt with by the Singapore Court of Arbitration. Before attempting to resolve a contractual matter in the courts or through arbitration, it is advisable first to exhaust all avenues of negotiation.
The authorities fail to improve protection of intellectual property (IP) rights (Moderate Risk)
Moves to ensure full protection of intellectual property (IP) rights in Vietnam are advancing. In November the National Assembly (the legislature) approved an Intellectual Property Law. The law, which will come into effect in July 2006, covers the protection of copyright, and rights to industrial property and cultivated crops. Such steps are necessary if Vietnam is to garner sufficient support to join the WTO. In addition to pushing through new legislation, the government is seemingly keen to show that it is making more of an effort to protect IP rights. In June 2005, the Ministry of Culture and Information sent official letter to 12,000 companies calling on them not to use pirated software. The government has also established an Anti-Corruption and IP-Protection Association for foreign-invested firms, but much remains to be done. Foreign investors should not expect the authorities to take the initiative in pursuing violations of IP rights--although vociferous complaints by companies may yield results. Businesses can help to prevent abuses by working with the authorities in matters of surveillance. Companies should also monitor black market and pirated products, and combat them with educational campaigns, and with incentives for purchasing authorised goods.
BACKGROUND
(Background material is updated twice yearly. Last update: October 5th, 2004)
Enforceability of Contracts
Contractual arrangements in Vietnam are backed by the force of law, but the legal system is complex, opaque, cumbersome and sometimes inconsistent. The courts are not transparent and cannot be relied upon to produce fair decisions: bribes and political influence often determine the outcome. Laws and regulations overlap and can be changed retrospectively at any time
Because of a lack of faith in the Vietnamese legal system, many foreign investors include clauses in their contracts allowing disputes to be dealt with by the Singapore Court of Arbitration. However, several foreign firms have recently won domestic litigation suits against local partners for breaches of contract. In such instances, a prolonged period of negotiation typically has preceded any attempt to resolve the matter in court. Often, a judge or magistrate gets involved in this pre-trial process. A full trial can be a fairly expeditious affair; afterwards, however, it is often subject to lengthy appeals. It remains to be seen whether the new arbitration law will make domestic arbitration more common and less cumbersome. Moreover, there remains room for jurisdictional disputes about whether the courts in Singapore or domestic courts have jurisdiction in some cases, a grey area which can add another layer of complexity to disputes.
Independence of the Judiciary
The judiciary is not held in high esteem. Legal education is poor, and there is no system of common law; thus, decisions are often arbitrary, and bribery of judges is not uncommon. Attempts to strengthen the judiciarys capacity through training and development programmes have continued, but much more work is needed.
Locally based arbitrators also may be used, and they will probably reach a settlement faster than the courts. Arbitration is more expensive than going to court, but the litigants secrecy is better protected. Arbitration decisions are enforceable in the courts.
Vietnamese firms tend to avoid the legal system altogether in resolving disputes. They prefer to solve their problems using bribes and by calling in (or soliciting) favours from contacts.
Foreign Investment: Discriminatory Practices
The regulatory framework for foreign investment remains highly restrictive in Vietnam and places major limits on the industries in which foreign investors may operate, the structure of their investment vehicles, their ability to finance their operations and their capacity to respond to changes in economic circumstances. But some important progress in liberalising this regime occurred in 2002-03. A May 2002 decision (Government Decision 260) simplified procedures for investment in a wide variety of local joint-stock companies. The new measure allows foreign ownership in non-state enterprises in 35 designated industries, including agriculture, forestry and fisheries, science and technology, education and medicine. It also replaced the burdensome requirement of approval from the prime minister with a simple local registration procedure. The scrapping of the tax on profit remittances from January 1st 2004 as part of the imposition of a uniform business tax for domestic and foreign enterprises constitutes another major reform.
Recent moves have also opened new opportunities for foreign investment in the utilities sector. From October 2003, domestic and foreign investors have been allowed to build electricity plants with capacities of less than 100 mw in Vietnam, and sell energy directly to local customers. The state-owned Electricity of Vietnam will only retain its monopoly over the power transmission and construction of plants of more than 100 mw. US telecommunications firms will also gain further access to the Vietnamese market through joint ventures with Vietnamese partners with up to 49% foreign ownership in the following sectors: value-added telecom services such as e-mail, voice mail, Internet data searching and online information processing (from December 10th 2003); Internet services (from December 10th 2004); basic telecoms services such as mobile communications (from December 10th 2005); and operation of fixed telecoms services (from 2007). These liberalisation measures were anticipated under the bilateral US-Vietnam free trade agreement. Majority- or wholly-owned FIEs remain illegal in the telecoms sector. Non-US FIEs in the countrys telecoms sector are still limited to business co-operation contracts (BCCs), in which foreign firms develop the telecoms infrastructure and local partners provide telecoms services.
Foreign direct investment (FDI) is measured in terms of both registered capital (a minimum value of committed capital nominated by foreign firms that receive a licence) and disbursed capital (the amount of capital that foreign-invested firms actually spend). FDI flows into Vietnam in 2003 totalled US$3.1bn, including US$1.95bn registered for 713 new projects and US$1.15bn in increased capital for 350 operational projects, according to MPI figures reported in the media. This compares with US$2.98bn in FDI inflows in 2002, US$2.4bn of which was in newly registered capital and US$580m in already licensed projects. New FDI inflows accounted for 6.0% of GDP in 2003, down slightly from 6.2% in 2002. The Ministry of Planning and Investment has targeted attracting some US$2.6bn dollars in newly-pledged FDI in 2004 (a 9.2% increase over 2003), though Planning Minister Vo Hong Phuc said that the total could reach US$3bn.
Firms from the US have been relatively slow to invest in Vietnam. US investors cite as disincentives cumbersome administrative procedures, a lack of legal transparency and the inadequate protection of intellectual property rights. But interest is increasing; it will probably translate into significantly more commitments over the next few years, particularly as additional provisions of the bilateral free-trade agreement come into force. In addition, Vietnam is offering an increasingly warm welcome to overseas Vietnamese (Viet Kieu), and the US is home of over half of Viet Kieu. Decree 81, effective from November 2001, lists four groups of Viet Kieu entitled to purchase houses in Vietnam under their own names. It has led to a rush by Viet Kieu to purchase farmland.
There is no system of private property in Vietnam. The state owns the land, and residents and investors buy and sell the rights to use ita tenuous kind of freehold title. Land-use rights can be bought, sold, inherited and used as collateral for a loan; nevertheless, the state can reclaim any land at any time, often with derisory levels of compensation.
The National Assembly passed a comprehensive new land law (Law No. 13/2003/QH11) on November 6th 2003; it entered into force on July 1st 2004. It replaces the 1993 Land Law and its amendments in 1998 and 2001, as well as the 1994 Ordinance on rights and obligations of foreign individuals and organisations ("foreign land users") leasing land in Vietnam. The new law seeks to create a more unified and strict system of land regulation in response to the states recent loss of control over land transactions and the proliferation of disputes about ownership. Foreigners (apart from those with Vietnamese origins) continue to be prevented from owning land-use rights: they must either lease their land from the state or enter a joint venture (JV) with a local partner who provides the land-use rights. Difficulties in finding and preparing a site are one reason that many investors have preferred to arrange a JV, with the local partner contributing the land and arranging clearance from local authorities for its use.
The new law requires the government to prepare a national plan for land management and registration that will be approved by the National Assembly. The Ministry of Natural Resources and Environment is responsible for ensuring that land is used in compliance with the approved plan. The allocation, leasing, and change or withdrawal of land use must also comply with the approved plan and must be registered at a newly created land use right office, details of which were still unpublished as of September 2004. In addition, the new law guarantees that all land users will be issued land use rights (LUR) certificates.
These changes could potentially benefit foreign investors by establishing a uniform system with transparent criteria and procedures, leading to greater security about the status of land, fewer boundary disputes and fewer land lease formalities. The new law also includes a provision that should speed the implementation of projects considerably: it stipulates that the relevant authorities must issue a decision to allocate/lease land within 30 days from the date that they receive the complete application from the land user. Based on the decision, the local People's Committee must clear the land, and the land must be transferred and the LUR certificate issued within ten days of completion of land clearance and payment by the land user of the relevant fees/rental.
With the exception of overseas Vietnamese (Viet Kieu), the new land law does not significantly change the rights to land of foreign investors. For instance, foreign individuals residing in Vietnam still may not purchase the land on which a private residence sits and are still liable for taxes on that land, though under Decree 60 of 1994 they continue to enjoy the rightseldom exercised in practiceto purchase the house itself from a government real estate entity (which they must sell within 90 days of definitive departure from the country). Such conditions are designed to discourage speculation and absentee landlordism while encouraging long-term investment. For their part, however, Viet Kieu who invest under the domestic law (Law on Encouraging Domestic Investment) will now be "allocated" land under the new law (as opposed to being leased land); they must pay land use fees and will have the same rights to transfer, improve, and sell it as domestic individuals and organisations. This constitutes yet another measure in the government's ongoing policy to encourage investment from overseas Vietnamese. Viet Kieu gained expanded rights to acquire property in November 2002. Other foreign land users and overseas Vietnamese investing under the Foreign Investment Law must still obtain LURs via a lease from the state. Their rights will depend on whether they pay land rental annually or for the entire term of the land lease. Land users that pay land rental for the entire term will now enjoy for the first time additional rights during the lease term: to assign/sell their LURs and assets thereon; to sublease their LURs and assets thereon; to contribute LURs and assets thereon to do business with other parties; and to sell or lease houses (where they are permitted to invest in the residential property sector). While these additional rights give foreign investors the rights granted previously only to domestic investors, in order to take advantage of them they must, in effect, purchase the land up front.
Vietnam is only just beginning to support import-substitution industries, ie industries that produce inputs that were previously imported. It will face considerable problems in doing so, however, until it can reduce the level of smuggling. Local-content requirements were announced for the countrys motorbike industry in Official Letter 162/TB-VPCP, which went into effect January 1st 2001. Every motorbike assembly factory or joint venture must register the proportion of Vietnamese-made components used in its production process (the so-called localisation rate) with the Ministry of Industry. The governments impatience with the rate of increase in the localisation rate (which, by law, was scheduled to reach 60% in 2002) led it to limit the import of completely knocked down kits (CKDs) for motorbike assembly in September 2002, and then to suspend imports altogether in November 2002. The measure was subsequently relaxed because of Japanese pressure (Honda and Yamaha quickly ran out of the imported CKDs by which they assemble motorbikes locally), but the government shifted towards using tariff policy to promote local content in January 2003. A fixed 50% tariff on imported parts replaced the previous sliding tariff of 60%, but the rate can be reduced to 15% if an assembler shows that at least 40% of its parts are produced locally.
Unfair Competitive Practices
Vietnam is only slowly emerging from a centrally planned, socialist economy dominated by state-owned monopolies. In key industries like electricity, aviation, and telecommunications, the state-owned company occupies a monopoly position, with market share of at least 80%. Other heavily regulated industries tend to have some foreign and private-sector participation but are dominated by a state-owned oligopolyseveral large firms with a market share of 10-40% each. These include cement, sugar refining and sales, minerals, banking, and petroleum, where prices tend to be high and most firms are neither efficient nor competitive.
The government sees the merits of market competition, in particular that it makes Vietnamese firms more efficient. But the authorities are still preoccupied with the potential job losses and corporate insolvencies that might follow from giving free rein to market forces. Moreover, there is concern about the fate of consumers: in some industries, public subsidies are the only thing keeping prices stable; introducing competition might cause price rises over time in those industries.
This explains the governments very slow work on a competition and antitrust law in recent years. However, the pace of reform accelerated in 2003, given the need to bring domestic laws into line with regional, bilateral, and prospective multilateral trade agreements. The latest draft of the competition law was released on September 3rd 2003; the National Assembly is expected to promulgate the law at its October-November 2004 session, and the law is expected to take effect in May or June of 2005. The law will apply to business enterprises and professional and trade associations in Vietnam; overseas enterprises and associations with activities in Vietnam; public utilities and state monopoly enterprises; and state administrative bodies. Where provisions in earlier enacted laws contradict the competition law, the competition law will prevail. The draft law sets out two different options for an enforcement entity: a new and separate ministerial-level body, or an arm of the existing Ministry of Trade. The bodys stature, nature, and functions will be defined in the final proposal.
In some economic sectors, the government is experimenting with limited deregulation or competition. For example, telecommunications was opened to domestic competition in October 2000. Vietnam Post and Telecommunications, the state-owned telecoms company, now competes with the armys Vietel and Saigon Postel. ETC, Vishipel, QT Net, Elinco, SEI and the Technology Development Investment Company have also been licensed to offer many telecoms and Internet services. As a result, new and cheaper services have been introduced, and prices continue to fall significantly. Moreover, a new foreign player, SK Telecom, a South Korean consortium, signed a business-co-operation contract with Saigon Postel in August 2001 to offer a mobile-phone network to compete with VNPTs two brands.
In a move that was ostensibly a step backwards, the Ministry of Post and Telecommunications (MPT) announced in March 2003 that it would merge all communications companies in Vietnam into VNPT in an attempt to increase the telecoms sectors competitiveness. VNPT also changed a handful of state-operated firms into self-accounting companies, while setting up others to handle software and satellite development. When the plan is fully completed (by end-2005), a new, semi-autonomous Post & Telecommunications Group will have about 70 affiliates and joint-stock companies. VNPT will act as the parent company overseeing the finances and development strategies of subsidiaries, which otherwise operate independently. The new group will ultimately be divided further into two independent departments: the Post Department and the Telecoms Department.
From October 2003, domestic and foreign investors have been allowed to build electricity plants with capacities of less than 100 mw in Vietnam, and sell energy directly to local customers. The state-owned Electricity of Vietnam will only retain its monopoly over the power transmission and construction of plants of more than 100 mw.
the government continues to pursue a gradual programme of partial privatisation (equitisation) at state-owned enterprises (SOEs), along with parallel efforts to restructure SOEs not undergoing equitisation. Motivations have included the desire to create an entrepreneurial private sector and the need to reduce the fiscal drain on state coffers of uncompetititive concerns. In 1990, Vietnam had 12,300 SOEs.; by February 2004, there were just 4,704. The governments goal is to further reduce the total to 2,000 by 2005.
Equitisation has not proceeded as far or as smoothly as authorities envisioned, as annual and five-year targets for equitisation have consistently gone unmet over more than a decade. The year 2003 was no exception, as roughly 400 firms were equitised, compared with an annual target of 927. Obstacles to equitisation are considerable. SOE managers and employees are reluctant to participate, as tax incentives may be lost, and state-run banks are said to view equitised SOEs as risky borrowers. Another problem is that complex valuation procedures can bog down an equitisation process for years. The asset-valuation process is often arbitrary and leads to excessively high or low valuations of a companys worth, even though new asset valuation guidelines were issued in November 2001 to try to address this problem. This, in turn, means stakes in a company are either impossible to sell or sell too cheaply, thus depriving the government of a firms true worth. Yet another difficulty is the underdeveloped nature of the Vietnamese stockmarket.
Under a pilot scheme announced in February 2004, SOEs involved in key industries such as electricity, telecommunications, banking, insurance and chemicals will be equitised in different forms. Some SOEs will have all their member companies sold while still acting as a parent company, representing the capital proportion of the state in newly-formed subsidiary companies. Other SOEs will be entirely equitised, with all their capital and assets likely to be sold. If successful, the pilot scheme will pave the way for SOEs in other sectors to adopt the new models in coming years.
Intellectual Property Rights
Ever since Vietnam opened its economy to foreign investment and trade in 1986, respect for intellectual property in the country has been a concern. With the introduction of the Civil Code (which took effect in July 1996) and accompanying implementing regulations, most intellectual and industrial rights are now legally recognised and protected in Vietnam.
To enforce an industrial property right against imitations in the market, firms have several less than optimal options. The holder of a registered trademark can ask the NOIP for an official evaluation, either directly or though an industrial property agent. The request must be in writing and provide proof of the legal trademark, an evaluation certificate and a sample of the imitation goods. Once the company has received an official evaluation, it may then ask the MoSTE to enforce the trademark. This process can be lengthy and bureaucratic, as judges tend to be poorly trained in intellectual property law and thus must consult with other agencies before making rulings. Consequently, foreign-invested companies tend not to wait for regulatory support.
Another option is to take the matter to court, but that can be a lengthy and complicated endeavour. For example, Foremost Vietnam, a Dutch-Vietnamese joint-venture dairy producer, successfully sued a local company that used one of its trademarks, although the dispute dragged on from June 1998 to October 2001. The defendant, Truong Sinh, appealed to the Supreme Court in late 2001, which again ruled in favour of Foremost. The foreign producer had the full backing of the state: the Prime Ministers Office, the Ministry of Trade and the MoSTE lodged submissions at the court on Foremosts behalf. The labels on Truong Sinhs products were forcibly removed. In June 2003, however, Deputy Prime Minister Vu Khoan requested that the Supreme People's Court and the Supreme People's Bureau of Prosecution review the case, in response to a letter sent in March to the Prime Minister by Truong Sinh and support for the company from the Vietnam Chamber of Commerce of Industry. Truong Sinh claims that it developed and sold the milk product in question before Foremost, even though it registered the trademark six months after Foremost, and that the product contains different ingredients and thus should not be covered by the same trademark. The courts had not revisited this matter as of September 2004, however.
Other companies are taking matters into their own hands, and some tend to approach the infringers directly as a first step. Coca-Cola (US) has become increasingly vulnerable to copycat producers; it has joined forces with local authorities, consumer associations and the police to help nab the offenders. Many firms negotiate informally with enforcement bodies like the Economic Police and Market Control Bureau in order to get them to pressure violators. This approach, however, may open avenues to corruption.
Action by the various enforcement bodies has mixed results. Unilever (Netherlands/UK) has benefited from police action in recent years against fake shampoo in imitation bottles. However, as of late 2003 Unilever continued to report large losses to counterfeits and to spend much of its US$20m annual advertising budget in Vietnam combating such frauds.
As international pressure increases on Asian countries to enforce industrial property rights, the Vietnamese government has been beefing up its legislative and regulatory framework. The Customs Law of 2001 and its implementing regulations state that owners of registered intellectual or industrial property rights can ask customs officials to postpone customs clearance of goods where infringement of those rights is suspected. However, companies have not taken advantage of this legislation, apparently deterred by the bond of 20% of the value of the questionable goods that they must put up during the investigation and by the fact that they cannot view the goods themselves. Instead, in recent years some large foreign firms, such as Honda (Japan) and Nike (US), have enlisted provincial and local authorities to intervene on their behalf in seizing counterfeit goods and fining violators.
MoSTE Decree 54 of October 3rd 2000 represented a major step forward for protecting industrial property, at least in theory. It covers trade secrets, offering them protection whether or not they have been registered with the NOIP-arguably a partial return to the first-to-use system. Rights of ownership over these kinds of property can be established automatically if certain conditions are satisfied. Another section of the decree clarifies when companies may take action against unfair competition concerning industrial property.
It was previously considered difficult to establish trademark violations in court, but MoSTE Circular 825 of May 3rd 2000 spells out the three criteria: the same symbol on the same kind of good, a similar symbol on the same kind of good or the same symbol on a similar kind of good. The administrative fines range anywhere from D2m (US$140) to D100m (US$7,000), but law enforcement agencies tend to assess fines mostly in the D10m-20m range. In the rare cases in which criminal penalties apply, they range from D20m (US$1,400) to D200m (US$14,000). Such fine levels were criticised as being inadequate for deterrence in studies released separately by both the US-Vietnam Trade Council and the Vietnam Chamber of Commerce and Industry in early 2004.
According to the anti-smuggling board, also known as the "127 Central Steering Board," relevant agencies uncovered more than 120,000 smuggling and trade fraud cases valued at D442bn (almost US$29m) in 2003. Authorities in Ho Chi Minh City seized about 100,000 pirated compact discs, DVDs and video CDs from a single shop in September 2003 as part of a crackdown on widespread bootlegging. Yet counterfeit CDs are widely available for about US$0.50 each; pirated DVDs can be bought for about US$1 each. Up to 90% of CDs and VCDs sold in Vietnam are pirated. Recent estimates suggest that 95-98% of all software in Vietnam is illegally copiedpossibly the worlds highest piracy rate.
The USVietnam bilateral trade agreement which came into effect in December 2001 committed Vietnam to meeting World Trade Organisation standards on protecting intellectual property (Trade-Related Aspects of Intellectual Property RightsTRIPs) within 18 months. (In addition, the USVietnam copyright agreement of December 24th 1998 allows US companies to take copyright infringers to court.) Most observers generally agree that changes in recent years have brought statutory laws roughly into line with TRIPs, though serious problems of enforcement remain.
Although Vietnam has not acceded to the Bern Convention for the Protection of Literary and Artistic Works, MoCI Circular 27 dated May 10th 2001 extended copyright protection to literary, artistic and scientific works of foreigners created in Vietnam or published for the first time in Vietnam.
Price Controls
The government continues to set rates for electricity, petrol, telecommunications, water, and fares for train and air travel. In most of these areas, the rates have traditionally been higher for foreigners, although harmonisation is underway.
Decision 137 of 1992 empowered the Government Pricing Committee (GPC) to set prices. The GPC is particularly concerned that foreign firms (especially from China and Thailand) are dumping goods on the local market at cut-throat prices, and proposals have been floated since 2002 for a tough anti-dumping regime. As of early March 2004, the National Assembly was considering a draft Ordinance on Anti-Dumping. However, any anti-dumping rules adopted, along with remaining price controls, will come under considerable pressure if Vietnam proceeds with its plans to join the ASEAN Free-Trade Area (AFTA) by 2006 and the WTO by 2005.
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