Asialaw - Clarity for Corporate Counsel

Vietnam is celebrating an anniversary and it is hard to forget it: just over one year after accession to the World Trade Organization, the three letters W-T-O seem to appear on almost every page of the local newspapers, events such as the Vietnam-WTO Trade Fair feature prominently on business calendars, and government officials frequently use the name of the organization when promoting foreign investment, business development and even tourism.

One of the benefits of WTO membership, for any country, is publicity. "Joining the WTO has put the name of Vietnam on the list of countries where people want to go. Since WTO became a likelihood as well as a reality, people have been flocking in to look," says Tony Foster, Vietnam managing partner at Freshfields Bruckhaus Deringer.

Vietnam's increased exposure has led to growth in foreign direct investment (FDI). From 2006 to 2007, registered FDI increased by around 68%, to US$20.3 billion. Newly-registered capital went from US$9.1 billion to US$17.8 billion in the same period. Increasing FDI means more work for law firms; a spokesperson for Vilaf - Hong Duc, a leading Vietnamese firm, said that in a matter of a week they had received enquiries relating to foreign investment from four clients, including Korean investors and American private equity firms.

Trade has been affected, too. Tariffs were reduced on more than 94% of domestic consumer goods resulting in the domestic sector becoming stronger. This in turn generated more interest from outside indirect investment. "We've seen, in the last two years, a huge upsurge in mergers and acquisitions activity involving Vietnamese companies," says Foster.

Change in Vietnam did not start with WTO accession, of course. The free market reforms (known as doi moi) initiated in 1986 allowed and later encouraged private enterprise, deregulation and foreign investment, and the US trade embargo with Vietnam was lifted in 1994. Vietnam joined Asean (the Association of Southeast Asian Nations) in 1995, and signed an important bilateral trade agreement with the US in 2001 which set out a plan for major legal reforms. In 2006, the country hosted the Apec (Asia-Pacific Economic Cooperation) forum.

For many people, therefore, joining the organization was the culmination of 20 years of change, and provided an important psychological boost and a broader outlook. "The WTO has given a win-win mentality to people," says Net Le, partner at LCT Lawyers in Ho Chi Minh City. "The motto of many Vietnamese companies has become 'Global vision and local action,'" he adds.

WTO membership stimulated Vietnamese reform
Although change has been happening for two decades, there is no doubt that WTO membership provided an important stimulus for legislative reform in Vietnam. In the years immediately before joining, there were several significant updates to the legal framework which were intended to meet criteria for WTO accession and unify existing laws (see box: Recent key changes to Vietnamese legislation).

The WTO itself seems happy with Vietnam's general progress. "I think the WTO is impressed," says Fred Burke, partner at Baker & McKenzie. "If you look at the big picture, Vietnam has done an incredible amount of work to change its legal system to adapt to a post-WTO environment. It goes into every sector."

Thomas Tobin, CEO of HSBC in Vietnam, agrees. "WTO is now an integral part of Vietnam's legal and business framework," he says. "The WTO cuts across a large number of sectors, and allows these sectors to integrate their growth."

 

Delays and confusion at the local level
Although the legal framework looks good at the top level, locally, where laws must be used on a daily basis, the story is quite different. The disbursement ratio - the ratio of promised foreign capital to implemented capital - is perhaps one sign of potential problems. The often-quoted figure of US$20.3 billion of approved FDI does not look so good when compared with the approximately US$4.6 billion that was actually disbursed in 2007. According to Nicolas Audier of Gide Loyrette Nouel, this ratio is too high. "It's the same as during the dark years in Vietnam," he says.

One explanation may be the difficulties investors find when bidding for projects. "There are land issues, tax issues ... many issues have to be discussed at the local level," says Audier. "At the top level, Vietnam is on the right track. But you have to go from the top of Vietnam to the local authorities and what we see is when clients are trying to secure a piece of land, it's still very difficult."

National laws must, of course, be implemented at a local level, which requires adequate institutional depth. "It's relatively easy to scribble a law; it's another to make it work," comments Nick Freeman, senior investment adviser to VietNam Holding Asset Management (VNH). "The institutional capacity necessary to translate business laws into a tangible reality remains a work in progress."

In Vietnam, once a law has been promulgated, enforcement authorities wait for rules of implementation in the form of government decrees and circulars. This might not be problematic if rules were published at the same time as the overarching laws, but this rarely happens. While waiting for rules, businesses and lawyers find themselves in limbo: foreign investors cannot proceed with their investments as the relevant authorities have no idea how to implement new regulations. "Administrative authorities are not always clear about their own powers," says Trung Luong, legal counsel at a local capital management company. He tells the story of one businessman who, despite diligently spending two years completing all necessary formalities, went bankrupt due to administrative confusion over tax laws. The man eventually sent a letter to the central government requesting his own imprisonment out of pure frustration.

Understandably then, while waiting for implementing guidelines, law firms are reluctant to make judgements. A 2006 report on that year's Investment Law published by Freshfields Bruckhaus Deringer concludes with these words:

"The Investment Law takes some steps forward and some steps backwards. The legal community is withholding judgement until the implementing regulations are issued."

(In the case of the Investment Law, it took around half a year for an implementing decree to be produced.)

Other lawyers find themselves constantly adding provisos to any advice they give. "We tell clients: 'The law is in place, but, because some legal provisions tend to be vague or broad, enforcement will depend on how competent authorities will interpret it. We know this is what we're supposed to do, but you have to be aware that in practice it could be done otherwise,'" says a Vilaf spokesperson.

Contradictions and lack of clarity at the top level
In addition to local-level issues, there are problems at the top, too. Despite the government being open to input, and circulating laws in draft form, there is still some way to go. Some business-group representatives were involved in a drafting process recently. "We went through up to 10 drafts before submission of a law to the National Assembly," says one businessman. "We had reached a good point with one of the latest drafts, but were then presented with a law which was different."

As well as last minute changes, those dealing with the evolving legal framework have noticed sudden apparent reversals of previous policy direction, and seemingly contradictory rulings. Alain Cany, chairman of the European Chamber of Commerce in Vietnam (Eurocham), cites the example of Decree 105/2003/ND-CP which limits the number of foreign staff that can be employed in any company to only 3% - an impediment to development in a time when business is booming and skilled labour is difficult to find locally.

Implementing guidelines can also be vague. A Vilaf spokesperson quotes a foreign investor as saying: "The Enterprise Law [Decree 139/2007] says our directors have to reside in Vietnam - and that's it. So, as long as they reside for one day, do they comply with the law? How long must they spend here every year?" Lack of clarity can be a problem for foreign investors who are serious about complying with the local law, but Vietnamese regulators may not realise that these relatively small points are actually issues which need careful attention.

Special interests are causing problems
The reason behind these inaccuracies and a continued lack of transparency might be related to Vietnam's consensus-based culture. "Within the committee they try to reach a consensus," Cany explains. "Sometimes they listen to some people who don't want to suddenly lose the opportunity to be involved in approving a license, or the opportunity to show their power, so they say 'No, we shouldn't change it.' I'm optimistic this will soon be an attitude of the past," he says.

Pham Nghiem Xuan Bac, managing partner of local firm Vision & Associates, has a similar outlook. "In my view, there is involvement of some general state corporations, or state groups," he says, adding that low transparency might be partially due to the continuing privilege or priority of these groups.

It could be that the rapid growth which is catching the attention of the world is also to blame. Recent governments, led by progressive Prime Ministers, have been decisive and are clearly sincere about progress and development, but the rush to bring Vietnam's complex legislation in line with WTO commitments may also have led to some oversights. In three years, almost all Vietnamese laws were reviewed and in 2006 and 2007 many significant business laws were submitted to the National Assembly and passed in only one session. Historically, laws had been discussed at the Assembly, given back to the government for revision and passed on the second submission. "The policy debates that feed into the drafting of some business laws were perhaps compacted somewhat, due to the urgency of meeting WTO compliance," comments VNH's Nick Freeman.

According to some, a lack of time might not be responsible for all the legal inconsistencies. Speaking on condition of anonymity, a spokesperson from a leading Vietnamese firm said that she believed the government had been "very creative" when issuing decisions. "Sometimes, I don't think it's an oversight," she said. "It's a new way to give leeway to the legal system and leave room for interpretation, and at the same time comply with treaty obligations."

Trung Luong echoes this sentiment, saying that change in Vietnam was inevitable but that conflicts remain between making global commitments and maintaining the political regime. "In some ways [the implementation delays are] a political trick - not dishonesty or a betrayal, but a trick." He believes this must change. "Businesses deserve more; they shouldn't have to put up with administrative problems and delays," he says.

On a positive note, it seems that the government realizes when mistakes are made, and allows ways around them: for example, although Decree 105 (limiting foreign staff) could not be repealed, Circular 04/2004/TT-LDTBXH issued six months later allowed companies to apply for exemptions; and the businessman involved in the 10-step drafting of a recent law adds: "Fortunately, at the final stage the National Assembly listened to the businesses' public reaction and adopted a reasonably good text."

Prepare for rewards, and a rough ride
For now, the legal headaches and delays are not putting off investors. The attraction of more than 8% GDP growth plus political stability, the low cost of doing business, a government committed to reform and a large, educated population is enough to outweigh any problems. "Compared to some other countries in the region in the 80s and 90s, Vietnam is following a path of improvement. We're definitely heading in the right direction," says Mark Fraser, name partner at Frasers Law Company.

Being a part of the WTO does a lot to reassure investors, both directly and indirectly. "The WTO schedule almost provides a guide for foreign investment," says Fraser, who goes on to add that WTO membership can have a "snowball effect"; property development is not specifically mentioned, for example, but rising wealth means that demand for higher-end residential apartments is increasing, and foreign property developers are keen to satisfy that demand.

A delay in meeting future WTO commitments might dissuade potential investors, though. Obviously aware of this, the government frequently makes positive statements and produces ambitious plans related to its commitments, and it is generally agreed that the WTO is showing patience with Vietnam.

According to Cany, the test in 2008/2009 will be to see how much of the promised foreign capital is disbursed. "If it can reach US$10 billion in the coming year, it's a good sign. If much less, this will be proof of continuing difficulties," he says.
Huck Thanh Nguyen, a partner at LuatViet Advocates and Solicitors, goes further in his predictions for 2008: "Two words: rough transition," he says. There will be rough transitions in three areas: developing procedural processes which will keep all government agencies happy, or at least content; getting the personnel involved to implement the processes; and, for investors, coping with the problems while trying to meet their own needs.

For many, including Freeman, infrastructure must be sorted out before investment can really grow. "If we are planning to go to the next level in terms of attracting higher value-added investment and be part of an increasingly complex and time-sensitive world, we've got to have adequate infrastructure. It's vital for foreign as well as domestic investors," he says.

Administrative reforms, although not headline-making, are also important over the next few years in order to ensure adequate depth at a local level. Net Le of LCT thinks it is also vital to do more to fight corruption. "The law is sometimes unclear and the law-making process is sometimes strange, which creates opportunities for corruption. We need an independent body against corruption, as well as a law on the interpretation of the law," he says.

For those wanting to make the most of what Vietnam has to offer, it is essential to find support from a good law firm with deep knowledge of the local market. "It takes a while to understand the country - the history, regional differences, political situation and so on," says Nicolas Audier. A good firm can help an investor to examine local needs and make sure their product is right for the market.

Vietnam is certainly making progress with legislative reform and domestic development, and membership of the WTO provides important guidance to keep the country on course. For quality law firms who are able to meet staffing challenges, the future looks good in almost all practice areas, particularly trade, intellectual property and real estate. Vietnam will continue to be an attractive destination for foreign investment over the next few years, provided investors are committed, prepared for challenges and equipped with plenty of patience.