Dec 24, 2012

Vietnam - Decentralisation’s pros and cons

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Despite bringing about positive effects in attracting foreign direct investment (FDI), decentralisation leaves corollaries. In order to secure the national interest in calling for more quality FDI, it’s high time to improve this mechanism.

After participating in an inspection tour to check the management and implementation of projects in tourism, real estate and resorts in several cities and provinces nationwide, Tran Hong Ky, Chief Inspector of the Ministry of Planning and Investment (MPI) frankly commented: “State management on investment, especially FDI in these sectors has been loosen since the decentralisation started.”

Of course, it is impossible to give one answer for all fields. However, it can be sure that Ky’s comment is not unilateral. Because, though it is undeniable that the decentralisation policy has a positive impact on the initiative of local governments in cities and provinces in investment promotion activities, improving the investment climate, reducing troublesome as well as saving time and costs for investors, the fact is, a lot of shortcomings have arisen during the implementation of this policy.

A success in Vietnam’s FDI attraction that has been proved through a quarter of a century is that as of October 20, 2012, Vietnam attracted over $208.1 billion of FDI, with significant contributions of decentralisation policy.

According to a report in the provincial competitiveness index in 2011 conducted by the Vietnam Chamber of Commerce and Industry (VCCI), while in 2009, FDI enterprises had to wait for two months to enter the market, the duration was reduced to 43 days in 2011. The licence granting time was also shortened from 60.9 days to 49.5 days, and business registration process only took 20.8 days instead of 48 days. Obviously, this is a very positive move.

However, with decentralised power, many localities have become quite ‘easy-going’ in licencing new FDI projects, especially large-scale ones which not only greatly affect the local socio-economy, but also put impact on the entire national or regional economy, said Do Nhat Hoang, director of the MPI’s Foreign Investment Agency.

MPI statistics show that only from 2007 to date, 24 FDI projects having the registered investment capital of more than $1 billion each were licenced, with the total registered capital of $70.8 billion, a far difference from the previous 20 years’ period when there were only two licenced FDI projects having the registered investment capital of over $1 billion each.

Until now, many of the 24 licenced projects have burnt into the air with their investment certificates revoked, such as the $9.8 billion Ca Na Steel Complex in south central Ninh Thuan province, or Dragon Beach, Nam Phu Yen Creative City and Wonderful World Park in southern Ba Ria -Vung Tau province.

It was said that the decentralisation policy in Vietnam had created too many “conductors” for managing FDI projects across the country. Therefore, due to the “tenure” thoughts of those conductors, cities and provinces have joined a race to attract FDI at all costs, breaking the development planning strategies of regions and industries.

Not to mention, the issuance of investment certificates was still regardless of quality and effectiveness of the proposed projects. Project verification remained troublesome. What’s worse, inspection and supervision activities were not paid enough attention, leading to the situation that many projects were licenced but not implemented on schedule. The case of a series of large-scale cement, iron and steel FDI projects which were licenced by cities and provinces, inappropriate with the development planning of industries and regions can be considered as the prime example.

Which way decentralisation should follow?

Existing shortcomings from the decentralisation policy are increasingly visible. If adjustment measures are not applied soon, or the state management and supervision is not tightened, negative impacts on the national socio-economic development will become tremendous. Thus, many opinions say that the decentralisation mechanism should be reviewed in order to optimise the effectiveness of this policy.

If the decentralisation mechanism is affirmed to be correct and necessary, ‘shrinking’ of this policy should not be mentioned. Moreover, Prof. Nguyen Mai, former deputy chairman of the former State Committee for Cooperation and Investment, now the MPI, frankly said that it was difficult to make a lot of changes in the implementation of the decentralisation mechanism, as psychologically, local leaders just wanted to extend the power of decentralisation, not to ‘give it back’.

However, according to Mai, to ensure the national interest in attracting FDI, it is a must to conduct specific surveys, with an objective and scientific attitude, on results and implementation of the decentralisation policy to local governments in cities and provinces from 2006, in order to make proper adjustments, promoting the creativity of localities as well as ensuring uniformity of investment-related laws and at the same time, improving the performance of state management authorities.

Mai also proposed three solutions to adjust the decentralisation mechanism. The “optimal solution” is to appropriately amend the regulations of streamlining power to local governments. Specifically, important projects such as those in power, transportation and manufacturing having the registered investment capital of $50 million onwards each will be licenced by the MPI after consulting relevant ministries and localities, in order to ensure overall benefits in the distribution of productive forces in regions and across the country as a whole. Municipal and provincial peoples’ committees and economic and industrial zones management boards will be authorised to licence FDI projects with less than $50 million in the registered investment capital each.

In the second solution, parts of regulations of streamlining power to local governments will be adjusted, with a specific mechanism for Hanoi and Ho Chi Minh City in the direction of keeping the current regulations. In other cities and provinces, the first solution will be applied.

As the third solution, the current regulations will be kept in a condition that the planning of industries associated with the planning of regions and localities will be made public. Local governments can only licence FDI projects within the framework of the planned strategies, and local governments’ regulations that are contrary to their competence will be reviewed and repealed. Relevant ministries will be responsible for compiling, issuing and giving guidelines to the implementation of norms, standards, procedures and regulations, while regularly checking and strictly handling all violations.

“The minimum solution is easy to implement because it will not face negative reactions of localities, however, it is a compromise solution that is not originated from the need of improving the performance of the state management authorities over FDI sector,” said Mai.

Relating to this issue, an expert with extensive experience in the field of FDI said, if the decentralisation policy was implemented as present, there would be a lot of problems, especially in the project appraisal stage, which is “overwhelming” to the local authorities’ capacity. “Thus, inter-regional, nation-scale and high technology projects should be licenced by the central governmental agencies,” the expert said.

In an orientation proposal of raising the effectiveness of attracting and using FDI until 2020, the MPI has referred to the consideration of reviewing and adjusting the decentralisation mechanism to make it more reasonable.

“Conductor” in FDI management

Nguyen Van Tu, former deputy director of Hanoi Municipal Department of Planning and Investment mentioned in his story a trend of “three no’s” in the city’s FDI management activities after FDI projects were granted with investment certificates. This can be seen as an example of the inadequacies in the current decentralisation policy.

These “three no’s” were initiated as the current investment-related laws aim at creating more favourable conditions for investors to do business, thus, state management authorities even do not know “who the investors are”, “where the enterprises’ locations are” and “how they work”.

According to Tu, this is the reality that many cities and provinces are facing without solutions. However, in the coming time, these problems may be resolved when a mechanism of coordination in management and supervision from the central to local levels over the FDI sector is built. The MPI is now drafting this set of regulations.

Similarly, a series of mechanisms and policies in FDI management will be changed in the near future to create favourable conditions for cities and provinces and ensure more strict and effective management at the same time. Moreover, the MPI has also proposed the establishment of a coordinating board at the macro-level, chaired by a deputy prime minister, to handle problems arising during the implementation of FDI projects, which ministries and localities cannot solve.

Nguyen Duc |

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