Legal risks make private enterprises invest less in large projects

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Enterprises expect a stable legal environment to rest assured to expand investment. Photo: H.Dịu
Enterprises expect a stable legal environment to rest assured to expand investment. Photo: H.Dịu

Private enterprises are the most sensitive to legal risks

According to the recently released Provincial Competitiveness Index (PCI) 2022 report, the results of a survey of more than 8,000 domestic private enterprises show that one of the difficulties that businesses face in business activities business is a change in policies and laws, with 9.45% of enterprises choosing. However, the good news is that this percentage has gradually decreased over the years, from 23.14% in 2018 to 17.8%, 17.68% and 15.76% in 2019, 2020, and 2021 respectively.

However, according to experts, legal risks are always a key issue in business operations and significantly impact revenue and profit. For example, investment projects in infrastructure, energy, processing and manufacturing industries often have large total investment capital, and the payback period lasts many years or even decades. As a result, many factors affecting the project’s profitability may change from the investor’s initial forecast during that time. Among those factors, changes in the legal environment and changes in State policies are among the most important.

As an example of the impact of legal changes in business, businesses said that the regulations on conditions to ensure fire prevention and fighting were not scientific, imposed excessive conditions and significantly increased fees and costs of the enterprise. For example, on average, manufacturing enterprises investing in fireproof paint increase factory costs by 20%. However, according to businesses, in the past, the inspection of fire prevention and fighting was very formal and perfunctory, so when an incident happened, the management agency reacted in an extreme direction. Recently, the police agency has carried out continuous fire prevention and fighting inspection; many enterprises that have been producing and doing business for many years were forced to suspend their operations because they could not meet strict requirements on fire prevention and fighting.

As reflected by the Korean Business Association in Vietnam, member enterprises have problems with changing regulations on fire prevention when expanding their operating factories. The fire protection permit and the as-built permit issued at the time of the initial factory construction are different from the current regulations. These problems increase costs and prolong licensing time for businesses.

Of course, in a volatile environment, it is impossible to require the legal system to maintain but to make adjustments when social conditions change or when inadequacies and obstacles are discovered. But not all businesses have the ability to predict regulatory changes.

According to the business survey results in the Business Law Flow Report 2022 published by the Vietnam Confederation of Commerce and Industry (VCCI), the expected proportion of businesses is changed in the central legal regulations. However, from 2013 to 2021, there was a downward trend, when in 2021, only 4.55% of businesses said that they could regularly predict it. Meanwhile, according to VCCI, the ability to predict changes in law regulations impacts enterprises’ business results. Businesses that are better able to predict regulatory changes often have better business results than those that are not.

According to this report, all economic sectors require stable business policies and laws to invest confidently. However, if they jointly invest in large projects, domestic private sector enterprises are much more sensitive to legal risks than state-owned enterprises and foreign-invested enterprises (FDI). Specifically, state-owned enterprises often have advantages in relationships with state agencies both in the process of law-making and enforcement. As for FDI enterprises, they are usually protected under Vietnam’s investment protection commitments. Moreover, in case of conflict with the host country’s Government, FDI enterprises have the support of the Government and diplomatic missions.

In contrast, domestic private sector enterprises will be exposed to very high risks of policy changes. Besides many other factors such as capital size, technology, and management level, VCCI believes that legal risks are also part of the reason domestic private enterprises rarely invest in large projects with long payback periods.

What are the solutions?

According to experts and businesses, the reduction of legal risks not only has an impact on the movement of industries and investment fields of the private economy but also helps these businesses to be ready to invest strongly in building solid factories, purchasing modern machinery, investing in human resources for research, development and branding. This will reduce the situation of businesses doing business the following time

Appreciate that the revision and re-compile of a series of important laws, such as planning, land, real estate business, etc. will create favorable conditions for the business environment. However, Mr. Nguyen Quoc Hiep, Chairman of the Association of The Vietnam Construction Contractors (VACC), believes that ensuring the uniformity and consistency of laws related to the same issue is very important to solve for businesses as the specific handling of law enforcement agencies.

“Businesses all want a clear legal corridor, creating open conditions for business and investment. The influence of the law is very clear, so even if it is just a draft, it has had much impact on the market. In addition, the stability of the legal system will also strongly impact encouraging large projects to invest with peace of mind,” said Mr Hiep.

Regarding solutions, the report of VCCI said that reducing legal risks for business requires many long-term and durable measures, which are difficult to follow the movement. Solutions must always balance maintaining stability to build business confidence and adjusting to better suit reality. “Political determination is necessary, but not sufficient because political will often depends on specific individuals, and when changing tenure, that determination can be lost, while large investment projects often last longer than the leadership’s tenure”, VCCI assessed.

Therefore, according to the agency representing the business community, when it is not possible to reduce the legal risks of the entire business environment, the Government can decide to reduce risks for each specific project through commitments of investment guarantee. However, this mechanism also has many potential risks, such as being difficult to calculate, possibly affecting the interests of third parties, and being easy to collude and manipulate. If the legal risk of the whole business environment is improved, it will reduce the cases where there is a separate commitment or reduce the level of risk of the State and society for projects.

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