Abbreviated Project Terms – a new measure to discriminate against foreign investment in Vietnam’s service market?

30 - 03 - 2010
By Bui Ngoc Hong*

In many investment certificates issued to foreign investors in Vietnam's service sector, the recently licensed project terms tend to fall in the range of 5 to 20 years.  This is usually shorter than the term requested by the investor and far shorter than the maximum term of 50 years stipulated under law. This increasingly common practice raises questions of WTO compliance, mainly, whether this failure to approve the requested project terms may be viewed as a breach of the National Treatment rule under the General Agreement on Trade in Services ("GATS").

The National Treatment obligations are provided in Article XVII of the GATS.  According to Article XVII.1, subject to exceptions described in Vietnam's service schedule, Vietnam is required to treat the services and service suppliers from other WTO members no less favorably than its own like services and service suppliers. In other words, the country is not allowed to maintain discriminatory measures that benefit domestic services or service suppliers over WTO services or service suppliers.

In project finance, the term of a project is one factor that determines when the investor may recover its invested capital, and take profit. If the project term is cut short, then it acts as a restrictive measure by discouraging the investment. When recoupment projections call for long term operation, no investor will contribute funds to a project that will truncate before it is capable of turning a profit, even though a project can re-up its term. No one, not even juridical persons, likes to be forced to seek repeated and costly approvals simply to maintain their existence. From this perspective, then, it is the investor and not the licensing authority that should be the party to fix the project term.

At no point in Vietnam's commitments to the WTO is there a provision to allow for the discretionary abbreviation of the requested term of a foreign invested project. In comparison to Vietnam's treatment of foreign investment projects, domestic investment projects are only limited by the maximum term allowed for the enjoyment of land use rights from 50 to 70 years. There is no other legitimate justification for the practice of limiting foreign investment project terms, particularly when such limitation is so discriminatory against foreign investment.

The restrictive measures allowed under GATS and Vietnam's WTO commitments are quite  transparent. However, because of the arbitrary nature of the Government's approval practices, the establishment of a term for foreign invested projects in service sectors remains unpredictable and opaque. Whether the reasoning behind the practice lies in protectionism, the practice itself remains discriminatory and acts as an obstacle to foreign investment in Vietnam's service sectors, an obstacle that appears to violate GATS and, thus, Vietnam's WTO commitments.

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