REVIEW AND ASSESSMENT OF THE CURRENT REGULATORY
FRAMEWORK ON THE MANAGEMENT OF FOREIGN AND PUBLIC
INVESTMENT IN SOUTH KOREA AND PEOPLE’S REPUBLIC OF CHINA
This paper will address the law and regulations governing the management of public and foreign investment
of some Asian countries. At the outset it should be said that in only few countries in the world the public
investment management system is regulated explicitly by law, and in even fewer countries is adopted a
comprehensive regulatory framework that disciplines each of the fundamental issues of public investment
management. The lack of a proper framework and the lack of reliable legal sources render particularly
challenging to conduct a comparative study that would cross analyse specific provision. For this reason, in
conducting the analysis of the legal framework applicable to investment management I decided to rely on the
on the policy and economics principles regulating and overseeing an effective managements system. These
have been standardized by the World Bank and are unanimously considered the basic feature of any effective
public investment management system.
The paper will be structured as follows: the first part will address the purpose and the basic legal sources that
govern public investment management with reference to the legal systems in Korea and China. The second
part will address the eight steps of public investment management. For every step the research will compare
Chinese and Korean regulations and it will assess whether they will be suitable for Vietnam. The last part
will analyse the management of foreign investment in China, Korea, and other countries.
FIRST PART: INTRODUCTION TO THE LAW ON PUBLIC INVESTMENT MANAGEMENT
I. THE CONCEPT OF PUBLIC INVESTMENT
It is extremely difficult to define what is public investment. The definition of public investment as an
investment is indeed wrong, as it simply consist as public expenditure that have little in common with the
business risks typical of an investment. The concept of public investment relies on the distinction between
the use of private funds, and the use of public funds. Public investment, as defined in standardized national
account statistics, is limited to a country’s physical infrastructure, such as roads, railways, canals, and
bridges; to capital goods used by government, such as office machinery; and to improving and maintaining
the existing capital stock – what is technically called “government gross fixed capital formation.” In
principle, the normal distinction between capital and current outlays would apply, with the former relating to
any expenditure whose productive life extends into the future. Thus, much public investment takes the form
of infrastructural outlays – for road and rail networks, ports, bridges, energy-generating plants,
telecommunications structures, water and sanitation networks, government buildings – which can have a
productive life of several decades. Such outlays range from small, one-off, limited infrastructural projects
that can be implemented within a year to more complex projects that take place over decades As in the
private sector, governments may invest in machinery and equipment – computers, laboratory equipment,
even textbooks – whose life span is much shorter.
But other types of outlays, some of a more current form, can also contribute to capital formation. Notably,
government spending on education and health contributes not only to an individual’s human capital but also
to that of society, with benefits that can extend for a lifetime. Here the capital good is less tangible than a
building or a piece of equipment. While governments traditionally classify spending on education and health
as current expenditure (and thus not a form of public investment), the policy implications of this treatment
are often contentious, particularly when governments seek to justify borrowing only for public investment.
Moreover, the public sector’s role in public investment is not limited to its own budgetary spending. A
simple focus on government outlays may yield too narrow a picture of the level of public investments and
more importantly, an overly restricted perspective on the potential role played by governments with regard to
the provision of public infrastructure. Most obviously, when the government collaborates in a public– private
partnership (PPP), most outlays will normally be made by private sector entities. Yet the purpose of these
outlays would be to provide goods or services for which there is justified public involvement.
In both China and Korea there is no comprehensive law disciplining public investment. The
expenditure of public funds is indeed regulated by various areas of law and mostly through decrees and
international guidelines. Furthermore, in any country the law sets the concept of public investment. As it was
explained above, the use of public funds is not an investment as such, but rather a disbursement for the
management of public goods. In order to define what constitutes public investment it is necessary to derive a
definition a contrario that is based on the budget allocation.
Article 18 of the Korean Finance Act 2006 defines Financial Resources for State Expenditure as “The
financial resources for State expenditure shall be the revenues other than national bonds or borrowings
(including loans from foreign governments, international cooperative organizations and foreign
corporations; hereinafter the same shall apply): Provided, That funds raised through national bonds and
borrowings may, if unavoidable, be appropriated to expenditure within the limit of the amount approved by a
resolution of the National Assembly.” Both the Korean and Chinese legislation do not offer a comprehensive
concept of public investment that separates it from joint ventures, private investment, or foreign investment.
Each of these concepts is regulated independently as distinct issues.
II. WHY TO REGULATE PUBLIC INVESTMENT?
When approaching PIM, the first question to be asked is: why is important to regulate PIM? Indeed, in most
of the countries PIM is not regulated at all, or only partially. Nonetheless, by adopting a sound regulatory
framework it will be possible to structure and articulate any steps of the PIM system in a way to minimise
risks of inefficiencies and corruption. Leinert (2005) argues that there are essentially three main areas where
the law can intervene in reforming and regulating public investment management: (i) improved performance,
(ii) decentralized budget and management authority, and (iii) greater transparency and accountability.
Components of Public Management Reform*
A. Improved performance
1. Reformulating and simplifying budget nomenclature: away from inputs, towards outputs and
outcomes
2. Emphasizing economy, efficiency, and effectiveness, including introducing performance
indicators
3. Improving financial management, including the use of accrual accounting instead of cash
based accounts
4. Improving delivery of government services to citizens
5. Introducing market mechanisms and allowing alternative suppliers of government services
(contracting out)
B. Decentralized budget and management authority
1. Creating “arms-length” government agencies with managerial autonomy
2. Disengaging the State from productive activities (privatization)
3. Replacing controls of central ministries (of Finance and of the Civil Service) with
decentralized control and audit by responsible managers in ministries and/or agencies. This
includes delegation of recruitment of staff and setting of pay scales by decentralized managers.
C. Greater transparency and accountability
1. Clarifying roles and responsibilities of all players in public management
2. Providing Parliament and the public with more financial and nonfinancial information on
government intentions, transactions and performance
3. Enhancing the accountability of the executive to parliament, and of agencies within the
executive to the “center”
4. Strengthening the independence and functioning of external audit bodies
*Ian Lienert, 2005, Are Laws Needed for Public Management Reforms? An International
Comparison, IMF
Any regulatory framework on PIM needs to look at these three components and must ensure that each of
them is addressed properly in order to have a sound PIM system. The “legal framework” regulating
investment management can be structured in two main bodies of high-level and ordinary laws that support
the public management system. Those laws can be divided in two main groups:
A. Constitutions
Whether written or unwritten, the Constitution includes the establishment of the fundamental organizations
of the State and the relationships between them. Constitutions generally include provisions and principles
regarding various government functions and issues that have important implications for the formulation and
coverage of laws governing public management. Those functions are:

The legislature and its competencies and organization.

The executive—its role and structure.

Sub-national governments—their establishment and competencies.

Constitutional bodies such as an external Audit Office or an independent Public Service
Commission.

Basic principles for budgeting and administrative structures.
The Constitution of the Republic of KOREA was promulgated in1948 and last revised in 1987. The
constitution does not have specific provisions on public investment management but it states in “Chapter
IX: The Economy” that “the economic order shall be based on a respect for the freedom and creative
initiative of enterprises and individuals in economic affairs”. The regulatory goal to “democratize the
economy through Harmony among the economic agents" reflects the strong prevalence of traditional
Korean values and the close relationship between politics and the economy, which leads all economic and
cultural input-outputs, including PIM programs.
CHINA's current Constitution was adopted in 1982 on the basis of principles in 1954 Constitution. The
Constitution stipulates that the basic tasks concentrate its effort on modernization drive, improve material
and cultural progress, showing great concerns about public utility. People’s Economic Rights are also
guaranteed. Article 18 permits foreign enterprises, organizations and individual foreigners to invest in
China and to enter into various forms of economic co-operation. The recent Constitution was revised three
times in line with changing situation --- 1988: “Private Economy and New Land-Use System”; 1993:
“Market Economy, Household Contracted Responsibility System” ; 1999: “Deng Xiaoping Theory, NonPublic Economy”--- to open the access of land-use, private or foreign partnership and investment guarantee
in constitution level, which contribute to China’s PIM cooperation and advancement.
B. Secondary Laws Related To Public Management Or International Investment
Laws supplement written constitutions. There are two major reasons why laws governing public
management may be adopted, namely to: (i) specify sound general principles; (ii) address specific problems.
Countries may adopt or modify laws for both reasons simultaneously. However, usually one of the two
factors dominates, depending on a country’s own legal traditions, including the perceived need to adopt a
law as opposed to issuing internal regulations. In some countries, particularly those in continental Europe
with strong “public law” and “administrative law” traditions, it is considered important to incorporate the
main principles underlying the public management system in formal law. The laws regulating public
investment management can be roughly differentiated into two macro-areas. On the one side there are laws
disciplining the management of public funds. Such laws usually are budget-related or deal with the
behaviour of government officials. In few cases the law disciplines coherently the procedures and the
sanctions related to the use of public funds for investment purposes. On the other side, there are law
disciplining the management of international investment.
Korea passed various acts in order to specify sound general principles or to address specific problems of PIM
system. The most important legal source is Korea 2006 National Finance Act. The aims of the Act are
“establishing the framework for efficient, performance-focused and transparent financial management and
sound fiscal operations”, which meet with Lienert’s legal purpose as stated before. Among other relevant
secondary sources of law are: the National Accounting Act, the Act on Public-Private Partnerships in
Infrastructure, the Financial Investment Services and Capital Markets Act, the Act on the Inspection and
Investigation of State Administration, the Public Capital Redemption Fund Act, some provisions of the civil
act, etc.. Besides these general laws on public management, Korea regulates the management of foreign
investment through the Foreign Investment Promotion Act. The Act is supplemented with the Enforcement
Ordinances and Enforcement Regulations of Foreign Investment Promotion Act, that prescribe particulars
authorized by Foreign Investment Promotion Act and mandatory subjects for their enforcement. The Act also
is also supplemented by the Foreign Exchange Transaction Regulations, dealing with cases of foreign
exchange and foreign transactions. Its Regulations on Foreign Investment and Introduction of Technology
state business areas where foreign investment is not permitted or permitted with certain limitations; and last,
it provides with a Special Taxation Restriction Act and its Enforcement Ordinances and Enforcement
Regulations, which include tax reduction for foreign investment.
Chinese PIM laws are formulated in accordance with the Constitution with a view to strengthening the
regulation of PIM in series of legislation and administrative acts. Among the most important sources are: the
Audit Law (2006 amended), Budget Law (1994 adopted), Law on Bid Invitation and Bidding 1999, State
Council’s decision of Investment System Reformation 2004, National Major Programs Management
Measures 1996, Major Programs Inspection Measures 2000, Provisional Management Regulations of
Programs sponsored by foreign governments and international organizations by NDRC 2005, Notice of
strengthening management about project loans of international finance organizations by NDRC 2008,
complementing with Government Investment Access Policy, Public Hearing System and Evaluation System.
For specific areas, there are Railway Law, Civil Aviation Law, and Electricity Law of the People's Republic
of China, Unfair Competition Law. In China, the investment activities are to be governed under the People’s
Republic of China Company Law, and by the relevant rules and regulations governing foreign investment.
The latter include the Provisional Regulations Regarding Investment by Foreign Investment Enterprises in
the People’s Republic of China (The Order [2000] No. 6), the Law of the People’s Republic of China on
Sino-foreign Equity Joint Ventures, the Law of the People’s Republic of China on Sino-foreign Cooperative
Joint Ventures and the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises. More
precisely, the registration of foreign investments is generally governed by the Company Law and the
Company Registration Regulations. However, if the laws governing foreign investments conflicts with the
Company Law and the Company Registration Regulations in certain provisions, the laws governing foreign
investments prevail. If all the above laws and regulations fail to cover certain provisions, the relevant
provisions in the administrative regulations, decisions of the State Council and other rules and regulations (as
opposed to laws) relating to foreign investment apply.
Recommendations for Vietnam
Like many other countries, Vietnam does not have any law that addresses in a coherent fashion
the topic of public investment management. The regulatory framework applicable to public
investment management consists of various secondary laws emanated from the National
Assembly, as well as Government Decrees. Nonetheless, unlike Korea or China, whose bodies
of laws disciplining public investment management regulate most of its important problems and
issues, albeit in a scattered way, Vietnam lacks even a definition of public investment. The
absence of a formal legal discipline on this important topic severely undermines the any effort
of reforming public investment management in Vietnam. Indeed, without any legal backing that
support and regulates the spending of public money, it would be difficult to structure the
investment system in such a way to minimize losses and increase efficiency. In order to achieve
the best result the primary recommendation would be to revise and amend the secondary law
that currently discipline public investment management by inserting provisions that define
“public investment” (see, L.Q. Su1). This would allow a more precise application of the current
provisions and it would reduce misinterpretations. Nonetheless, the amendment of secondary
laws will not be enough in the medium-long term, as the current framework present various
overlaps, and lacks consistency. Hence, it is recommended that Vietnam adopts a
comprehensive law on public investment management that derogates to all existing provisions,
so to address in a structured way the most pressing problems concerning the spending of public
money for investment projects.
1
Lee Quang Su, Reviewing Existing Legal Framework for State Management of Public Investment in Vietnam, Ministry
of Planning and Investment, 2011).
SECOND PART: THE REGULATION OF DOMESTIC PUBLIC INVESTMENT AND THE VARIOUS
PHASES OF THE INVESTMENT MANAGEMENT PROJECT
According to the main body of literature developed by the World Bank there are some phases that every
investment management system should have. In analysing the investment management law of a country is
therefore important to verify that each of these phases has been taken into account by the applicable laws and
ordinances.
The Phases of A Project that Must be Taken Into Account by the
Management Law
I. INVESTMENT GUIDANCE, PROJECT DEVELOPMENT & PRELIMINARY SCREENING
It is really important that public investment is anchored to general guidelines, national plans that provide a
broad long-term strategy of the country. National and/or sector strategy documents should be specific
enough, and have sufficient coherence and authority to actually guide public investment, and to be used
systematically to screen new projects. Such strategy papers can be specified by lower level guidelines that
provide more detailed analysis of the priorities. Sector strategies are carefully budgeted, and are closely
integrated and consistent with medium term budgets. It is important that those strategy documents provides
for a rough budget plan and are referenced in the annual budget.
The project development phase requires that line ministries and spending agencies initiating public
investment projects prepare a background paper that shows all the relevant information. Such paper should
make reference to national strategies, sub-level strategies, problems to be addressed, expected results, timing,
and overall budget involved. After this, there should be a first screening of all the project proposals in order
to ensure that the proposed projects are in line with the above criteria, and are rejected if they not meet them.
The importance of this stage is critical because an appropriate first level screening ensures that time will not
be wasted in the phase of the detailed project appraisal to review an inconsistent project.
In KOREA, all the goals and the relevant guidelines to public investment are prescribed by secondary laws,
national financial management plans, or by other long-term vision documents, such as the PRSP. National
financial management plans generally will contain basic direction and goals of financial management
(including public investment management). This is the same for Long-and medium-term financial forecasts
and for other plans that allocate resource and direct investment (which could tell strategic guidance of
resource distribution in PIM). Generally, PIM will be supplemented by a sector or sub-sector level strategy.
This strategy aims to take full use of available resources in order to ensure en effective use of government
funds.
One of the most important principles of Korean PIM system is the efficiency. For this reason the Korean
PIM establishes a process of first-level screening of all the project proposals in order to assess whether the
project would fit with the long terms goals of the national investment plans; It is required to promote the
program in a flexible manner due to the characteristics of the program; or It is possible to raise financial
resources and promote the program in a stable manner in the long and medium term or if there is more
effective way to execute the program, etc. So the centralized or delegated approval justification of PI
program is very important and basic consistency with government policy and strategic guidance must be
realized in certain programs.
Except for traditional public investment, PPP (Public Private Partnership) was first introduced in Korea with
the enactment of the Promotion of Private Capital into Social Overhead Capital Investment Act in 1994. The
Act was amended to the Act on Private Participation in Infrastructure (PPI Act) in 1998, after the onset of
Asian financial Crisis in 1997. In the amendment of the PPI Act in 2005, a service contract type, BTL
(Build-Transfer-Lease) of private participation was introduced in addition to the existing user fee type (BTO,
Build-Transfer-Operate)2.
The Chinese Constitution states that all foreign investment located in CHINA shall abide by the law of the
PRC, and by national goals and relevant long-term strategy. The 2008 Notice on the strengthening of
management of project loans by international finance organizations promulgated by the National
Development and Reform Commission (NDCR) provides that the application work of international
investment should adhere to theree principles. These are (i) the centralized and leading role of he State. (ii)
efficiency, (iii) and cost effectiveness. Central and local NDRCs will accord with the Plan for National
Economic and Social Development. The Most recent one is “THE TWELFTH FIVE-YEAR PLAN(FYP)-- 2011-2015” reported by NDRC, drafted by the Fifth Plenum of the 17th Central Committee of the
Communist Party of China and the final version was passed by the Eleventh National People's Congress in
March, 2011. The 12th FYP report listed 39 focal points, such as industrial structure improvement, new
energy, soft power, finance and tax system, social security development, public transportation construction,
pollutant reduce, natural calamity emergency rescue, etc. All of those will be the guidelines for public
investments of central and local governments and public organizations. Although public investment
programs can be divided into multiple types, as the eight phases can adapt to most PIM rules, government
procurement programs are an exception. As a special type of PI, Government Procurement Law of PRC 2002
regulates them. However, for the preliminary guidance and screening phase, there is no big difference.
Recommendations for Vietnam
It is of utmost importance for Vietnam to follow the Korean model and to set national public
investment plans or long-term vision documents. As it was explained below, this should be the
first screening level for projects. Only those that fall within the plan shall be accorded further
attention. Right now, the central planning system envisages long-term vision documents
promulgated by each ministries, and for the most important economic sectors. Nonetheless, at
present master plans are too generic. It is important to develop more detailed documents with a
vision to four/five years, which would set precise objectives and strategies. The plan should not
simply set out industrial or development policy objectives, but should indicate priority area of
intervention. The more detailed is the plan, the easiest is the first level screening of the proposed
project. One important element of this system is the attention to the budget. The plan should be
linked to the budget cycles and should try to envisage realistic budget expenditures.
2
Jay-Hyung KIM, Global Financial Crisis and Fiscal Implications of PPPs in Korea, Managing Director, PIMAC, KDI, Jan. 30, 2010.
II. FORMAL PROJECT APPRAISAL
The project appraisal phase is a critical step in the overall public investment process. After a project passes
the first level screening, then it is subject to a more detailed analysis. The objective of such analysis is not to
look at whether the project is in line with government priorities, but rather, if it fulfil more detailed criteria,
such as low social or environmental impact. This process follows a standard and well-defined set of
procedures, with explicit approval required for projects to advance at specific stages. Projects are appraised
using the full range of techniques as appropriate. There are comprehensive central guidelines on project
appraisal, including specific detailed guidance on the appraisal of PPPs.
The first step is the pre-feasibility study which overview the relevant issues of the project, identifies options
for a preliminary design, and identifies whether a project is feasible. In this regard is helpful to maintain a
portfolio of all the appraised projects in order to track how many projects have been selected but also allows
revisiting rejected projects later on when underlying project circumstances change and they are likely to
generate net positive benefits.
In the feasibility study are conducted various analysis, such as environmental, social impact assessment,
review of data, overview of the relevant alternatives, review of the project outcomes and objectives and a
scrutiny of their costs/benefits. This last issue is particularly important as it ensures that public money is
spent for a project that has a good public value for money. In order to ensure that the competent ministries
have the capacity to implement this cost/benefit analysis is important that are drafted guidelines that describe
techniques of economic evaluation that are appropriate to the scale and scope of the project – with larger
projects requiring more rigorous tests of financial and economic feasibility and sustainability. In particular
the project appraisal process should consider economy-wide and project-specific uncertainties, such as
inflation, cost overrun, change in output and key input prices over the project life. Is important that also
projects involving non-standard procurement, such as public private partnerships (PPPs) are subject to the
same appraisal process as standard public investment, and the costs and benefits of such projects should be
assessed and compared against a full financed public investment project..
Since a feasibility assessment that employs complex techniques of cost benefit and cost effectiveness
analysis is important that the law specifies the basic elements of the project appraisal:

The need for a project is well justified;

Project’s objectives are clearly specified;

Broad alternative options to meet project’s objectives are identified and comparatively
examined;

The most promising option is subject to detailed analysis;

Project costs are fully and accurately estimated; and

Project benefits are assessed qualitatively as likely to justify the costs.
Lastly, the last step of the project appraisal phase is the project design. This involves an analysis of the costs,
a full risk assessment, the outline of the indicators of performance and an implementation strategy that can
be used as a reference tool by the implementing agency.
KOREA recognizes that a well publicized and transparent appraisal guideline is significant for a wellfunctioning formal project appraisal, especially for larger projects, as they require more detailed tests of
financial and economic feasibility and sustainability. Budgetary decisions in Korea are competence of the
Ministry of Strategy and Finance (MoSF), and are managed by the Public and Private Infrastructure
Investment Management Centre (PIMAC). The model appraisal guideline of Korea include the 2006
National Finance Act Feasibility Guidelines, MoSF Rule Setting, Quality Control Conducting PFS,
PIMAC in KDI and AHP technique.
The development of PIM guideline rules and theories3
The 2006 National Finance Act prescribes the legal framework governing the preliminary feasibility study
(PFS). In practice, all new large-scale projects with total costs of 50 billion Won or more are subject to PFS
(PFS has expanded to non-infrastructure programs); Local government and PPP (Public-Private Partnership)
projects are also subject to PFS if central government subsidy exceeds 30 billion Won; PFS guidelines were
adapted in diverse public sector such as roads, rails, seaports, airports, dams, and cultural facilities. The
following types of projects are exempted from PFS: a) Typical building projects such as government offices
and correctional institutions; b) Legally required facilities such as sewage and waste treatment facility; c)
3
Jay-Hyung KIM, Global Financial Crisis and Fiscal Implications of PPPs in Korea, Managing Director, PIMAC, KDI, Jan. 30, 2010.
Rehabilitating projects and restoration from natural disaster; d) Military facilities and projects related with
national security4.
PFS Procedure5
In order to conduct the preliminary feasibility study Korean authorities adopt the so-called “Analytic
Hierarchy Process” (AHP), which is a multi-criteria decision making technique, which combines quantitative
and qualitative evaluations into a decision with a hierarchical structure. In the final score of the AHP the
economic analysis weights between 40-60% of the final score, policy analysis around 25-35%, and the
balanced regional development analysis around 15%-25%. The final decision is the result of the combination
of the three elements, and only if the AHP scores more tan 0.5 then a project is appraised as feasible. From
1999 to 2007, 188 out of 335 projects in Korea were deemed feasible, 147 projects (43.8%) cancelled and
$82 Billion saved6.
4
Jay-Hyung Kim, Public Investment Management in Korea: Efficiency and Sustainability, Managing Director, PIMAC, KDI, May 3,
2010.
5 Jay-Hyung Kim, Public Investment Management in Korea: Efficiency and Sustainability, Managing Director, PIMAC, KDI, May 3,
2010.
6 Jim Brumby, Efficient Management of Public Investment, Sector Manager, PRMPS, The World Bank.
Flowchart of PFS7
In order to conduct the preliminary feasibility study is of outmost importance to have skilled government
officials able to conduct project evaluations. In this respect, the Korean legislation Korea encourages an
established process for training staff in project evaluation technique. Article 101 of Korea 2006 National
Finance Act disciplines the Training of Finance-Related Public Officials8. KDI would be the Project
manager, university professors may be invited to give demand analysis, and private firms were possibly
hired to operate cost estimation. Open review process is also necessary such as a open discussion on a midterm and final PFS/RFS reports & review by the MoSF and line ministries, PIMAC, and field specialists
from private and public sectors.
The current formal project appraisal of CHINA, i.e. preliminary feasibility study (PFS), is structured on four
different project appraisal methods: 1) the Financial Appraisal, 2) the National Economy Appraisal; 3) The
Environmental Effect Appraisal, which is conducted independently; 4) and the Social Appraisal, which
emerged comparatively later than other appraisals but is growing rapidly. All four appraisal methods are
used in order to evaluate the feasibility of the project.
Economic Appraisal Methods and Parameters of Programs is a manual published by NDRC in 2006 and it
provides that when the financial appraisal is feasible, while national economy appraisal is unfeasible, then
the program should be abandoned. The core criteria of financial appraisal is “profit”, while the core of
7
Jay-Hyung Kim, Public Investment Management in Korea: Efficiency and Sustainability, Managing Director, PIMAC, KDI, May 3,
2010.
8 Amended by Act No. 8852, Feb. 29, 2008.
national economy appraisal is the percentage of net added value of national income and social benefit versus
its Total Project Cost (TPC).
The financial and national economic appraisals are based on quantitative Indicators, while the
environmental, political and social cultural appraisals have no definite standards and are based on qualitative
indicators. For detailed methods, there is cost-income analysis. When the project cannot be measured by
money, cost-effect analysis will be adopted. Because it cannot be measured by money, cost-effect analysis
will be adopted. The most noted theories in China include “comprehensive benefit appraisal” invented by
Tsinghua University’s NGO Institute, based on 3E (economy efficiency effectiveness), 3D (diagnosis
designing development) and customer satisfaction. Tongji University and Standard Ration Institute of
Ministry of Housing and Urban-Rural Development (MOHURD) of the PRC have also published a book
called Research on Economic Appraisal Methods and Parameters 2004. This book provided a systematic
identification of cost-effect analysis and it is constantly used to conduct social appraisals.
China legislated the Environmental Effect Appraisal Law of PRC in 2002, in which the environmental effect
of the program plan an its implementation are both required by law. The appraisal must be object, open and
fair and the state encourages experts to participate in the appraisal in proper way. Without the EEA reports
the plan will not be examined and approved. For certain projects, such as agriculture, forestry, energy, water
conservancy, stock raising, which are conducted by the departments at the municipal levels, the report should
include (a) the analysis, prediction and evaluation of the possible environmental influence; (b) methods to
prevent or reduce any negative outcome; (c) conclusion.
China’s social appraisal was launched in 1986. China’s public investment social appraisal is made by the
China International Engineering Consulting Corporation and is managed by the State-owned Assets
Supervision and Administration Commission. The standard used to evaluate a project in the social appraisal
is the “social interests”. According to the research of Investment Institute of National Plan Commission (later
was replaced by NDRC) and Standard Ration Institute of MOHURD, the process for social appraisal
generally requires nine steps: (1) draft the plan, (2) define the scale of the appraisal, (3) choose the standard,
(4) ascertain the standard through investigation, (5) make optional plan, (6) analysis and appraisal, (7) decide
the best plan, (8) experts hearing and approval, (9) summarize and report.
Recommendations for Vietnam
Vietnam should develop clear guidelines and procedures for project appraisal. As of now it is
unclear who will conduct the appraisal and what will be the criteria used.
“Currently, there are no legal provisions which specify the criteria on the investment
development policies in terms of approval process such as the suitable criteria for development
strategy, matching with social policy or environmental sustainability”9.
In Korea the so-called “Analytic Hierarchy Process” combined various criteria in the same
system and gave a numerical coefficient to any of them. The final result would determine the
decision as to whether the project should be implemented. Such system ensures efficiency.
Nonetheless, it requires specialized personnel able to conduct the appraisal, and it requires the
integration of different evaluation methods. As of now, it is unclear whether it would be
possible to unify in one system the various criteria specified by the various law (environment,
construction, etc.). It would be important that Vietnam develop a system to keep track of all the
project proposals and their final outcome (if the project have been implemented). This system
was adopted in Korea and it helped the local administration to increase the efficiency.
At present there are different guidelines for environmental, social, and economic appraisal of
the project. At present different appraisals are made independently from each other. . For
instance, according to the Law on Environmental Protection the environmental impact
assessment must be made separately from the others.10 This renders the overall process
cumbersome and complicated, as it requires the implementation of various procedures. The
different appraisals should not be made separately and should be combined in one single
appraisal, which would balance different considerations, by giving different weight to social,
efficiency, and environmental concerns.
III. INDEPENDENT REVIEW OF APPRAISAL
The independent review of appraisal is a key feature of all investment management laws of advanced
economies. The need for an independent review rises because often proposals are overestimated in terms of
benefits or underestimated in terms of costs. This function can be performed by the ministry of finance or by
a designated specialized agency. In Korea, the Public Investment Management Center (PIMAC) was
established in 1999 in KDI, a semi-autonomous agency, in order to create an arms-length review of project
appraisal. In countries where donor-funded projects are significant, the independent review can be
coordinated with donors in order to help channel resources to priority areas. In this context, clarity of
specific responsibilities is an important issue. Indeed, a multiplicity of players with unclear accountabilities
Lee Quang Su, Reviewing Existing Legal Framework for State Management of Public Investment in Vietnam, Ministry
of Planning and Investment, 2011, p. 23
10 Lee Quang Su, Reviewing Existing Legal Framework for State Management of Public Investment in Vietnam, Ministry
of Planning and Investment, 2011, p. 30
9
can overburden the appraisal system.
In Korea it is the responsibility of the acquiring agency or organization to review all appraisal and specialty
reports to be acquired in connection with purposed programs or projects and to establish an amount, which it
believes to be just appropriate before the initiation. For the Inspection of the review, the review appraiser
should request and obtain from the first appraiser any needed corrections or revisions to complete a deficient
appraisal report. The appraisal report itself cannot be changed by the review appraiser, which has to request
the intervention of the first appraiser. Upon completion of the review, the review appraiser should place in
the parcel file a signed and dated statement setting forth:
(a) the estimate of applicable income, the compensation, possible damages, financial resources
necessaries to complete the project, and also list potential risks, if such allocation or listing differs
from that in the appraisal;
(b) a comparable study;
(c) a declaration that the review appraiser has no direct or indirect personal interest in the project,
and that I does not receive any monetary benefit;
(d) a declaration that the review has been reached independently, without collaboration or
direction, and is based on appraisals and other factual data.
(e) The final recommendation on the final costs of the project
The most important element in the appraisal review is the independence. And in practice, independent peer
review might be necessary to check any subjective, self-serving bias. Donor-financed projects should be
subjected to the same appraisal as government funded projects. It should be noticed that a clarification of
specific responsibilities of review appraiser is essential. A multiplicity of reviewers with unclear
accountabilities can overburden the appraisal system and a formal set of delegations is necessary to keep
minor projects away from clogging up appraisal. Review Appraiser Qualifications and Appraisal Review
Techniques are relied on both systems and well-trained work staff or experts.
In CHINA, there are two ways to review the appraisal. The first one is to submit the project to the related
departments for approval; another one is to have the project examined by a group of experts. For example,
the environment protection departments are responsible to call on representatives from relevant agencies and
experts to build up a team to review the EEA report and give written observation. In construction programs,
the construction organization has to submit all original materials about investigation, design, construction
and supervision to diverse responsible public authorities. The original materials must be true, accurate and
completed. Some scholars in China argue that the independence of appraisal should be strengthened,
especially when the state-owned companies and foundations operate it.
Recommendations for Vietnam
The main issue with regard to independent review of appraisal is to ensure the independent of
the personnel conducting the review. According to the report of Vietnam public Investment
Management System “The laws on cadres, civil servants, the anti-corruption, wastefulness,
inspection, supervision contain provisions some responsibility of the authorities relating to the
decision-making and management of public investment to ensure effective prevention of
corruption or loss of capital and assets of the State. However, these provisions are still generic,
lack of feasibility so less effective in managing and supervising the implementation of public
investment policies”11. Vietnam should set up an independent body, specifically entrusted with
competence in reviewing project and controlling budget expenditures. This body should be
independent from political power and should be able to impose fines.
IV. PROJECT SELECTION AND BUDGETING
In general, only projects that have been subject to thorough appraisal and have been independently reviewed
are selected for funding in the budget. Multi-year budget authority supports effective project implementation.
It is important that essential that public investment projects and all the procedures linked to their
implementations are in line with the budget cycle.
After the introduction of Medium Term Expenditure Framework (MTEF in 2004) for Budgeting the budget
cycle in Korea covers a 5 year term (including the current year) and sets spending ceilings for sectors and
programs. As stated in the National Finance Act, the budgetary general provisions shall provide for: Ceilings
on national bonds and borrowings; Maximum amount of issuance of treasury bills and temporary
borrowings; Other necessary matters concerning budget execution. For example, when making the Fiscal
Risk Management for PPPs, Korea sets a safeguard ceiling on government payment: the annual government
payment should be 2% of total government budget expenditure, and the PPP investment would be 10% to
15% of total public investment.
In this way there are more transparent criteria for selecting projects, as the appraisal process is linked to the
budget cycle. Furthermore, a multi-year budget allocation system can ensure adequate financing for long
term selected projects. Effective gate-keeping is a challenge for this step of PIM, it must be guaranteed that
only appraised and approved projects are selected for budget financing, except for emergency reason, in case
of projects evade established process.
Lee Quang Su, Reviewing Existing Legal Framework for State Management of Public Investment in Vietnam, Ministry
of Planning and Investment, 2011, p. 29
11
The project selection in CHINA is governed by the Law on Bid Invitation and Bidding of 1999. This law
states that the selection of the projects should always be conducted through an open bid system. The public
procurement system abides by the principle of “open, equity, justice and faithfulness”. Any breach law will
face civil or even criminal penalty. National budget is significant to PIM. In China the government has
conducted various reforms on the budgeting system in order to reach the goals of keeping a balance between
the central and local governments, which should share equal obligations in public constructions. Budget of
various levels of governments should be reported and approved by vis-à-vis people’s congress.
In supervising the budget of certain public investment programs, central finance minister and local financial
departments exam the speed of Transfer Payment, the delegation of the money, the items registered to be
approved, and the management of money and efficiency of costs.
Recommendations for Vietnam
According to the report in Public Investment Management in Vietnam
“The provisions on the application of advancing state budget, government bonds and other
capital resources are generic, not specific and difficult to apply in practice. For example,
Decree Law 60/2003 guiding the state budget only provides general provisions in advance
budget next year, including investment-development expenditure and regular expenditure; limit
of advance by sectors; division of responsibilities between the Ministry of Planning and
Investment and the Ministry of Finance in the proposing, implementing and arranging plan to
complete the advance; assigning the task of local authorities to decide advance and recovery
expenses in advance.”
Accordingly, it would be important for Vietnam to develop multiyear budget proposals, and
possibly link them to the 4/5 years long-term strategy plans on public investment. It would be
important for Vietnam also to decide how to raise the funds and to decide what State capital
should be allotted to public investment projects.
V. PROJECT IMPLEMENTATION
The project implementation phase requires a strong focus on managing the total project costs over the life of
each project. It is critical to establish and develop effective measures, such as efficient procurement plans,
guidelines and institutional capacity to manage and monitor project implementation, total project cost
management system and multi-year budgeting. This essentially requires clear roles and responsibilities are in
place for project implementation, accounting systems record total and annual project costs, regular reports on
financial and non-financial progress and close monitoring by a line ministry responsible for subordinate
implementing agencies and/or by the CFA. Sound procurement systems must be in place and must be
implemented consistently, with advanced techniques for allocating risks between government and
contractors. The project design should include a realistic timetable to ensure the capacity to implement the
project and it should indicate various organization responsibilities. It is important also to have an accounting
system that captures and reports all project costs, rather than accounting by separate contracts or stages and
tracking against annual appropriations.
Korean PIM guidelines generally request clear organizational arrangements and a realistic timetable to
ensure the capacity to implement and cost-effective procurement and contracting system. Article 8 of the
National Finance Act “Performance-Focused Financial Management” stated that the MoSF shall prepare
guidelines concerning the performance plan and then notify the head of each central government agency and
each fund managing entity. Effort shall be taken so that budget Bills, draft fund management plans and
performance plans shall be consistent with each other in terms of program details and program costs. With
regard to large-scale development programs prescribed by Presidential Decree, the head of each central
government agency shall include the cost and expenses required for each of the stages. The budget Bill shall
be formulated appropriately for those programs for which the working plans for the entire work process have
been completed, and the total program cost should be fixed to prevent any delay in the project.
Implementation Process of PI12
12
Jay-Hyung KIM, Global Financial Crisis and Fiscal Implications of PPPs in Korea, Managing Director, PIMAC, KDI, Jan. 30, 2010
In order to prevent imprudent cost-increases in implementation, the Minister of Strategy and Finance shall
require public officials under his/her control to conduct inspections and monitoring. This would ensure that
the execution or settlement of the budget and the fund management plans would be properly conducted.
Furthermore, in Korea the law allows individual citiziens to monitoring against unlawful spending of budget
and funds. Indeed, when it is obvious that a person executing the budget or funds of the State is violating any
Act or a subordinate statute, each citizen has a right to submit evidence of any unlawful spending to the head
of the central government agency or the fund managing entity responsible for the execution and demand to
take corrective measures. The right for a citizen to monitor the management of pblic funds is one of the most
effective strategies to combat bribery and to ensure a good management of public resources.
In China the National Plan Commission promulgated in 1996 the National Major Programs Management
Regulations, which states that the aim of the law is to improve invest efficiency, to ensure the quality and
the completion of the projects, and to promote the sustainable, rapid and sound development of the national
economy. After the completion of the preliminary feasibility study and the other following steps the
departments in The State Council decides which projects should be given priority and approved.
In China the company or the foundation that carries out the project is legally responsible for every phase of
the project implementation. In parallel to the legal responsibility of the company, the law states that also the
chief executive officer and other person directly responsible will be held accountable for the delay of the
project, corruption, or for any other situation that would reduce the quality of the project or, more in general,
produce economic losses.
The Order of National Development Plan Commission No 6 and the National Major Construction
Inspection Order 2000 discipline the monitoring system of investment projects. Ministry of Finance has an
overall supervision function, which co-shares with local authorities. According to the report of Bureau of
Financial Supervision and Inspection of Ministry of Finance, from Feb, 2011 to Apr 2011, the local
commissioners inspected 2356 hundred million Yuan’s worth of public investment programs.
According to the law, one inspector must be always accompanied by 3 or 5 assistants, all selected among
public officials. When it is necessary, the National Development Plan Commission can allow other experts to
participate in the inspection. The inspector should submit at the end of the inspection the final report which
should cover the following content: (1) if the construction program fulfil the approval procedures; (2) the use
of the fund of the project and the control of the total costs; (3) analysis of quality and of the progress of the
project; (4) and a general comment on the chief executive official. On important point stated in the law is
that it is illegal for the inspected units to fake relevant materials, to refuse or block inspection, or to adopt
other misconducts which would interrupt inspectors’ work.
Recommendations for Vietnam
This phase of the project is the most critical one, as it requires an efficient procurement system
in place, and legal tools to assess the compliance of the procedures to the legal requirements. It
is particularly important to allow third parties, such as citizens, consumer organizations, to
launch a complaint against the agency responsible to carry out the project, in case of
mismanagement. Vietnam has no such system in place. This leads to a situation whereby the
discretion of public officials in granting the contract, and in managing the overall project, can
only be controlled by fellow public officials, and not by external independent agencies. Clearly,
granting rights to private individuals to monitor the work of the public administration, and to
launch complaints for violation of the law, is a complex topic that cannot be dealt with in a
matter of days. Nonetheless, Vietnam should carefully begin to think how to integrate
progressively the rights of private individuals to monitor the work of the public administration
into the Vietnamese legal system.
VI. PROJECT ADJUSTMENT
The Project adjustment is a fundamental feature of the overall project management framework and it make
sure that specific mechanisms are in place to trigger a review of a project continued justification if there are
material changes to project costs, schedule, or expected benefits. For instance in Korea projects are
automatically subject to re-appraisal if real costs rise by more than 20%.
The adjustment process should promote some flexibility to allow budgetary changes when circumstances
arise. For instance, in case the evaluation found that the project is not any longer beneficial there should be a
way out in the funding approval process or the monitoring process to request project sponsors to reconsider
their involvement or even to stop the disbursements. This suggests that funding should be carried out in
tranches, with the tranches relating to the discrete phases of the project. Each funding request should be
accompanied by an updated cost-benefit analysis and a reminder to project sponsors of their accountability
for the delivery of the benefits. The law should allow the Government to create the capacity to monitor
implementation in a timely way and to address problems as they are identified. Monitoring project
implementation would minimally involve comparison of project progress relative to the implementation
plan. The law should require the implementing agencies to submit progress reports to identified monitoring
agencies that may then need to audit both financial and physical implementation.
Project adjustment in KOREA should bestow flexibility to allow changes in disbursement plan according to
changed circumstances. Through active monitoring with periodic progress reporting, the condition of project
should be always flexible. In order to decide whether a project should be cancelled or closed in case the costs
would override the benefits, the Korean legislation provides for a system that compares the three elements of
the project system: the Total Project Cost Management (TPCM), the Re-assessment Study of Feasibility
(RFS), and the Re-assessment of Demand Forecast (RDF).
TPCM requires that any changes in size, costs, and time frame throughout the project cycle should be based
on preliminary consultation with MoSF, except for exceptional circumstances. The ministry in charge of the
project is to consult with the MoSF for any adjustment of the project. The line ministry is allowed to set
construction contingencies for up to 8% of the contract price of a project to cope with inevitable design
modification.
The Re-assessment Study of Feasibility is conducted if the total cost has increased by more than 20 percent
or if the preliminary feasibility study has not been conducted. The team that conducts the RSF study would
makes a judgment as to whether the project should be continued or stopped. In order to decide the team will
look at the preliminary feasibility study and it would compare the current situation with that envisaged in the
study. One of the responsibilities of the team is to find alternatives to cut down size and cost. From 2003 to
2007, 5 out of 61 re-assessed projects were stopped /cancelled in Korea.
The goal of the Re-assessment of Demand Forecast is to verify the adequacy of demand forecast with the
latest information available, reflecting changes in project environment. RDF can be conducted at any phase
throughout the project cycle from planning to construction completed, when a substantial decrease of
demand is anticipated due to material changes or errors that have been found in the demand forecast, of if
more than five years have passed since the latest demand forecast had been conducted. If the demand
forecast for a project is decreased by 30% or more, the MOSF would conducts a reassessment study of
feasibility and it would decide whether to continue or to stop the project. In conclusion, according to the
Korea legislation projects are re-assessed for their feasibility if the Total Project Cost increases by more than
20% or if the demand forecast decreases by more than 30% according to the Re-assessment of Demand
Forecast.
As stated in the chapter 7 of China’s budget law 1999, the modulation of annual budget must be approved by
people’s congress or its standing committee. Central departments should report to the state council and local
governments report to the superior governments. The Chinese system is less sophisticated than the Korean.
The adjustment standards are flexible in China. Generally if the program contributors realize the necessity to
make adjustment during the project cycle, as in the case of a change in the price, or in the investment
environment, or if the final costs would exceed total budgeted costs, the project managers can report to
superior agencies for approval. The final decision depends on the size and scope of the project. For
influential or national influential project, the ratification of People’s Congress or National People’s Congress
may be demanded.
Recommendations for Vietnam
The goal of this phase is to make sure that the project will remain cost/effective at all times,
even in presence of a change in circumstances. The current regulatory framework for project
adjustment in Vietnam law is fundamentally regulated by the Decree 113/2009/ND-CP on
monitoring and evaluation of investment. Nonetheless, it is overlapped by other decrees
regulating the investment in specific sectors. This renders the regulatory framework rather
incoherent, as it provides different regulations according to the sector in which the project takes
place, and according to the level of public contribution to the project. According to the report in
the Management of Public Investment in Vietnam,
The provisions on monitoring and evaluating investment are not uniform. According to Decree
12/2009, projects using state capital over 50% of total investment must be monitored and
evaluated by methods issued in that Decree. For other capital-funded projects, the monitoring
and evaluation of investment done by investment-deciding person. However, Law on
Construction stipulates the supervision and evaluation of projects with construction suitable
with certain type of capital resources. Specifically, for projects using 30% or more state capital,
state agencies in authority supervise and evaluate the whole process of investment based in
content and criteria approved. For other capital-funded projects, state agencies in authority
supervise and evaluate the objectives, compliance with the relevant planning, land utilization,
schedule and environment protection. 13
Articles 3, 4, 5 and 6 of the Decree 113/2009 set out the basic provisions on monitoring and
evaluation of the project. From the Decree it is unclear on which precise criteria and to what
extent the project can be adjusted. Indeed, it is not yet specified in the law when the project does
not satisfy the criteria. For instance, in Korea it clearly say that when the costs of a project arise
above 20%, then the project must be reconsidered. The lack of precision render more
complicated a strict control on the project. It is therefore recommended that Vietnam set out
precise criteria on which to control the development of the project.
VII. FACILITY OPERATIONS AND BASIC COMPLETION REVIEW AND EVALUATION
It is important that when the project is completed the overall management and the operation of the project are
handed over to the competent agency. This requires a check of the status of the project in order to assess
whether the facility requires post-completion adaptation or ancillary investment before the assets can be
Lee Quang Su, Reviewing Existing Legal Framework for State Management of Public Investment in Vietnam, Ministry
of Planning and Investment, 2011, p 26-27.
13
utilized. Furthermore, it is important to maintain the asset registers that list all the cost and keep all the
records, including legal property titles. Active monitoring of service delivery is a desirable element of
ensuring that the new assets serve the purpose over their useful life. This suggests that the quantity and
quality of service delivery associated with facility operation should be tracked through time. Moreover,
agencies responsible for service delivery should be held accountable for results. For the facility operation,
asset registers need to be maintained and asset values recorded.
Organization of PIMAC in Korea14
Cross-country Comparisons15
It is important to make sure that once the project is completed is measured against the indicators and project
design that were developed in the first phases of the management process. The completion review should be
made compulsory by the law and be applied to all projects in a systematic way. The review should involve a
post-completion examination to be carried out two to three years or more after project completion. This
phase of the project management should be responsibility of the responsible agency or line ministry and it
should compare the project’s outputs and outcomes with the established objectives in the original project
14
Jay-Hyung Kim, Public Investment Management in Korea: Efficiency and Sustainability, Managing Director, PIMAC, KDI, May 3,
2010.
15 Jim Brumby, Efficient Management of Public Investment, Sector Manager, PRMPS, The World Bank.
design. The project design should build in the evaluation criteria and the learning from former ex post
evaluations to improve future project design and implementation.
The evaluation should focus on three main issues:

The timing of the project (whether the project was finished within the original (and
amended) time frame);

The analysis of the compliance with the original budget;

The assessment of whether the outputs were delivered as specified in the project design.
As a supplement to this basic element, a supreme audit institution should periodically conduct a compliance
audit of a sample of investment projects.
In Korea the Ex Post Performance evaluation (PE) is conducted by the Ministry of Land, Transport and
Maritime Affairs. Construction projects with a total production costs of 50 billion Won ($50 million USD) or
more are subject to performance evaluation, which shall be conducted within three years of construction
completion. Analyses of the performance include cost, time overrun, comparison of forecasted demand,
actual demand, and project impacts; at last based on the degree of acceptance by local residents, submit
suggestions for improvements. Another evaluation is EBP (In-depth Evaluation of Budgetary Program)
processed by MoSF. No EBP on public investment program has been conducted so far16.
On the basis of CHINA’s State Council’s Decision of Investment System Reformation 2004, NDRC made
Regulations on PIM Ex-Post Evaluation of Central Government 2009. Up to now, many local departments
and large-scale enterprises have established or are establishing their ex-post evaluation rules. China’s ex-post
evaluation comprises five aspects: technique, economic, environment, society and management. Compared
with PFS, the most important feature of ex-post evaluation is the information feedback as the foundation of
long-term investment plans, policies and benefit to subsequent programs. NDRC is devoting much effort to
spreading the ex-post merit & mode.
NDRC will make the list of ex-post evaluation programs annually. Article 7 provides the types of elements
that must be taken into account: (1) significance to the industry structure’s modification; (2) significance to
energy saving, environment protection, districts development and national security; (3) improvement of the
resource distribution, investment direction and the overall situation; (4) improvement in new technique,
equipment, material, financing and business mode into use; (5) complicated and cosmically adjusted
programs; (6) impact on large scale immigrants, poor areas, people in poverty or other vulnerable groups; (7)
high-percentage cost programs; (8) effect on the public opinion. Article 8 provides the contributor should
submit ex-post evaluation report within 3 months since NDRC’s annual evaluation project published. The
report is supposed to cover: (1) the general introduction; (2) summarize of the process; (3) estimate of the
16
Jay-Hyung Kim, Public Investment Management in Korea: Efficiency and Sustainability, Managing Director, PIMAC, KDI, May 3,
2010.
effect; (4) comment of the achievement of aims; (5) experience, lessons and advices. As stated in the chart
below:
CHINA’S GENERAL STANDARDS OF EX-POST EVALUATION
ITEMS
THE
CONTENTS
GENERAL
INTRODUCTION;
Aims, content, investment budget, preliminary examinant and
approve, fund sources and transfer payment, progress and
schedule; Rough estimate approval; and implement, etc.
SUMMARIZE OF THE Preliminary arrangement, implementation of construction,
PROCESS
ESTIMATE
operation of program, etc.
OF
THE Technique standards, financial, economic, environmental
EFFECT;
ESTIMATE
benefits, etc.
OF
ACHIEVEMENT
THE
OF
AIMS
The accomplish extent of aims, the reason of discrepancy, the
sustainability, etc.
EXPERIENCE, LESSONS
The main experience, lessons and relevant advices of program
AND ADVICES
constriction.
Recommendations for Vietnam
Articles 3 to 6 of the Decree on Monitoring and Evaluation 113/2009 set out precise regulations
on the monitoring and evaluation of the project. If properly implemented such rules would be
enough to ensure the respect of the basic norm on ex-post evaluation. Nonetheless, as stated in
the report on Investment Management in Vietnam, the provisions of Decree 113/2009 overlap
and sometimes conflict with the provisions of the Decree 12/2009 on construction.
One major flaw of the current system is the absence of clear penalties and sanctions for those
projects that are found not respecting the criteria originally spelled out in the early phases of the
project implementation. Vietnam should develop a more clear system of project evaluation, and
provide administrative sanctions against the project team that did not comply with the criteria
set out in the early phases of the project.
THIRD PART: THE REGULATION OF FOREIGN INVESTMENT MANAGEMENT
I. THE DEFINITION OF FOREIGN INVESTMENT
China
The Chinese laws regulating foreign investment do not provide a definition of investment. Companies’
permanent presence has to set up operations as an appropriate legal entity, depending on the intended
business scope, and be compliant with Chinese legal and tax requirements. The most common legal
structures used for establishing a presence in the PRC are:17

Representative Office (the "RO"). ROs are the first step taken by foreign companies when
establishing a permanent presence in China. ROs can undertake market investigation, display, publicity
activities in connection with the products or services of foreign companies, and liaison activities in
connection with the products sales, services provision, domestic procurement and domestic investment
of foreign companies. However, ROs are not permitted to engage in any profit activity, which means
that they cannot sign contracts, receive income, or issue invoices and business tax receipts. Under PRC
law, an RO is considered to be an extension of its establishing company, and does not have the status of
a legal person.

Wholly Foreign-owned Enterprise (the "WFOE"). A WFOE refers to a company incorporated in
China with limited liability that is owned by one or more foreign investors. The WFOE has to get the
approval from MOFCOM prior to registration with SAIC. In addition, besides the approval from
MOFCOM, the WFOE should obtain approvals from other governmental authorities such as NDRC and
SFDA etc., depending on the WFOE's business scope.

Equity Joint Venture (the "EJV"). An EJV is typically used for long-term projects and is formed by
foreign companies, enterprises, other economic organizations or individuals and Chinese companies,
enterprises or other economic organizations. An EJV is a limited liability company and the proportion of
an EJV's registered capital contributed by the foreign investors shall not be less than 25%.

Contractual Joint Venture (the "CJV"). A CJV is formed with join capital or terms of cooperation
between foreign enterprises, other economic organizations or individuals and Chinese enterprises or
other economic organizations. CJV can be registered as a limited liability company, which owns the
status of legal person, but it is not mandatory. A CJV should set up a board of directors (a CJV, which
has the status of legal person) or a joint management committee (a CJV which has no status of legal
person), which is the authority of CJV.
17
Baker Tilly International, Doing Business in China, 2008.

Foreign-invested Partnership Enterprise (the "FIPE"). . FIPEs allow for partnerships between two
or more foreign enterprises or individuals, or a combination of foreign enterprises or individuals and
Chinese individuals, legal persons or other organizations. FIPEs do not need to obtain the approval from
MOFCOM. They only require registration through the local branches of SAIC. However, businesses in
certain sectors will need to comply with other specific regulations and the FIPE should submit approvals
from relevant authorities when applying for its registration.

Branch Office. A foreign company can set up a branch office in China if certain prerequisites, which
may vary for different industries, can be met. Such branch office does not have independent legal person
status and its parent company will be held liable for all of its business activities in China. Generally, in
practice not all industries are permitted to establish a branch office by the foreign company in China.
The approval authority for the establishment of branch offices is generally MOFCOM or its local
counterparts, while for certain regulated industries, it is the industry administration authority, such as
China Insurance Regulatory Commission ("CIRC") or China Banking Regulatory Commission
("CBRC") that is charged with the approval responsibility. Following the obtaining of approval of
establishment, a branch office must apply to the local branch of SAIC for a business license.
Korea
Chapter 2 of Foreign Investment Promotion Act defines the four categories of foreign investment in Korea:

Investment made through acquisition of newly issued share. Where a foreigner intends to make an
investment by means of purchas- ing stocks newly issued by a Korean corporation (including a Korean
corpo- ration in the process of being established) or by a company run by a national of the Republic of
Korea, the foreigner shall report, in advance, what he intends to do to the Minister of Knowledge Economy
under the conditions as prescribed by Ordinance of the Ministry of Knowledge Economy.

Investment made through acquisition of existing shares. Where a foreigner (including such persons
of special relationship as prescribed by Presidential Decree; hereafter in this Article the same shall apply)
intends to make investment by acquisition of stocks or shares which have already been issued by a company
run by a national of the Republic of Korea or a Korean corporation (hereinafter referred to as existing stocks,
etc. ),

Investment made through mergers (M&As).
1. Where a foreign investor has acquired stocks issued upon the capitaliza- tion of the surplus reserve
or reevaluation reserve of the foreign-capital invested company in which he has been involved, or of
reserve funds as prescribed by other Acts and subordinate statutes;
2. Where a foreign investor acquires the stocks of a newly incorpo- rated corporation or a surviving
corporation after a merger, the compre- hensive exchange of stock, the transfer of stock and a company
division with the stock he possesses at the time when the relevant foreign-in- vested company is merged,
the stock is comprehensively swapped, the stock is transferred or the company is divided;
3. Where a foreigner has acquired stocks of a foreign-capital invested company registered in
accordance with the provisions of Article 21 by means of purchase, inheritance, testamentary gift, or gift
from a foreign investor;
4. Where a foreign investor has acquired stocks by means of investing the proceeds from the stocks
which were acquired under the conditions as prescribed by law; and
5. Where a foreigner has acquired
stocks using convertible bonds, ex-changeable bonds, stock depositary receipts, and such other similar
ones as may be converted into, available for the acceptance of, or exchanged for stocks.
 Investment made through long-term loans. Loan with maturity of not less than five years (based on the
period of loan specified in the loan contract that has been made for the first time), which is supplied to a
foreign-capital invested company by a person falling under any of the following: (i) Overseas parent
company of the foreign-capital invested com- pany; (ii) Company with capital investment relationship
prescribed by Presidential Decree with the company in (i); (iii) Foreign investor; or
(iv)Enterprise with
capital investment relationship prescribed by Presidential Decree.
 Not-for-profit corporation. Where a foreigner contributes to a nonprofit corporation pursuant to this Act
with the purpose of establishing continuous cooper-
II. FOREIGN INVESTMENT APPROVAL AUTHORITIES
China
In China, several authorities are responsible for overseeing different aspects of foreign investment through
their central and local branches.18
(a)
National Development and Reform Commission (the "NDRC"): The NDRC co-ordinates
development policy and approve foreign investment projects. Along with the project approving
procedure, opinions from other relevant authorities (e.g. the Ministry of Environment regarding
environmental protection for a plant project) are often involved in this process.
(b)
Approval of establishment of foreign invested enterprises (the "FIE") by the Ministry of
Commerce (the "MOFCOM"): MOFCOM is responsible for examining and approving the
establishment of FIEs, including the form of their constitutional documents and the approved areas
in which they will be permitted to conduct business.
(c)
Special Industry Approvals: Although the main approving authorities are the NDRC and
MOFCOM, other authorities may also be involved in approving procedures particularly where there
18
Mayer Brown JSMA, Guide to Doing Business PRC Brochure Banking & Finance, China, 2010.
is some limitation on the entrance by foreign investors into a special industry. For example, the preapproval from the State Food and Drug Administration ("SFDA") or its branches is needed if the
investment involves the pharmaceutical production.
(d)
Registration with the State Administration for Industry and Commerce (the "SAIC"): All
business entities need to maintain records of corporate documents with local branches of SAIC
including basic information regarding registered capital, directors, shareholders and the
constitutional documents.
SAIC also oversees initial approvals for special industries such as
advertising.
(e)
Other business administrations relevant to foreign investors: The tax bureau, the
administration of foreign exchange, the finance bureau, the customs and the administration of
quality supervision, among others, are all involved in the routine management of FIEs.
Korea
As far as investment in Korea is concerned, different authorities, organizations or agencies are competent to
approve or receive a declaration of foreign investment.19 Depending of the case under scrutiny, they include
the Minister of Finance and Economy, the Ministry of Knowledge Economy, the Korea Trade-Investment
Promotion Agency (KOTRA, which operates invest KOREA, the national investment promotion agency)
and Home/branch offices of foreign exchange bank. The Ministry of Commerce, Industry and Energy plays a
significant role as a consultant and regular announcer of restrictions and approval to relevant government
agencies or departments on foreign investment in Korea.
III. GENERAL POLICY ON RESTRICTION AND PERMISSION
China
As far China is concerned, the Interim Provisions for Guiding Foreign Investment and the Industrial
Catalogue for Foreign Investment sets the different categories of investment. The document is issued by the
China's National Development and Reform Commission (NDRC) and the Ministry of Commerce
(MOFCOM), which governs foreign investment in Chinese companies. This documents classifies foreign
direct investment in various business activities as encouraged, restricted, prohibited or permitted. In the
absence of other rules to the contrary, not listed activities are considered permitted to foreign investment.
The “permitted” category is the standard category, with no particular restrictive or favourable treatment;
investment in activities in the “encouraged” category is subject to less strict administrative requirements and
may enjoy certain tax and other benefits; investment in activities in the “restricted” category is subject to
higher levels of scrutiny and stricter administrative requirements, and may be denied at the discretion of the
approval authorities; lastly, the prohibited category concerns foreign investment that are not permitted.
19
Invest KOREA, Methods of Entry into Korea for Foreign Investors, available at
http://www.investkorea.org/InvestKoreaWar/work/ik/eng/bo/bo_01.jsp?code=102030201
The items in the catalogue encouraged for foreign investment mainly include new agriculture technologies,
comprehensive development of agriculture, energy resources, communications, important raw materials, new
and high technologies, export-oriented and foreign-currency-earning projects, comprehensive utilization and
regeneration of resources, prevention of environmental pollution, and those that give play to the advantages
of China's mid-west areas. Meanwhile, foreign investment is directed to the technological upgrading of
traditional industries and old industrial bases and to the continued development of labor-intensive projects
that comply with the state's industrial policies.
Foreign investment is prohibited in projects that endanger the state security and bring damages to public
interest; that cause pollution of the environment and damage natural resources and public health; that use
large farmland and are unfavorable to the protection and development of land resources; and that endanger
the security and normal function of military facilities.
Japan
Japan’s primary law concerning foreign investment, is the Foreign Exchange and Foreign Trade Act. The
law provides that government ministries may prohibit or place conditions on a proposed foreign investment
if they determine that it may harm national security, public order, public safety, or the smooth management
of the economy. However, the Japanese government has not used this authority since FEFTA was amended
in 1991, according to the Japanese government.
The Japanese regulatory scheme established under FEFTA treats foreign investment differently based upon
the sector in which the investment is taking place, among other criteria. Foreign investment in a sector that is
determined to be sensitive requires prior notification and government approval, while investment in other
sectors only requires an after-the-fact notification to the government. Foreign investment in all industries
requires notification through one of these routes. A government notice provides tables that specify the
sectors and the individual industries that require prior and after-the-fact notification. Industries not listed in
either table must submit prior notification. Failure to notify, among other violations under FEFTA, can result
in criminal penalties including jail for up to 3 years and/or a fine of three times the investment amount or 1
million yen, whichever is larger.
According to the Japanese government, prior notification of a foreign investment is required for

national security: aircraft, weapons, nuclear power, spacecraft, and gunpowder;

public order: electricity, gas, heat supply, communications, broadcasting, water, railroads, passenger
transport;

public safety: biological chemicals, guard services; and

smooth management of the economy: primary industries relating to agriculture, forestry and
fisheries, oil, leather and leather products manufacturing, air transport, and maritime transport.
(These areas are reserved under Article 2 of the OECD Code of Liberalization of Capital
Movements.) Prior notification is also required in additional circumstances. The Japanese government requires prior
notification for investments from countries with which Japan has not completed a reciprocal investment
agreementand if the foreign investment involves certain capital transactions subject to permission by the
Finance Minister. If there is doubt as to whether a company is subject to prior notification, administrative
agencies will provide an advance consultation outside of the formal review process.
Korea
Except as otherwise set by specific laws and the regulations of the Republic of Korea, foreigners may engage
in, without restraint, various activities of foreign direct investment in the Republic of Korea. However,
subject to restriction are foreign investment activities that threaten national security and public order; or
would have a harmful effect on public health or the preservation of the environment; or are markedly
contrary to commonly accepted Korean standards of decency and morality, or violate any Korean laws and
regulations. The categories of business in which foreign investment is restricted are the business categories
where it is difficult to apply the Foreign Investment Promotion Act rather than prohibits foreign investment.
As far as restriction or prohibition of foreign investment is concerned, foreigners may currently invest in
1,058 business types out of a total of 1,121 types under the Korean Standard Industry Classification,
excluding 63 business types (excluded business types) as stipulated under Article 4 of the Foreign
Investment Promotion Act, including public administration, educational organizations, national defense and
so on. The investment ratio is restricted for 28 business types (restricted business types) from those in which
foreigners may invest. In particular, special attention must be drawn to the fact that foreign investment in a
defense-related business through the acquisition of its existing shares requires the approval (and consultation
with the concerned ministers) of the Ministry of Commerce, Industry and Energy. 20
Business categories where foreign investment is restricted are announced in accordance with the 'Regulations
on Foreigner Investment and Technology Introduction' or the 'Integrated Notice on Foreigner Investment'.
Restricted business categories include postal service, central bank, individual-business mutual aid, pension,
stock and future exchange, other financial market management, clearing house. Also legislative,
administrative, judiciary, foreign diplomatic missions to Korea, and other international and foreign
organizations are also restricted categories. In terms of research and development of economics, or other
research and development on liberal arts and social science, foreign investment is also restricted, as much as
20
Invest KOREA, Guide to Foreign Direct Investment in Korea, 2010, available at
http://www.investkorea.or.kr/InvestKoreaWar/work/ik/eng/lr/lr_main.jsp?num=2
educational organizations (infant school, primary and secondary educational institutions, special educational
institutions). Last but not least, the limitation is also put on artist; religious organizations; organizations of
industries, experts, environment movement, politics, labor movement, etc.
Business categories where foreign investment is restricted include postal service, central bank, individualbusiness mutual aid, pension, stock and future exchange, other financial market management, clearing house.
Also legislative, administrative, judiciary, foreign diplomatic missions to Korea, and other international and
foreign organizations are also restricted categories. In terms of research and development of economics, or
other research and development on liberal arts and social science, foreign investment is also restricted, as
much as educational organizations (infant school, primary and secondary educational institutions, special
educational institutions). Last but not least, the limitation is also put on artist; religious organizations;
organizations of industries, experts, environment movement, politics, labor movement, etc.
The Korean government enforces, if applicable, the restrictions on foreign investment by capping the number
of stocks that foreigners can acquire. To enhance transparency in foreign investment restriction, the Korean
government enforces the Consolidated Public Notice for Foreign Investment. This system is to help
foreigners easily understand changes made in the laws and regulations relevant to foreign investment as the
Korean government consolidates such changes and places public notification every year. Foreigners are not
allowed to invest in the companies that are engaged, in any way, in businesses where foreign investment is
prohibited and/or partially permitted. In the case where a foreigner intends to invest in a company that is
engaged in more than two businesses where foreign investment is limitedly permitted, the foreigner cannot
invest exceeding the investment ratio prescribed for the business with the lowest ratio for foreign investment
permission. However, a foreigner can invest in a company engaged in foreign-investment restricted business
if only the sales revenues of the restricted business are less than 1 percent of its total sales amount.
Nevertheless, in case the company's revenues from the restricted business exceed 1 percent of its total sales
amount after the foreigner purchases its stocks, the foreigner should transfer his/her stocks in the company to
a Korean national or a Korean corporation within six months from the settlement of its account.
IV. THE REVIEW PROCESS AND PROCEDURES
China
According to PRC law, the foreign invested projects should be submitted to NDRC or its local branches for
the project review (if necessary) and the contract and articles of association (the "AOA") should be
submitted to MOFCOM or its local branches prior to registration with SAIC. The following chart shows
which level of government approvals should be obtained:
Sector
Investment Amount
MOFCOM
Encouraged
Less than USD300 million
Provisional or local Provisional or local
or Permitted
Restricted
MOFCOM
NDRC
USD300 million and above
Central MOFCOM
Central NDRC
Less than USD50 million
Provisional or local Provisional or local
USD50 million and above

NDRC
MOFCOM
NDRC
Central MOFCOM
Central NDRC
For projects under the encouraged and permitted categories with an investment exceeding US$100
million (including US$100 million) and projects under the restricted category with an investment exceeding
US$50 million (including US$50 million), the report must be examined by the State Development and
Reform Commission before submission to the Ministry of Commerce of the PRC for approval.

For projects under the encouraged and permitted categories with an investment exceeding US$500
million (including US$500 million) and projects under the restricted category with an investment exceeding
US$100 million (including US$100 million), the report must be examined by both the State Development
and Reform Commission and Ministry of Commerce before submission to the State Council for approval.

For projects not included in the aforementioned categories, the report has to be examined and subject
to approval by provincial, autonomous region or municipalities authorities.

Moreover, for the approval of an investment company by MOFCOM, if its registered capital is less
than USD300 million, the approval level should be provisional or local MOFCOM, and only if its registered
capital is or exceeds USD300 million it should obtain the approval from central MOFCOM.
The basic approval process is that an FIE may be established only with the approval of the Chinese
government. The approval process for forming new entities or for acquiring existing companies (thereby
converting them into FIEs) is largely the same. The approval process begins with a name reservation
application to the SAIC to check on the proposed name for the FIE. After the company name has been
reserved, the applicant must obtain substantive examination and approval of the investment by MOFCOM.
Examination and approval by MOFCOM is the key stage in the approval process. It requires submission of
the full definitive documents for the proposed FIE to MOFCOM, and may also require a feasibility study
report describing background on the project, along with other supporting documents. MOFCOM has the
flexibility to request documents not expressly set forth in the statutes if they believe such documents would
be helpful to its decision.
Investment Review Procedures
Source: US Government Accountability Office, Foreign Investment, 2008
Project Verification from NDRC is technically required for any foreign investment project, but in practice,
the NDRC's approval is critical only in certain industries, such as automotive industry, oil exploitation
industry, etc. After approvals from MOFCOM and NDRC (if necessary), the FIE may be registered with
SAIC for issuance of a business license. Under PRC law, the date of issuance of the business license is the
date of incorporation of a company. After obtaining the business license, the FIE should complete remaining
registrations with relevant authorities including branches of State Administration of Foreign Exchange (the
"SAFE"), General Administration of Customs of the People's Republic of China (the "Customs") and State
Administration of Taxation ("SAT"), etc.
For some industries, the FIE should obtain special approvals. Environmental approval from State
Environmental Protection Agency (the "SEPA") may be required prior to applying to MOFCOM for
manufacturing enterprises, or for any investment project that entails a construction project. Before
registration with SAIC, for companies involving food or pharmaceutical production, they have to get the
approval from SFDA. Some typically regulated industries (including, for example, securities, banking and
insurance) involve special approval regimes in addition to, or in place of, MOFCOM examination and
approval. CSRC reviews applications to set up or acquire securities companies, CBRC covers banks, and
CIRC reviews insurance company applications.21
The Netherlands
The Netherlands possesses no review process for foreign investment, and according to Dutch government
officials, the Netherlands lacks the general authority to block investment. Foreign and domestic companies
are treated equally under Dutch law, and regulations for mergers and acquisitions apply to domestic as well
as foreign investment. Foreign investment, like domestic investment, must go through an anti-trust review.
However, these reviews do not provide the Dutch government the authority to block investment upon
national security grounds, according to government officials. The one exception is in the financial sector, in
which the Netherlands Central Bank, and in some cases the Finance Minister, can block mergers and
acquisitions.
The Financial Supervision Act establishes the authority for the Netherlands Central Bank to review and grant
approval to all mergers and acquisitions involving Dutch companies in the financial sector, including banks,
management companies for collective investments, investment firms, and insurance companies. For a
transaction involving one of the five largest banks in the Netherlands, the transaction must receive approval
from the Ministry of Finance. When a company acquires at least 10 percent ownership of a Dutch company,
the investor must apply to the Netherlands Central Bank to receive a “declaration of no objection.”
According to Dutch government officials, this application can be submitted after a transaction has been
completed. The Netherlands Central Bank performs a review of the transaction and decides whether or not to
issue a declaration of no objection. In the case of the five largest banks, the Netherlands Central Bank makes
a recommendation to the Finance Minister, who has the authority to issue the declaration of no objection.
The Netherlands Central Bank or the Finance Minister can effectively block a transaction by refusing to
issue this declaration. The Bank or Finance Minister has 3 months from the date of application to render a
decision. The review and approval process in the financial sector is primarily intended to determine whether
any financial mergers or takeovers would lead to undesirable developments in the Dutch financial sector.
Korea
Regarding Korea, the general procedure for making an investment consists of a simple application and
registration process. The investor makes report to the Minister of Commerce, Industry and Energy indirectly,
though Invest KOREA, which is actually conducted directly by Invest KOREA, the official comprehensive
national investment promotion agency (IPA) providing one-stop service to foreign investors. The investor
then registers the corporation or the private company with the Ministry of Knowledge Economy. Afterwards,
21
Tiger Tong Xiaohu, China Business Guide 3rd ed. (China Knowledge Press Pte Ltd: 2005) at 164.
the investor provides the Ministry with information/details about the business.22 More precisely, each type of
foreign investment defined in Chapter 2 of FIPA entails a specific set of procedures that is detailed in the
following sub-sections.23

Acquisition of New Shares: Any foreigner who intends to undertake a foreign investment by acquisition
of shares newly-issued by a Korean company must file a notification in advance with any branch of a
foreign exchange bank, a designated foreign bank, or Invest KOREA of KOTRA.

Acquisition of Issued and Outstanding Shares: Any foreigner who intends to undertake a foreign
investment by the acquisition of outstanding shares issued by a Korean company must file a notification
in advance with any branch of a foreign exchange bank, a designated foreign bank, or Invest KOREA of
KOTRA. Any foreigner who intends to undertake a foreign investment by the acquisition of outstanding
shares issued by a corporation operating in the defense- industry business must obtain the approval of the
Ministry of Knowledge Economy in advance.

Acquisition of Shares by Merger or Consolidation: Any foreigner who undertakes a foreign investment
by the acquisition of shares by merger or consolidation must file a notification with any branch of a
foreign exchange bank or a designated foreign bank, or Invest KOREA of KOTRA, within 30 days after
the acquisition.

Foreign Investment through Long-term Loan: If a loan with a maturity of five years or more is extended
to a foreign-invested company by its foreign parent company or by a company having an affiliation with
the said foreign parent company through capital investment meeting certain conditions, then the foreign
investor must file a notification in advance with any branch of a foreign exchange bank, a designated
foreign bank, or Invest KOREA of KOTRA.
United States
In July 2007, the Foreign Investment and National Security Act of 2007 (FINSA), entered into force, revising
US national security reviews of foreign investment in US companies. FINSA authorizes the President of the
United States to “suspend or prohibit” any foreign acquisition, merger or takeover of a U.S. corporation that
is determined “to threaten the national security of the United States. It does so by giving the power to screen
investment to the CFIUS. The CFIUS is an interagency committee, chaired by the secretary of the US
treasury, which reviews the national security implications of foreign investment in US businesses. It was
established by President Gerald Ford’s executive order in 1975.
FINSA statutorily established CFIUS and formalized the process under which CFIUS conducts national
security reviews of “covered transactions.” The “covered transactions” subject to CFIUS review are broadly
defined by FINSA to include “any merger, acquisition or takeover that is proposed or pending after August
23, 1988, by or with any foreign person which could result in foreign control of any person engaged in
22
Foreign Investment Promotion Act, Chapter 2 and 5, available at http://untreaty.un.org/cod/avl/pdf/ls/Shin_RelDocs.pdf
Invest KOREA, Foreign Investment Procedures, available at
http://www.investkorea.org/InvestKoreaWar/work/ik/eng/bo/bo_01.jsp?code=102041602
23
interstate commerce in the United States. In particular, transactions involving “critical infrastructure” and
“critical technologies” are identified by FINSA as matters subject to CFIUS national security review.
FINSA sets forth the actions to be taken by the President, should he find that there is “credible evidence” to
support a belief that a foreign person might take action, which threatens to impair U.S. national security.
These prescribed protections include suspension or prohibition of such transaction and other appropriate
relief, including divestment. FINSA further provides increased oversight by Congress, which includes a
required annual report of CFIUS reviews and investigations.
After receiving formal notification from the parties, CFIUS has 30 days to decide whether the transaction
presents significant issues that would require an investigation. If CFIUS concludes at the end of this period
that the transaction does not threaten to impair the national security, the review is terminated and the
transaction is cleared.
Under FINSA, CFIUS must conduct a 45-day investigation if:
(i) the lead agency and CFIUS determine
that the transaction threatens to impair US national security, and the threat was not mitigated during the
initial 30-day review;
(ii) the acquirer is controlled by or acting on behalf of a foreign government (subject
to an exception for a finding of no threat to national security within 30 days by the chairman of CFIUS and
the lead agency): or
(iii) the transaction could result in a change of control of critical
At the conclusion of the investigation or the 45-day period, CFIUS customarily prepares a report to the
president and can recommend that the president block or unwind the investment. The president must act
within 15 days of receiving CFIUS’ report. Historically, the president has followed CFIUS’
recommendations, and each recommendation to the president has had the unanimous support of the CFIUS
member agencies.
V. RECOMMENDATIONS FOR VIETNAM
The Vietnamese law disciplining foreign investment is not clear as regard to the kind of investments that are
allowed. Rather the law differentiates between direct and indirect investment, being the distinction beads on
the participation of the investor to the management of the investment (the IMF Balance of Payment Manual
provides similar distinction). In doing so the law nonetheless fails to specify at what level of control is
necessary to be considered as a direct investor. In the Japanese legislation forein investment is distinguished
from portfolio not by looking at the control of the firm but, rather, by looking at the tipes of transaction
covered. Capital movements (loans, purchase of securities, bonds and equities, etc..) are considered as
portfolio investment and have their own regulatory framework distinguished from FDI. If Vietnam wants to
treat differently FDI from Portfolio, it should provide a distinction based on the types of transaction covered,
or provide a threshshold for the control of the company (ie. 10% or more of shares).
In Vietnam the procedure to obtain an investment certificate is complex and may involve a number of
agencies at various levels of Government. According to the 2005 Law on Investment the authority to issue
investment certificates has been decentralized to the provincial level. Investment certificates are now issued
either by the province’s People’s Committee or by the Management Committee of a zone, if the investment
is located in a zone. The decentralization of licensing authority to provincial authorities has streamlined the
licensing process and significantly reduced processing times; however, it has also given rise to considerable
regional differences in procedures and interpretations of relevant investment laws and regulations. The
procedure to obtain investment certification is complex, requiring investors to get approval from several
ministries and/or agencies, depending on ownership (foreign or domestic), size and the sector of investment.
Administrative procedure is consistently an issue for foreign and domestic investors. Foreign investors often
complain that investment license granting procedures are complicated and time consuming. From a policy
point of view, the benefit of decentralization has some negative impacts on the ability of MPI to control and
organize the inflow of investment to more productive areas. Indeed, the current law, which provides one-byone project registration and appraisal regimes should be reviewed for adjustments and complements to be
replaced with a controlling mechanism over investment inflows and outflows into the economy.
The Ministry for Planning and Investment should take responsibilities in evaluating and allocating the
investment according to a more precise economic plan, in order to enhance and maximise the benefits of
investment in all the strategic sectors of the economy. From a regulatory point of view, there are various
overlaps between legislations, such as the law on investment, land, construction, environment, real- estate
business that would require harmonization and coherence.