LAND POLICY - THE TURN POINT TO THE RENOVATION IN VIETNAM

LAND POLICY - THE TURN POINT TO THE RENOVATION IN VIETNAM Prof. Dr.Sc. Dang Hung Vo M.Sc. Do Duc Doi Ministry of Natural Resources & Environment I. GENERAL OVERVIEW Before 1986, when Vietnam s economy was State-subsidized, the State not only played its role in legislating, executing and judiciary but also directed economic activities. The administrative system directly managed state-owned enterprises as well as community-owned economic organizations. The major labour force in agriculture was agricultural cooperatives, while in industry and services it was stated-owned enterprises. Inputs of all production and trading processes including lands, natural resources, capital, and labours were provided by the administrative system based on askgive mechanism. The State allocated land free to individuals and organizations after considering their requests and recovered this land if they could not use their lands properly. Therefore, land had no price. The State only allowed transferring of construction units on land, and land is attached to those units. The only function of land administration system was surveying agricultural land areas to facilitate calculating agricultural land tax, a major income from land of the State budget. During 30 years of warfare, this mechanism was proved efficient. However, after 1975, Vietnam stepped into a new period when economic development became the main focus. From this point, many shortcomings of the State-subsidized mechanism had come to light as there was no motive power for the economy. In the period of 1975-1980, agricultural cooperatives poorly operated, agricultural production dramatically decreased and food shortage happened in many areas. Stated-owned enterprises in industry and service sectors had also no effects. In 1986, the State of Vietnam initiated an overall renovation policy starting with economic reform and affirmed its commitment to a market economy operating under the state management. The market economy system is recognized as the major driving force for economic development. The first renovation implemented in 1986 was boosting up agricultural economy by allocating agricultural cooperatives land to households for stable permanent uses. Policies on agricultural land were adjusted, and the legal system on land was established based on the first Land Law issued in 1987. The land administrative system was reconstructed in such a way that focused on facilitating the agricultural land allocation to households. After five years in practice, the State further renovated policies on agricultural land by conceding the market of land use right, hence encouraged land consolidation for mass production of agriculture. This was the main content of the second Land Law issued in 1993. The above renovations have resulted in proven successes: in 1990, Vietnam has become a country of the 3 biggest rice exporting countries in the world for the first time, and to date, it is 1

amongst the top countries in exporting agricultural products such as coffee bean, peppercorn, shrimp, fish, etc. In 1994, Vietnam started its industrialization and modernization process based on the development of industrial and service sectors with the goal to become an industrialized country in around 2015. At this point, land policies had two main focuses: (i) establishing an appropriate mechanism to make more land for nonagricultural uses from a certain part of agricultural land in principle of assuring the social, economic and environmental benefits of transformation; and (ii) making land to be an internal resource for development of the investment through the inter-connection channel between the real estate market and the capital market, mostly by land mortgage and land securities. In the period of 1994-2003, the Land Law did not focus on managing non-agricultural lands, and these types of land are regulated by the Government s decrees. However, the third Land Law issued in 2003 has focused on non-agricultural land and the transformation from agricultural land to non-agricultural land. This Land Law improved four major tools: the legal system, land use planning system, land finance system, and land administration system, for managing land in the real estate market. To date, Vietnam s economy has grown rapidly with the average annual growth rate of about 8, national GDP of 2006 was 60 billions USD, and the contribution of non-agriculture sectors to the economy was about 80. The real estate market is also expanding remarkably, and attracting a big amounts of investment, both domestic and oversea. However, in 2007, the real estate market has the status of 'overblown', leading to a serious 'hot fever of land' as the State was unable to adjust the market by its policies. Land price in big cities centers is amongst the top price in the world (the highest price is about 60,000 USD/1m 2 ), whereas the GDP per capita is amongst the lowest group of the world (about 600 USD/year). The current real estate market is posing risks to the sustainability goal in the country s development process. II. THE RENOVATED POLICY OF LAND FOR AGRICULTURE DEVELOPMENT During 1975-1980, the average food production of Vietnam is only about 13.5 million tons/year. The production slightly increased to 16.5 million tons/year during 1981-1985. In 1986, Vietnam carried out country renovation - 'Doi Moi' with a breakthrough in land policies: agricultural cooperatives lands were allocated to households for stable permanent uses, thus creating a new motive for agriculture production. The first Land Law (1987) which came into force on January 1 st, 1988 legalized the land allocation to households as land users and issued the land use right certificate (LURC) to land users as the legal basis for land use. It expanded the opportunities of farmer households, who started to enjoy land use rights and had much greater choice on how to best use own land parcels with the better investment. The new policy had a profound effect in raising agricultural production and productivity, mostly rice production. 2

After five years of country renovation, the need of land consolidation for household farmstead and mobilizing a part of agricultural labour force to industry-service sectors became more apparent. The State of Vietnam took the next step of land policy renovation by: (i) conceding land price, although it was defined by the State; and (ii) the Land Use Rights could be legally transferred, exchanged, leased, mortgaged and inherited. The second Land Law (1993) which came into force on October 15 th, 1993 legalized the above renovation on land policies. Following the Land Law (1993), a number of measures were applied to encourage land consolidation and re-planning of farming areas along with improving rural infrastructures such as transportation, irrigation, electrical supply, and etc. Some typical successes were: (i) many farms (household and multi-household) on aquaculture, forestry, and agricultural products processing were built; (ii) a part of agricultural labour force in rural areas was moved to non-agricultural sectors such as mechanical services, irrigation, electrical supply, transportation, pesticides supply, etc.; (iii) most of households got money to invest into agricultural production by mortgaging their land use right to credit funds. Land use right has been legally accepted on the market transaction. However, the land price assigned by the State is usually much lower than the market price, making the ask-give mechanism continue to persist. The continued renovation on land policies has become the main force to improve agricultural production and productivity. Vietnam and Thailand are two South East Asian countries amongst the top 3 biggest rice exporters in the world. Table 1 shows rice production/productivity in the period of 1991-1997 of Vietnam compared to that of Thailand. Table 1: Rice production/productivity of Vietnam and Thailand Year 1991 1992 1993 1994 1995 1996 1997 Rice Production tons) Vietnam 19.6 21.5 22.8 23.5 24.9 26.4 27.6 Thailand 19.8 20.2 19.1 19.7 19.0 20.0 19.8 Rice Productivity (100kg/ha) Vietnam 31.1 33.3 34.8 35.6 36.8 37.7 39.0 Thailand 20.52 19.58 21.28 21.1 21.3 21.2 21.0 To date, land policies for agricultural sector have been considered stable, agricultural production and productivity have been kept at high level, and many agricultural products of Vietnam have become favorite products in the international market. The State is trying to encourage technological initiatives and agricultural mechanization, electrification, and irrigation to make a new motive for agricultural economic development and rural modernization. 3

III. THE RENOVATED POLICY OF LAND FOR INDUSTRIALIZATION OF COUNTRY The second Land Law (1993) was an important renovation for agriculture development. Unfortunately, it did not provide a sound basis for land policies which would accelerate industrialization and national economic restructuring in the direction of increasing shares of land and labour for the industrial and servicing sectors. One year after the birth of this law, Vietnam set out a roadmap of country s industrialization and modernization to the year 2000. This induced a series of land issues such as how to make more land available for the projects of basic infrastructure development, industrial zones building, and new urban areas construction?; how to satisfactorily compensate, resettle and create new jobs for the farmers whose lands were recovered to implement non-agricultural development projects?; how to settle land disputes and claims?; how to deal with environmental pollution caused by non-agricultural projects?; or how to develop the real estate market properly?; etc. Meanwhile, land management authorities lacked of a legal corridor to deal with these issues in practice. For this reason, Standing Committee of the National Assembly promulgated two ordinances on rights and obligations of domestic organizations using land and of foreign organizations and individuals renting land in Vietnam. The Government also promulgated a number of decrees to managed non-agricultural land uses. Based on these ordinances and decrees, the National Assembly amended and supplemented the Land Law in 1998. The Land Law was further amended and supplemented in 2001 respecting to decentralization of land administration. In ten years, the implementation of the second Land Law (1993) and its amendments and supplementations exerted positive impacts promoting the country s industrialization. However, policies on land still have several shortcomings as the follows: 1. Land prices defined by the State were much lower than that on the market (normally around 1/10 of market prices). Virtually, the State has continued to subsidize land prices, thus intensified the corruption in land management and speculation in land use. 2. Real estate market could not develop since economic organizations were kept out of land transaction. Enterprises had only land leasehold right from the State (land leased by the State), but did not have land freehold right from the State (land allocated by the State). Therefore, they could only transact their properties invested on land, but could not transact the land use right. From 1998, enterprises have been allocated with land in an indefinite period of use time either: (i) to construct dwelling house for sale/lease, (ii) to get back their investment in infrastructure (the 'exchanging land for infrastructure' mechanism will be described minutely in the paragraph 4) 4

3. The State gave its enterprises excessive favours such as allowing these enterprises to used land leased by the State as their own properties for capital contribution in joint venture with foreign investors. 4. The State allowed implementing 'exchanging land for infrastructure' mechanism based on the principle that investors have to invest in developing infrastructure; the State will then, as an equivalent, valued the infrastructure and allocated land to investors for residential or production use in an indefinite period of time. This mechanism acted as an important inter-connection channel between capital market and real estate market, making land to be an invested capital. Unfortunately, the State caused huge loss to itself by setting a very low price of land, and helped investors to gain 'super' benefits from land. 5. There were big obstacles in practice when the State recovered lands to lease or allocate to investment projects. Firstly, land prices stipulated by the State were much lower than the market prices, making users of recovered land to protest against value of land compensation and raising land complaints (land complaints contributed to 70 of the total disputes in the country). Secondly, many investors unfairly made benefits from this mechanism by setting up 'fake' projects to arrogate lands from other people, and many managers made corrupt use of their authorized competence recovering land to use for their own. Land corruption, by this way, became more and more serious. 6. During the first years implementing this new law, administrative procedures for land recovery, land allocation, land lease were burdensome and inappropriate with land use in practice. For example, it is regulated that the recovery, allocation and lease of land areas over 1 hectare to investment projects are put under the direct authority of the Prime Minister, while that of land areas under 1 hectare under the authority of provincial People Committee s President. After ten years in implementation from 1993 to 2003, the new land policies for non-agriculture land use was proven inappropriate with the market economy. A number of motive forces for development were created, but still insufficient. Investors heavily depended on land that were directly decided by the State, and they had no rights in land transactions. Consequently, the real estate market poorly developed, whereas the disparity between the land prices defined by the States and the market land prices unintentionally intensified land corruption, speculation, and complaint. In 2001, the State started to implement the project 'Summarizing 10 years implementing land legislation and land policies' to put forward new land policies thus creating new dynamics for the country s industrialization and modernization. As a result, the third Land Law was adopted by the National Assembly in the end of 2003 and came into force on July 1 st 2004. The Land Law (2003) puts forward a number of new policies on land as the follows: 5

1. It clearly defines a legal framework for people s ownership regime on land, and specifies the State s decision making authority on land use planning (the State determines land use purpose), on land recovery, allocation and lease for the projects using land which aimed at preserving national interests, community interests, national defense, security and some kinds of projects for economic development; the State gives land users the rights of land exchange, transfer, donation, inherit, mortgage, and land contribution as capital. 2. It provides specific regulations to solve complicated, historical induced land issues, principally by no reconsideration of all the pre-existent administrative decisions but reviewing civilian relationships on land such as land lend, land lease, house care offer, etc. to make proper judgment in accordance with the Civil Code. 3. It fully renovates land financial systems based on 'one price of land' principle, meaning that State-defined price of land is equal to the market price of land at normal condition. 4. It eliminates land favours given to State-owned enterprises, makes up equality on land use between the domestic enterprises from different economic sectors, and makes up also economical equality between the domestic investors and foreign investors. In cases using land for residential or commercial purpose, domestic enterprises can choose either using land allocated by the State with the land use fee payment or lease land from the State with the rental annual payment; foreign enterprises can choose lease land from the State with either the rental payment for the whole leasing term or with the rental annual payment. Domestic enterprises that pay land use fee for land allocated by the State have the same rights and obligations with foreign enterprises that pay rental for the whole leasing term. The only difference in terms of land use between domestic and foreign enterprise is that foreign enterprises can not transfer land use right, can not lease land as well as receive land as capital contributed from households or individuals. 5. Land parcels are put under the direct management of local authorities, in which provincial People Committees are authorized to make decision on lands used by the organizations, and district People Committees are authorized to make decision on lands used by the households, individuals and communities. 6. Land mortgage is encouraged, and land mortgage registration procedure is simplified. However, land users can not mortgage land to foreign banking organizations. 7. Land use planning is improved to be more appropriate with the market mechanism and to assure social, economic and environmental benefits. 8. It restricts the State s authority in land recovery for economic development projects. The State has the right to recover land only for the development projects of urban area, industrial zones, economic zones, high technology zones; for the invested projects with the 100 foreign direct investment; and for the industrialservicing production projects with the domestic investment at high level, otherwise 6

investors must directly get land by transfer, by rent or by land contribution as capital. 9. It fully renovates the mechanism of compensation, support, and resettlement for the people whose land recovered by the State: compensation by land is prioritized over compensation by money, and if compensation by money is applied, compensation amount will be based on the market price of land; farmers whose land area is recovered over 30 of their agricultural land would have compensation by non-agricultural land and free training for new jobs; people whose residential land is recovered would be resettled at sites with better living conditions. 10. It fully renovates whole the land administration based on: (i) moving a big part of the administrative works to land registration system operated by the Land Registration Office, a public service organization, (ii) providing specific regulations to promote transparency of land use registration in LURC issuing procedure, in land transaction procedure, (iii) apply administrative penalties to State officials who broke the laws or harassed people/organizations at administrative works. 11. It renovates settlement mechanism of land disputes, land complaints on administrative decisions, and denouncements on land corruption based on principles that procedures must be transparent, time-limit must be fixed, authorities and responsibilities must be specific, and results must be publicized. The above mentioned land policies positively impacted on the speed up in the country s industrialization and modernization. Domestic and foreign investments significantly increased. The real estate market rapidly expanded and had higher proportion in the economy. More industrial zones, economic zones, high technology zones, new urban areas are constructed throughout the country. The growth of non-agriculture sectors in Vietnam in the period of 2003-2006 is represented in the following tables. Table 2: Investment by ownership in the period of 2003-2006 Investment in Vietnam in the period of 2003-2006 Total Investment Investment from State owned sector 7 Investment from non-state (domestic) sectors Foreign Direct Investment (FDI) 2003 14953 7910 4649 2394 2004 18183 8739 6860 2584 2004-2003 3230 830 2210 190 2005 21446 10102 8150 3194 2005-2004 3263 1363 1290 610 2006 24931 11569 9406 3956 2006-2005 3485 1467 1256 762

Table 3: Structure of GDP by economic sectors in the period of 2003-2006 2003 2004 2005 2006 2004-2003 2005-2004 2006-2005 TOTAL 21015 22652 1637 24564 1912 26571 2007 Agriculture 4427 21.1 4620 20.4 193 4806 19.6 186 4969 18.7 163 Industry 8087 38.5 8914 39.4 827 9867 40.2 953 10890 41.0 1023 Services 8501 40.5 9119 40.3 618 9892 40.3 773 10712 40.3 820 Table 4: Structure of GDP by ownerships in the period of 2003-2006 2003 2004 2005 2006 2004-2003 2005-2004 2006-2005 TOTAL 21015 22652 1637 24564 1912 26571 2007 State sector 8635 41.1 9304 41.1 669 9990 40.7 686 10625 40.0 635 Non-State sector 10031 47.7 10729 47.4 698 11609 47.3 880 1265 47.3 956 Foreign investment 2349 11.2 2619 11.6 270 2966 12.1 347 3381 12.7 415 The above table indicates that total investment in Vietnam in the period of 2003-2006 slightly increased year by year, wherein State sector s investment increased, non-state domestic sectors investment decreased, and foreign direct investment (FDI) significantly increased. One can say that eliminating the ask-give mechanism in land does not satisfy the non-state domestic investors, creating equality in rights and obligations on land between domestic and foreign investors satisfies strongly the foreign direct investors. Structure of GDP by economic sectors shows that Vietnam s economy development has recently moved towards an industrialized country with industry s contribution of over 40, service s contribution of over 40 and agriculture s contribution of around 19. Structure of GDP by ownerships shows that State sector s contribution is of about 40 and slightly decreasing, non-state sector s contribution is of about 47 and increasing, foreign direct investment s 8

contribution is of only about 12 and significantly increasing. It is concluded that the land policies renovation has accelerated the country s industrialization. The renovation of land policies was comprehensively performed in all four land and real estate market management tools which are law, planning, finance, and administration. However, development and implementation of the legislation system on land still be challenged by the following issues: 1. The renovation of the four above mentioned land management tools was asynchronous: the land legislation system and land administration system were rapidly improved but not land finance system. To date, non-agricultural land use taxation has no changes compared to that of the state-subsidized economy, and the land use planning system has not been developed conformably with the market economy mechanism. 2. Land policies and land legislation have always been developed in accordance with the country sustainable development direction. However, the real estate development policies and legislation are not synchronous themselves, there is a lot of the legal conflicts, causing difficulties in applying these laws and policies in practice. Moreover, in the land legislation system, there are some differences in the rights and obligations on land between foreign investors and domestic investors. These differences must be adjusted to be in accordance with Vietnam s commitments joining the World Trade Organization (WTO). 3. Land use planning system is inflexible, not conformable to the market mechanism, and lacks of a specific quantification measure to assess its effectiveness in social, economic and environmental aspects. It is popular that land use planning and construction planning and socio-economic development planning are not synchronously developed. 4. The State controlled land prices still somewhat differ to the market prices (land use fee is about 70 of market price of land, State s land rental payment is only about 30 of market rental price of land), while there is no legal corridor for the land valuation activities. The land price disparity keeps raising the land complaints, land disputes and existing of the ask-give mechanism in land. Tax posed to land transfer is 28 of income for enterprises and 25 for individuals. Tax posed to agricultural land use is waived for land area under land use area limit, and deducted for land area over land use area limit. However, tax posed to nonagricultural land use and attached properties is not adjusted accordingly. The current non-agricultural land use tax (excluding tax for attached properties) for lands of highest price is as low as 1.6 kg rice/1m 2 /year. This taxation for nonagricultural land with attached properties has lead to land speculation. 5. The land administration system was thoroughly renovated towards enhancing transparency, publicity and simplicity to encourage public registration of land transactions and reduce corruption in land management. However, local authorities do not strictly observe these renovations. Consequently, land use certificate issuing 9

and land transaction registration is not transparent, while corruption in land management is not eliminated. IV. CONCLUSIONS In Vietnam, land policies and land legislation have become a breakthrough in the country s renovation and a main motive force for agricultural and rural development. Presently, land laws and policies play an important role in the country s industrialization and modernization. However, the current policies on land still have many shortcomings which could negatively affect the sustainable development. Policies on land finance have been insufficient to eliminate weaknesses in land management such as land corruption and speculation, and unreasonable compensation for land recovery. Land use planning has not harmonized economic development, social development and environmental protection. Land administration system has not yet provided transparent civilian relationships between the State and land users and between the land users. At the end of 2007, a new 'hot fever of land-house' started to raise in big cities of Vietnam, making land prices in Hanoi and Ho Chi Minh city to go on top of the world while the average income per capita is still in bottom group of the world. This land fever is expected to flare up since there is a big 'virtual demand' from land speculation. Dwelling house construction and commerce is bringing 'super' profits to investors, thus attracting huge investments into the land-house market. In 2006, the economic growth of Viet Nam is 8,17 with the inflation of 6,60, and in 2007, the economic growth is 8,48 but the inflation is 12,63. The 'hot fever of land-house' is one of the main reasons to increase the current inflation. An economic disaster will happen if the real estates market s over-blow is not timely prevented. REFERENCE: 1. Statistic Database of the Viet Nam General Department of Statistics. 2. Land Legislation System of Viet Nam from 1987 to 2007. 10