Organization of the study

Chapter 1

Introduction and Methodology
1.1 Introduction
1.1.1 General background
Many economic changes have been introduced in Vietnam in the last ten years.
The centrally planned economy dominated for more than 40 years, but had not helped
improve the nation's welfare. Since 1986, certain economic reforms have been
launched and have put the economy in an encouraging position. The market oriented
economic model is increasingly accepted by Vietnamese citizens from different social
classes.
The changes in the economic structure have had a significant impact on the
operating environment of business which influences decisions on investment projects
due to the presence of risk and uncertainty.
Uncertainty and risk accompany many forms of investment. They are inevitable and
sometimes require complicated analysis before the decisions are made. The return on
projects has to be carefully analyzed taking into considerations the risk characteristics
of the project.

1.1.2 Objectives of the study
The overall objective of this study is:
To highlight the main traits in the operating environment of business in Vietnam,
while focusing on financial aspects in analyzing risk and return in project
financing.
To achieve this, the specific objectives are as follows.
1. Carry out a literature review with a view towards developing a conceptual model
for risk and return as well as methods dealing with risk.
2. Based on secondary data collected from various sources, prepare a brief on the
situation of project financing in Vietnam.
3. Based on findings, compare theoretical procedures with real practice and
attempt to develop a model for risk-return analyses in project financing

4. Draw conclusions and make recommendation.


2

1.2. Methodology
The researcher aims first to conduct a review of the literature in order to highlight
the following issues:
v Project financing - Concept and definition
v Different kind of risks in project financing
v Methods of dealing with risk

An analytical framework for risk and return analyses will be presented to support
methodology as guideline for next sections.
The researcher also examined secondary data through in order to describe the
operating environment of business in Vietnam with respect to risks associated to and
return on investment projects. Some major points are named below.
v Legal infrastructure and investment situation
v Banking systems and financial institutions (briefly)
v Project financing in the Vietnamese context

One of the main parts of this research is to study two cases typical for the housing
business, with the focus on private sector. The direct interview is supported by a set of
questions developed in form of a questionnaire. The case studies rely mainly on the
materials collected on individual project.
The first case study is conducted on the Service Apartments Development project
where the major capital contribution comes from foreign investors. The second case will
look at an Office Building Development project, where the funds come only from
Vietnamese investors.
The author carried out the in-depth interviews concerning 2 projects in order to find

out problems associated with project financing, regarding:
v Parties involved;
v Funding structure;
v Returns expected in relation to risk.


3

Interview of some financial institutions, concerning:
v Lending conditions;
v Interest rate priority and repayment terms;
v Risk and return considerations.

Based on (1) literature review, (2) secondary data about operating environment of
business, (3) case studies on selected projects, and (4) personal interviews made with
some financial institutions, a model is proposed as a guideline for risk-return analyses
in project financing in Vietnam.

µ The scope of the study
Secondary data which are used to highlight main traits of operating environment of
business in Vietnam were collected in Vietnam.
Data collection relating the financing of two hotel projects was carried out in Hanoi
city.

µ Organization of the study
This report begins with the introduction and objectives of the research study in
Chapter 1, then
it presents the methodology for research planning and
implementation. This chapter also presents the organization of the research report in
form of organization chart.

Reviewing literature is carried out in Chapter 2, which provides an overview on: (a)
Parties involved in project financing, (b) Different kinds of risks in project financing, and
(c) Some methods dealing with risks.
Some main traits of operating environment of business in Vietnam are highlighted in
Chapter 3. The basis for conducting this part is secondary data derived from journals,
magazines, reports and other sources.
Two case studies are presented in Chapter 4 and Chapter 5. One is concerned
with service apartments project financed mainly by foreign investors. The other is office
building project funded by local investors.
Chapter 6 makes a comparison between theoretical and practical aspects
regarding project financing in Vietnamese context and attempts to develop a model for
risk and return analyses in project financing within operating environment of business in
Vietnam. This chapter also suggests an breakdown structure of stages in project
lifecycle to be used in combination with the model.
Conclusions and recommendations are made in Chapter 7, which also figures out
the limitation of this research study and provides some suggestions for further
considerations in this topic.


4

Appendices and references are listed at the end of the report.

µ Organization chart of the report
The organization of this report, summarized in the section above, is presented in
form of organization chart (figure 1).


5

INTRODUCTION

METHODOLOGY

LITERATURE
REVIEW
(Conceptual)

SECONDARY
DATA
(Situational)

CASE STUDIES

CONCEPTUAL
FRAMEWORK

CONCLUSIONS
AND
RECOMMENDATION

Figure 1 - The Organization Chart of Research Study Report


6

Chapter 2

Literature Review
Consideration of the risk and return

In project financing
2.1. Project financing - Concept and definition
2.1.1. Definition of project financing
"Project financing is a financing of a particular economic unit in which a lender is
satisfied to look initially to the cash flows and earnings of that economic unit as
the source of funds from which a loan will be repaid and to the assets of the
economic unit as collateral for the loan". [Nevitt,1983]

2.1.2. Interested parties
Project sponsors. They take equity risk in the project and normally have the
highest portion of profit or loss. They are a group of companies and organizations
which identify the market opportunities, then organize and negotiate with other parties
to appraise, invest, subcontract, operate and monitor the project. [Nevitt,1983]
v First group: Corporations, Investment Banks
v Second group: Government agencies, The World Bank (WB), regional

Development Bank (DB), Government Banks
Creditors. They take debt risk in the project and have priority in claim against the
project in the case of default. Creditors can be categorized as senior debtors and
subordinated debtors. They include:
v Commercial banks,
v Institutional Investors,
v Public Investors.

Supplier. The profitability of the project is strongly influenced by the price of
feedstock for project. Relevant uncertainties will be relieved if project gets a long-term
supply contract within certain price limits with supplier. The project-supplier relationship
secures mutual benefit since project is normally a big potential customer for the
supplier.
Buyer. For the project this is potential customer, whose promise to buy output of

the project can greatly enhance the credit of the project. The project-buyer relationship
also secure their mutual benefit because the buyer can be sure about the future supply
to itself.


7

Contractors. They could be construction contractors or operating contractors. Their
ability to complete construction on time and the ability to operate the project effectively
are two of the major concerns of creditors.
Multilateral agencies are government agencies and international organizations
which provide their support to some large projects specially important for the socialeconomic development of a country. The form of this support could be providing of
equity capital, guarantees, concessions, low interest loans, subsidies, and local service,
roads, water, sewers, and police protection.

2.1.3. The process of project financing
µ Preliminary feasibility study
The purpose of this stage is to determine whether the project has sufficient merit to
warrant further expenditure of time and effort to bring it about. Normally, independent
engineering, legal and financial consulting firms are invited to conduct a preliminary
feasibility study, since their judgments are considered subjective and could be easily
accepted by both sponsors and lenders.
A preliminary feasibility study will determine the objectives of the sponsors; review
the plan of the sponsors to see whether the project is both technically and financially
feasible; raise questions and issues which must be answered; and suggest alternatives
ways to accomplish the sponsors' objectives.

µ Planning
In this stage, different scenarios for the financing will:
v be derived based on the preliminary feasibility study and assumptions about

term structure of interest rate, currency exchange risk, inflation risk, debt/equity
ratio, anticipated cash flow, completion risk, political risk, etc.
v be tested and compared to get one optimum funding plan.

µ Arranging the financing
An information memorandum is prepared and presented to prospective lenders with
the following:
v The sponsors and promoters of the project are identified.
v Third party guarantors to the project (suppliers, buyers, contractors, etc.) are
v
v
v
v

identified.
Location of the project.
The estimate of construction cost.
The financial plan
The proposed terms for financing (amounts, maturities, and timing).


8

µ Monitoring and administering the financing
Cost over-runs and completion delays are the major concerns while monitoring the
project during the construction period. Debt must be taken down to match the financial
plan and construction schedule, and estimates to completion must be prepared from
time to time.
Administration of the loan agreements when implementing financing plans involves

monitoring the actual operating cost and economics against the financial plan and
production goals (market, sales revenues).

2.1.4. Sources of funds
The main sources of funds are lenders and sponsors:

µ Commercial lenders include
v
v
v
v
v
v
v

Banks;
Institutional investors;
Commercial finance companies;
Leasing companies;
Individuals;
Investment management companies;
Money market funds.

µ Commercial sponsors are
v Companies requiring products or services;
v Companies supplying a product or material to the project;
v International agencies (WB, DB).

2.2. Different kinds of risk in project financing
Risks related to project financing can be identified separately during various phases

of project lifecycle (Table 2.1).


9

Table 2.1. Project financing risks during various phases of project lifecycle
Development phase
v
v
v
v

Bid risk
Credit risk
Technological risk
Market risk

Construction phase
v
v
v
v
v

Political risk
Exchange risk
Performance risk
Cost over-run risk
Completion risk

Operating phase
v
v
v
v
v
v

Political risk
Exchange risk
Performance risk
Cost over-run risk
Liability risk
Off-take risk

µ Development phase
Bid risk. Because the lenders are not willing to participate in development phase,
sponsors have to provide equity. If the project proposal does not get the approval for
its implementation, the sponsors would loose the money spent in preparing the bid, this
is referred as bid risk. Similarly, financial advisers would have to write off their costs if
project proposal is not accepted. [Nevitt,1983]
Credit risk. This risk refers to sponsors' creditworthiness, which would be
supported by letters of credit from banks. The questions of whether a credit risk or an
equity risk is involved usually arises in connection with the adequacy of the underlying
equity investment in the project, and the risks assumed by the sponsors and third
parties. [Nevitt,1983]
Technological risk. This risk is considered when a new technology is used in a
project. Lenders always try to avoid financing a project using new and untested
technologies on a nonrecourse basis, unless the technological risks can be fully
absorbed by some other parties. The reason is that new technology would increase the

completion risk, cost over-run risk and even the risk of failure of the project.
Market risk. This risk refers to the marketability of a product or service produced
from project operation, and must be considered at the beginning in form of market
survey and research. Competing products, estimated price and volume of the product,
future cash flows, and completion from suppliers closer to the markets, or with less
expensive sources of raw materials, feedstocks or energy are involved in a careful
market study. [Nevitt,1983]

µ Construction phase
Political risk refers to the occurrence of likelihood that a firm will suffer losses
because of political or macroeconomic developments (political risk has the same
meaning as country risk). This risk is difficult to ensure against, although there are
various strategies to avoid it (such as joint agreement with a public partner).


10

Exchange risk. The major concern for international investors is currency and
foreign exchange risk when cash inflows and cash outflows are realized in more than
one currency. Potential losses may occur due to currency fluctuation.
Performance risk. Final responsibility for a project's performance lies with the
sponsors, who may provide performance guarantees. [Nevitt,1983]
Cost over-run risk. Cost over-run plagues many projects, and usually have a stand
by facility which is based on the guarantees from sponsors and the additional capital
from sponsors in the form of subordinated loans or through fixed price contractors.
Completion risk involves both contractors and suppliers at construction phase. To
achieve the completion of the project by a certain date, sponsors often provide
performance incentives and guarantees.

µ Operating phase

Most of the risks at the operational phase can be covered through agreements with
the relevant parties. Operating risks can be taken by the operating and maintenance
contractors through a performance guarantees; cost over-run by the sponsors through
fixed price contractors; off-take risk through take-or-pay agreements or advance
payments; and liability risk can be covered through insurance.
Political risks can be classified into two group: extra-legal versus legal-government
risk and macro versus micro risk. Since political risks refer to the probability of
occurrence of the events (which will cause losses to the firm) in the non-market
(political, economic, and social) environment of business, they are difficult to avoid.

2.3. Methods of dealing with risk
2.3.1. Sensitivity analysis
" Sensitivity analysis is a risk analysis technique in which key variables are
changed and the resulting changes in the net present value (NPV) and the rate
of return are observed." [Brigham,1992]
It is clear that many of the variables which determine a project's cash flows are
based on a probability distribution rather than being known with certainty. If a key input
variable, such as units sold, changes, the project's NPV will also change. Sensitivity
analysis can indicate exactly how much the NPV will change in response to a given
change in a input variable, other things held constant.
The analysis technique begins with the so-called base case situation, which is
developed using the expected values for each input. Then the table describing the
deviation from base level of considered variables will be developed. The values used to
develop the table, including units sales, sales price, fixed cost, and variable cost, are


11

most likely, or base case, values, and the resulting project's NPV is called base case
NPV. Deviation from base level is usually: -10%; +10%; -20%; +20%; etc. All NPVs will

be used to construct the graphs. The slopes of the lines in the graphs shows how
sensitive NPV is to changes in each of the inputs.
Sensitivity analysis is probably the most widely used risk analysis technique,
however it has limitation due to not considering the range of likely values of key
variables as reflected in their probability distributions.
2.3.2 Scenario analysis (Probability analysis)
"Scenario analysis is a risk analysis technique in which "bad" and "good" sets of
financial circumstances are compared with a most likely, or base case,
situation." [Brigham,1992]
Scenario analysis considers both:
(1) the sensitivity of project's NPV to changes in key variables and
(2) the range of likely values of these variables as reflected in their probability
distributions.
In scenario analysis, all of input variables are set for three cases:
(a) at their worst reasonably forecasted values (e.g. worst case scenario);
(b) at their best reasonably forecasted values (e.g. best case scenario); and
(c) at their most likely values (e.g. base case).
The worst case variable values are used to obtain the worst case NPV and the best
case variable values to obtain the best case NPV. The expected NPV can the be
determined based on estimate of the probabilities of occurrence of the three scenarios,
the pi values, as follows.
Expected NPV = p1(NPV1) + p2(NPV2) + p3(NPV3)
Where:

index "1" denotes worst case;
index "2" denotes base case;
index "3" denotes best case.

The standard deviation of NPV (sNPV) and the coefficient of variation (CV NPV) are
determined based on expected NPV and NPV i.

Scenario analysis can provide good information about project's stand-alone risk.
There is however, a limitation of this technique in that it only a few discrete outcomes
(NPVs) are considered for the project, even though there really are an infinite number
of possibilities.
2.3.3. Monte Carlo Simulation


12

"Monte Carlo Simulation is a risk analysis technique in which probable future
events are simulated on a computer, generating estimated rates of return and
risk indexes." [Brigham,1992]
To prepare a computer simulation, the probability distribution of each uncertain
cash flow variable must be specified first. Once this has been done, the simulation
follows the following steps:
1. The computer chooses at random a value for each uncertain variable based on
the variable's specified probability distribution.
2. The value selected for each uncertain variable, along with values for fixed
factors such as the tax rate and depreciation charges, are then used by the
model to determine the net cash flows for each year, and these cash flows are
then used to determine the project's NPV in the first run.
3. Steps 1 and 2 are repeated many time, say 500, resulting in 500 NPVs, which
make up a probability distribution.
The resulting NPV distribution is graphed to determine the expected NPV, sNPV, and
CVNPV for any set of assumptions.
The primary advantage of simulation is that it show the range of possible outcomes
along with their attached probabilities, rather than merely a point estimate of the NPV.
However, this technique has not been widely used in industry. One of the major
problems is specifying the correlation among the uncertain cash flow variables.

2.3.4. Utility theory
"The utility of a sum of money can be defined as its relative degree of
usefulness or desirability to the decision maker".[Merrett,1976]
Utility theory suggest a way of not having to rely on the long-term averages, but still
retaining a probabilistic framework of the analysis in the face of risks which are large
relative to the risk-taker's resources. Utility theory attempts to provide a formal
framework for measuring the subjective value of sum of money in a given situation. It is
not the expected monetary value of a decision that the maker should be trying to
maximize, but rather expected value to him/her, that is its expected utility value.
Experiments have shown that the individual's own utility function is likely to reflect
his/her own risk horizon based on the sum of money he/she is accustomed to deal with
for his/her firm. An executive who often settles issues involving hundreds of thousands
of dollars is likely to have a linear function in the low hundreds of thousands, with the
curve flattening and dipping above and below the positive and negative ends of such
range. His superior, who deals in millions, usually has the same shaped function but his
linear range covers the low millions. The chief executive of this multi-million dollar firm
may think of a two to one on gamble for plus or minus $10 million acceptable, but
applies much heavier weights against losses and gains above and below that mark.


13

Utility theory applies mainly to the few relatively large projects which by definition
have unique features. Further, utility curves can be drawn up only for relatively simple
gambling situations, and these fail to reflect the many complexities

2.3.5. Decision trees
"The decision trees is a network diagram approach to analyzing the value of
information, particularly applicable to investments characterized by high
uncertainty and requiring a sequence of related decisions to be made over a

period of time". [Merrett,1976]
It is possible to take the decision with the information which already exists, but if the
decision maker can obtain more information, he/she may possibly to reduce the degree
of risk attaching to the decision such as project financing. A problem is whether or not
to purchase information about the likely outcome of an investment proposal before
finally committing to one course of action or another.
It is clear that information is rarely free and available. It generally costs both money
and time to obtain. There is unlikely to be certainty that after paying for the additional
information, it will reduce the risk. So the decision maker is faced with an expensive
delay resulting in an uncertain decrease in uncertainty. This delay will only been
justified if it causes him/her to change the decision he/she was going to make anyway
into a better one.
It is possible to display the complexities of such a decision with an information flow
diagram - the so-called decision tree(s). This diagram is applicable to investments
characterized by high uncertainty and requiring a sequence of interrelated decisions to
be made over a certain period of time. The more complex the chain, the more essential
becomes the use of such technique.
The concept of the network diagram is also used where the sequential decisions
which are mapped out do not necessarily involve the purchase of further information.
This display technique helps to outline the options open to a decision maker and the
likely logical action to take at each decision point.
An extension of the decision tree approach to include continuous probability
distribution is a further refinement well worth considering for major projects of a
complex nature.
If a decision tree is used as a master plan in outline for the control of the analysis of
a complex problem, it can be well worth the trouble of its construction. Also its role as a
visual aid to the explanation of a complex plan of action to top management justifies its
use by the planer.

2.3.6. Game theory

"Game theory is intended to provide a logical framework for the study of the
strategies open to the decision maker in the face of total uncertainty. Various


14

objectives can be still studied with an advantage even under these conditions,
such as the minimization of the risk of loss, the maximization of the chance of
gain, or the minimization of the regret the decision maker may suffer from
having not chosen the outcome the turned out to be the best". [Merrett,1976]
Primarily, game theory is concerned with the conditions of limited information which
apply in game situations and is concerned to provide rules for decision taking in
situations in which probability theory is not applicable due to absence of probabilistic
information. The principle of game theory can be explained in following example.
An investor is faced with a number of possibilities A 1, A2, A3, A4, A5, etc., and
there are a number of states of the world possible S 1, S2, S3, S4, etc., whose affect on
each outcome, as measured by an NPV, can be calculated. Where:
+ A1, A2, A3, A4, A5 are the alternatives as different sized hotels proposed to
build;
+ S1, S2, S3, S4 are the different socio-economic situations when the hotels come
in service.
These possibilities could be arranged in the form of a matrix (Table 2.2). There are
some criteria for selecting the size of the hotel: (1) Minimax, (2) Maximax, and (3)
Minimization of the regret.
Table 2.2 NPV under various situations (Ai,Si)
Possibilitie
s
A1
A2
A3

A4
A5

S1
100
200
170
10
(60)

STATES OF THE WORLD
S2
S3
S4
90
180
250
210
110

80
160
240
400
310

70
150
190
380

460

µ Minimization of the risk of loss (Minimax)
The investor should choose the "best" worst case. Arraying the worst cases for
each alternative he gets A3 which is clearly the best choice on this criterion (Table 2.3).

Table 2.3 NPV in the "best" worst case
Possibilitie
s
A1

STATES OF THE WORLD
S1
S2
S3
S4
70


15

A2
A3
A4
A5

150
170
10
(60)

µ Maximization of the chance of gain (Maximax)
Maximax means selecting the most favourable case among the best available ones.

Table 2.4 NPV in the "best" best case
Possibilitie
s
A1
A2
A3
A4
A5

S1

STATES OF THE WORLD
S2
S3
S4

100
200
250
400
460

This would lead to the selection of A 5, since the maximal NPV is 460.

µ Minimization of the regret
The measure of this regret is defined for each entry in the matrix as the difference

between that alternative and the best result for that same state of the world.
Table 2.5 Differential NPV under each alternative (Ai)
Possibilities
STATES OF THE WORLD
S1
S2
S3
S4
A1
100
160
320
390
A2
0
70
240
310
A3
30
0
160
270
A4
190
40
0
80
A5
260

140
90
0
The investor wishes to select the alternative which is likely to result in the least
regret whatever the state of the world may turn out to be. He should therefore array the
largest measures of regret for each alternative and select the alternative with the
smallest of such measures
Table 2.6 The largest NPV difference under each alternative (Ai)
Possibilities
STATES OF THE WORLD


16

S1
A1
A2
A3
A4
A5

S2

S3

S4
390
310
270

190
260

A4 is the best choice on the basis of this criterion. If for some good reason the
investor was to remove A 5 from the possible choices open to him, he must rearrange
the arraying and the best choice would be changed (A3).
It is possible to combine the game theory approach with limited use of subjective
probabilities and this may prove to be a more fruitful line of attack. Suppose there are
two states of the world:
s1 :
s2 :

probability of occurrence of depression period S 1
probability of occurrence of boom period S2 (where: s2 = 1 - s1)

And there are two alternatives open to the investor: A 1, and A2. He has calculated
the outcomes possible under S 1 and S2 and expressed as discounted cashflow (DCF)
yield (or NPV's). Thus:

Table 2.7 Possible outcomes in various cases (DCF yield)
Possibilities
A1
A2

STATES OF THE
WORLD
S1
S2
Outcomes
5%

15%
6%
12%

First the investor tries to find out the indifferent point when both alternatives will
appear equally attractive. The matrix shows that
Expected DCF yield(A 1) = a1 = 5s1 + 15s2
Expected DCF yield(A 2) = a2 = 6s1 + 12s2
Then the condition for indifference is
a1 = a2 Þ 5s1 + 15s2 = 6s1 + 12s2

Þ s1 = 3s2

Since the sum of the probabilities are equal to 1 (e.g. s 1 + s2 = 1), therefore:
s1 = 3/4 or 0.75 and s2 = 1/4 or 0.25


17

the expected outcome of both alternatives are:
a1 = a2 = (5 x 0.75) + (15 x 0.25) = 7.5 %
To choose between A 1 and A2 the investor only has to decide whether, in his view,
S2 has a greater or lesser chance of turning out to be the true state of the world than
25%. Now if he bets the chance of a boom is more than 25% likely, his problem is
solved. A1 must be the better alternative, because any increase in the multiplier 0.25 in
the calculation above will increase the expected value of A 1 and reduce that of A2.
The advantage of this technique is that it provides a statement of what the
probabilities have to be mark the logical break-even point between one choice of action
and another.

2.4. Analytical framework for analyzing risk & return in project financing
Through the reviewing of literature, an analytical framework is suggested to be used
in analyzing the theoretical issues, possible application, and practical problems
associated with the process of project financing (Figure 2).


18

LITERRATURE REVIEW

PARTIES
INVOLVED IN
PROJECT
FINANCING

KINDS OF RISK
IN PROJECT
FINANCING

METHODS
DEALING WITH
RISKS

CONCEPTUAL MODEL
FOR RISK AND
RETURN

CASE STUDY 1
(Foreign investment)

CASE STUDY 2
(Domestic investment)

PERSONAL
INTERVIEW
(Financial Institutions)

SECONDARY DATA
Main traits of Operating
Environment of Business

Figure 2 - Analytical framework for risk-return analysis in project financing


19

Chapter 3
SECONDARY DATA

Main traits of operating environment of business in Vietnam

3.1. Introduction
Under the centrally planned economy, all types of businesses were public 1 and
were theoretically considered as riskless. Risk and uncertainty arise automatically when
the free market economy has been introduced since 1986. The concept of risk is not
familiar to most local managers of both state-owned and private enterprises.
In contrary, foreign investors carefully study political, social and economic situation
to classify the country risks or any kinds of risk possibly related to their business in
Vietnam. Generally, they are concerned with the country's legal infrastructure,
especially laws on foreign investment and land. They also cautiously study the banking

system, which has certain effects on the financing of their investment projects. These
points are reviewed to highlight some features of business environment.

3.2. Situational description of operating environment of business in Vietnam
3.2.1. Legal infrastructure and foreign investment status
µ Legal Infrastructure

Many foreign investors found the overall framework for business transactions and
relations somewhat unclear. However, they need to understand the country's legal
infrastructure, if they wish to benefit from their business. General recognition is that the
legal framework for the commercial transactions and contractual relations, essential to
the effective functioning of the market system, is improving:
v
v
v
v

A commercial code is being prepared, and expected to be passed in 1995;
Legislation of contract law already exists;
Company law for private firms has been enacted; and
Bankruptcy law, passed on Dec. 1993, was implemented since July 1994.

Behind the task of preparing all these economic laws is larger and more difficult task
- the work of developing well-functioning institutions to implement the laws, including
building up the legal profession. [UNDP, 1993]

1

The word "public" was used to refer all State-owned enterprises under centrally planned economy.

20

Legal Institutions:
Legal institutions at several levels are involved in the formulation, issuance, and
implementation of the laws necessary for the reform of the economic system. These
include the National Assembly (NA), the country's legislature; the Standing
Committee (SC) of the National Assembly, which exercises the legislative powers
entrusted to it by the National Assembly; the Government (G), which is the highest
executive organ; the Ministry of Justice (MOJ) and other ministries (M) and agencies
which are charged with the preparation of legislative and governmental acts; the
Courts (C); the State Economic Arbitration (SEA)2, which have bankruptcy powers
under the new legislation; and the Procuracy (P), which supervises the executive in its
implementation of laws.
Law proposal

Law proposing bodies
(G,M,C)

@ Draft Committee
@ MOJ
@ Other ministries
Draft
View

Government

Reviewed Draft

Authorize

National
Assembly

N.A. Law
Committee
Report, View

N.A. Standing
Committee

APPROVAL

Figure 3.1 Legislative process

2

State Economic Arbitration was trasformed into Economic Courts since 1993.