Where is environmental governance in FDI attraction?

Having been working on the Vietnam Provincial Governance and Public Administration Performance Index (PAPI) for eight of its 15 years, research team member Dr. Paul Schuler was thrilled to be present at the last week’s launch in Hanoi of the 2023 results, talking about some improvements in certain dimensions while still outlining concerns.

“It is superb that the Vietnamese government is using this as a tool to improve governance and has allowed this index to continue,” he told VIR. “In general, most research on these different indexes indicates that when governance improves, we tend to see more foreign investors wanting to put money into different provinces.”

“However, citizens are seeing challenges in the environment. This is going to put pressure on businesses to grow in a more environmentally friendly manner. But we do not measure explicitly the degree to which the local governments require businesses to comply with environmental regulations. That is more related to other indexes that look specifically at businesses,” he added.

Environmental governance is one among the dimensions that the PAPI 2023 focuses on. Similarly found in previous years, the 2023 results strongly suggest that hubs of environmental concern remain in the Red River Delta and Southeast regions, where more industrial provinces are located, and the Central Highlands.

Among 16 localities in the low quartile, six are from the Red River Delta and four each are from the Southeast and Central Highlands.

Worse still, all localities scored below 4.3 points on the 1-10 point scale in 2023, below the national highest score of 4.73 points in 2021. Eight localities made significant improvements over the past three years, while 26 others scored lower in 2023 than 2021.

In addition, around 80 per cent of respondents in all cities and provinces agreed that their local businesses did not have to offer additional money to local authorities to bypass environmental regulations. The proportion of agreements increased in 24 cities and provinces, higher than in 2022, but still declined in 35 localities compared to 2021.

The largest on-year drops in the percentage of respondents who believed their local governments did not accept bribes to avoid green regulations (by more than 18 per cent) were seen in Haiphong, Phu Tho, Quang Binh, Thai Binh, and Thanh Hoa.

The PAPI Research Team blamed the perceived lack of local governments’ commitment to environmental protection and the poor quality of domestic water sources as reasons for low provincial scores.

Research team member Dr. Dang Hoang Giang told VIR, “The findings prove that several cities and provinces have yet paid due attention to environment government. This is a big concern. If cities and provinces do not change this, it will negatively affect the country’s effort to implement the net-zero commitments.”

Dr. Duong Trung Y, vice president of the Ho Chi Minh National Academy of Politics noted that, in the common effort of Vietnam to build a constructive and action-oriented government, it is witnessing a strong increase in the role and impact of assessments from individuals and businesses on the operation of the local state apparatus.

“Objective indicators such as PAPI, the Provincial Competitiveness Index, or the Public Administration Reform Index are not only important basis to evaluate the effectiveness of public service performance of ministries and local agencies, but also provide important suggestions for Vietnam to continue improving the country’s development policy, implementing the national digital transformation strategy, building a people-centric and enabling state, and leaving no-one behind,” he noted.

Moreover, foreign-invested enterprises now head to sustainable development in alignment with the green growth strategy in Vietnam. As shown in a March survey conducted by Decision Lab, about 60 per cent of businesses have a board-level governance structure for sustainability and almost 60 per cent have defined environmental, social, and governance targets. And a similar rate of businesses also indicated that they have budget allocated for such initiatives.

Dr. Y also commented that although green growth and sustainable development have become a trend in Vietnam and globally, not all businesses and investors consider environmental governance as a key factor for making business and decisions.

“We now still see a lot of financiers prioritise transportation, infrastructure, and energy and others when they choose an investment destination. Possibly, in the future, their priorities may change, so cities and provinces should pay more attention to the environmental governance to be competitive.”

As shown in PAPI 2023, while seeing the above on-year drop, many cities and provinces are still attractive to foreign investors. For instance, Ho Chi Minh City, Dong Nai, Hanoi, Thai Binh, and Haiphong are still among the most attractive destinations for foreign financial backers in Vietnam.

According to statistics from the Ministry of Planning and Investment, Ho Chi Minh City lured $5.85 billion worth of foreign funding in 2023, ranking first, followed by Haiphong, Thai Binh, and Quang Ninh.

In the first quarter of 2024, these localities continue to be on the top 10 list for foreign capital attraction.

Source: Vietnam Investment Review