Investment plays an important role in economic development. It is one of determinants in expanding productive capacity. The increase of investment impacts positively on the growth and development of the economy. Vietnam economy is in the period of transition. The requirements for development need a large sum of capital. At the early stages, the potentials of private sector are limited and difficult to mobilise. Hence, the government investment will play an important role in achieving the development goals.

The oil and gas is the fastest growing industry in the economy, a major source of state revenue and a crucial inflow of total export revenue. Its objectives in the economic plan which aims at fast economic growth and structural shift to industry, at rural development and generally, at raising living standards throughout the country reflect its position as a major export industry.

The above mentioned explains for the relevance of thesis in analysing the role of government investment in economic development - the case of oil and gas industry.

Within the scope of the thesis, the analysis limits to the effect and contribution of government investment in economic development especially in the oil and gas industry. Government investment includes sources from the budgetary investment, governmental credit and self-investment of State-owned enterprises that government could intervene and control. This thesis focuses on the period of 1990 - 1998 to analyse the role of government investment.

To clarify the government investment in the economic as a whole and in the oil and gas industry, some raised questions should be in the thesis' concern.

1 - The role of investment in economic development?

2 - The necessity of government investment?

3 - What is the role of government investment in Vietnamese economy?

4 - How can government investment impact on development?

5 - What are the role of oil and gas industry in Vietnamese economy?

The methodology of study can be in the forms of qualitative, descriptive and comparative methods. The data used in the thesis could be referred from Petro Vietnam, General Office of Statistics, Ministry of Planning and Investment, Ministry of Finance, World Bank, International Monetary Fund, UNDP, ADB, UNIDO and so forth.

The significant role of states in creating economic development has been widely recognised in Third-World development. According to J. Merquior (1993), "the truth is that we have simultaneously too much state and too little state". This argument effectively sums up the situation in developing countries. Too many states have taken on responsibilities for development while they have had too little capacity to promote it. In response to the poor performance of many developing countries, it is generally emphasised on the need to reduce the extent of government intervention in the economy.

By the 1990s, the contributions of governments to economic development would be challenged by a new context of international and domestic conditions. The concern for public sector heightened pressures on government to perform in more effective ways.

As indicated above, governments are able to pursue development in this new context respond flexibly to rapidly changing domestic and international conditions and demands so that national goals are protected and achieved.

2.2.1.1 - Harrod - Domar Model

Their theory has been used extensively in developing countries to access the relationship between growth and capital requirements. This model is assumed that "output depends on the amount of capital invested in that unit". It shows that the determinants of growth are the capital or investment. In economic term, it is usually used the ICOR - incremental capital-output ratio to assess productivity because in the essence, it is measured the additional capital on the increase of output. This Harrod-Domar model is adopted not only for the entire economy as general but also for a specific industry as particular.

This model is to explain rather long run tendencies in comparison to the Harrod-Domar model which is supposed to characterise medium term growth rates. Solow assumed that the population and labour force are the same so that output per capita and output per worker are equal. From the Solow-Swan model of the steady state, the capital-labour ratio reaches an equilibrium value and remains unchanged at that level and so as the same to output per worker. Thus, the Solow growth model means a stable dynamic growth process. But this model also implies that the long run growth rate cannot be influenced by government intervention, government investment only shows level effects and transitory effects on the growth rate but does not affect the long run rate on the balanced growth path.

On the macroeconomic level, DeLong and Summers (1991) - F. Coricelli (et al) (1998) conducted through cross-country studies in which they investigated whether investment is combined with external effects by analysing the impact of the physical investment on economic growth. They concluded that the investment shows strong externalities and is a fundamental determinant of economic growth. Another empirical study was undertaken by Romer (1986). He used aggregated long run economic data and made conventional growth with inputs of capital and labour. Thus it can be stated that here is strong evidence that investment in physical capital shows positive spillover effects which should be taken into account in theoretical models of economic growth.

The key property of endogenous growth models id the absence of diminishing returns to capital. The simplest approach is to assume that the production function is linear in per capita capital as the endogenous AK model. The technology coefficient A determines the rate of growth and any policy intervention which can influence this coefficient influences the growth rate.

The new growth theorists have suggested that the larger capital has a higher return because of various externalities and/or complementarities from policy effects to capital accumulation. If an economy is not at the frontier, then additional investment can produce a longer-term increase in productivity growth. Jorgenson (1990) has shown that the higher productivity growth rates have been heavily influenced by a much higher rate of capital investment.

The first to integrate the stock of public capital in a macroeconomic production function were Arrow and Kurz (1970). In the first case, they suppose a production function which shows decreasing returns to scale. As a result they find out that the rate of growth is determined by the exogenously given rate of technical progress. In the second case, they posit increasing returns to scale but the result of the second version is the outcome of a purely intertemporal optimisation process. This is possibly the reason why this model has not gained much attention in the economic literature.

The idea that public investment positively affect the production opportunities in an economy was taken up again by Barro. In contrast to Arrow and Kurz, however, Barro assumes that the flow of public investment directly enters the macroeconomic production function instead of the stock of public capital. Barro distinguishes between non-productive government consumption and productive government investment which positively influence the productivity of the private sector. The econometric results supported by Barro estimate that the "crowding-in coefficient" of government investment for private investment lies between one and two - that is one unit of government investment could crowd in from one to two units of private investment.

In theory, the first concern is the model of IS - LM. It is the base to study the " crowding-out" of the government investment. There are two forms of crowding out both directly and indirectly. Directly crowding out assumes that public and private expenditures are mutually exclusive substitutes whereas many could be argued to be complements. Indirect crowding out may occur even where complementarity exists, although the costs of this distortion are not necessarily greater than the benefits of intervention. The problem is that it is not possible to measure such distortionary costs nor the benefits of intervention with any accuracy, or even at all.

In the literature, there is some debate on whether public investment crowds out or crowds in private investment. There is some evidence from a number of countries that public infrastructure investment crowds in or is complementary to private investment while public non-infrastructure investment crowds out or substitutes for private investment.

To summarise, one can state that all studies analysing the effects of non-productive government spending find a negative correlation between this variable and the growth rate of aggregate output. As to the impact of productive public capital, the theoretical and empirical studies seem to postulate a positive effect on private output, although no concrete proof could be obtained.

Vietnam is shifting to a multi-ownership economy allowing resource allocation through market forces. Consequently, the role of the government has begun to change, and it must change further to meet new conditions in market economy. In recent years, as a result of doi moi policies, growth performance has been higher than the "miracle" economies of East Asia except China, averaging about 8% per year during the period from 1990 to 1998. The industry sector has grown at around 13%. Stable economic growth brought about significant increase in investment level in the economy. However, the country still has an enormous task of "catching up" then the government of Vietnam has recognised that significant efforts need to increase the level of investment and to provide incentives for economic development.

In the early years, investment was not focused on infrastructure, but on production therefore the results were gained so quickly. Since 1996 economic growth needs more investment as large investments have mainly been concentrated on infrastructure. It has also conformed to the ICOR of the economy with low levels in 1990-1995 and raising much higher since 1996.

In response to the dynamic world economy, development economists and policy-makers recognise the need for changing the roles of the government in promoting economic development. This is particularly evidenced by the recent development of transition from central planning towards market orientation in the former Soviet Union, East European countries and Vietnam.

Much of the debate on the role of directing the economy has tended to revolve around the role of state enterprises in the economy and the excessive presence of the state in directly administering various aspects of economic life. It is not suggested that the government should not contribute to mobilising resource, influencing the allocation of resources through macroeconomic policies and so forth.

In the mid-1980s, the reforms have mainly focused on imposing a hard budget constraint on SOEs and on increasing managerial autonomy, and they have indeed achieved these goals. The sector has experienced faster growth than the economy as a whole in recent years. The performance of SOEs has been improving since 1991-1992, when a number of important reforms were introduced to increase autonomy, impose a hard budget constraint and establish a clear profit motive for the sector. In terms of contributions, the state sector have registered a steady increase to the government budget, which amounted to some 10% o GDP- or about 50% of total budgetary revenues - in 1990-98, otherwise, it has lessened since 1995.

As a result of the reorganisation with Decree 388/HDBT and Instruction No. 500/TTg, state enterprises has decreased by over 50% to 5,800 of SOEs in order to improve their efficiency, steady growth and contribution to the budget. But state enterprises are not yet able to play the leading role due to their low competitiveness, their serious shortage in capital and others. In addition, in the reform of the SOEs, a number of General Corporations - GCs are established. The objective of formation of the GCs (according to Decree 90 and 91/TTg) was to create large economic unit, to concentrate capital and to strengthen the competitiveness in the domestic as well as foreign markets. However, many GCs have exposed weaknesses in being able to create positives linkages and operating inefficiently.

To analyse the government investment, the observation should be to go into its parts of government expenditure from the budget, government credits and investments from SOEs by themselves. And thus, they would be contributed to put the whole picture for the government investment.

The large source of investment funds is the government budget, and the figures on budgetary investment are likely to be reliable. They show a sharp decline between 1985 and 1990 from about 8% to 5% of GDP and a further small decline. The sharp budget cuts in 1991 were achieved by compressing current and especially capital expenditures declined by over 45%. However, public investment recovered sharply after 1991 following the improvement in revenue collection.

It could be mobilised through domestic and/or foreign sources in which the ODA loans formed mainly. Thus, ODA sources have a sharp influence on the government credit through the increase of ODA commitment and disbursement rate. Maintaining and raising levels of investment should be the central objective of the government. On the macroeconomic front, the main challenge faced by Vietnam in encouraging investment concerns the management of ODA though these capital inflows represent an extraordinary opportunity for Vietnam to increase rapidly its investment levels and thus productive capacity for economic growth. The efficiency in the use of ODA sources remains low.

The priority of ODA funds to infrastructure construction was highly appreciated by Vietnamese government. The resources which mostly finance specific long-run projects on the one hand, could be eliminate the volatility of short-term capital inflows leading to macroeconomic instability at the early stages of development and cannot be liquidated easily on the other hand.

The participatory role of the self-investment by SOEs in the production varied widely depending upon the specific circumstances. It has been remained the principal instrument to give direction to the economy though its contribution reaches only under the one fourth.

(p: projected)

On the other hand, the SOE investment has been a critical factor in the mobilisation of resources for development as directly through generation of their inefficient operations. Additionally, the emphasis was on the amount of investment rather than the efficiency of investment thus performance in the state enterprises has been disappointing so the also will be its investment.

Government investment has two main objectives. First, it gives economic and social foundation and incentives to enable multi-ownership agents to invest into business expansion, accelerate economic growth and restructure geared towards industrialisation and modernisation. Second, it creates the new development of state-own enterprises in some key sectors. However, availability of relevant data for detailed analysis of the government investment is very limited as a result in part of generally limited statistical capacity, in part of inadequate accounting standards, and in part of rapid change in the national accounts, statistics are uneven and incomplete.

In Vietnam, the total investment could be structured in two main groups. The first item is the state investment which includes investments from government budget, government credit and self- SOEs. The second non-state investment focuses on the investment of foreign direct investment (FDI) and non-government domestic investment. And the growth rate of non-government investment depends mostly on the up and down of FDI not on the domestic private investment. In other words, the FDI inflow has a sharp influence on the non-government investment and the entire economy in general.

To assess the level of government investment to meet macroeconomic stabilisation objectives of the sustained high growth rate and high levels of investment, the coefficients of crowding-in/out should be concerned. It shows the amount of government investment could attract the flow-in non-government investment or induce the flow-out. The coefficients mean that the one unit of government investment could give rise to what amount of non-government investment so the much higher the much better they gain. In the early stages of development, the government investment has mainly focused on the infrastructure in Vietnam like the other mentioned countries thus the crowding-in has been appeared. However, when the capital investment in recent years has fallen, the coefficients would be in the down trend due to usual rules as mentioned above chapter.

(p: projected)

During the period of 1990-1995, government investment plays an active role in encouraging the non-government investment especially FDI. Although the private investment has flown in much higher than FDI, its tendency has a smooth downward. Otherwise, the FDI has been gradually increasing. It is illustrated in the reached peak crowding-in coefficient in 1995. After that, the coefficients has slowed down and tends to crowd out especially non-government domestic investment.

In sum, government investment gives active incentives to encourage the growth together with some deepening reforms of the economy during the period of 1990-1995. Since 1996, the reform has been slowing down in consistent with the inefficiency and downward of government investment and non-government investment. However, government investment has remained an important role in economic growth and development. The state investment has been focused on the infrastructure to create a sound foundation and incentives to non-state investment. In time, the inefficacy of government investment has been revealed. It leads to an alarming signal of crowding out non-government investment.

In general, government investment is necessary to facilitate and encourage the non-government investment. Otherwise, it should be lessen up for the more dynamic and more efficient investment from other sources and sharpening restructure and reforms to raise the coefficients. Hence, it would sustain the stable growth rate of investment for Vietnam economic growth and development.

Vietnam has an area of around 330,000 sq. km and several hundreds thousand of square kilometres of continental shelf and exclusive economic zones with several tertiary and sedimentary basins where oil and gas could be identified are : Hanoi trough in Red River delta, Song Hong basin in the North, Phu Khanh basin in the Centre, Cuu Long and Nam Con Son basins in the South East, Malay- Tho Chu basin in the South West and Hoang Sa (Paracel) - Truong Sa (Spratly) basin groups.

The petroleum activities in the Continental Shelf in the shallow water area (under 200m), accounting for 25% of the whole surface of the Continental Shelf concentrating on Nam Con Son and Cuu Long basins where several oil field have commercially been developed and production is in progress. Vietnam's potential is currently estimated at 3.3-8.2 billion tons of oil equivalent. Hence, these great natural potentials create the incentives for oil and gas industry to grow.

The Vietnam oil and gas industry is a young one which has been for recent year growing to become a spearheaded economic branch of the country. Its sales of crude oil is increasing, and the revenues always rank among the top of industries. Thus, it has made an important contribution to the economic growth, and made Vietnam the fourth oil producer in the South East Asia and among 44 oil and gas producer countries in the world.

Since the moment of the first cubic metre of mineral gas was drilled from the Tien Hai in Thai Binh, Vietnam oil and gas industry has experienced a large number of changes. In September 1975, the Geological Union No. 36 was established then replaced by the Vietnam General Oil and Gas Department and now the Vietnam Oil and Gas Corporation was founded. In 1998, Vietnam achieved the production of the 50,000,000 ^th ton of sale crude oil. This is one of the milestones marking the achievements scored by the industry after 23 years of construction and development, and at the same time confirming the Vietnam petroleum potential and the capability of the present Vietnam oil and gas industry as well.

This time of oil and gas industry could be expressed in three periods: before 1975 with divided the North and the South; 1976-1980 in the time of reunification and 1981-1989 of the early stage of growth. Each period of time has various impacts and achievements for the industry development.

This period started after the "open door" policy of Vietnam government has been carried out. This period has witnessed the most aggressive oil and gas exploration efforts on the whole continental shelf of Vietnam, the petroleum activities have become very exciting since then.

It is important to have a look at global and regional consumption patterns which could influence Vietnam's oil and gas industry. World demand has been estimated to rise from 36.9 million b/d in 1990 to 40.6 million b/d in 2000. By 2005, oil demand in the developing countries is projected to rise to 22.5 million b/d - UNIDO. Vietnam is well endowed with materials for the oil and gas. Consumption of per capita energy consumption, however, is still only about 450 kilogram of oil equivalent (kgoe).

If annual GDP growth averages 6% through 2001 and 7.5% thereafter, the consumption should grow by an average of 9% a year. By 2010 total modern energy demand will be three times the level in 1998. Demand for petroleum products will be two and half times higher. Demand for natural gas will be nearly 10 times higher.

In recent years during 1990 - 1998, the domestic demand for modern energy particularly oil and gas has grown 30% faster than GDP and the continued expansion is required to support growth in industry and exports.

The petroleum plays a crucial role in Vietnam's economic prospects. Nowadays, the world economy as general and each country as particular could not be in progress without energy. Additionally, its main export keeps an increasing resource for GDP.

In recent year, although it had achieved the far more rate of growth than GNP and industry as general, its growth has a smooth downtrend mainly due to the regional crisis. Moreover, its production has taken a increasing part in the output of the industry. It raises from the one fifth to the one fourth during this period.

It is the Vietnam's highest export sector and it is in the favour of world position in raising oil price, hence, it remains the sharp influence on the economic development in Vietnam.

With stable high rate of exports, the export of oil and in future gas possibly will have been playing the more important role for Vietnamese economy. It could be the main source for the industrialisation. In addition, not only be the main export and important division of the industry, it present in a major source for around 20% total government revenues. It is the highest source for government budget particularly in foreign currency from its exports.

In short, the oil and gas is the key industry of the economy. It maintains the high stable growth rate in the long period of time. Hence, its contribution in GDP and industry is remarkable together with the main source for government revenue.

PetroVietnam (formerly named Vietnam Oil and Gas General Department) established in 1975 - the National Oil and Gas Corporation of the Socialist Republic of Vietnam, solely engages in all aspects of oil and gas business. The move from central planning has also created a serious dichotomy in the institutional management of the sector. The oil and gas operations previously under the Ministry of Heavy Industry during 1990 - 1992 but since April 1992, oil and gas have been taken over directly by the Prime Minister.

The oil and gas industry is the special industry not only because of natural resource but its great riskness as well. Not like the other industries, it spends a extremely large fortune but it might be not beneficial. Moreover, to abstract oil and gas from the basins, it takes long time to invest with expensive equipments and machines. For exploration and production of oil and gas, it needs more capital than labour for its riskness.

In time, it becomes the capital-intensive industry with the share of 60-75% in the total inputs if it is considered as the only capital and labour for production. Thus the contribution of capital is the most concern and determinant.

To create such great development in the oil and gas needs a large sum of capital to invest. For many developing countries, the shortage of capital always lessens the economic growth. In Vietnam, there are more difficulties in mobilising capital and investing in the effective way. It is possible that these objectives could be conflict and hardly to harmonise. Therefore, to ensure sufficient capital for the needs of huge investments to develop oil and gas industry is the fundamental reason to form such important role of the government investment for oil and gas industry. Furthermore, government investment could ensure the effectiveness of capital arrangements in order to provide capitals needed, in time and with least expense. It could give rise to ensure investment properly in right direction for development, in appropriate projects which bring high economic efficiency and meet the political tasks of the development of the industry.

Table 4.3.2.a - Government Investment in the Oil and Gas (% of Total)

During the studied period, the government investment remains high. It mostly takes over a half of total investment. In the early stage of industrialisation, the need for oil and gas infrastructure remains a huge amount which takes long time to benefit so government investment plays a crucial part. Such large investment could form the concrete base for gradual growth in this industry and forwarding to the economy. Thus the growth of outputs in the oil and gas could be involved in the industrialisation and modernisation for economic development especially gas for future.

Moreover, the ICOR of the oil and gas remain low level. It shows the efficient ratio of investment along with the raising up output. The low ICOR would give opportunities for more investments in this industry that keeps it in the way of further development.

The ICOR of the oil and gas keeps high efficiency to invest as the lower than the economy with 3 or 4. It has encouraged the non-government investment which pursues the profit to penetrate in the oil and gas. It is noted that the petroleum gives a chance to create a large benefit from the given invested capital as

The riskness of large investment would be washed up though, in the case of limited sources for government revenue. It is stated that it is beyond government's capacity in responsibility for determining rates of change of output, investment, exports together with reducing deficits on national accounts. It is doubtful that it can fine-tune the macroeconomic policy variables with enough sensitivity to realise policy-making needs.

Additionally, the rate of return in this industry is higher than the other emerging industries. It is the incentive to attract investment from non-government sector which pursue high level of profit. In comparison with the light and heavy industries which have experienced in good position of growth, the petroleum has been in the favour of highest benefits. The petroleum products could be for exports or domestic utilisation for the large population in Vietnam. It creates the potential market for non-government participants. It might be the long-term guarantee to invest a great fortune in Vietnam oil and gas industry. Thus the attractive incentives encouraged the non-government investment are appeared clearly in the favourable terms of other industries.

The role of government investment has been also showed in the effective coefficient to attract or discourage non-government investment. In the case of oil and gas, non-government investment is contributed mainly by FDI. It is called the crowding-in/out coefficient. For the early developed sector, the government investment would be needed much more but it could be in difficulty of the flow-in non-government investment. In time, the higher soundness leads the larger attraction then the coefficients will raise.

It is rather small compared with the coefficient of the economy as mention in the above chapter. It shows that the government investment is not in the most beneficial position in comparison with the crowding-in non-government investment. Its coefficients are, however, higher than the general ones in terms of attracting FDI. The main reason lies on the potential natural resources of oil and gas to attract more FDI. For the whole economy, its coefficients keep low level thus the less active effects to encourage non-government investment are experienced.

In addition, there are signs of the crowding-out coefficients as the results of the decrease of the coefficients and the go-down of the FDI. It could have a bad influence on the oil and gas growth because the non-government investments also mean high-tech transfers and other management skills. Moreover, such investments could pay the high riskness with the great amount of capital based on the long lasting experiences in the oil and gas of the world so Vietnamese industry in the early stage of growth and development could benefit from the outside strong foundations for its own formation and production.

For the period of 1990 and 1996, the coefficient tendency has followed the common rules and it has shot down in two years of 1997 - 1998. The main reason could be from the regional crisis so the foreign investment has melt out. It might also gives the inherent signal of the inefficient investment of the government in the sector that it is possible to create more opportunities for the other sectors to benefit from the such lucrative area. Thus it could give some concerns for the efficient attraction of government investment then the more chances for non-government investments should be given in the future for raising the coefficients.

Otherwise, the average value added in the oil and gas has only reached 12 - 15% in the period of 1990 - 1998. It is far behind the average rate of the added value is 30 - 35% for the whole economy and industry 19 - 25%. It shows the low level of processing and manufacturing in the oil and gas industry. The production has been just abstracting natural resources for the crude products. In term of benefit, Vietnam has not been in the favour position and government investment is not possible to be the best instrument to raise the added value due to its inefficiency as mentioned.

Although oil and gas is the key exporter of Vietnam, the depth of government involvement might not be familiar with international trend. The reason lies mostly in the budget deficit especially for the developing countries like Vietnam thus the reduce of government investment is the matter of time. However, in the transitional economy, it is evident that the government continues to appropriate a sizeable component of national resources to run the machinery of economy, to promote national development.

In the coming years, oil and natural gas still remain the main fuel resource and feedstock for industry in many countries in the world. Positive oil and gas show gained form exploratory wells drilled recently make the possibility in discovering other oil and gas fields within the Vietnam's continental shelf. The achievements of the petroleum industry in Vietnam have been significant although the exploration began more than 40 years ago when the French searched for oil in the country's onshore basins and the first major commercial discovery was made in 1975.

Vietnam urgently needs to boost hydrocarbon resource development, for various reasons. First, oil exports earn significant foreign exchange. Second, gas will be an environmentally and economically important source of energy. Third, the oil and gas is contributed the key source for budgetary revenue. And finally, it is among the most attractive industry for foreign investment. To ensure continued and balanced development of the hydrocarbon sector, the government should quicken the pace of exploration and develop pipelines, platforms, and other infrastructure for the refinery to raise the value added in the oil and gas industry. Further, government needs to give more incentives and facilitate the entrance for the domestic private investment with high coefficients in the oil and gas in the case of down-trend foreign investment to sustain growth rate of the industry.

During 1990-98, Vietnam's economic growth - averaging 8.2% a year - and remarkably stable macroeconomic balance led many to conclude that it was a nascent East Asian tiger. But Vietnam's growth is now slowing because of the financial crisis in East Asia and because of its own inertia in implementing structural and policy reforms especially in the state sector.

The market economy has changed the social structure and many basic functions and tasks of the government as compared with the central planning period. In the market economy, the most essential functions and tasks of the state are to provide "rules of game", or the effective framework and mechanism for the society and the economy. To achieve this, the state should intervene in the economy at reasonable level for the purpose of encouraging sustainable development. The role of the state is also changed and restructured in the context of the transition to market economy.

The basic aspect of government investment is the efficiency problem. Low efficiency of state investment has been discussed due to the poor micro management of resources and resulting in serious macro imbalance of a large government budget deficit. During the period of 1990-1995, all of the government investments had posed the active increase in forms of growth rate and coefficients. Otherwise, the slow-down has appeared since 1996 along with the low process of reforms and restructure. Furthermore, the budgetary and SOE investment have been of the inefficiency in recent years. Together with state credits, it is in the favour of foreign agents and with many complicated conditions so the less effects could be estimated.

To fulfil the promise of its oil and gas resources, Vietnam should provide the right framework for private sector development. Fiscal incentives - such as acceptable fiscal terms in production sharing contracts - are needed to encourage non-government investment in exploration and production. The level and structure of oil and gas tax system should be changed to ease financing constraints and ensure long-term efficiency in investment and resource use decisions.

Government leadership is essential for creating a viable private sector, especially in light of Vietnam's nascent legal and financial infrastructure. Making the transition to a mixed economy requires step by step reorganisation of government institutions and an appropriate legal infrastructure in order to realise the benefits of private enterprise. State entities need to be modernised and made more autonomous to perform adequately in the new environment. In its capacity as a state holding company, PetroVietnam acts on behalf of the state in production sharing contracts. It is generally considered unwise for government to invest its scarce resources in risky exploration ventures where the private sector can be encouraged to bear the risks. Similarly, there is little justification for government involvement in retail distribution activity in the petroleum sector.