Uneven Progress on Private Sector Development

May 23, 2003

Ha Noi - Progress in private sector development remains uneven throughout the country with the majority of new businesses concentrated in Ha Noi and Ho Chi Minh City, reveals a report reviewing the implementation of the Party Resolution on the private sector development.

The report was prepared by the Central Institute for Economic Management (CIEM), Ministry of Planning and Investment as part of the project “Institutional Reform for Business Development”, supported by the UN Development Programme (UNDP). Mr. Le Xuan Ba, Vice-Chairman of CIEM, will present the report on 26 May at the second Domestic Business Meeting that will bring together decision-makers and private entrepreneurs in Viet Nam’s central town of Hoi An.

The report also refers to a Government Directive outlining local governments’ responsibilities in implementing the Enterprise Law. Instructions include the revision of any local licenses or provisions that are contrary to the Law, and the amendment of plans that work against the promotion of a level playing field and stimulation of private investment.

The domestic private sector in Viet Nam has witnessed a dramatic increase since the enactment of the Enterprise Law in early 2000, which has helped create some 62,300 businesses with a total investment of about US$ 7.4 billion. In 2001, this sector represented some 25 percent of the total investment in Viet Nam compared with 20 percent of the foreign sector. However, the domestic private sector remains small, accounting only for 4% of total GDP. Furthermore, the playing field is far from level. Different enterprise groups, classified mainly by ownership, are governed by separate legislations and regulations.

The report notes that provinces in general have made clear progress in improving business registration, cutting time and cost of setting up a business. Registration time has been reduced from 15 to only 7 or 3 days. The northern province of Ha Giang can even give a green light within 24 hours. This achievement is due to the implementation by the majority of provinces of the “One Stop, One Stamp” policy to streamline public administration. Ho Chi Minh City is taking the lead in using on-line registration coupled with an efficient business information system.

Face-to-face dialogue between local government officials and entrepreneurs has become more regular. Most provinces hold annual meetings to understand the needs and concerns of businesses and answer to their questions. The southern province of Binh Duong has set up a consulting council for investment under the management of the Vice-Chairman of the People’s Committee. This council meets every Thursday to help investors and businesses overcome difficulties they face.

However, for many provinces, the challenge remains in terms of creating a level playing field for private businesses, especially regarding access to land and credit. Progress has been most uneven in these areas. Again Binh Duong, together with Ho Chi Minh City, have made investors’ life easier by authorizing transfer of land-use rights faster than regulated by existing legal framework. The process is 5 days shorter, on average, than stipulated in current regulations. Ho Chi Minh City even cooperates with neighboring provinces to find land for investors.

Government financial support is provided through the Fund for Development that offers investors preferential interest rate. In Ho Chi Minh City, many projects have been granted 3% interest rate loans per year. Up to now, 42 projects –almost all are private- have been granted favorable loans, totaling about VND 9 billion. In 2002, Long An province granted 90% of its Fund for Development to the private sector.

Other provinces have been creative in tackling the credit issue. Tuyen Quang’s provincial Bank for Investment and Development, for example, has granted significant trust guarantee loans to private enterprise. This approach is followed by Ha Giang province which goes further by providing zero interest rate loans to efficient enterprises.

But these examples are far from typical and the Fund for Development is only available for a limited range of projects concentrating on a number of areas encouraged by the Government or in remote and difficult areas. Investors often find credit inaccessible because of the complexity of lending procedures. Many small enterprises lack to capacity to design a business plan to submit for loan.

The report points out that in general lending procedures and investment incentives have not been improved as fast as expected. One example is the Credit Guarantee Fund for SMEs which exists only in paper due to the lack of funding at the provincial level. Commercial banks are often reluctant to contribute to the Fund they view as unsafe.

The different approaches and uneven progress across provinces are attributed, according to the report, to the absence of guidelines and inconsistency of the legal framework. The Land Law, which is being amended, is one example. Due to high tax on transfer of land-use rights, which is even higher than the land rent, some enterprises prefer to pay the rent.

At the first Domestic Business Meeting in December 2002, Mr. Nguyen Van Dang, Deputy Head of the Party Commission on Economic Affairs, said the Party Resolution sought to abolish discrimination between different economic sectors. “The Resolution highlighted the need to ensure equality between economic sectors in terms of opportunities and choices for development,” Mr. Dang said.

UNDP Resident Representative, Mr. Jordan Ryan, noted that the existence of a healthy private sector that creates jobs and generates tax revenue, is critical to reduce poverty and achieve the Millennium Development Goals (MDGs). “Viet Nam will be better positioned to meet its many social and economic challenges in the coming decade if it can further tap the talent and drive of domestic private entrepreneurs. And it is critical that this expansion happen in the most equitable way possible, so as not to exacerbate income and human development gaps in the country,” Mr. Ryan said.

Mr. Ryan also called for continued, even more frequent dialogue between government authorities and private sector at both national and local level, and creation of public-private partnerships to improve the enabling environment for business growth and achieve provincial economic development plans.

Two Domestic Business Meetings are scheduled for 2003 to cover the central and southern provinces. According to CIEM President, Dr Dinh Van An, CIEM ensures appropriate inter-agency follow-up on the issues discussed at each of the events to translate entrepreneurs’ feedback into the practical actions.

Contact informationDo Thi Nguyet Nga, Programme Officer, Tel. 942 1495 Ext. 254