Improving the Quality of Business Environment Reforms Case Study of the Reform of the Enterprise and the Investment Law

1. Improving the Quality of Business Environment ReformsCase Study of the Reform of the Enterprise and the Investment Law in Vietnam Int’l Conference “Reforming the Business Environment – From Assessing Problems to Measuring Results” Cairo, Egypt: 1 December 2005 Le Duy Binh, GTZ & Nguyen Dinh Cung, Central Institute of Economic Management

2. Vietnam: Economic Overview • “Doi Moi” (renovation policy) in 1986 shifted the economy from planned to market-oriented • Stable macro-economic conditions • High economic growth: • 7.0% in 2002 • 7.2% in 2003 • 7.7% in 2004 • 7.6% (est) in 2005 • Living standards steadily improving, poverty decreasing

3. Vietnam Overview (cont’d) • Still poor and under-developed country: • Per capita GDP: $550 (2004) • Predominantly agricultural economy (70% of population) • Less than 1 enterprise per 1,000 people • Human Dev’t Index: ranked 104/177 countries (2005) • Business environment not yet competitive: • WEF competitiveness rating: 81/117 (downgraded by 4 ranks from 2004) – lowest among ASEAN countries • WB Doing Business 2006: Vietnam third in number of reforms, but still ranked 99/154 in overall ease of doing business • State-owned enterprises still dominate key sectors of the economy; tend to be inefficient, unable to create sufficient jobs • FDI is increasing (~US$5 bil in 2005), but competition from other East Asian for FDI is stronger than ever

4. Background: Why Ongoing Reform of the Business Environment in Vietnam? Some improvements in the business environment in the last decade: • The environment for doing business has improved • Results of Enterprise Law of 2000: • Freedom to do business guaranteed • Nearly 200,000 new enterprises established within 6 years of passage of the law • Very important effects in terms of job creation, poverty reduction and growth Remaining Issues and challenges: • The quality of growth still a matter of concern • Achievement of Vietnam Development Goals requires bolder reforms of the business environment • Accession to WTO imminent • Legal framework for business still inconsistent and in some cases contradictory • Implementation of business laws inconsistent; thus business environment varies from province to province

5. Current Legal Framework for business and investment in Vietnam: • Laws regulating business organization: • Enterprise Law 1999 - private domestic enterprises • SOE Law 2003 – State-owned Enterprises • Foreign Investment Law –FIEs • Law on Cooperatives – business cooperatives • Laws regulating investment activity: • Foreign Investment Law • Domestic Investment Encouragement Law • Weaknesses of legal framework: • Unlevel playing field • Inconsistencies between the laws • Not compliant with international best practices and commitments

6. Unified Enterprise Law (UEL) and Common Investment Law (CIL) • UEL and CIL are introduced in 2003 with the following objectives: • Address level playing field issues • One business registration system for all investors • Same rights for investors (both domestic and foreign) • More freedom to do business/investment • More transparent business environment/ further administrative reforms • Address issues related to NT, MFN and WTO • Set timeframe for SOEs to be converted and subject to the same playing field • Improve corporate governance practices

7. The Lawmaking Process • General law making process in Vietnam • The same Ministry responsible for both drafting and administration of the law • National Assembly role is limited • Public consultation either limited or formal • Little or no ex-ante impact assessment • UEL and CIL • Process started in 2003, just passed • MPI responsible for drafting the law • UEL: CIEM (research think tank of MPI, relatively independent) • CIL: Legal Department of MPI

8. GTZ Approach in Support of the Unified Enterprise Law & Common Investment Law • Overall Approach: • Improving the quality of the law • Supporting the effective implementation of the law • Developing tools and guidelines based on application experience Objective: The UEL and the CIL are well designed and effectively implemented Improving the quality of UEL and CIL More effective implementation andmonitoring of UEL and CIL 1 2 3 4 6 5 Introducing RegulatoryImpactAssessmentand other innovative tools in the making of the 2 Laws Improving the quality of dialogue and consul-tationon the Laws Introductionof bestpractice, high-quality policy researches Awareness raising on the benefits of the reforms, cooperationwith the mass media Capacity building for ministries and provincial authorities, to ensure consistency of implementation Support to Implementation Taskforce to deal with specific implementationissues: E.g.: business licenses

9. GTZ Approach: Example 1 • Regulatory Impact Assessment Introduced as an Innovative Method in the Making of the Laws: Focus and process of RIA: • Focus on the “shift from an investment licensing mechanism to investment registration”, i.e. a significant reduction of entry barriers • Conducted by Prime Minister Research Commission, with support from GTZ and UNDP • The process and study results presented to: • Policy makers and business community in Vietnam • To the National Assembly (workshops organized by PMRC and GTZ, as well as by MPDF) • A Regulatory Impact Statement on the issue was developed • Used by PMRC for different proposals to the Prime Minister on the issue of investment licensing (under the CIL) • Introduction of RIA as an innovative tool • Application of RIA on conditions of UEL and CIL • Localization of RIA and development of Vietnamised RIA Guidelines

10. Regulatory Impact Assessment Introduced as an Innovative Method in the Making of the Laws (2) Initial Results: • Recommendations to Prime Minister on the basis of study results, submitted to National Assembly as background for debate of law by National Assembly. • One of the recommendations: “…In consideration of the costs and benefits analysis of the investment registration and licensing system, it is recommended that: • “The proposed requirement on investment registration applicable to Project of less than VND 15 billion should be abolished” • “Investment projects of up to VND 300 billion should only be required to be registered” • “Only project of more than VND 300 billion should be required to go through an appraisal and licensing process. However, the licensing procedures and criteria should be transparent” Thus: • Study results directly used by Vietnamese policy advisors for making direct inputs to the highest authorities (Prime Minister and National Assembly) • Recommendations currently under debate by NA

11. “…Despite its success, the Enterprise Law does not allow individual to established one-member liability limited companies, denying the individual investors the right to freely select the type of enterprise. This threatens to cause undeserved negative consequences to a number of investors an companies…” (High Time for Another Breakthrough?, CIEM, GTZ & UNDP, 2005) GTZ Approach: Example 2 High Quality Policy and Business Issue Researches • Analysis of problems and policy recommendations • Addressing hot and imperative business issues • Also used for awareness raising • Winning public supports With strong supports from the press and the business associations • An example: Now praised by the business community and NA deputies as one of the important advances of the law in further liberalizing the freedom to do business and recommends that: “…individual may establish one-member liability limited company…” UEL in the Current Draft: “…One-member Liability limited company is owned by an organization or by an individual……” (Article 62, Final Draft of UEL”

12. GTZ Approach: Example 3 Strengthen Policy Dialogues/Involvement of Business Community • Policy Dialogue and Consultation on the Laws through • Improving the quality of policy dialogues and consultation by providing advices and supports in the organization of policy dialogues • Public consultation and RIA are integrated in a process • Development of guideline and manual • Some impacts: • Increased participation of the business community (foreign and domestic) in the making of the law, e.g. • Letter from Eurocham to the Drafting Committee of the Law after the consultation workshop between GTZ, UEL Drafting Committee, and Eurocham in March. • Much of the inputs from this letter was again used in a joint letter by Eurocham, Amcham and Auscham on the CIL to the National Assembly, providing critical comments.

13. GTZ Approach: Example 4 Awareness Raising for Reforms Inputs from GTZ Inputs from GTZ Inputs from GTZ

14. Key Challenges Ahead… • Development of Approaches to RIA that can be Implemented in Vietnam • Limited local capacity on RIA and innovative tools to improve the quality of business laws • Limited absorption capacity from the Government side • Many of the issues go beyond the work scope of a private sector development project

15. Key Lessons Learnt… • Strengthening the national ownership • Being well-informed about the reform agenda of the Government and precise screening of request for supports • Right partner for respective reform process • Focus on impact achieves while maintaining flexibility and responsiveness to demands • Use the press to win public support • Long-term cooperation, not just short-term • Building trust is critically important • Cooperation makes power

16. Thank you, and for additional information please contact: • Le Duy Binh : binh.sme@gtz-vietnam.com.vn • Nguyen Dinh Cung: cung@ciem.org.vn • Corinna Kuesel : corinna.kuesel@gtz.de • URL: www.sme-gtz.org.vn; www.sme.com.vn