Improving the Quality of Business Environment Reforms Case 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

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

Vietnam Overview (cont’d) Still poor and under-developed country: Still poor and under-developed country: Per capita GDP: $550 (2004)Per capita GDP: $550 (2004) Predominantly agricultural economy (70% of population)Predominantly agricultural economy (70% of population) Less than 1 enterprise per 1,000 peopleLess than 1 enterprise per 1,000 people Human Dev’t Index: ranked 104/177 countries (2005)Human Dev’t Index: ranked 104/177 countries (2005) Business environment not yet competitive: Business environment not yet competitive: WEF competitiveness rating: 81/117 (downgraded by 4 ranks from 2004) – lowest among ASEAN countriesWEF 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 businessWB 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 jobsState-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 everFDI is increasing (~US$5 bil in 2005), but competition from other East Asian for FDI is stronger than ever

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

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

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

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

GTZ Approach in Support of the Unified Enterprise Law & Common Investment Law  Overall Approach: Improving the quality of the law Improving the quality of the law Supporting the effective implementation of the law Supporting the effective implementation of the law Developing tools and guidelines based on application experience 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 and monitoring of UEL and CIL Introducing Regulatory Impact Assessment and other innovative tools in the making of the 2 Laws Improving the quality of dialogue and consul- tation on the Laws Awareness raising on the benefits of the reforms, cooperation with the mass media Capacity building for ministries and provincial authorities, to ensure consistency of implementation Support to Implementation Taskforce to deal with specific implementation issues: E.g.: business licenses Introduction of best practice, high-quality policy researches

GTZ Approach: Example 1 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 Regulatory Impact Assessment Introduced as an Innovative Method in the Making of the Laws: Regulatory Impact Assessment Introduced as an Innovative Method in the Making of the Laws:

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

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 With strong supports from the press and the business associations GTZ Approach: Example 2 Analysis of problems and policy recommendations Analysis of problems and policy recommendations Addressing hot and imperative business issues Addressing hot and imperative business issues Also used for awareness raising Also used for awareness raising Winning public supports Winning public supports “…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) 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” High Quality Policy and Business Issue Researches An example: An example:

GTZ Approach: Example 3 Policy Dialogue and Consultation on the Laws through 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 dialoguesImproving 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 processPublic consultation and RIA are integrated in a process Development of guideline and manualDevelopment of guideline and manual Some impacts: Some impacts: Increased participation of the business community (foreign and domestic) in the making of the law, e.g.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.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.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. Strengthen Policy Dialogues/Involvement of Business Community

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

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

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

Thank you, and for additional information please contact: Thank you, and for additional information please contact: Le Duy Binh: Le Duy Binh: Nguyen Dinh Cung: Nguyen Dinh Cung: Corinna Kuesel: Corinna Kuesel: URL: URL: