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Despite many reforms,
doing business is still not easy in Vietnam
Vietnam's efforts in improving its business environment have been
recently recognized by the World Bank Group's Doing Business in 2006
report, which ranked the country among the world's top reformers.1
Reforms were initiated in enterprise registration, property
registration, contract enforcement, and bankruptcy regulation.
Despite this progress, Vietnam still has some way to go before it
can be considered an easy place to open and run a business; the
country ranked 99 out of 155 on the overall ease of doing business,
suggesting a big gap between initiating and implementing reform.
This bulletin reviews Vietnam's recent efforts in modifying
regulations and considers what measures are still needed to further
improve the business environment, focusing on the Doing Business
indicators.
Starting
a business: Post-registration procedures remain complex and
time-consuming
The Enterprise Law of 2000
was a significant reform that made it easier to start a business.
Simplified registration has resulted in more business creation,
boosted investment and produced more jobs over the past few years.
However, as of January 2005, business registration in Vietnam still
took 50 days and involved 11 procedures. By comparison, starting a
business in Canada - the top performer according to Doing Business -
takes only three days and requires two procedures. One barrier in
Vietnam was that business registration agencies in Vietnam reported
difficulties in managing the names of enterprises in a consistent
and uniform manner, which led to disputes over the reporting of
company names. In 2004, by establishing electronic name
verification, Vietnam cut business entry time by one week.
While the process of
obtaining a business registration certificate has been shortened, a
recent survey by GTZ and CIEM revealed that post-registration
administrative procedures are still a major hindrance to
entrepreneurs. Respondents said that it takes around 260 days to go
through 13 administrative procedures before enterprises can begin
production. This delay occurs for the following reasons: i) many
overlapping, illogical and/or unforeseeable procedures; ii) poor
coordination among state authorities; iii) complicated and
frequently changing regulations; and iv) mutual mistrust between
enterprises and state authorities. Not only is the total cost
associated with delays high, but firms also incur other extra costs
beyond statutory fees.2 Moreover, the high number of
existing business licenses and conditions, as well as the
introduction of many new ones and the reappearance of abolished ones
under other forms, constitute additional barriers to economic
activity.3
According to the survey,
the time and associated costs of starting a business can be reduced
further by: making all information on start-up requirements
accessible to the business community, eliminating unnecessary
administrative procedures, simplifying fees and eliminating
unofficial payments, and systematically reviewing existing
sublicenses in order to assess their costs and benefits and then
developing a uniform rationale and strategy for licenses.
Registering Property: Lack of land titles hinder firms' access to
land and capital
The recent amendment of
the Land Law has brought about positive changes, such as a new and
speedier "registration" system via a network of district Land
Registration Agencies and specific time-limits on procedures. As a
result, the time required to register property fell by 11 days, from
78 to 67 at present. Registration has also become less expensive,
due to official costs being reduced from 5.5% of property value in
2003 to 1.2% in 2004 and a reduction of transfer tax by 4%. Despite
these improvements, Vietnam still ranks 39 out of 155 in the ease of
property registration. By comparison, in New Zealand, the top
performer, property registration takes only two days for two
procedures and costs 0.1% of the property value; in neighboring
Thailand, it takes only two days for two procedures and costs 6.8%
of the property value.
Accessing land remains a
major concern for private firms in Vietnam. According to the GTZ/CIEM
survey, it takes about 230 days to complete the 7-step process
required to obtain Land Use Rights (LURs) or lease land.4
Due to the long and costly nature of this process, unsurprisingly,
many land users do not have LUR certificates. In addition, it is
estimated that 70% of land transactions take place in the informal
market. Because they are unofficial, these transactions cannot serve
as the required collateral for bank loans. Without formal titles,
LURs and the security that both provide, banks are reluctant to make
loans. As a result, firms face serious limits to accessing capital
and tend to make fewer investments, such as funding expansion
projects. If implemented efficiently, property registration can
significantly improve firms' access to both land and capital. In
order to address land constraints further, the government should
make a constant effort to effectively enforce the Land Law and to
simplify land-related administrative procedures.
Contract
Enforcement: Ineffective mechanisms for enforcing contracts and
resolving disputes among firms
Commercial contracts
benefit all firms, as they provide market opportunities and improve
competitiveness. In Vietnam, the limited extent and unrealized
potential of business-to-business linkages stem from ineffective
contract enforcement mechanisms. According to a recent World Bank
paper, firms generally have little confidence in the ability of
Vietnam's legal system to enforce contracts and resolve disputes,
which in turn lessens the attractiveness of formalizing business
relationships. In fact, firms tend to adopt a risk mitigation
strategy of limiting entry into contracts, preferring to make deals
with those they know well instead. In 2003, for example, Hanoi,
which had over 10,000 firms, had only 70 cases brought to the
Economic Court, and 20 to the International Arbitration Center.5
Vietnam has recently made
efforts towards improving contract enforcement. The amended Civil
Litigation Code has moved cases to lower jurisdictions, allowing
district courts to hear cases involving more than 50 million dong
[3,145 USD]. This has reduced the time for contract enforcement by
two months, from 403 days in 2003 to 343 days currently.6
However, enforcing a contract still takes a long time, requires 37
procedures among the highest number of procedures in the East Asia
region and leads to court and attorney fees of up to as much as 30%
of the debt value.9 The next steps in strengthening
contract enforcement could include i) revising and harmonizing the
existing body of laws on commercial contracts; ii) introducing
summary proceedings and simplifying trial procedures in courts; and
iii) strengthening the capacity of judges and commercial
arbitrators.10
Closing a
business: Bankruptcy procedures have been simplified
In a market economy,
closing a business is a normal practice that allows for the
reallocation of resources to where they may be used more
efficiently. Bankruptcy laws serve as an instrument towards this
purpose as they allow for the closing of a failed business or the
preservation of a normally viable one that is experiencing temporary
problems. However, bankruptcy protection is rarely used in Vietnam;
only 45 bankruptcy cases have occurred since the Bankruptcy
Law was passed in 1993.
Amended in 2004, the revised Bankruptcy Law makes it easier for
firms to file for bankruptcy as it requires only one condition -
that a business is unable to pay an overdue debt upon request;
before, a business also had to suffer losses for two years and have
attempted reorganization before it could file for bankruptcy.
Another change in the amended Bankruptcy Law established the
seniority of creditors' claims to those of the tax office. These
changes have resulted in a reduction of six months on the entire
bankruptcy process. Already, recovery rates have increased from 16%
to 19%.11 Even with these improvements, the recovery rate in Vietnam
is still among the worst in the world. In order to raise recovery
rates, future reforms will need to focus on improving foreclosure
and liquidation processes. Foreclosure and liquidation often lead to
the sale of the entire firm to new owners who can maintain it as a
going concern. This allows creditors to be better off, since saving
viable firms yields higher recovery rates; workers win too, because
they can keep their jobs.
(1) The data for all sets of
indicators in the 2006 report are for January 2005. Doing Business
in 2006: Creating Jobs, World Bank and International Financial
Corporation (IFC), September 2005.
(2) From Business Ideas to Reality: Still a Long and Costly Journey,
GTZ/CIEM, Hanoi, 2005.
(3) Overview of Business Licenses in Vietnam, Nguyen Thi Thu Trang,
ADB working paper, September 2005.
(4) See From Business Ideas to Reality: Still a Long and Costly
Journey, ibid.
(5) Promoting Business-to-Business Commercial Contracts in Vietnam,
Vietnam Private Sector Development Policy Note, The World Bank,
January 2005.
(6) The time required for dispute resolution is recorded in calendar
days, counted from the moment the plaintiff files the lawsuit in
court until settlement or payment. See Doing Business in 2006.
(9) The cost indicator measures the official cost of going through
court procedures, including court costs and attorney fees where the
use of attorneys is mandatory or common, or the costs of an
administrative debt recovery procedure, expressed as a percentage of
the debt value. See Doing Business in 2006.
(10) See Promoting Business-to-Business Commercial Contracts in
Vietnam and Doing Business in 2006.
(11) The recovery rate measures the efficiency of foreclosure or
bankruptcy procedures. It estimates how many cents on the dollar
claimants - creditors, tax authorities and employees - recover from
an insolvent firm. See Doing Business in 2006. |
