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Vietnam’s Improving Business Environment Amid Pandemic: Provincial Competitive Index 2020

10/05/2021    5

•    Vietnam’s economic landscape continues to demonstrate positive signals for both domestic and foreign corporations doing business in Vietnam despite the COVID-19 pandemic.

•    For the fourth consecutive year, Quang Ninh led the rankings, building itself as an example for other provinces seeking further growth and development.

•    In 2020, Vietnam showed positive improvements in terms of reducing informal charges, maintaining law and order, increase proactivity, and enhancing a fair business environment.
Despite the COVID-19 pandemic, as per the latest Provincial Competitive Index (PCI) 2020, Vietnam’s economic and investment landscape continued to move from strength to strength.

The PCI introduced since 2005 is a collaborative report developed by the Vietnam Chamber of Commerce and Industry (VCCI) and the United States Agency for International Development (USAID).

The PCI measures 10 sub-indices:

•    Low entry costs for business start-ups;

•    Easy access to land and security of business premises;

•    A transparent business environment and equitable business information;

•    Minimal informal charges;

•    Limited time requirements for bureaucratic procedures and inspections;

•    Minimal crowding out of private activity from policy biases toward state, foreign, or connected firms;

•    Proactive and creative provincial leadership in solving problems for enterprises;

•    Developed and high-quality business support services;

•    Sound labor training policies;

•    Fair and effective legal procedures for dispute resolution and well-maintained law and order.

The PCI results showed that the quality of economic governance at provincial levels in Vietnam has experienced an upward trend. This is the fourth consecutive year that the median province in the list reported a score above 60 points on a 100-point scale.

The positive developments include continued decline in administrative costs, strengthening security and order, more dynamic and proactive provincial authorities, significantly improved administrative reforms, and increasing equality in the business environment.

There are a variety of reasons for the improved rankings building in the last few years. The improved PCI and economic landscape can be attributed to enhanced trade schemes, ease in corporation procedures, efforts to fight corruption, and promoted tax incentives.

The PCI report is based on feedback from almost 12,300 businesses, of which more than 10,000 private businesses are operating in 63 provinces and cities, with 1,600 foreign-invested enterprises operating in 22 localities in Vietnam.

Highlights from the PCI 2020

Top provinces

According to the report, the top four provinces with the highest quality of economic governance were Quang Ninh, Dong Thap, Long An, and Binh Duong.

Quang Ninh remained at the top of the list for the fourth consecutive year, with a total of 75.09 points, up from 73.40 points compared to 2019. Following Quang Ninh was Dong Thap, with an aggregated score of 72.81 points, which kept the province in the top five for the 13th year. Coming in the third and fourth place are Long An  (70.37 points), and Binh Duong (70.16 points).

The remaining provinces in the top ten include Da Nang, Vinh Long, Hai Phong, Ben Tre, Hanoi, and Bac Ninh.

Quang Ninh tops the list for four consecutive years

One of the core factors driving the growth of Quang Ninh is government support and incentives offered to domestic and foreign businesses. More specifically, due to the adverse impacts of the pandemic in 2020, Quang Ninh authorities emphasized supporting struggling firms to improve the general local business landscape.

For example, Quang Ninh’s government allowed businesses to extend their debt payments, exempt or reduce loan interest rates, and provide access to finance for businesses.

Quang Ninh also made improvements in administrative reforms such as providing administrative procedures online, increasing digital public services and conducting close communication with businesses.

Such reforms have contributed to the reasons why Quang Ninh’s Gross Regional Domestic Product (GRDP) in 2020 surged to 10.05 percent, ranking third across the country.

Reduced informal charges

From 2016 to 2020, the Vietnamese government has focused primarily on achieving an anticorruption business climate at all levels. This is being done by improving the regulatory framework along with other actions to strengthen investigations and legal proceedings.

The PCI also focused on analyzing the significant improvements of the country in this aspect. In 2019, 53.6 percent of firms reported that they have been paying informal charges. In 2020, this figure dropped to 44.9 percent, with the size and frequency of informal charges being reduced considerably over time.

Further, the share of firms that paid a large amount of informal charges (charges that exceed ten percent of a firm’s sales revenue) reduced to only 5.4 percent in 2020, compared to 7.5 percent in 2016.

Well-maintained law and order

Vietnam aims at building a strictly regulated business environment for businesses across the nation and has shown positive efforts to improve this aspect in the previous years. According to the PCI, 89.3 percent of firms stated that they trust the copyrights or contract execution regulations. This is an increase from 87.8 percent in 2016 and demonstrates a positive sign for Vietnam in this area.

Moreover, around 78 percent of firms affirmed that provincial courts process their cases efficiently.

Increased proactivity

The proactivity subindex of the PCI measures the flexibility and innovation of provincial authorities regarding regulations, helpfulness, and effectiveness of policies among others. This has improved over time over recent years. More specifically, 72 percent of firms felt that the Provincial People’s Committees were proactive in handling emerging matters of businesses in 2020, compared to the figure of 65.8 in 2016.

Provincial authorities have shown collaboration and proactivity in solving business issues, as well as working together with them to create a more active and dynamic economic environment. Hence, a large number of firms are highly satisfied with the provincial service and actions compared to the previous years, and Vietnam is expected to maintain this positive climate to fully develop the country’s PCI landscape.

Equality in the business climate

With progress in trade and investment growth in Vietnam, it is crucial that the Vietnamese market maintains a transparent and unbiased environment for both local and foreign-invested firms.

This objective was clearly defined in Resolution 35/NQ-CP by the government, issued in May 2016, and also in the policy bias subindex of the PCI. Fortunately, this unbiased trend is improving over time, with the share of domestic firms encountering difficulties in operating their businesses due to provincial authorities’ favoritism towards state-owned enterprises declining to 24.7 percent in 2020.

Moreover, only 29 percent of firms reported that the provincial governments prioritized foreign direct investment (FDI) operations over domestic investment in 2020.

Challenges remain

Although Vietnam has demonstrated positive results regarding the PCI index in 2020, there are still some areas for improvement.

To elaborate, for informal charges, in 2020 the share of firms that stated they have to pay informal charges to expedite land procedures reached 32 percent, which is the same level as in 2017. Even though this is a decline from 36 percent in 2019, it is obvious that this area needs stronger efforts for improvement.  

Moreover, there seem to be challenges in tackling regulation implementation at local levels efficiently. Unfortunately, around 73.5 percent of domestic firms reported feeling that provincial authorities did not implement initiatives properly at the department level.

Also, firms still feel that administrative procedures are complicated and time-consuming, with only 22 percent of firms reporting that they spend less than ten percent of their time understanding and implementing regulations.

Further, regarding unfair favoritism, provincial governments still show bias towards big-scale companies, and this remains a challenge for Vietnam, with 53.9 percent of firms reported of bias in 2020, compared to 54.6 percent in 2016. Thus, we can see that over the last five years, the situation has not seemed to be improved, and will require further extensive measures to truly tackle this favoritism issue.

Governance and infrastructure

There is a strong positive correlation between governance and infrastructure. The PCI report states that provinces that perform well in governance also have a higher quality infrastructure.

However, on the other hand, provinces that outperform in the infrastructure aspect but do not perform well in the governance area are caught in a structural advantage trap. This means that they do not aspire to advance in the governance aspect because they believe that infrastructure investment will come to their province regardless of adequate governance structure.

For provinces that outperform in the governance aspect but do not have high-quality infrastructure system encounter multiple hardships, and they will have to overcome their difficulties by extensive dedicated reforms.

In general, the Vietnamese infrastructure index has improved since 2014. However, in 2020 the median of the infrastructure index dropped modestly from a high of 68.45 points in 2019 to 67.41 points in 2020. This can be related to the decline of the sub-indices such as industrial zone quality, roads, public services, and information technology.

Optimistic business environment remains

The result of the PCI report demonstrates that in general Vietnam has done an adequate job at improving the country’s economic and social landscape in 2020 despite the challenges of the pandemic. However, the fact that several provincial governments still prioritize big-scale companies compared to other smaller firms needs to be efficiently addressed and improved by both the Central and local governments.

Although challenges remain, overall, the business environment in Vietnam still holds strong opportunities and prospects for both domestic and foreign corporations. This report aims to facilitate both existing and potential investors to better understand the Vietnamese business climate, and more specifically the economic landscape in Vietnam’s provinces.

Source: Vietnam Briefing