Document of The World Bank FOR OFFICIAL USE ONLY Report No. 72940-VN INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED CREDIT IN THE AMOUNT OF SDR 162.7 MILLION (US$250 MILLION EQUIVALENT) TO THE SOCIALIST REPUBLIC OF VIET NAM FOR THE FIRST ECONOMIC MANAGEMENT AND COMPETITIVENESS DEVELOPMENT POLICY OPERATION February 19, 2013 Poverty Reduction and Economic Management Department Vietnam Country Management Department East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. VIETNAM - GOVERNMENT FISCAL YEAR JANUARY 1 – DECEMBER 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of January 2013) Currency Unit Vietnamese Dong US$1.00 20749.00 WEIGHTS AND MEASURES Metric System ABBREVIATION AND ACRONYMS AAA Analytical and Advisory Activity MONRE Ministry of Natural Resources and Environment ADB Asian Development Bank MPI Ministry of Planning and Investment Aps Administrative Procedures MTDS Medium-Term Debt Management Strategy APCA Administrative Procedures Control Agency MTIF Medium-Term Investment Framework ASEAN Association of Southeast Asian Nations NPLs Non-performing Loans AusAID Australia Agency for International Development OECD Organization for Economic Cooperation and Development ABP AusAID-Bank Partnership Program in Vietnam OOG Office of Government CFAA Country Financial Accountability Assessment PAPI Public Administration Performance Index CIEM Central Institute for Economic Management PCI Provincial Competitive Index CIT Corporate Income Tax PEFA Public Expenditure and Financial Accountability CPIA Country Policy and Institutional Assessment PFM Public Financial Management CPS Country Partnership Strategy PFMRP Public Financial Management Reform Project DA Deposit Account PIM Public Investment Management DFID Department for International Development PIR Public Investment Reform DPO Development Policy Operation PPP Public Private Partnership DSA Debt Sustainability Analysis PRSC Poverty Reduction Support Credit EMCC Economic Management and Competitiveness ROSC Report on the Observance of Standards and Codes Credit FA Financial Agreement SAV State Audit of Vietnam FDI Foreign Direct Investment SBV State Bank of Vietnam FSAP Financial Sector Assessment Program SECO Swiss State Secretariat for Economic Affairs GDP Gross Domestic Product SEDS Socio-Economic Development Strategy GDT General Department of Taxation SEDP Socio-Economic Development Program GCs General Corporations SEGs State Economic Groups GOV Government of Vietnam SMEs Small and Medium Enterprises GSO General Statistics Office SOCBs State-owned Commercial Banks IDA International Development Association SOEs State-owned Enterprises IDF Institutional Development Fund TAMP Tax Administration Modernization Project IFC International Finance Corporation TWG Technical Working Group ILO International Labor Organization UNIDO United Nations Industrial Development Organization IMF International Monetary Fund UNDP United Nations Development Programme JICA Japan International Cooperation Agency VASS Vietnam Academy of Social Sciences MDGs Millennium Development Goals VAT Value-Added Tax MDTF Multi-Donor Trust Fund VASS Vietnam Academy of Social Sciences MOF Ministry of Finance VCCI Vietnam Chamber of Commerce and Industry MOIT Ministry of Industry and Trade VDR Vietnam Development Report MOJ Ministry of Justice WTO World Trade Organization Vice President: Axel Van Trotsenburg Country Director: Victoria Kwakwa Sector Director: Sudhir Shetty Lead Economist: Deepak Mishra Task Team Leader: Habib Rab SOCIALIST REPUBLIC OF VIETNAM ECONOMIC MANAGEMENT AND COMPETITIVENESS CREDIT 1 TABLE OF CONTENTS CREDIT AND PROGRAM SUMMARY ....................................................................................................... i I. INTRODUCTION .............................................................................................................................. 1 II. COUNTRY CONTEXT ..................................................................................................................... 2 RECENT ECONOMIC DEVELOPMENTS IN VIETNAM ................................................. 5 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ............................... 15 III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES ....................... 18 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ..................................................... 21 LINK TO COUNTRY PARTNERSHIP STRATEGY ........................................................ 21 RELATION TO OTHER BANK OPERATIONS ............................................................... 21 COLLABORATION WITH THE IMF AND OTHER DONORS ....................................... 22 ANALYTICAL UNDERPINNINGS ................................................................................... 24 LESSONS LEARNED ......................................................................................................... 26 V. THE PROPOSED ECONOMIC MANAGEMENT AND COMPETITIVENESS CREDIT 1 .. 30 OPERATION DESCRIPTION ............................................................................................ 30 POLICY AREAS ................................................................................................................. 35 PILLAR 1: MACROECONOMIC STABILITY ..................................................................... 35 PILLAR 2: TRANSPARENT, EFFICIENT AND ACCOUNTABLE PUBLIC SECTOR .... 39 PILLAR 3: ENABLING BUSINESS ENVIRONMENT ........................................................ 46 VI. OPERATION IMPLEMENTATION ............................................................................................. 51 POVERTY AND SOCIAL IMPACTS ................................................................................ 51 ENVIRONMENTAL ASPECTS ......................................................................................... 54 IMPLEMENTATION, MONITORING AND EVALUATION .......................................... 54 FIDUCIARY ASPECTS ...................................................................................................... 55 RISKS AND RISK MITIGATION ...................................................................................... 58 ANNEXES ANNEX 1. LETTER OF DEVELOPMENT POLICY ...................................................................................... 60 ANNEX 2. EMCC POLICY MATRIX ............................................................................................................ 63 ANNEX 3. EMCC MONITORING TABLE ..................................................................................................... 69 ANNEX 4. COMPETITIVENESS AND GENDER ......................................................................................... 71 ANNEX 5. FUND RELATIONS NOTE ........................................................................................................... 78 ANNEX 6. COUNTRY AT A GLANCE .......................................................................................................... 81 MAP SOCIALIST REPUBLIC OF VIETNAM ECONOMIC MANAGEMENT AND COMPETITIVENESS CREDIT 1 The First Economic Management and Competitiveness Credit was prepared by an IDA team consisting of Anjali Acharya (Senior Environmental Specialist, EASVS), Christian Bodewig (Senior Economist, EASHS); Deepak Mishra (Lead Economist, EASPV); Duc Minh Pham (Senior Economist, EASPV); Habib Rab (Senior Economist, EASPV); Hisham Abdo Kahin (Senior Counsel, LEGES); Huong Thi Lan Tran (Governance Specialist, EASPV); Huong Thi Mai Nong (Junior Counsel, EACVF); James Anderson (Senior Governance Specialist, EASPV); Kien Trung Tran (Senior Procurement Specialist, EASR2); Lan Phuong Nguyen (Team Assistant, EACVF); Linh Anh Thi Vu (Team Assistant, EACVF), Linh Hoang Vu (Economist, EASPV); Mette Frost Bertelsen (Country Officer, EACVF); Nga Thi Quynh Dang (Trust Fund Coordinator, EACVF); Phuong Anh Nguyen (Consultant, EASPV); Quang Hong Doan (Senior Economist, EASPV); Quyen Hoang Vu (Economist, EASPV); Robert Gilfoyle (Senior Financial Management Specialist, EASFM); Sameer Goyal (Senior Financial Sector Specialist, EASFP); Thang Long Ton (Country Economist, EASPR); Viet Quoc Trieu (Financial Sector Specialist, EASFP); Viet Tuan Dinh (Senior Economist, EASPV); and Yuling Zhou (Lead Procurement Specialist, EASR2). EMCC 1 was coordinated by the International Cooperation Department of the State Bank of Vietnam led by Mme. Doan Hoai Anh (Director-General) and supported by Mr. Tran Anh Tuan (Manager). Contributions of colleagues gratefully acknowledged from the Ministry of Finance; the Ministry of Planning and Investment; the Ministry of Industry and Trade; the Ministry of Justice; the Office of the Government; the Government Inspectorate; and the State Bank of Vietnam. Additional contributions gratefully acknowledged from Dominic Mellor (ADB), Renwick Irvine (DFID), Nguyen Thi Ngoc Minh (DFID), Brigitte Bruhin (SECO), Nguyen Hong Giang (SECO), Mark Palu (AusAID), Andy Isbister (AusAID), Daisuke Watanabe (JICA), Truong-Thi Quynh Trang (JICA), Naito Yuko (JICA), Joanne Pindera (CIDA). Thanks also to DFID and AusAID for contributions to the EMCC Programmatic AAA respectively under the Vietnam Governance, Economic Management and Social Protection Trust Fund and the Australia-Bank Partnership Trust Fund. Peer reviewers for EMCC 1 were Vivek Suri (Lead Economist, EASPR), Salman Zaidi (Lead Economist, SASEP), and Paolo Zacchia (Lead Economist, AFTP2). Comments and guidance were also gratefully received from Ed Mountfield (Manager, OPSPQ), Hoon Sahib Soh (Operations Advisor, EASOS), Pablo Saavedra (Economic Advisor, OPSPQ), and colleagues from PREM, SDN, and HDN anchors. The operation was prepared under the overall guidance of Victoria Kwakwa (Country Director, EACVF), Sudhir Shetty (Sector Director, EASPR), and Deepak Mishra (Lead Economist, EASPV). CREDIT AND PROGRAM SUMMARY SOCIALIST REPUBLIC OF VIETNAM ECONOMIC MANAGEMENT AND COMPETITIVENESS CREDIT 1 Borrower The Socialist Republic of Vietnam Implementing Agency The State Bank of Vietnam Financing Data Terms: IDA terms for blend country (5-year grace, 25-year maturity). Amount: SDR 162.7 million (US$250 million equivalent) Operation Type The proposed Economic Management and Competitiveness Credit (EMCC 1) is the first in a programmatic series of three Development Policy Operations (EMCC 1-3). EMCC 1 is a single tranche operation. Main Policy Areas After a period of high economic growth - fed largely by rapid accumulation of factors of production - a loss in competitiveness is now adversely impacting Vietnam’s medium to long-term development potential. The EMCC will focus on economic management reforms that will contribute to higher productivity in Vietnam. It will support seven policy areas: (i) financial sector; (ii) fiscal policy; (iii) public administration and accountability; (iv) state enterprise management; (v) public investment management; (vi) efficiency of the business environment; and (vii) equity and transparency of the business environment. Key Outcome Indicators The EMCC intends to support the Socio-Economic Development Plan’s (SEDP 2011-2015) ambition to strive for a new economic growth model, which targets competitiveness and the quality of growth. It will contribute to a range of outcomes including: (i) Macroeconomic stability through: enhanced financial sector stability; and maintenance of fiscal discipline; (ii) A transparent, efficient and accountable public sector through: improved public administration and accountability; strengthened state enterprise management; and enhanced public investment management; and (iii) An enabling business environment through: a more efficient business environment; and greater transparency and equity of the business environment. The operation will also look at two cross-cutting themes: (i) protecting the poor from adverse effects of Vietnam’s economic transition and competitiveness-related reforms; and (ii) promoting greater data and policy-making transparency. Analytical work and policy dialogue will aim to ensure that these cross-cutting issues are appropriately taken into account in the reforms supported under the operation. Program Development The EMCC’s overall goal is to contribute to “enhanced competitiveness to Objective(s) and boost growth and poverty reduction.â€? This supports the Government’s Contribution to CPS priorities set out in its SEDP 2011-2015, and in its recently announced priorities for structural reforms around state-owned enterprises (SOEs), the banking sector and public investment. i The EMCC is directly aligned to the objectives under the first pillar of the Country Partnership Strategy (CPS), which focuses on improving national competitiveness. More specifically, it will support measures to strengthen CPS Outcome 1.1: Improved Economic Management and Business Environment. Risks and Risk Vietnam faces important short-term domestic macroeconomic Mitigation management challenges. Whilst foreign exchange reserves have more than doubled in 2012, they are low by international standards. The ongoing domestic credit crunch could further worsen both growth prospects and asset quality. Another risk is the authorities’ departure from fiscal and monetary discipline prompting inflation resurgence. This could unravel gains already made and further weaken confidence. A similar outcome, but where potential growth is compromised, could arise from delayed and poor implementation of structural reforms including the resolution of bad debts in banks and SOEs. Vietnam is also vulnerable to the effects of a prolonged global economic slowdown, which could adversely affect exports, remittances, foreign investment, and possibly aid. Although it has managed to navigate the global economic crisis reasonably well through implementation of a large stimulus package, fiscal space is now limited because of high levels of public debt and large contingent liabilities from a weak banking sector and poorly managed SOEs. Mitigation measures include closer monitoring of macroeconomic developments, and increased dialogue with the authorities in collaboration with the IMF to ensure steadfast implementation of reforms already announced and to prepare for new ones. The ongoing work on a Financial Sector Assessment Program (FSAP) by the World Bank and IMF is expected to provide a comprehensive roadmap for financial sector reform. The EMCC series can itself be considered as part of a risk mitigation strategy as it underscores the need to reform, builds consensus around challenging issues and helps design appropriate responses. A potential lack of leadership and ownership over the EMCC program could ultimately affect its end results. This could be due to lack of incentives to pursue large reforms through EMCC in light of its multi- agency design. The EMCC has developed new governance arrangements to help strengthen Government ownership and coordination of the program. A more focused agenda, and dedicated resources to help bring in high-quality analytical input should also help to mitigate some of the above risks. But there are also important political economy challenges due to short-term losses for important interest groups. This can create powerful opposition to tightening of fiscal and monetary policies, and indeed any change to the status quo in the management of SOEs, the banking sector and management of public investments. Strong political commitment is needed to drive much needed reforms. Finally, whilst the need for reform may be strong, it will be important to adopt policies and institutions that are consistent with implementation capacity. Sophisticated standards will not serve their purpose if there is limited capacity to implement them. The program will maintain a very close dialogue to ensure appropriate sequencing and prioritization of reforms. Operation ID P122793 ii IDA PROGRAM DOCUMENT FOR A PROPOSED ECONOMIC MANAGEMENT AND COMPETITIVENESS CREDIT 1 TO THE SOCIALIST REPUBLIC OF VIETNAM I. INTRODUCTION 1. The proposed Economic Management and Competitiveness Credit (EMCC) is a new series of three programmatic Development Policy Operations (DPOs) (FY13-15). The EMCC succeeds a ten-year series of Poverty Reduction Support Credits (PRSCs) to Vietnam, which ended in FY12. The PRSC series supported significant reforms, which have contributed to Vietnam’s successful development record over the past ten years. It was the main vehicle for policy dialogue between the Government of Vietnam (GOV) and Development Partners on economic management, governance, social sector, and financial sector reforms. The EMCC aims to contribute to the next phase of Vietnam’s development. This Program Document outlines the objectives, components, and expected results of EMCC. 2. The EMCC proposes to support economic management reforms to enhance competitiveness for sustained growth and poverty reduction. Competitiveness is broadly defined as “the set of institutions, policies and factors that determine the level of productivity in a country.â€?1 Macroeconomic instability, poor public service delivery, and high costs of doing business are symptoms of low competitiveness resulting from weak (or poor implementation of) policies and institutions. After a successful period of high economic growth fed by rapid accumulation of factors of production, a loss in competitiveness is now adversely impacting Vietnam’s medium to long-term development potential. The Socio- Economic Development Strategy (SEDS 2011-2020) therefore proposed a new economic growth model, which targets competitiveness and the quality of growth. 3. The EMCC series comes at a critical time, as the government embarks on a new wave of policy reforms to address competitiveness challenges. The EMCC will focus specifically on three elements of competitiveness: (i) macroeconomic stability; (ii) transparency, efficiency and accountability of the public sector; and (iii) an enabling business environment that promotes private sector development. The operation will also look at two cross-cutting themes: (i) protecting the poor from adverse effects of Vietnam’s economic transition and competitiveness-related reforms; and (ii) promoting greater data and policy- making transparency. Analytical work and policy dialogue will aim to ensure that these cross-cutting issues are appropriately taken into account in the reforms supported under the operation. The design of the EMCC is based on feedback from the government and Development Partners, and lessons learnt from implementation of the PRSC series. 1 World Economic Forum – Global Competitiveness Report. 1 II. COUNTRY CONTEXT 4. Vietnam has seen impressive economic growth and poverty reduction in the past twenty five years. Political and economic reforms (Ä?ổi Má»›i) launched in 1986 have transformed Vietnam from one of the poorest countries in the world, with per capita income below US$100, to a lower middle-income country within a quarter of a century. At the end of 2011, Vietnam’s per capita income was estimated at US$ 1,374.2 Using a ‘basic needs’ poverty line initially agreed in 1998 3, the poverty headcount fell from 58 percent in the early 1990s, to 14.5 percent by 2008, and by these standards is estimated to have fallen further by 2010. 4 The country has attained five of its ten original millennium development goal (MDG) targets and likely to attain two more by 2015. 5. Reforms in the early nineties contributed to major competitiveness gains, which enabled a structural shift from agriculture to higher productivity manufacturing. Investments in physical capital and human resources led to increased productivity. Vietnam’s membership in the Association of Southeast Asian Nations (ASEAN) and the World Trade Organization (WTO) in 1995 and 2007, respectively and a series of bilateral trade agreements promoted further reforms, leading to higher private and public investments. These helped to raise efficiency in the enterprise sector, boosted agriculture production, increased foreign trade and investment, and improved public service delivery.5 Chart 1: Contribution to Different Factors of Production to Real GDP Growth, 1990-2010 (in %) 10 0.0 8 0.8 1.7 1.5 5.0 4.4 Contribution of 4.3 0.8 1.3 3.0 0.4 1.0 0.6 TFP (%) 6 1.5 1.0 0.9 5.8 4.1 0.5 1.4 1.3 0.5 0.9 1.2 0.9 0.3 2.6 1.3 0.1 1.5 0.8 Contribution of 3.5 1.4 1.3 1.2 4 1.4 1.4 7.6 L (%) 3.5 1.4 5.7 5.8 4.8 5.1 5.2 4.8 4.3 5.2 2 1.5 3.9 4.0 3.5 3.8 3.9 Contribution of 1.6 3.1 3.1 3.6 K (%) 0.9 2.5 1.4 0.7 0.7 0 1990 1995 2000 2005 2010 Source: World Bank, Vietnam Development Report 2012 (www.worldbank.org/vn/vdr). 2 Source: World Bank, http://data.worldbank.org/country/vietnam. 3 The GSO-WB poverty line was presented in the 2000 Country Economic Memorandum Attacking Poverty (World Bank, 2000) and is approximately $1.10 (2005 Purchasing Power Parity (PPP)). It was constructed on the basis of the consumption behavior of the poor in the 1993 Vietnam Living Standards Survey (VLSS), and has been updated for inflation for each round of the VLSS. 4 A new poverty line was estimated for 2010 by the General Statistics Office (GSO) and World Bank (also referred to as the GSO-WB poverty line) that better reflects living conditions of the poor. The new poverty line is equal to VND 653,000 person/month ($2.25 person/day, PPP 2005). Based on the new line and updated monitoring system, the national poverty rate in 2010 is 20.7 percent, which compares to an official poverty rate of only 14.2 percent in 2010 using official MOLISA urban and rural poverty lines (VND 500,000 person/month and VND 400,000 person/month, respectively). 5 See VDR 2012 p.13-15 for an overview. 2 6. There is growing recognition however that reforms now need to promote more efficient use of factor endowments, and increase productivity across the economy . Growth during the 2000s has been driven mostly by factor accumulation, and in particular capital deepening (Chart 1). The relative contribution of capital accumulation has increased further in the last five years but its marginal productivity has declined, as has labor productivity growth due to a skills deficit. 7. Recent assessments and surveys indicate that competitiveness constraints stem largely from a number of policy and institutional weaknesses. 6 There have been bouts of macroeconomic instability, which has adversely impacted market confidence. Public sector governance is increasingly fragmented, leading to uneven implementation of rules and regulations. Inefficient public investments have contributed to falling marginal productivity of capital. Finally, a severe shortage of skilled labor is creating bottlenecks for business expansion and higher-value addition. Chart 2: CPIA 2009-2011 (0-6) Chart 3: GCI 2012-2013 (0-7) Institutions Econ Mgt 6 5 4 4 3 Higher Ed & 2 Structural 2 Infrastructure Overall Training Policies 1 0 0 Health & Prim Macro Env Public Social Inc Ed Sector Mgt Policies Vietnam Philippines Thailand Indo Vietnam IDA Average Source: World Bank. Source: World Economic Forum. 8. Based on broad indicators of policy and institutional performance, Vietnam is more competitive than other low-income, factor-driven economies, though less so compared to other middle-income, efficiency-driven economies. To illustrate, Chart 2 shows that Vietnam scores well compared to other IDA countries in most indicators of the Bank’s Country Policy and Institutional Assessment (CPIA). The only exception is on structural reforms, where it falls a little behind the overall IDA average. Similarly under the Global Competitiveness Index 2012-2013 (Chart 3), Vietnam fares relatively well compared to factor-driven economies such as the Philippines, although it has lost some ground on macroeconomic management. Vietnam performs less well on basic requirements of competitiveness relative to more efficient economies in the region including Indonesia and Thailand. Addressing competitiveness challenges is necessary to help Vietnam avert a middle-income trap – where it is no longer able to compete against low-wage economies in manufactured exports, or against more advanced economies in innovative products. 6 Ref: (i) CIEM, ACI and NUS, “Vietnam Competitiveness Report,â€? (p. 39-57); (ii) VDR 2012; (iii) MOIT, UN, UNIDO, “Vietnam Industrial Competitiveness Report,â€? 2011 – Executive Summary; (iv) European Chamber of Commerce in Vietnam, “White Book of Trade, Investment Issues and Recommendations,â€? (2012) and the EuroCham Business Climate Index. 3 9. Vietnam’s rankings on several cross-country competitiveness assessments have recently declined. Vietnam fell sixteen places in the last two years to 75th out of 144 countries in the World Economic Forum’s Global Competitiveness Index – the sharpest drop was in the macroeconomic dimension where Vietnam fell by 41 places to 106th. It is now the second lowest among ASEAN countries in the overall rankings. In comparison, Cambodia rose by 12 places and the Philippines rose by 10 places. In the Bank’s Logistics Performance Index, which looks at trade facilitation issues, Vietnam has consistently ranked around the 65th percentile, whereas other countries like Sri Lanka and Philippines have now overtaken Vietnam. 10. Vietnam’s overall ranking in the Doing Business survey fell between 2012 and 2013. In 2013 it ranked 99th out of 185 countries, falling from 90th position in 2011 and 98th position in 2012. This is below the East Asia Pacific average of 89th position. Vietnam’s ranking fell in five out of ten indicators between 2012 and 2013 (Chart 4): dealing with construction permits (27 to 28); getting credit (38 to 40); protecting investor (167 to 169); enforcing contracts (41 to 44); resolving insolvency (145 to 149). This was not because of a deterioration in the Vietnamese business environment, but because other countries gained ground. Areas such as starting a business (109 to 108) and procedures for paying taxes (153 to 138) have improved, but performance remains poor. Chart 4: Doing Business Inidcator Rankings for Vietnam Starting a Business 200 Dealing with Resolving Construction Insolvency 150 Permits 100 Enforcing Getting Contracts 50 Electricity 0 Trading Registering Across Property Borders Paying Taxes Getting Credit Protecting Investors 2013 2012 Source: Vietnam Doing Business 2012. 11. A similar picture emerges on business environment challenges when looking at results from the Bank’s 2009 Enterprise Survey.7 Dealing with tax authorities imposes a heavy regulatory burden on private enterprises, which also fuels corrupt practices. Over half of firms surveyed said they were expected to give gifts to secure government contracts. Government has acknowledged that corruption is a major impediment to development and has worked to strengthen the legal and institutional framework to address this. It will soon start to monitor and evaluate the results of its anti-corruption efforts, and publish the information on the Government Inspectorate website. The Enterprise Survey also highlighted inequities across different types of businesses. For example, it took around 53 days for small firms to obtain an import license while it only took 8 days for larger firms. 7 World Bank and IFC Enterprise Surveys – Vietnam Country Profile 2009. 4 12. Though Vietnam continues to attract foreign investments, there is a growing gap on implementation of foreign investment commitments. Implementation of foreign direct investment (FDI) commitments was highest during 1997-2004 (73.5 percent), but dropped sharply to 40.1 percent in 2006-2008.8 FDI disbursements are on a falling trend, peaking at $72 billion in 2009,9 and coming down to $9.5 billion in 2012 (year-to-date). In the early years, FDI flows were concentrated in import substitution and non-tradable sectors. More recently, they have turned to labor-intensive industries, the real estate sector (which in the last year has shrunk), and export-oriented firms. In 2012, the processing and manufacturing sectors remain the largest recipients of FDI, with 65 percent of the total. 13. Available evidence shows little technology transfer between foreign firms and the domestic private sector, which could otherwise contribute to firm-level competitiveness. The links between FDI-driven export firms and domestic Small and Medium Enterprises (SMEs) are limited. The rapid expansion in the export of electronics has been fairly recent. Much of the activity is focused on assembly – higher-value added activities are conducted elsewhere. Export growth in Vietnam does not bring about as much value addition as for example China (20 percent vs. 33 percent in China from manufacturing value added). 10 Large firms are not plugged into local clusters and value chains. RECENT ECONOMIC DEVELOPMENTS IN VIETNAM 14. Vietnam’s economy gradually returned to a relatively stable macroeconomic environment during 2012 compared to the tumultuous period of 2007-11. In early 2011, the country was in a phase of heightened macroeconomic vulnerabilities. This was characterized by high and rising inflation, extreme volatility in the foreign exchange market, rapidly dwindling international reserves, a sharp rise in country risk following default by one of the biggest state-owned enterprises (SOEs), high levels of fiscal and trade deficits, and weaknesses in the banking and corporate sectors. These vulnerabilities and the absence of a persuasive strategy to address them led to weakening sentiments towards the country’s economic prospects. Stabilization measures (Resolution 11) implemented in 2011 and 2012 helped Vietnam avert a macroeconomic crisis, restore macroeconomic stability, reduce inflation, strengthen fiscal and external accounts, and stabilize the exchange rate (Chart 6). The increased supply of US dollars in the market has enabled the State Bank of Vietnam (SBV) to replenish foreign exchange reserves, which are now reportedly just over two months of imports (Chart 8). CIEM, ACI and NUS, “Vietnam Competitiveness Reportâ€? (2010). 8 9 Vietnam Development Report (2012). 10 http://blogs.worldbank.org/developmenttalk/blogs/vandana-chandra; also see Hinh Dinh (2012) on “Light Manufacturing Sector in Vietnam.â€? 5 Chart 5: Inflation rate (y/y), in % Chart 6: Parallel market premium 25 (USD-VND exchange rate) 16% 14% Pre-Resolution 11 20 12% 15 10% Post-Resolution 11 8% 6% 10 4% 2% 5 0% -2% 0 J-10 M-10 S-10 J-11 M-11 S-11 J-12 M-12 S-12 J-13 J-10 M-10 S-10 J-11 M-11 S-11 J-12 M-12 S-12 Chart 7: CDS (Difference between Vietnam 3 Chart 8: International reserves (in months of 250 and Emerging Asia) imports) 2.3 200 2.1 2.0 2.0 1.9 Pre-Resolution 11 2 1.8 1.7 150 100 1 50 Post-Resolution 11 0 0 -50 q4-10 q1-11 q2-11 q3-11 q4-11 q1-12 q2-12 J-10 M-10 S-10 J-11 M-11 S-11 J-12 M-12 S-12 Source: SBV, GSO, IMF, World Bank Staff. Real Sector 15. Stabilization policies and sluggish global growth have led to economic slowdown during 2012 (Chart 9). GDP growth slowed to 4 percent in Q1 year-on-year, the lowest it has been in three years. Growth picked up in Q2 2012 (4.6 percent) and Q3 (5.4 percent), reaching 5.03 percent for the whole year. This is lower than the target of 6-6.5 percent initially set for 2012. The slowdown has been felt most acutely in the construction sector as well as by SMEs. Nearly 42,000 SMEs are reported to have closed, liquidated or temporarily suspended their operations during the first ten months of 2012 – a 6.7 percent increase compared to the same period in 2011. Chart 9: Real GDP Growth 2005-2012 10 Growth rate (Quarter-on-Quarter ) 8.5 8.2 8.5 Growth rate (Year-on-Year) 8 6.8 6.3 5.9 6 5.3 5.0 4 9.1 9.1 8.7 9.2 8.6 9.2 7.3 7.8 7.1 7.5 7.8 8.0 7.5 7.2 7.3 6.9 5.7 6.0 5.9 6.0 5.8 6.4 5.6 5.7 6.1 6.1 5.4 2 4.5 4.0 4.7 3.1 0 q1-05 q2-05 q3-05 q4-05 q1-06 q2-06 q3-06 q4-06 q1-07 q2-07 q3-07 q4-07 q1-08 q2-08 q3-08 q4-08 q1-09 q2-09 q3-09 q4-09 q1-10 q2-10 q3-10 q4-10 q1-11 q2-11 q3-11 q4-11 q1-12 q2-12 q3-12 Source: General Statistics Office, Government of Vietnam. 6 16. A major source of the growth deceleration is slowing public and private investment. With slowdown in credit growth and efforts to restructure public investment, total investment has fallen sharply — from 41.9 percent of GDP in 2010 to 34.6 percent in 2011. The decline has been uniformly shared across the state budget, state-owned enterprises and the private sector. As noted above, foreign investments have declined in recent years. This is a source of concern as Vietnam will require infusion of foreign capital to restructure its state–owned enterprises and banking sector. External Sector 17. Vietnam’s loss of competitiveness does not show up in its export numbers, which are driven primarily by foreign-invested enterprises. As shown in Chart 10, at 34.2 percent in 2011, Vietnam recorded the highest rate of export growth in developing East Asia, with China coming at a distant second. The country’s total export turnover in 2012 is estimated at $114.6 billion, rising 18.3 percent over 2011. The foreign-invested sector (including crude oil) contributed 63 percent of total Vietnam’s exports and grew 31 percent in 2012, while the domestic sector contributed 37 percent and grew at 1 percent. Chart 10: Vietnam export growth relative to selected Asian Countries (in %) 40 34.2 Vietnam 28.7 China 30 24.2 22.8 Indonesia 20.4 20 Philippines 14.3 14.0 Malaysia 10.5 10.2 10 7.6 6.9 Thailand 5.2 4.0 0.7 1.3 0 -6.7 -3.9 -10 -9.0 2011 q1-12 q2-12 Source: General Statistics Office, Government of Vietnam. 18. The difference between the sluggish domestic enterprise sector and robust foreign enterprises can largely be explained by three factors. First, stabilization policies including the hike in interest rates, lower credit growth, and slower growth in public spending, have affected domestic enterprises considerably more than their foreign counterparts. Second, exports have been particularly buoyant as production capacity in a number of foreign enterprises (particularly in the electronic sector) has come on stream in recent years. Finally, domestic enterprises, particularly SOEs, which are known to be less efficient than their foreign competitors, have lost market share. The last factor has accelerated during the recent growth slowdown as the economy tries to rid itself of inefficiencies and structural constraints. 7 19. Imports have slowed down significantly together with falling growth, and in particular due to falling demand for construction material. Import spending in the year to August is estimated at $114.3 billion, up 7.1 percent year-on-year. Imports of machinery and equipment by foreign firms remained strong. However imports by domestic firms decreased, reflecting a strong consolidation of public as well as private investment. Imports of raw materials and intermediate goods (fertilizer, animal feed, cotton, fiber, fabrics) have also decreased, reflecting falling domestic demand and growing inventory. Imports of automobiles and motorbikes fell sharply partly because of a hike in taxes and fees to deal with chronic traffic congestion in large cities. 20. Vietnam has, as a result of these developments, posted a surplus on its trade account for the first time since 1992. This has in turn contributed to a record current account surplus estimated at 5 percent of GDP. Vietnam’s turnaround in its external balance — from double-digit deficit to surplus in a period of five years and without any sharp and sudden adjustments to the exchange rate — has been particularly impressive. 21. The improved current account position has enabled the SBV to shore up foreign exchange reserves. International reserves have built up from 7 weeks of import cover (end 2011) to about 10 weeks (December 2012), which is roughly $20 billion.11 This was also helped by a fall in domestic capital flight, as exchange rate stability and falling inflation have helped to restore confidence in the VND (Chart 12). This is reflected in the fact that the reference rate for VND has been stable at 20,828 Dong to the US Dollar for nearly a year, and a narrowing differential between the parallel and official rates. Chart 11: Current and Trade Account Chart 12: VND/USD exchange rate Balance (% of GDP) 22,500 20 14.2 Current account deficit 15 11.9 21,500 Trade deficit (BOP definition) 8.9 10 6.6 20,500 4.1 5.0 5 0.4 19,500 0 -0.2 Parallel market (mid) 18,500 -5 Official rate (SBV) -5.0 Official upper band -10 -7.0 17,500 2008 2009 2010 2011e 2012f Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Source: SBV. 11 The Prime Minister at the Consultative Group Meeting in December 2012 indicated that reserves were equivalent to three months of imports. 8 Inflation and Monetary Policy 22. Inflation has been falling steadily in the past twelve months. Headline and food inflation peaked at 23 and 34 percent respectively in August 2011 (Chart 13). By December 2012 headline inflation for the year had fallen to 6.8 percent. While year-to-year inflation has been steadily declining, the month-on-month inflation, which suffers from seasonality bias and hence an imperfect measure of the general price movements, is expected to rise during the lunar new year months, and remains high in January-February 2013 (Chart 14). Chart 13: Headline, food and core inflation rate Chart 14: YOY and M/M headline inflation (yoy, %) rate (%) 40 4.0 25 Headline Monthly (LHS) Food 3.0 year-on-year (RHS) 20 30 Core 2.0 15 20 1.0 10 10 0.0 5 0 -1.0 0 J-10 M-10 S-10 J-11 M-11 S-11 J-12 M-12 S-12 J-13 J-11 M-11 S-11 J-12 M-12 S-12 J-13 Source: General Statistics Office, Government of Vietnam. 23. The decline in the inflation rate can be largely attributed to stabilization measures. There is a strong parallel with the last inflation episode — when inflation peaked at 28.3 percent in August 2008 and plummeted to 8.1 percent in May 2009. But there is also a critical difference. In 2008/09, global commodity prices, especially the price of crude oil plunged from around US$150 per barrel to less than US$40 per barrel in the space of a few months. The current disinflation episode, however, has occurred despite high global prices, pointing to the effectiveness of Resolution 11 in bringing inflation down to single digits. 9 Table 1: Vietnam Key Economic Indicators 2010 2011 2012e 2013f 2014f 2015f Output, Employment and Prices Real GDP (% change y-y) 6.8 6.0 5.0 5.5 5.7 6.2 Domestic demand (% change y-y) 10.3 -0.4 3.1 4.4 5.0 5.6 Industrial production index 1/ (% change y-y) 9.3 6.8 4.8 5.5 6.5 6.8 Unemployment (%) 2/ 4.3 3.6 4.2 4.0 4.0 4.0 Consumer price index (% change, period average) 9.2 18.7 9.1 8.0 7.2 6.0 Public Sector Government revenues (% GDP) 29.6 27.7 25.1 25.4 25.5 25.3 Government expenditures (% GDP) 32.7 30.9 29.9 29.2 29.1 28.7 Government balance, official (% GDP) 3/ -0.7 -1.5 -3.2 -2.3 -2.0 -2.0 Government balance, general (% GDP) 4/ -3.1 -3.2 -4.8 -3.8 -3.5 -3.4 Public sector debt (% GDP) 5/ 54.0 55.4 53.7 53.3 53.1 53.0 Foreign Trade, BOP and External Debt Trade balance (billions US$, BOP definition) -5.1 -0.5 9.9 8.9 9.3 10.1 Exports of goods (billions US$, fob) 72 97 115 131 151 175 (% change y-y) 26.4 34.2 18.2 14.1 15.5 16.1 Key export (% change y-y) 6/ -23.0 45.9 15.0 5.0 5.0 5.0 Imports of goods (billions US$, cif) 85 107 114 132 154 180 (% change y-y) 21.2 25.9 6.6 16.3 16.3 16.6 Current account balance (billions US$) -4.3 0.3 7.1 3.8 3.7 3.9 (% GDP) -4.1 0.2 5.0 2.5 2.2 2.1 Foreign direct investment (billions US$, net) 7.1 7.1 7.2 7.3 7.5 7.5 External debt (billions US$)/5 45.4 50.1 55.6 59.8 63.5 68.2 (% GDP) 43.8 40.8 39.3 38.4 37.4 36.9 Debt service ratio (% exports of g&s) 3.3 2.8 3.4 3.3 3.1 3.0 Foreign exchange reserves, gross (billions US$) 12.4 13.6 .. .. .. .. (months of imports of g&s) 1.8 1.5 .. .. .. .. Financial Markets Domestic credit (% change y-y) 32.4 14.3 7.0 12.0 15.0 15.0 Short-term interest rate (% p.a.) 7/ 11.6 14.9 9.0 .. .. .. Exchange rate (Dong/US$, eop) 8/ 19,498 20,828 20,828 .. .. Real effective exchange rate (2000=100) 117.4 122.7 .. .. .. (% change y-y) 1.0 4.5 .. .. .. Stock market index (Jul. 2000=100) /9 484.7 351.6 413.7 .. .. Memo: Nominal GDP (billions US$) 103.6 122.8 141.5 155.5 170.0 184.9 Sources: Vietnam Government Statistics Office, State Bank of Vietnam, IMF, and World Bank staff estimate e = estimate; f = forecast 1/ The industrial production index (IPI) is a new series replacing previous "industrial production value in constant 1994 price". 2/ Urban areas 3/ Excludes off-budgetary items 4/ Includes off-budgetary items 5/Public and publicly-guaranteed debt. Forecast by Debt Sustainability Analysis 2012 6/ Crude oil (value) 7/ Three-month deposit, end-of-period. 8/ Central Bank's inter-bank exchange rate. 9/ Ho Chi Minh Stock Index. 10 24. The SBV has aggressively cut interest rates in response to the slowdown in growth and falling inflation. Key policy rates have been cut by 500 basis points between March and July 2012 (Chart 15). The cap for dong deposit has also been reduced from 14 percent to 11 percent. The rules on lending to real estate and for private consumption have been relaxed. SBV is encouraging commercial banks to lower lending rates and promote credit for production, agriculture and rural development, exports, and small and medium enterprises. SBV has also lowered the foreign exchange position limit (ratio of total foreign exchange to the institutions' equity capital for the previous month) of credit institutions and branches of foreign banks by day-end to 20 percent, from the current level of 30 percent. The move is aimed at preventing commercial banks from hoarding foreign currencies and generating more VND liquidity in the banking system. Chart 15: Key interest rates (%) 50 Chart 16: Key monetary aggregates (y-o-y change) 16 40 14 Discount rate Refinancing rate 12 30 10 20 8 Total liquidity (M2) 10 Total credit 6 4 0 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Source: SBV. 25. Despite this, total credit has grown by only 7 percent in 2012, which is much lower than the 15 percent target for the year. Total deposits on the other hand rose by more than 11 percent during the first ten months of the year (Chart 16). The rate cuts may have helped alleviate cost pressures in the private sector, but they are unlikely to impact on supply or consumer spending. This is partly because both individuals and firms are already highly leveraged, and there are uncertainties over future economic prospects, which has contributed to a more cautious attitude. The enterprises are unwilling to take out loans, or unable to due to lack of collateral. 26. Maintaining a strong monetary policy framework, anchored in clear and transparent objective, is critical for Vietnam. Sustained high inflation and exchange rate volatility in 2009-10 impacted negatively on SBV credibility, which simultaneously pursued multiple objectives (inflation, international reserves, credit growth, exchange rate). Implementation of Resolution 11 has helped to restore confidence. There have also been efforts at strengthening the institutional framework for monetary policy. The new SBV Law (effective January 1, 2011) aims to enhance the SBV’s autonomy and accountability over monetary policy decisions, and focuses its objectives on price and exchange rate stability. The Memorandum of Understanding signed between SBV and Ministry of Finance (MOF) in February 2012 helps to strengthen coordination of monetary and fiscal policy through more regular exchange of information. 11 27. The SBV would benefit from greater operational and policy independence. Whilst there is a monetary policy committee, it does not benefit from the autonomy to set policy rates. Transparency and predictability of policy decisions remain a challenge. Market- based monetary policy instruments are limited. SBV has inflation forecasts but there is no formal inflation targeting in Vietnam. Although the monetary policy framework is not a focus area under the EMCC, the operation will monitor developments closely, together with the International Monetary Fund (IMF), the Asian Development Bank (ADB) and other stakeholders as part of its dialogue on the overall macroeconomic policy framework. Fiscal Policy 28. The Government has prioritized fiscal consolidation efforts, particularly by targeting more efficient public investment. The overall deficit fell from 5.2 percent of GDP in 2010 to an estimated 3 percent in 2011 (Chart 17). This was in part due to strong revenue performance and an initial conservative estimate of oil revenue. Corporate Income Tax (CIT) and Value Added Tax (VAT) (together around 55 percent of total revenue) grew at 29 and 19 percent respectively between 2010 and 2011, despite tax relief granted to over three hundred thousand enterprises. Total capital spending (including off-budget) declined slightly by 0.4 percent (and from 12 percent of GDP to 9.4 percent) over the same period (Chart 18). Chart 17: Aggregate Revenue and Expenditure Chart 18: Breakdown of Cap and Rec Exp (% 40 (% of GDP) of GDP) and Capital to Recurrent Ratio 50 100 30 40 83 80 20 30 60 55 48 49 41 44 10 20 38 40 0 10 20 Budget Budget Budget Budget Estimate Actual Actual Actual 0 - -10 Budget Actual Budget Actual Budget Actual Budget 2009 2010 2011 2012 2009 2010 2011 2012 Capital expenditure Recurrent Expenditure Revenue Expenditure Budget balance Capital/Recurrent Chart 19: Major Taxes (% of GDP) Corporate Chart 20: Social Sector Spending (% of GDP) income Education Health 10 tax Social Security Other Social Expenditure 9 Personal 0.7 0.7 8 0.7 income 0.6 0.6 7 tax 0.6 0.6 3.6 3.3 3.3 3.1 2.9 6 Value 3.0 5 added tax 2.9 1.7 1.9 1.8 1.7 4 1.6 1.2 Natural 1.3 3 resource 2 tax 5.0 4.8 4.8 4.6 3.7 4.2 4.4 1 Trade - taxes 2007 2008 2009 2010 2011 including Budget Actual Budget Actual Budget Actual Budget excise on imports 2009 2010 2011 2012 Source: MOF and World Bank estimates. 12 29. A combination of economic slowdown and tax relief for enterprises has contributed to lower than expected domestic revenues in the first nine months of 2012 (Chart 21). Revenue collection in the first three quarters declined by 0.6 percent in nominal terms compared to the same period last year. The VAT, which makes up around a third of total revenue, declined from 5.4 percent of GDP in the first three quarters of 2011 to 4.8 percent in the first three quarters of 2012. This is in part due to tax relief measures introduced in May this year (Resolution 13). Lower VAT returns also reflect falling domestic consumption. VAT on imports and customs receipts have declined due to lower volume of imports and because of lower imports of high margin dutiable goods like cars. CIT payments by foreign invested enterprises have remained relatively strong (17 percent increase between Q3 2011 and Q3 2012), particularly compared to private domestic firms, thanks to buoyant exports. Chart 21: Government Revenue first nine Chart 22: Government Expenditure first nine months of 2012 (VND Bn) months of 2012 (VND Bn) 19,737 Capital 127,980 Non-tax 9 Months Salary 35,000 49,180 Budget Reform 9 Months Trade taxes 36,091 Budget Interest Nat Res Tax 31,540 Soc Sec 64,500 Excise 32,141 Health 37,960 VAT 136,729 Educ 101,600 PIT 35,169 43,826 Econ CIT 145,479 57,930 Admin - 50,000 100,000 150,000 200,000 250,000 - 50,000 100,000 150,000 200,000 Source: MOF. 30. Government expenditure in the first nine months of 2012 has remained on track . Outturn across major spending categories has been around 75 percent of budgeted expenditure (Chart 22). There are also indications that the government has maintained discipline over capital expenditure, a major policy commitment in the 2012 State Budget amid growing concerns over inefficient public investments. By Q3 2012, the government had spent 71 percent of its VND 180 trillion capital budget. The ratio of capital to recurrent expenditure (on-budget only) was at around 27 percent in the first nine months of 2012 compared to an average of 29.5 percent over the same period in 2010-2011. MOF has reported that 67 percent of VND 60 trillion planned capital spending through off-budget bonds was also executed in the first nine months of 2012. These make up nearly a quarter of total capital spending. The government has capped off-budget capital expenditure to VND 225 trillion between 2011 and 2015, but this has been heavily frontloaded. Based on this, the government will need to limit off-budget capital spending to a total of VND 45 trillion in 2014 and 2015. 31. The impact of slower revenue collection on the government’s 2012 fiscal deficit target is still uncertain. In the first nine months of 2012, the fiscal deficit stood at 5.4 percent of GDP compared to a budget estimate of 5.2 percent for the entire year.12 The former however excludes off-budget capital spending, which means that the deficit in the first nine 12 World Bank staff estimates based on data published on MOF website. 13 months could in reality be higher, unless repayments of these debts have accelerated. Slower revenue collection has also contributed to a current fiscal deficit of 0.5 percent of GDP, meaning that domestic revenues in the first three quarters of the year were insufficient to cover recurrent expenditure. These developments may be offset in part by higher than budgeted oil revenue. The projected price of oil in the 2012 State Budget was $85 per barrel, whereas average price in the year to October 2012 was around $106 per barrel. 13 Other revenue will likely pick up as growth starts to gather pace in the last quarter of the year. The government could therefore meet its revenue target, which it tends to overshoot due to consistent underestimation in the annual State Budget. 32. The National Assembly in mid-November approved the 2013 State Budget estimates. Government revenue is estimated to increase by 10 percent compared to the 2012 Budget to VND 816 trillion, and expenditure will also rise by 10 percent to VND 987 trillion. The overall budget deficit comes to 4.8 percent of GDP, based on government estimates. A priority for the government is salary adjustments for public servants. The 2012 State Budget raised the base salary from VND 830,000 per month to VND 1,050,000 per month. Starting May 2013, the government plans to increase this by a further 14 percent to VND 1,300,000 per month, which may cost close to VND 60 trillion. On the other hand, the government has proposed a nominal cut to capital expenditure from VND 180 trillion in the 2012 Budget, to VND 170 trillion in the 2013 Budget.14 Notwithstanding higher off-budget spending as noted above, this would constitute the first nominal cut in the capital budget, certainly since 2006 though most likely going further back. Structural Reforms 33. Banking sector problems mounted during 2012 as new information about the health of the sector came to light and critical restructuring issues were left unresolved . Even though problems in the banking system have been building up for some time, these were not reflected in the non-performing loan (NPL) ratios reported by banks to the SBV. The current regulatory regime discourages banks to report NPLs above 3 percent.15 Even as late as September 30, NPLs reported by banks stood at 4.93 percent. At the same time, SBV reported its own estimate of NPLs at 8.82 percent. Several independent analysts and academics — some of them using international standards to measure bad loans — estimate NPLs to be even higher.16 34. The authorities have tried to seek viable solutions to the problem of rising NPL, but without significant success. As a short-term response, SBV issued regulations in May 2012 allowing 14 banks to trade in bad debts. This was to enable banks with stronger capacity and capital base to acquire bad debts in weaker banks after paying a reasonable premium. Thus far, the solution has brought limited results. For the longer term, SBV has issued Circular 02/2013/TT-NHNN, replacing Decision 493 with stricter loan classification 13 http://www.worldbank.org/prospects/commodities. 14 “Reducing Public Investment to Increase Salary Level,â€? Vietnam Business Forum (November 22, 2012). 15 For example, SBV’s Circular 26 dated September 13 restricts the listing by a credit institution in case its NPL exceeds 3 percent. Similarly other observers have noted that a credit institution with NPL ratio above 3 percent is not allowed to expand and open new branches (though it seems such a restriction did not fully materialize). 16 It is reported that the accumulated provisioning in the system reached VND75 trillion in the Q3, after the banks had written off VND12 trillion bad debts. Such provisioning is still far from the publicly announced bad debts of more than VND200 trillion which is by itself an underestimate by international standards. 14 and provisioning requirements. This should allow more accurate reporting on NPLs and provide a better understanding of system-wide risks. The SBV has also submitted a plan to the Government for the establishment of a central Vietnam Asset Management Company (V AMC) to address the bad debt problem. However, policymakers could not reach a decision on the AMC. The SBV is working on a broader framework to resolve NPLs, of which the AMC may be a part. 35. In order to support the Government to strengthen the financial system, a joint World Bank-IMF Financial Sector Assessment Program (FSAP) is under preparation . The initial focus of the FSAP has primarily been on Observance of Standards and Codes of good practice (ROSCs) and on information/data collection. The FSAP however will also help carry out stress tests to better evaluate system weaknesses. It will be an opportunity for the government to comprehensively assess the stability and development needs of the financial sector. The aim is to strengthen financial oversight, increase compliance with international standards, promote sufficient operational independence of all regulatory bodies, and strengthen institutional capacity. If implemented, the FSAP recommendations should help Vietnam to build a more resilient financial sector for its sustainable development. 36. On SOEs, the Prime Minister has recently issued Decision 929/QD-TTg on the restructuring of State Owned Economic Groups and General Corporations. This is one of the prior actions under EMCC 1 discussed in more detail below. Reform priorities over the coming years include: (i) accelerating the equitization process including diversifying ownership, attracting strategic investors, and capital market development; (ii) strengthening corporate governance, and better monitoring of potential fiscal risks from SOEs; and (iii) improving overall regulation and oversight of SOEs. 37. On public investments, the Government has taken on a reform agenda to address public investment inefficiency and fragmentation. The responsibility for screening, appraising, selecting, and executing infrastructure projects rests with Vietnam’s 63 provincial governments. Although this has helped to create strong competition among sub-national entities, the delegation of authority coupled with weak central oversight has led to inefficient spending and a lack of linkages between infrastructure and national priorities. Government reforms on public investment include: (i) the development of a Medium-Term Investment Framework (MTIF) to provide more predictability for planning and implementation of capital projects; (ii) mobilization of private resources for infrastructure development, especially through Public Private Partnerships (PPPs); and (iii) strengthening oversight, monitoring and evaluation of capital projects funded by public resources. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 38. Vietnam’s economy is expected to grow at a moderate pace of around 5.5 percent during 2013. In the Bank’s base-case scenario, assuming the continuation of the good spell of macroeconomic stability and reasonable export growth, we do not expect any strong headwinds that could destabilize the economy in 2013. The trade and current accounts are expected to remain in surplus in 2013 though by a smaller amount than in 2012. We also expect some consolidation of the fiscal accounts and inflation remaining in the high single digit. 15 39. With the restructuring agenda gaining momentum, we expect some important progress in 2013. Efforts to divest non-core assets and equitize a large number of SOEs could send a positive signal to investors about government’s commitment to this agenda. It could also involve some pains in terms of retrenchment of labor and restructuring of bad debts. We also expect some efforts to resolve the bad debt problem, though given the complexity of the issues involved, it is likely to be a much more drawn-out process. Many of these actions would involve costs and it is unclear how these will be met. If the costs are paid by allowing foreign or domestic private enterprises and banks to invest in the weak banks, it will certainly help to keep the fiscal situation under control and boost investor’s confidence. Given the low price of risk in global capital markets, Vietnam has a unique opportunity to clean up a part of its bad debt problem by accessing external capital at a much lower cost than would have been otherwise possible. 40. There are however several downside risks to the projections. First, on the external side we expect a weak global recovery but no big negative shocks from the United States, Euro Area or Japan. Therefore Vietnam’s exports, FDI and remittances should continue to do as well as in 2012 or better. We also assume oil prices to remain relatively high (around US$ 105 per barrel) but non-oil commodity prices to gradually fall—which should help keep a lid on domestic inflation. We also assume that more progress will be made on the restructuring agenda in 2013 compared to 2012. Debt Sustainability 41. Vietnam’s public debt is currently at sustainable levels. Total outstanding Government and Government-Guaranteed external debt increased by nearly 50 percent from 2008 ($21.8 billion or around 21 percent of GDP) to end of 2010 ($32.5 billion or 32.7 percent of GDP) due to the Government’s fiscal stimulus package. Although debt to the external private sector rose from around $3 billion in 2008 to $5.4 billion in 2010, more than 80 percent of Government and Government-Guaranteed external debt is long-term and concessional from official creditors. Domestic public debt has gone from around 18 percent of GDP between 2006 and 2008, to around 21.5 percent of GDP in 2010, also due to the fiscal stimulus. 42. Vietnam is assessed at low risk of debt distress. The Present Value of Government and Government-Guaranteed external debt is estimated at around 27 percent of GDP, considerably lower than the 50 percent of GDP threshold for external debt sustainability. The Present Value of public sector debt (i.e. including domestic debt) is closer to 50 percent of GDP. Maintaining the current course of fiscal consolidation is essential for debt sustainability. It will help to shelter against potential exchange rate shocks, slowing exports due to falling global demand, and declining sources of concessional financing. Some of the recent developments imply a different set of assumptions than what was considered in the last Debt Sustainability Analysis (DSA). Weaker economic growth and higher recapitalization needs due to large NPLs would adversely impact the debt sustainability. This will be looked at in more detail in the next DSA planned for Q2 2013. 43. There is growing recognition that contingent liabilities from SOEs and the financial sector pose significant risks to debt sustainability. Explicit obligations in the form of government guarantees are less than 5 percent of GDP. But implicit obligations, for 16 example in the event of a systemic shock in the financial sector, are not captured under government and government guaranteed debt statistics. A large proportion of NPLs is attributed to state enterprises. SOEs are in turn highly leveraged – between 2007 and 2009, debt-to-equity ratio averaged 307 percent relative to 183 percent for non-state firms and 145 percent for foreign firms. SOEs also had the highest debt-to-asset ratio among the three groups. Therefore economic slowdown, affecting SOEs, could further affect NPLs and a banking sector crisis. However, even in the absence of a shock, Vietnam’s debt dynamics can change quickly depending on costs of the government’s economic restructuring agenda. The latter includes a plan to deal with NPLs in the system and restructure the largest state enterprises in the country (i.e., Economic Groups and General Corporations). The preliminary 2013 Budget estimates however do not seem to have provisions for restructuring costs. Summary 44. Vietnam’s current macroeconomic situation is more stable than it has been in the past two years. As discussed earlier, Vietnam’s inflation is at two-year low, its international reserves have doubled in the past 12 months, the exchange rate has been stable, and its trade and current account deficit are at modest levels. Stabilization measures implemented over the course of 2011 and 2012 have helped to achieve and maintain this stability. Policies pursued by the Government have been costly in terms of growth, but they are consistent with restoring macroeconomic stability. Moreover, the Government remains fully committed to maintaining macroeconomic stability as seen from the communiqué issued after the recently concluded Party Plenum. Therefore, in our view, the current macroeconomic policy framework is adequate for a Development Policy Operation. 45. However, Vietnam faces important short-term domestic macroeconomic management challenges. Whilst the level of foreign exchange reserves has more than doubled in 2012, it is low by international standards. The sharp slowdown in domestic credit and tepid growth are further worsening asset quality. The risk that authorities would depart from fiscal and monetary discipline prompting inflation resurgence is low but rising. Delayed and poor implementation of structural reforms including the resolution of bad debts in the banks and SOEs could unravel gains already made and weaken confidence further. Vietnam is also vulnerable to the effects of a prolonged global economic slowdown, which could adversely affect exports, remittances, foreign investment, and possibly aid. Although it has managed to navigate the global economic crisis reasonably well through implementation of a large stimulus package, fiscal space is now limited because of high levels of public debt and large contingent liabilities from a weak banking sector and poorly managed SOEs. 46. These risks are being mitigated through closer monitoring of macroeconomic developments, and increased dialogue to ensure steadfast implementation of reforms already announced and to prepare for new ones. The ongoing FSAP is expected to provide a comprehensive roadmap for financial sector reform and accelerate implementation. EMCC series itself can be considered as part of a risk mitigation strategy as it underscores the need to reform, builds consensus around challenging issues and helps design appropriate responses. 17 III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES 47. The Government’s development priorities are set out in its Socio -Economic Development Strategy (2011-2020), and the accompanying Socio-Economic Development Plan (2011-2015). The SEDS sets out the country’s goals over the coming ten years, and the SEDP lays out more specific policy actions and programs to achieve those goals. The SEDS includes a long-term growth strategy that gives attention to structural reforms, environmental sustainability, social equity, and emerging issues of macroeconomic stability to minimize short-term vulnerability and achieve sustained long-term growth. It identifies three areas of ‘strategic breakthrough’: (i) improved market institutions and administrative reforms for a more competitive and equitable business environment; (ii) development of human resources and investment in science and technology; and (iii) improved infrastructure. 48. Extensive research in recent years has supported the SEDS objective of transitioning Vietnam to a new economic growth model that is focused on competitiveness and the quality of growth. In 2010, the first ever National Competitiveness Report for Vietnam (VNCR) was completed jointly by the Central Institute for Economic Management (CIEM) under the Ministry of Planning and Investment (MPI), and the Asia Competitiveness Institute (ACI) under the Lee Kuan Yew School of Public Policy (National University of Singapore).17 The report was initiated and overseen by Deputy Prime Minister Hoang Trung Hai. The VNCR provides a broad assessment of competitiveness issues and priorities to address these going forward. In October 2010, the Prime Minister issued Decision 1914 on implementation of a comprehensive research program to identify measures for improving the efficiency and competitiveness of the economy. In late 2011, the Ministry of Industry and Trade (MOIT) together with the United National Industrial Development Organization (UNIDO) prepared the Vietnam Industrial Competitiveness Report. It highlights some key areas where policy changes would help to boost industrial competitiveness in Vietnam. CIEM, ACI and NUS, “Vietnam Competitiveness Report,â€? 2010. 17 18 Box 1: Participatory Process for SEDS 2011-2020 and SEDP 2006-2010 and Reforms Supported under EMCC The SEDS 2011-2020 and SEDP 2011-2015 went through an extensive consultation, continuing the process instituted during the preparation of SEDP 2006-2010. Earlier plans were premised on centrally set production targets, with no consultations beyond Government ministries and agencies, and no independent review of performance. In contrast, SEDP 2006-2010 was widely consulted with among others civil society, the private sector, Vietnamese living overseas, and Development Partners. For SEDS 2011-20, a sub-committee for strategy formulation was established in 2008, which comprised of 47 members from the Politburo and the Party’s Central Committee. The sub- committee was headed by the Prime Minister and eight permanent members. The team responsible for reviewing SEDS 2001-2010 and formulating SEDS 2011-2020 was headed by the Minister of Planning and Investment. The team included 37 members, most of whom are ministerial level. The process leading to SEDS 2011-2020 formulation included a detailed review of 2001-2010 SEDS. The drafting team sought comments from international experts, and Vietnamese living overseas for international experiences to help prioritize policy actions in the strategy. A number of background research papers were commissioned and discussed. A detailed SEDS outline was submitted to the Party’s Central Committee for approval before it was further developed. For the first time ever, the draft SEDS 2011-2020 was published on the MPI website to collect comments from a wide public domain before it was submitted to the Party Congress for approval in the first quarter of 2011. There have been extensive consultations on many of the policy reforms supported under EMCC e.g. design of the MTIF decree is being reviewed extensively with sub-national authorities through a process supported by the Belgian Technical Cooperation; Development Partners have contributed to discussions on the Anti-Corruption Law revisions – including through regular Anti-Corruption Dialogues; Changes to tax legislation are based on dialogue with the private sector; priorities for reform of Administrative Procedures (AP) were informed through a contest that sought proposals from the private sector for AP simplification; and the Vietnam Chambers of Commerce and Industry provide regular feedback simplification of the legislative framework to improve competitiveness. 49. Important efforts have been made in recent years to gather evidence on key constraints to competitiveness, and to identify solutions through dialogue. The Provincial Competitiveness Index (PCI) developed jointly by the Vietnam Chamber of Commerce and Industry (VCCI) and the US Agency for International Development (USAID) in 2005 has become a critical tool for measuring and assessing the quality of economic governance in Vietnam’s 63 provinces from the perspective of private sector. It is based on an annual survey that looks at a range of issues from business entry and compliance costs to quality of infrastructure. PCI has provided an important channel for public-private dialogue on economic governance reforms. Another initiative is the Provincial Governance and Public Administration Governance Index.18 This is based on a survey of nearly 14,000 citizens on the performance of provincial and local authorities on governance and public administration. 18 Public Administration and Performance Index (PAPI) is a joint initiative of the Viet Nam Fatherland Front, the Centre for Community Support and Development Studies (CECODES) under the Viet Nam Union of Science and Technology Associations, the Commission on People’s Petitions under the Standing Committee for the National Assembly (since February 2012), and the UNDP in Viet Nam. 19 Finally, the Government Inspectorate (GI) and the Office of the Steering Committee on Anti- Corruption recently completed a survey with Bank support – the largest of its kind in Vietnam – to inform a range of policy and institutional reforms in the coming years. The results were recently published under a report entitled “Corruption from the Perspectives of Citizens, Enterprises and Public Officials.â€? 50. These efforts have enhanced dialogue on the effectiveness of sub-national public sector governance, and provided key input to competitiveness reforms. An important initiative worth mentioning in this regard is the Master Plan of Administrative Procedure Simplification in the fields of state management, 2007-2010, also referred to as Project 30. This was led by the Office of the Government (OOG), with support from USAID’s Vietnam Competitiveness Initiative. Project 30: (i) put together a comprehensive inventory of administrative procedures (APs) across all levels of government; (ii) reviewed these procedures according to legal consistency, necessity, and reasonableness; and (iii) started to simplify APs and publish a consolidated list on a public website. Even though the project has formally come to an end, the function is being taken forward and implemented by the Ministry of Justice (MOJ), and will be supported by the EMCC. 51. As noted above, the Government in the last year has announced structural reforms in three areas of economic governance that have a significant impact on national competitiveness. These are SOEs, the banking sector, and public investment management. The policy decision came after mounting evidence that inefficiencies and structural weaknesses in these areas are adversely affecting competitiveness and compromising the long-term growth potential of the economy. 52. To help steer national competitiveness efforts, the Prime Minister recently established a National Council on Sustainable Development and Competitiveness Capacity Enhancement. The National Council was set up on May 31, 2012 by Decision 641 of the Prime Minister. It is chaired by Deputy Prime Minister Nguyen Thien Nhan. The MPI; the Ministry of Labor, Invalids and Social Assistance (MOLISA); and the Ministry of Natural Resources and Environment (MONRE) play lead roles. But the Council has government- wide membership to advise the Prime Minister on priority actions to enhance national competitiveness. One of the Council’s first tasks on the competitiveness agenda is to develop an indicator set to monitor progress on a regular basis. 53. The EMCC is designed to support the above agenda, focusing on the first strategic breakthrough area of SEDS on improving market institutions and administrative reforms. Policy areas under this umbrella include macroeconomic management, public finance management, public investment management, SOEs, the financial sector, and business regulations. Much effort will be needed in all of these to achieve the SEDS’ objective of increasing Total Factor Productivity (TFP) so that it contributes to at least a third of real GDP growth. 20 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM LINK TO COUNTRY PARTNERSHIP STRATEGY 54. The EMCC is directly aligned to the objectives under the first pillar of the Country Partnership Strategy (CPS), which focuses on improving national competitiveness. More specifically, it will support measures to strengthen CPS Outcome 1.1: Improved Economic Management and Business Environment. This includes reforms to strengthen Vietnam’s macroeconomic policy framework, public financial management (PFM), the financial sector, and market-based regulations. The EMCC will also contribute to the three cross-cutting themes of the CPS: (i) strengthening governance is one of the central objectives of policy and institutional reforms aimed at promoting competitiveness; (ii) analyzing the gender impact of competitiveness reforms, and measures to improve gender equity, which can lead to important gains in productivity; and (iii) strengthening resilience is also front and center of the competitiveness agenda, as Vietnam’s transition will lead to major structural shifts in the economy, which will require measures to protect vulnerable groups. 55. Although the EMCC is focused on economic management reforms under the competitiveness pillar, some of these will be cross-cutting in nature and therefore will impact on other parts of the CPS. For example, public investment reforms should impact positively on the quality of efficiency of infrastructure services (Pillar 1, Outcome 1.2). Administrative reforms to strengthen accountability structures will have a direct impact on the quality of and access to basic services (Pillar 3, Outcome 3.2). Policies to address the social impacts of reforms to support Vietnam’s transition will contribute directly to improving household resilience to shocks (Pillar 3, Outcome 3.1). RELATION TO OTHER BANK OPERATIONS 56. The EMCC aims to continue and further deepen reform efforts started under the Public Investment Reform (PIR) Development Policy Operation (DPO) and in two out of the four pillars of the PRSC. The PIR DPO supported specific reforms to strengthen the Public Investment Management cycle including project selection, implementation, financial management, and project oversight. Strengthening public investment management is one of the priority areas under the EMCC, and includes reforms around medium-term investment planning (EMCC 1) and revision of the Public Investment Law (EMCC 2). In relation to the PRSC, the EMCC will continue to engage on policy and institutional reforms under the Business Environment and Modern Governance pillars of the PRSC. The objective as noted above is to focus on economic governance reforms, many of which were initiated under these two pillars, but which need to further accelerate to keep pace with growing challenges. 57. The EMCC will also engage indirectly in policy reforms related to the social inclusion and natural resource management pillars of CPS. On social inclusion the EMCC will look at addressing the poverty and social impacts of competitiveness-related policy reforms, particularly to address any potential costs of structural reforms (e.g. impact of deceleration in growth or SOE restructuring on employment) and macroeconomic shocks (e.g. impact of commodity price increases on the poor). As such, the EMCC team will work 21 closely with the Social Protection team, which is developing a Social Protection System Project and a new Programmatic AAA on Social Protection. EMCC will not address education and health sector reforms like the PRSC, but it will work closely with Bank staff in the Human Development Network to ensure that any cross-cutting issues (e.g. on PFM or accountability reforms) complement ongoing activities. Similarly on natural resource management, the EMCC will align with efforts under: (i) the Power Sector Reform DPO, which supports longer term reform of power markets (including elimination of Electricity of Vietnam monopoly), increase private sector participation, and enhance overall sector efficiency and service delivery; and (ii) the Climate Change DPO, which supports the adoption of policies and the strengthening of institutional capacity to promote climate resilient and lower carbon intensity development. Both of these are directly related to the overall competitiveness that the EMCC will support. 58. The EMCC will complement work under Investment Lending operations and Non-Lending Technical Assistance, which are designed to strengthen different areas of economic governance. The World Bank is currently the largest provider of technical assistance to MOF. The Tax Administration Modernization Project (TAMP) and the Public Financial Reform Project (PFMRP) together make up around three quarters of total external TA commitments to MOF. They support the strengthening of public revenue administration and expenditure management, which are both core elements of policy and institutional reforms under the EMCC pillar on transparent, efficient, and accountable public sector. The Bank also administers the Multi-Donor Trust Fund (MDTF) on Public Finance Modernization, which has provided critical TA to prepare Vietnam’s first Public Expenditure and Financial Accountability (PEFA) Review, strengthen public debt management, review implementation of tax policies, and strengthen institutions for cash management. At the MPI, the Bank has three Institutional Development Facility Grants, which are directly related to proposed EMCC program. These grants support: (i) public procurement audit, including activities related to procurement system assessment and e-Procurement; (ii) public procurement legislation, including the development of new procurement law and related decree; and (iii) development of the new Public Investment Law and supporting regulations. At the SBV, the Bank has a Financial Sector Modernization and Information Management Systems project, which is directly related to the first pillar of EMCC. This project is expected to strengthen the financial infrastructure, improve reporting, strengthen data processing and potentially help disclose more financial information during the period of the EMCC series. COLLABORATION WITH THE IMF AND OTHER DONORS 59. The EMCC has been developed in close consultation with Development Partners that also supported the PRSC series. Initial ideas, including proposed objectives and areas of focus for EMCC were discussed with Development Partners at a series of seminars and meetings between September 2010 and December 2011. Development Partners supported the proposed scope of the operation, including narrowing the policy dialogue on macroeconomic stability, public sector governance, and the enabling business environment. However they also indicated that there should be an explicit discussion on how the EMCC complements other operations that also target competitiveness issues (e.g. skills and infrastructure). The donors welcomed the proposed changes to the governance and implementation arrangements, in particular the additional resources for analytical work. 22 60. Based on the initial feedback, the Bank prepared an Approach Paper, which was discussed at a workshop with Development Partners and the Government in March 2012. This helped to build consensus around the general outline of the EMCC, and the need to look at the impact on competitiveness as the main filter to prioritize reforms under the program. Development Partners suggested to strengthen the components on poverty, social and gender impact assessment under the program. There were also requests to strengthen PFM diagnostics as a critical input to decisions on budget support. Following these discussions, the Government submitted to the Prime Minister a formal request to establish the governance framework for the EMCC. The Prime Minister’s Decision on this was issued on August 7, 2012, which paved the way for formal preparations. 61. The EMCC will continue to provide a mechanism to harmonize donor budget support, but there will be some important differences. There was a total of fourteen Development Partners that supported the ten-year PRSC series. Fewer donors however are expected to participate in the EMCC. This is in part because several bilateral donors are gradually scaling back their programs as Vietnam transitions to middle-income status. It is also because in the early days, the PRSC was the only budget support operation in Vietnam. It was the main channel for policy dialogue between the Government and Development Partners across a very wide range of government functions. However, today there are other DPOs (e.g. higher education, energy, climate change), which offer additional channels for those wanting to engage more deeply in specific sectors. Finally, the EMCC proposes a narrower focus than the PRSC, which may not always be aligned with Development Partners’ broader set of priorities. 62. The EMCC will continue to seek the Development Partners’ active participation in policy dialogue and analytical work as under the PRSC. The role of co-financiers under the PRSC evolved over time from providers of financing to partners engaged in the preparation of the operations and the policy dialogue with the government. This coordination also reduced the transaction costs for the government ministries and agencies. One of the new features under the EMCC is to have dedicated resources for analytical work and short-term technical assistance. The United Kingdom’s Department for International Development (DFID) and the Australian Agency for International Development (AusAID) have already committed around a total of $405,000 per year for analytical work and TA, respectively through the Vietnam Governance, Economic Management and Social Protection Program and the AusAID-Bank Partnership Program in Vietnam (ABP). The ADB has some dedicated resources for analytical work and TA, which it can channel to the EMCC over the course of FY13. Other Partners including Japan International Cooperation Agency (JICA), Swiss State Secretariat for Economic Affairs (SECO) and Canada International Development Agency (CIDA) are providing support to counterpart ministries and agencies to help deepen the analytical underpinning of the program. 63. The IMF and the World Bank have had a close working relationship in Vietnam on the PRSC, which will continue with the EMCC. The IMF has not had a program in Vietnam since the Poverty Reduction and Growth Facility expired in April 2004. But it maintains a regular policy dialogue through Article IV consultations, interim staff visits, and its resident representative office in Hanoi. It supplements this dialogue with technical assistance. The IMF has engaged closely in the PRSC process, including through the provision of Letters of Assessment in support of PRSC operations. There are a range of ongoing areas of joint work between the Bank and the Fund, which are of direct relevance to 23 the EMCC. These include a joint work program on strengthening debt management, annual joint debt sustainability analysis, tax policy and administration reform, public expenditure management, banking sector supervision, and the FSAP. 64. The Bank and the International Finance Corporation (IFC) are already collaborating on a number of competitiveness-related reforms. These include: (i) strengthening financial sector soundness, with the Bank supporting regulatory reforms and the IFC engaging with top-tier and emerging top-tier financial institutions to strengthen their capital bases and attract international banking partners; (ii) improving management of state enterprises, with the Bank helping to strengthen the policy framework for SOE restructuring and transparency, whilst the IFC continues to support global standards of corporate governance and risk management, and in attracting strategic partners and investors; (iii) on energy, the Bank supports issues of operational efficiency, market competition, and transparent and cost reflective electricity pricing, whilst the IFC promotes energy efficiency; and (iv) on infrastructure investments, the Bank is supporting the establishment of a framework for implementation of Public Private Partnership (PPP) projects, whilst the IFC is providing advisory services on PPP transactions. 65. In addition, however, there are two specific areas under the EMCC, on which the Bank and the IFC are working jointly. The first relates to the trigger on simplification of Administrative Procedures. The IFC is helping to develop a Monitoring and Evaluation system to assess the impact of this simplification. This is discussed further below, but the Bank is exploring opportunities to supplement the IFC’s work to enable the M&E system to be up and running by end 2013. This is a trigger under EMCC 2. The second area relates to the amendments of the Corporate Income Tax Law and the Value Added Tax Law, which are respectively triggers under EMCC 2 and EMCC 3. The Bank and IFC are working with MOF to help assess the impact of changes to CIT and VAT policies to help inform the amendments of these two laws. ANALYTICAL UNDERPINNINGS 66. The EMCC draws its strategic and analytical underpinnings from a range of sources. The strategic framework for EMCC is based on: (i) Government’s SEDS (2011- 2020); (ii) World Bank’s CPS (2012-2016); (iii) Vietnam Competitiveness Report (2010); 19 and (iv) the World Economic Forum Global Competitiveness Index. The PCI, Public Administration Performance Index (PAPI), Project 30, the Anti-Corruption Diagnostic, and the Government’s restructuring plans (SOEs, financial sector and public investment) have all helped identify reform measures to be supported by EMCC. Table 2 below summarizes specific Bank Analytical and Advisory Activity (AAA) work and their relation to the different EMCC pillars. 19 Prof Michael E. Porter and Dr. Christian E.M. Ketels in CIEM, ACI and NUS, “Vietnam Competitiveness Report,â€? (p.23). 24 Table 2: AAA Underpinnings for EMCC AAA Outline EMCC Pillar VDR 2012: Market VDR 2012 outlines priority reforms for SOEs, public 1, 2 Economy for Middle investment management, and access to information to support Income Vietnam Vietnam’s transition to a market economy and tackle vulnerabilities. VDR 2010: Modern VDR 2010 focuses on Vietnam’s most pressing governance 2 Institutions challenges to promote greater transparency, oversight and accountability in a system with substantial devolution of authority to sub-national Government. VDR 2009: Capital VDR 2009 looks at challenges of mobilizing capital for 1, 3 Matters development when the global economy is going through financial crisis, and recommends ways that Vietnam can address those challenges and most efficiently meet its development financing needs. Tax Reform in This Volume is a comprehensive review of the tax system in 1, 2, 3 Vietnam: Toward a Vietnam, with specific recommendations to strengthen both More Efficient and tax administration and policy. Equitable System (2011) Programmatic Public PPFR started in FY12 to scale up AAA on public finance 1, 2 Finance Review management. The first output is a review of fiscal (FY12–14) transparency in Vietnam. The Bank also supported extensive quality review of the Government’s PEFA self-assessment. Further work is planned on fiscal decentralization and revenue forecasting in FY13. Debt Management A DeMPA was completed in FY12 with an assessment of the 1, 2 Performance strengths and weaknesses of public debt management, which Assessment provided the basis for a follow up Debt Management Reform Plan. Programmatic AAA on The Programmatic AAA, which was launched in FY12 builds 1 Financial Sector on earlier analytical and TA work looking at: (i) regulatory Soundness and framework for the financial sector; (ii) assessment of the Institutional Capacity health of the banking system; (iii) preparedness and ability to Building detect problems in the financial sector; (iv) development of non-bank sector. There will also be an upcoming Financial Sector Assessment Program in FY13. Vietnam Trade and This (ongoing) task, to be delivered in Q4:2012, will provide 2, 3 Transport Facilitation input to the Government’s strategic planning as the FY13 foundations for a national action plan on trade competitiveness enhancement Semi-Annual Taking The Country Economic Team undertakes regular monitoring 1 Stock and regular and due diligence of real sector, fiscal, monetary and external macroeconomic developments, including major macroeconomic policies and monitoring institutional reforms. Vietnam Poverty This is the most up to date and comprehensive assessment of 1, 2, 3 Assessment and poverty in Vietnam. It proposes a revised GSO-WB poverty Analysis FY12 line and improvements to methods used to measure welfare and monitor poverty. 25 67. Key policy reforms in the EMCC series are drawn from the above, but in addition it will also have dedicated resources for analytical work and short-term TA for specific policy actions. This was one of the main recommendations from reviews of the PRSC. This should enable the Government and Development Partners to assess the potential impacts of specific policy actions and help refine the proposals. It should enable all stakeholders to tell a clearer story on what the EMCC is achieving. 68. The analytical work will start early to allow time to refine and agree on the policy actions well in advance of the next operation, e.g. the analytical work for EMCC 2 policy actions would start with the preparation of EMCC 1. The analytical work does not necessarily have to determine the policy actions, but they should help to inform decisions based on the potential impact of different options. It should help strengthen ownership for and understanding of the reforms, and build capacity in assessing policy reforms. It should also help to monitor implementation of the reforms after these have been adopted. 69. Priorities for analytical work and short-term TA will be decided jointly by the Government and the Development Partners. There may be times however when the resources are used by the Bank directly and in a flexible manner to carry out quick analysis on a particular issue. The Bank will lead the analytical pieces as part of task management of the operation, but it will partner with government counterparts so that they are able to participate fully. The analysis will be conducted jointly by the Bank, government counterparts, Development Partners and external consultants. For EMCC 2 and EMCC 3 analytical work and TA is starting on: (i) assessing the impact of CIT and VAT policy changes (jointly with IF and in coordination with IMF and the European Union); (ii) reviewing the potential labor market impacts of SOE restructuring (jointly with ADB and in coordination with ILO); (iii) advising on Procurement Law reform; (iv) efficiency of public investments; and (v) review of SOE information disclosure. LESSONS LEARNED 70. The proposed design for EMCC builds on extensive experience and reviews of the PRSC in Vietnam, and lessons from DPO Retrospectives. The PRSC was successful in harmonizing multi-donor budget support and policy dialogue across 17 different sectors. It was an unprecedented series of ten consecutive operations, which mobilized around $1.6 billion in IDA credits from the Bank, and an additional $1.1 billion in concessional assistance from a total of fourteen Development Partners. An Independent Evaluation Group review in 2009 found the Vietnam PRSC series to be exemplary in its predictability, continuity, and development partner coordination.20 A more recent joint evaluation of the PRSC noted that aside from its success in promoting donor harmonization, the PRSC accelerated reforms that may otherwise have taken a longer time.21 The Implementation Completion Review noted that Development Partners felt that PRSC gave them greater exposure to a broader policy reform platform, allowed them to better align their programs to GOV priorities and, as a result, leveraged more resources for the country. 20 Poverty Reduction Support Credits – an evaluation of World Bank support by the Independent Evaluation Group. 21 ACE Consultants, “Joint evaluation of the PRSC General Budget Support operation in Vietnam,â€? July 1, 2011 – report supported by DFID, the World Bank, the ADB, JICA, AECID, SECO and CIDA. 26 71. The design of the PRSC was well suited to Vietnam but there is growing recognition that the approach needs to evolve to address changing circumstances. WTO accession played an important role in building consensus for reforms under PRSC. In the latter stages of PRSC however, it became increasingly difficult to maintain the same breadth of meaningful reforms. Engagement areas narrowed over time, as illustrated by Chart 23 below. The Government increasingly valued technical depth and international experience to help remove obstacles to a more limited number of policy actions. This was partly because implementation of PRSC reforms highlighted new challenges that had to be addressed in existing areas. There was an element of learning by doing, partly because the implementing agencies themselves were gradually adjusting. As a result the engagement under the PRSC was gradually deepening in a smaller number of areas. Chart 23: Number of sectors, ministries/agencies and policy actions under PRSC 1-10 50 45 40 35 30 25 20 15 10 5 0 PRSC 1 PRSC 2 PRSC 3 PRSC 4 PRSC 5 PRSC 6 PRSC 7 PRSC 8 PRSC 9 PRSC 10 Number of sectors Number of Mininistries/Agencies Total policy actions 72. Another important development was that several Development Partners withdrew or reduced their development assistance to Vietnam as the country was graduating to middle-income status. The number of co-financiers peaked at 11 for PRSCs 6 and 7 and then started to fall. Chart 24 however shows that this did not necessarily impact on the total level of financing under the PRSC. Some switched their focus to more specialized policy-based operations, as the number of such operations increased, which is illustrated in Chart 25 below. The PRSC is no longer a one-stop-shop for policy dialogue. 73. Development Policy Operations therefore remain important instruments in Vietnam. The PRSC, together with co-financing and other DPOs, made up less than two percent of general government expenditure. This will not change under EMCC. However, budget support could contribute up to 20 percent of financing needs. This is not insignificant at a time when sources of concessional financing for Vietnam are becoming scarcer. However, more than the financing need, DPOs have played a critical role in coordinating policy discussions across government ministries and agencies. Even with a narrower focus, the EMCC will support policy reforms that have stakeholders across different parts of Government. The EMCC will therefore build on the policy coordination efforts under PRSC. Given the nature of the policy dialogue, this would be more difficult to achieve through an Investment Lending Operation or through a Program for Results Operation. 27 Chart 24: PRSC 1-9 Co-financing and co- Chart 25: Number of DPOs and Prior financiers 300 12 Conditions 250 10 30 7 25 6 200 8 5 20 4 150 6 15 3 100 4 10 2 5 1 50 2 0 0 0 0 2007 2008 2009 2010 2011 PRSC PRSC PRSC PRSC PRSC PRSC PRSC PRSC PRSC 1 2 3 4 5 6 7 8 9 Combined # of prior actions (left axis) Co-financing # co-financiers Number of DPLs (right axis) 74. In light of the above, the design of the EMCC incorporates a number of new features that build on the lessons of the PRSC series: (i) Focus on economic management reforms that will have cross-cutting impact: PRSC evaluations have indicated that the breadth of the PRSC offered a wide platform for dialogue, which helped mobilize a large number of Development Partners. At the same time there was a trade-off in terms of depth. The ACE evaluation of the PRSC recommended that the follow up operation focus on economic management issues, which is also the preference of Development Partners wanting to support the EMCC. This does not mean that the EMCC will not touch on sector issues – rather it will focus on strengthening cross-cutting policies and institutions of economic management, which should improve service delivery in the sectors. (ii) Continue to harmonize even if across a smaller number of Government Ministries/Agencies and Development Partners: The large number of Development Partners, ministries/agencies, and policy actions imposed significant coordination and logistical costs on the Bank, even though it helped to reduce transaction costs for the government. The EMCC aims to continue harmonization efforts, though around a smaller number of partners as some of them scale back their operations in Vietnam, and others look to partner on sector specific DPOs. On the government side, there will be fewer ministries/agencies involved in the EMCC compared to the PRSC series. The total will drop from an average of 17 to 6 ministries/agencies. Each will have a larger stake in the process. This should help to strengthen incentives to engage, which started to wane somewhat in the latter stages of the PRSC series. (iii) Strengthen analytical underpinning of the program: The PRSC series was able to bring in a wide range of sector expertise, which helped inform the policy dialogue. However, the analytical depth did vary across sectors. The quality of the policy dialogue is only as good as the quality of the analytical work and TA underpinning it. Therefore the EMCC will include dedicated resources for analytical work and short- term TA to inform policy discussions. It is also hoped that this can help to strengthen incentives among government ministries/agencies to participate in the discussions as there is a direct and tangible input to their reform efforts, and strengthen analytical capacity. 28 (iv) Government leadership and ownership: There can only be strategic breakthroughs if these are government owned and led. This may be an obvious point, but the EMCC will more explicitly require GOV to lead the process of determining which actions should be prioritized in the agreements. A new governance arrangement is proposed whereby the overall strategic guidance will come from a ministerial level Steering Committee, and the technical preparations and assessments will be conducted by a Technical Working Group with relevant government and Development Partner representatives. A repeated theme in the PRSC series was the need to build analytical capacity within the government, so that the government, rather than Development Partners, can lead the process of determining which actions should be prioritized in the agreements. The new governance arrangements are designed to address this issue. (v) Strengthen results focus and communication: The issue of linking policy actions to results is a challenging one across all DPOs. Recent DPO retrospectives have highlighted the difficulties in having specific and meaningful outcome indicators, particularly for economic governance reforms. These difficulties may arise because of the time lag between the policy action and results; problems of attribution; and weak domestic Monitoring and Evaluation systems. The EMCC will try to address this by having a simple and clear policy matrix that highlights the specific problems that policy actions are trying to address and the expected results. However, the results may not be always outcome indicators – it is important to acknowledge that a process or an output can be as meaningful in the context of a DPO. The EMCC will also scale up efforts to communicate the objectives and results of the operation using different media. This should help reach a broader audience and strengthen participation and accountability for results. 29 V. THE PROPOSED ECONOMIC MANAGEMENT AND COMPETITIVENESS CREDIT 1 OPERATION DESCRIPTION 75. EMCC 1 is the first in a programmatic series of three annual DPOs with a proposed IDA credit of $250 million for each operation. The EMCC will focus on three areas of economic management, which are critical to competitiveness for a country at Vietnam’s stage of development. These are: (i) macroeconomic stability; (ii) the transparency, efficiency, and accountability of the public sector; and (iii) the enabling business environment. These priorities are drawn from the SEDS 2011-2020 and the analytical work discussed above. Their relative importance to an economy at Vietnam’s stage of development is also illustrated by the World Economic Forum’s Global Competitiveness Index. It shows that out of twelve interdependent factors that impact on competitiveness, those that matter relatively more for factor-driven economies like Vietnam’s include (Chart 26): (i) basic institutions for public sector governance and the business environment; (ii) infrastructure; (iii) the macroeconomic environment; and (iv) health and primary education. Chart 26: Twelve Pillars of Competitiveness (Global Competitiveness Index, GEF) (1) Factor-Driven Economy: Basic Requirements - Base institutions for public sector governance and the business environment - Infrastructure (2) Efficiency-Driven Economy: - Macro environment Efficiency enhancers (3) Innovation-Driven - Higher education and training Economy: Innovation and - Health and Primary education sophistication factors - Goods market efficiency - Business sophistication - Labor market efficency - Innovation - Financial market development - Technological readiness - Market size 76. The operation will also look at two cross-cutting themes: (i) protecting the poor from adverse effects of Vietnam’s economic transition and competitiveness-related reforms; and (ii) promoting greater data and policy-making transparency. Analytical work and policy dialogue will aim to ensure that these cross-cutting issues are appropriately taken into account in the reforms supported under the operation. For example on the first theme, the operation will look at the potential labor market effects of SOE restructuring, and the incidence of changes in tax policy. It will identify opportunities to ensure that poverty and social issues substantively inform EMCC policy dialogue. On the second theme there is general acknowledgement that overall transparency of public policy is a priority area for governance reform in Vietnam. Despite progress, several studies including VDR 2010 and VDR 2012 note that much more is needed. Credible and timely availability of economic data, and better communication of policy changes can mitigate market inefficiencies, help reduce macroeconomic instability, and increase competitiveness. 30 77. Part of the EMCC agenda will be to help refine and further develop policies supported earlier under PRSCs, based on lessons learnt from implementation. As noted above, PRSC-supported reforms have required, and will require, adjustments and fine tuning based on lessons from implementation. This could be because policy changes were complex for the existing level of capacity. One example of this was in the financial sector where PRSC supported draft regulations to better assess portfolio risks. These had to be updated based on impact evaluation carried out in the banking sector, and will now be supported by EMCC 1. Another example where EMCC 1 should help to accelerate implementation of policies adopted under PRSC is on SOE reform. Under PRSC 10, the Government adopted Decree 59 to accelerate equitization. Under EMCC 1, this will be taken forward through a Decision to restructure State Economic Groups and General Corporations. These are discussed further below. 78. The EMCC focuses on a subset of competitiveness challenges faced by Vietnam. It will only indirectly tackle issues of skills 22 and infrastructure, which are also important constraints to competitiveness, but are covered under other operations. Education and skills feature prominently on the government's policy agenda, and the Bank has extensive operational and analytical support in the sector. The Bank most recently is supporting innovative skills measurement surveys, which will feed into Vietnam Development Report 2013 and make an important contribution to the competitiveness debate. Similarly on infrastructure, the Bank provides considerable financial and analytical support to improve the quality of utility services, improve connectivity, and enhance operations and maintenance. The EMCC will ensure complementary support as discussed above and may address cross- cutting economic management issues that impact positively on skills (e.g. public finance management) and infrastructure (e.g. public investment management). 79. The EMCC will not focus on public policies to promote specific sector-level innovation through for example Research and Development, technology adoption and adaptation, and intellectual property rights. A recent study by the University of Copenhagen and CIEM finds that less than a third of Vietnamese manufacturing firms undertake technology upgrading-related initiatives. Most perceive they have satisfactory level of technology.23 These are therefore also important elements of competitiveness, but to address them adequately would require a separate operation with sector-level reforms. The Bank together with the Organization for Economic Cooperation and Development (OECD) is completing a study on science and innovation to look at some of these issues. In addition, a new policy framework for science and innovation promotion is being developed, to be 22 The Bank has extensive analytical and operational engagement in these areas. Skills is a topic of active Bank- supported research, with innovative skills measurement surveys, which will feature in this year's Vietnam Development Report on skills. A benchmarking of Vietnam's workforce development system has also been conducted. The Bank together with the OECD will launch a science and innovation study at the end of 2012. A new Higher Education Act has just been adopted by the National Assembly which, among others, is expanding the autonomy of HE institutions. This reform is being supported by the forthcoming HE DPO 3 operation. The government is engaged in technical discussions, with World Bank support, on changes to the general education curriculum. A new policy framework for science and innovation promotion is being developed, to be supported by the forthcoming Fostering Innovation, Research, Science and Technology operation and the Inclusive Innovation operation. 23 Royal Embassy of Denmark (Business Sector Program Support); University of Copenhagen (Development Economics Research Group); MPI (CIEM), “Firm-Level Competitiveness and Technology in Vietnam: Evidence from a Survey in 2010â€? (November 2011). 31 supported by the forthcoming Fostering Innovation, Research, Science and Technology (FIRST) operation and the Inclusive Innovation operation. 80. Despite the EMCC’s narrower focus compared to the PRSC and the breadth of issues related to competitiveness, it still covers a wide range of policy areas . Chart 27 below gives an overview of the proposed areas for inclusion under the EMCC, and their links to the overall program objectives. The EMCC’s overall goal is to contribute to “enhanced competitiveness to boost growth and poverty reduction.â€? This will be supported through the three EMCC pillars of macroeconomic stability, public sector governance and enabling business environment. For each of these pillars there are specific objectives to which prior actions will contribute. 81. Triggers and policy actions for EMCC 1-3 are based on dialogue with GOV using this overall strategic framework, which helps to promote selectivity, whilst ensuring sufficient flexibility for the series going forward. The selection of triggers and policy actions is fully aligned with the good practice principles on conditionality, building on the lessons learnt under the PRSC – this is discussed further in Box 3 below. In addition, the following points help prioritize triggers and policy actions: a. Public Investment Management, SOE and banking sector reforms are prominent themes under the program in line with GOV’s priorities for structural reforms. In addition, the EMCC prioritizes GOV efforts to streamline administrative procedures and strengthen fiscal discipline because they are critical to productivity and competitiveness, and provide continuity from PRSC and PIR operations. b. Macroeconomic stability is a major priority for competitiveness in Vietnam, and hence a core objective of EMCC. Working closely with the IMF, the EMCC will: (i) review adequacy of the macroeconomic framework – a prerequisite for any DPO; and (ii) ensure that it supports, and does not undermine, the stabilization effort of the Government. It will include triggers related to fiscal discipline and financial sector stability. The EMCC, however, will not have quantitative policy actions on monetary and exchange rate issues. c. The program aims to maintain a balance across the different pillars for the series as a whole, though sequencing means that some pillars are more prominent than others in a given operation. d. A number of umbrella legislation and decisions were prioritized as triggers and policy actions. Examples include Prime Minister’s Decision 929 on SOEG and SOC restructuring, Prime Minister’s Decision 254 on Banking Sector Restructuring, Prime Minister’s Decision 263 on simplification of Administrative Procedures, and Prime Minister’s Decision on Public Debt Management. These help to provide the overall policy framework for reforms in these areas, but also set out an agenda for future policy actions, which in some cases will be supported as the series progresses. e. A number of overarching laws are also supported in the latter part of the series. Through analytical work and TA, the EMCC hopes to inform the development of policies within these laws, bringing in international experience and lessons. 32 f. The majority of triggers and policy actions have some ongoing or prior input by the Bank or other Development Partners through TA or analytical work. This helps to ensure that the EMCC dialogue is informed by in depth knowledge of policy reforms. There may be some areas where there is limited prior engagement by Development Partners, but that GOV regards as a priority for productivity and competitiveness. For these, TA or analytical work will be agreed to inform future operations. 82. The EMCC is aligned with Vietnam’s current policy cycle. Policy changes in Vietnam follow a pattern beginning with a ten year National Strategy (SEDS 2011-2020), the most recent one being approved by the Eleventh National Party Congress in January 2011. The national strategy is followed up with the Five-Year Plan, SEDP 2011-2015, which was approved in October 2011. These two provide the backdrop against which each ministry and government agency prepares its own strategy. This is followed by the development of action plans, which lay out the key legislative and regulatory changes that need to be undertaken. The final step involves the actual changes to Law and followed by Decrees and Circulars. EMCC 1 coincides with the initial phase of this policy cycle, which explains why many of its triggers constitute legislative changes. 33 Goal Chart 27: EMCC Program Overview Pillar ENHANCED COMPETITIVENESS TO BOOST GROWTH AND POVERTY REDUCTION Objective MACROECONOMIC STABILITY TRANSPARENT, EFFICIENT, ENABLING BUSINESS ACCOUNTABLE PUBLIC ENVIRONMENT SECTOR 3. PUBLIC 4. STATE 5. PUBLIC 6. EFFICIENT 7. TRANSPARENCY AND 1. FINANCIAL 2. FISCAL ADMINISTRATION AND ENTERPRISE INVESTMENT BUSINESS EQUITY OF BUSINESS SECTOR STABILITY DISCIPLINE ACCOUNTABILITY MANAGEMENT MANAGEMENT ENVIRONMENT ENVIRONMENT 1.1 Bank 2.1 Debt 3.1 Anti- 4.1 SEG/GC 5.1 Med 6.1 Online 7.1 CIT Law restructuring thresholds Corrup. Law restructuring Term Inv Pl. business reg. 1.2 Loan 2.2 Med- 3.2 Tax 4.2 SEG/GC 5.2 Pub Inv 6.2 Admin. 7.2 VAT Law classification Term Debt Admin. Law classification M&E syst. Procedures St. 1.3 Foreign 2.3 Cash 3.3 Transp. 4.3 SEG rest. investment in management compliance plans 5.3 Pub Inv 6.3 AP 7.3 Comp. banks Law reform M&E Law 3.4 Customs 4.4 SEG fin. 1.4 NPL Law disclosure resolution 6.4 Procur. 7.4 Enterp. plan 4.6 State Law Law capital inv. Prior Actions for EMCC 1 4.5 Retrench. 1.5 Capit. policy adequacy & 4.7 SEG 7.5 Trade prudential Triggers for EMCC 2 equitization. Law thresh. stds Triggers for EMCC 3 4.7 SOE M&E system. 34 POLICY AREAS PILLAR 1: MACROECONOMIC STABILITY 83. Pillar 1 of EMCC will support macroeconomic stability through measures that: (i) enhance financial sector stability; and (ii) maintain fiscal discipline. In addition, the operation will monitor the impact of potential macroeconomic shocks (e.g. from commodity prices) or tightened macroeconomic policies on the poor. Although the operation does not propose triggers on the monetary and exchange rate policy management framework, the EMCC will monitor them closely—together with the IMF—as part of its assessment of the overall macroeconomic policy framework. Under this pillar the EMCC will also continue to promote the transparency of macroeconomic and financial sector reporting (see Box 2). Objective 1: Enhanced financial sector stability 84. Banking sector reform is one of the top priorities on the Government’s agenda. Asset quality in Vietnam’s banking sector has declined significantly in recent years. This is in part due to high credit growth in the run up to 2010, with increased exposure to financially troubled SOEs. Broad money (M2) has gone up from 58 percent of GDP in early 2000s to around 123 percent by end 2011, and banking credit from 39 percent to around 125 over the same period.24 Credit growth was reduced to 14.3 percent in 2011 and to less than 2.8 percent in the first eight months of 2012, compared to 32 percent in 2010 and 39 percent in 2009. The ratio of loans to deposits has reduced from around 100-120 percent in 2009-2011 to less than 90 percent in 2012. But a combination of a slowing economy, an overleveraged corporate sector, poor risk management capacity in commercial banks, inadequate supervisory capacity of the Central Bank and weak disclosure of information have heightened systemic risks in the sector. As noted above, the SBV’s estimates of NPLs stand at around 8.82 percent of outstanding loans, though most analysts put it at a much higher level. 85. More transparency and consistency is needed to assess the true level of NPLs. Decision 493/2005/QD-NHNN (April 2005) on loan classification and loss provisioning for, helped to enhance banking supervision in Vietnam. It set out clear criteria to determine NPLs, required credit institutions to establish internal credit scoring systems, and developed internal regulations on credit quality control. There is a need however to update some of the provisions and strengthen implementation: (i) the current regulations do not adequately cover all exposures arising from credit operations; (ii) most credit institutions are classifying loans based on quantitative method only (Article 6), and only a few are applying the qualitative method (Article 7); (iii) after 7 years of implementation, a few commercial banks and one financial leasing company have obtained approval from the SBV to use quantitative methodology as stipulated in Article 7 for loan classification and provisioning; and (iv) regulations on the classification of off-balance-sheet items, general and specific provisions, and write offs need to be improved. These reforms are high priority in light of the vulnerabilities in the financial sector. There are now 38 joint-stock banks. Most of the SOCBs in Vietnam have been equitized except the Bank for 24 Agriculture and Rural Development; the share of SOCBs has declined steadily but they continue account for nearly half of the system. There are also 2 policy banks, 5 fully foreign-owned banks, 5 joint-venture banks, 48 foreign bank branches, 17 finance companies, 13 finance leasing companies, and around 1,000 people’s credit funds. 35 86. Prior action 1.1 under EMCC 1 is the issuance of a Decision to provide a comprehensive credit institutions restructuring plan and direction on related policy actions, including enhancing role of foreign participation in domestic commercial banks, incentives for consolidation of banks (especially weak banks) and plan to deal with non- performing loan (NPLs) (Prime Minister Decision 254/QD-TTg, dated March 1, 2012). The Decision sets out a comprehensive policy framework to deal with weak banks, improve regulation, and avert systemic risk. Specifically on weak banks, it adopts the following policies: direct acquisition of equity by the SBV for eventual divestiture; allowing greater foreign participation in domestic commercial banks; incentives for state-owned commercial banks (SOCBs) and joint stock commercial banks to purchase weak bank assets; and a consolidated plan to deal with bad debt. There has already been some progress in implementing these policies for example through the merger of Saigon-Hanoi Bank (medium- sized bank) and Habubank (small bank with serious NPL problems); and approval and implementation of restructuring plan for Tien Phong Bank (to a strategic investor who now holds 20 percent stake). In addition to this, SBV has adopted an Action Plan (SBV Decision 734, April 18, 2012) to implement Prime Minister Decision 254. 87. In this regard, prior action 1.2 under EMCC 1 is the issuance of Circular 02/2013/TT-NHNN dated January 21, 2013 to improve banking supervision through strengthened regulations on asset classification, internal credit rating and loan loss provisioning to better address credit risks (this Circular replaces Decision 493/2005/QD- NHNN). Revision of Decision 493 was a prior action under PRSC 9. Given the complexity of the regulations, impact evaluations on and consultations with the banking sector were carried out by SBV. These resulted in several changes to the regulations. The revised Circular replacing Decision 493 adopts the following policies: (i) wider scope of application - previous draft only covered bank loans and guarantees, whereas new Circular will regulate all assets with credit risks, e.g. corporate bonds, banks' deposits in other banks; (ii) more quantitative, stricter criteria for loan classification; (iii) commercial banks to better align internal credit risk ratings systems with international standards; (iv) closer monitoring of transfer of bad assets to subsidiary organizations; (v) closer monitoring of loans in category 2/5 (3-5 are NPLs). Banks were consulted on the draft; and (vi) increased information on credit institutions through the Credit Information Center. SBV is keen to ensure that whilst the Circular should allow better monitoring of the banking sector portfolio, it should be in line with the implementation capacity in the banking sector. The Circular also provides guidance on loan loss provisioning in line with the revised loan classification. 88. The EMCC will monitor progress with bank restructuring, and the impact on banking sector targets under Prime Minister Decision 254 to be achieved by 2015: NPL ratio for SOCBs to be less than 3 percent (based on Vietnam Accounting Standards); loan to deposit ratio of SOCBs to be lower than 90 percent and loan to deposit ratio across the banking system to be below 85 percent. The Action Plan on regulatory reform provides the basis for future triggers, which should enable the implementation of Prime Minister Decision 254. EMCC 2 will pursue the following triggers: (i) amendment of Decree 69 to allow increase foreign participation in local commercial banks (trigger 1.3); and (ii) adoption of a comprehensive policy framework to address the problem of NPLs across the banking sector (trigger 1.4). As a concrete follow-up action to the adoption the new Circular to replace Decision 493, the SBV is exploring the possibility of disclosing loan provisioning and NPL data according to the new standards. EMCC 3 has a trigger issuance of a Circular to meet 36 capital adequacy and other prudential thresholds that are consistent with international standards (trigger 1.5). Objective 2: Fiscal Discipline Maintained 89. The Government has maintained fiscal discipline and public debt at sustainable levels and is starting to strengthen its debt management capacity to handle potential risks from contingent liabilities. Public debt stock is currently around 53 percent of GDP, around 60 percent of which is external and 40 percent domestic debt. Much of the external debt is borrowed on concessional terms. Vietnam is at low risk of debt distress according to the IMF and World Bank’s latest DSA. The Government has gradually built up its debt management capacity, though the system is fragmented. There are also risks from contingent liabilities, the full extent of which is not known;25 the cost of borrowing has risen in light of market perceptions of risk; and sources of concessional finance are gradually declining. 90. GOV has a 3-year medium term debt management program for 2009-12 (prepared in 2008-09), but it only covers external debt. The focus is primarily on debt sustainability indicators, namely public debt to GDP targets. The program sets out to maximize external funding from concessional sources for implementing investment projects, and using less concessional external loans to on-lend to SOEs and sub-nationals. Currently, debt management goals are focused on the level of debt rather than the composition of debt. A clearer distinction is needed between fiscal policy and debt management objectives, which should focus on the structure of debt and risk exposure. 91. To address some of the above issues, prior action 2.1 under EMCC 1 is the issuance of a Prime Ministerial Decision to strengthen the institutional framework for debt management and establish prudential debt thresholds for medium-term fiscal sustainability (Prime Minister Decision 958/QD-TTg, dated July 27, 2012). The Decision sets out a long-term strategy (2011-2020) for public debt management, consolidating for the first time external, domestic, sub-national, off-budget, and SOE debt. It includes adoption of the following policies: (i) medium to long-term deficit targets and borrowing limits; (ii) changing the composition of the debt portfolio to increase share and maturity of domestic debt; (iii) medium to long-term thresholds for public debt stock and debt servicing. These are summarized in Table 3 below. The Decision does not set out formal penalties in case thresholds and targets are breached, and some of them may be above current levels. However they do increase transparency around overall fiscal management, and take account of development expenditure needs over the coming years. Additionally, the Decision helps to consolidate for the first time targets and thresholds on different financing sources. 25 MOF has indicated that from 2013 onwards, it will be working with line ministries, provincial authorities, and other government agencies to collect more detailed information on contingent liabilities and risks. 37 Table 3: Summary of Selected Policies Adopted Under Prime Minister Decision 958 Indicator 2011-2015 2016-2020 Deficit targets and borrowing limits Fiscal deficit (inc. off-budget) < 4.5% of GDP Around 4% of GDP < VND 500 trillion (VND 350 Bond-financed infrastructure < VND 225 trillion trillion for re-financing) Supplemental borrowing for < VND 55 trillion per year targeted infrastructure Composition of debt portfolio Government External Debt < 50% of Total Public Debt ODA Debt > 60% of Total External Debt Maturity of Domestic Increase on average by 4-6 Increase on average by 6-8 Government Bonds years years Thresholds for debt stock and debt servicing Total Public and Publicly < 65% by 2020 Guaranteed Debt Total debt service obligation < 25% of annual Government revenue External debt service < 25% of annual export revenue obligation Foreign Reserves (% of short- > 200% per year term debt) 92. In addition to setting prudential fiscal targets and thresholds, Prime Minister Decision 958 also has a list of policy and institutional reforms that will be pursued over the medium to long-term to strengthen debt management. One of these reforms is the adoption of a Medium-Term Debt Management Strategy (MTDS), which is linked to the policy target on the composition of the public debt portfolio. The development of the MTDS is part of ongoing Bank technical assistance, and will be supported under EMCC 2 (trigger 2.2), including through a possible joint Bank-Fund MTDS mission. The MTDS will look more closely at debt portfolio composition issues, and annual borrowing and repayment plans, which are critical to fiscal discipline. Finally another associated reform to be supported under EMCC 2 is a Decree on modernization of government cash management (trigger 2.3). Current weaknesses in cash management capacity (e.g. no Treasury Single Account, lack of detail in cash flow forecasts, and limited active cash management) lead to inefficiencies when it comes to coordination with debt management. This is a priority area of reform, which otherwise can impact negatively on the cost of borrowing. 38 Box 2: Promoting transparency of macroeconomic and financial sector reporting The EMCC aims to support increased transparency of macroeconomic and financial sector reporting by the Government of Vietnam. The 2012 Vietnam Development Report noted that despite progress, there are significant challenges to promoting the public availability, coverage, comprehensiveness and communication of macroeconomic data and analytical reports. The lack of transparency creates uncertainty in the markets and feeds into macroeconomic instability. There is a need to strengthen the timeliness, quality and public availability of key macroeconomic indicators. Specific issues and challenges include: greater clarity on assumptions for the Government’s macroeconomic forecasts; publication of quarterly GDP data by expenditure; more regular and predictable publication of data on foreign exchange reserves (currently there is a lag of 6-9 months); more detailed breakdown of banks’ credit by borrowing sector/sub-sector, by currencies and by maturities; more comprehensive data sources for compilation of the Balance of Payments, which suffer from important gaps; more accurate and complete data on FDI; and more data on the health of SOEs. A recent World Bank review finds that fiscal transparency in Vietnam could be significantly enhanced at relatively little cost and with potentially big gains. Increased public availability of fiscal information in Vietnam in recent years is matched by strong interest and demand among stakeholders. Improvements in budget classification, and analytical presentation and reporting of budget reports could have important benefits in terms of market perceptions of risks. The EMCC will pursue this dialogue to promote a more accurate and complete picture of government finances to market participants. Transparency and disclosure related regulation at SBV need to continue to be strengthened. On banking sector statistics, Circular 35 (in December 2011) supported under PRSC 10 was a good first step to introduce a few of the Financial Soundness Indicators (FSIs). However, the Circular’s implementation needs to be strengthened. Furthermore, enhancements need to be made to the Circular to cover all the FSIs and make them available periodically to the public. Transparency and consistency of information are both important points coming out from the Insolvency and Creditor Rights ROSC which is expected to be completed by November 2012. It will also guide follow-up TA, which will feed into the preparation of the revised bankruptcy law scheduled to be approved in 2013/14. The EMCC will monitor its implementation. PILLAR 2: TRANSPARENT, EFFICIENT AND ACCOUNTABLE PUBLIC SECTOR 93. Pillar 2 of EMCC will support a transparent, efficient, and accountable public sector through measures that: (i) improve public administration and accountability; (ii) strengthen state enterprise management; and (iii) enhance public investment management. The first objective targets the growing problem of corruption and inefficiencies in public administration, including in two areas namely domestic taxes (EMCC 1) and customs (EMCC 2), which are particularly susceptible to corruption and are major drags on competitiveness. The other two objectives on state enterprise and public investment management reforms are priorities in the Government structural reform agenda, which also includes the banking sector as discussed above. 39 Objective 3: Improved public administration and accountability 94. Corruption is a growing concern in Vietnam and a major impediment to competitiveness – it crowds out honest businesses, leads to poor public services, and increases costs to society. The 2005 Anti-Corruption Law provided an important base for anticorruption efforts in Vietnam, particularly in the areas of reducing red tape, improving transparency and introducing asset declarations. The Law has enabled simplification of close to three thousand administrative procedures between 2008 and 2012, leading to lower transaction costs for private businesses. But significant challenges remain. Enterprise surveys consistently report government delays in handling business processes, which increase the incidence of corruption. A recent survey finds that 69 percent of firms reported being victims of corruption.26 Implementation of transparency measures and disclosure of information is still well below the desired level. Only 60 out of 117 communes in a survey in 2010 publicized local detailed land use planning, a document mandated as “publicâ€? by the anticorruption law and land related documents.27 Similarly, the filing of assets and income declarations of public officials, a trigger under an earlier PRSC, has not been as effective as expected because the information is not disclosed. 95. Prior action 3.1 under EMCC1 is the issuance of the Law 27/2012/QH13 amending Law 55/2005/QH11 on Anti-Corruption and including stricter transparency guidelines in areas and sectors most vulnerable to corruption. (Law 27/2012/QH13, dated November 23, 2012 on Anti-Corruption). The amendment was based on a government-led review of implementation of the 2005 Law and the first phase of the National Strategy on Anti-Corruption. The amendment will enable the adoption of several policies, including: (i) disclosure of asset and income declarations of public servants, including wider scope and coverage – these will be reported annually and tracked under EMCC; (ii) stricter enforcement measures for disclosure of information in corruption-prone sectors including land and extractive industries, the Bank will monitor through its Vietnam Transparency Project; and (iii) disclosure of operational and financial statements of, as well as details of investments in non-core businesses by, State Enterprises – details on compliance will be reported through the GI’s regular anti-corruption efforts. 96. The policy measures focus on improving transparency because the Anti- Corruption Law is the most comprehensive legal document requiring public agencies to disclose and provide information to the public. Transparency is integral to the Government’s anti-corruption agenda, and a cross-cutting theme in EMCC. Policy dialogue under PRSC and ongoing technical assistance have consistently advocated for something more sweeping such as an Access to Information Law. But at present connecting transparency to the fight against corruption and the amendments to the Anti-Corruption Law hold the best prospect of supporting transparency in Vietnam. EMCC 2 therefore has a follow up trigger on adoption of a decree to regulate and guide the implementation of the amended Anti-Corruption Law to strengthen disclosure and transparency; control assets and income of public officials and strengthen the dealing with corrupted activities (trigger 3.3). In the meantime, the EMCC will also monitor the implementation of the anti-corruption Monitoring 26 Corruption Situation in Business Sector in Vietnam, 2012, VCCI and DEPOCEN. 27 Survey Report on Information Disclosure of Land Management Regulations, 2010, DEPOCEN for the World Bank. 40 and Evaluation system supported under PRSC 10. Data compilation has already started and first results are expected to be published in 2013. 97. One area of public administration, which has been particularly susceptible to corruption, is tax administration. The private sector complains about the lack of consistent application of tax laws. The appeals process is very complex. The Enterprise Survey (2009) found that a relatively high proportion of firms said they give gifts or unofficial payments to tax officials: 33 percent, which is well above the median for countries surveyed.28 Tax administration as reported above has proved to be an important constraint on competitiveness in Vietnam. The Tax Administration Law of 2007 establishes the legal basis for tax administration operations in Vietnam including taxpayers’ rights and obligations. Despite achievements, full compliance with tax obligations remains burdensome, in particular for small taxpayers. A business entity has to spend close to 900 hours per year to comply with tax regulations – Vietnam ranks 138th out of 185 countries on this dimension of the Doing Business survey.29 Finally, the Government wants to address the issue of transfer pricing, which several companies reportedly take advantage of to minimize profit declarations in Vietnam. 98. To address some of the above challenges, prior action 3.2 under EMCC is the issuance of an amended Tax Administration Law to streamline procedures; introduce advance pricing arrangements; increase risk-based management; and improve transparency (Law 21/2012/QH13 dated November 20, 2012 on Tax Administration). There are three main groups of reforms. The first is on simplification of administrative procedures, which aim at lowering burden on private businesses – specific policy measures are summarized in Table 4 below. The second group of reforms aims at modernizing tax administration and moving towards international standards. Among other things, this will allow the Government to pursue two new policies: (i) Advance Pricing Arrangement whereby enterprises need to voluntarily propose their pricing method or price of transactions before declaring and paying tax. This helps to address the issue of transfer pricing discussed above; and (ii) stronger risk-based management to increase efficiency through more proportionate application of tax administration procedures. Although the General Department of Taxation (GDT) has risk management procedures in place, these are not yet operational, which affects the efficiency of tax audits. The third set of reforms relates to improving the efficiency and effectiveness of tax administration. These will also enable adoption of new policies including: (i) the need to clear customs obligations before clearance and release of goods; (ii) payment of tax liabilities in installments for those that are not able to pay in full; (iii) new penalties for tax law violations and time limits within which violation cases need to be settled; and (iv) expanded provisions for on-site audits based on risk management principles. 28 Please see page 9 of “Enterprise Surveys – Vietnam Country Profile 2009.â€? At the same time, the proportion of firms identifying tax rates or tax administration as a major problem for their operation and growth is among the lowest in the world: 6 percent and 5 percent, respectively. 29 Please see http://www.doingbusiness.org/data/exploreeconomies/vietnam/. 41 Table 4: Policy measures to simplify administrative procedures Policy area Measures VAT declarations for small and medium Reduce the number of declarations from 12 to 4 taxpayers times per year Settlement of ‘check first refund later’ cases Time required for settlement reduced from 60 to 40 working days Settlement of ‘refund first check later’ cases Time required for settlement reduced from 15 to 6 working days Follow up on ‘refund first check later’ cases Post-refund examination to be completed within 1 year for high risk cases Tax refund dossier Abolish requirement for tax receipts Debt relief in case of bankruptcy Replace tax finalization form with decision on bankruptcy 99. A number of these policies will come into effect once implementation regulations and guidelines have been adopted. This includes for example guidelines for implementation of Advance Pricing Arrangements. The development of some of these regulations and guidelines are being supported through the Multi-Donor Trust Fund on Modernization of Public Finance Management (PFM MDTF 2 supported by Australia, Canada, Denmark, European Union, and Switzerland). Implementation will also be supported by the Bank’s flagship project, TAMP. The EMCC will therefore monitor the progress and implementation of the revised Tax Administration Law. EMCC 3 will pursue administrative modernization in Vietnam’s Customs services, which as noted earlier is also an important impediment to competitiveness (trigger 3.4). Objective 4: Strengthened State Enterprise management 100. The number and relative importance of SOEs in Vietnam’s economy have declined though the State maintains dominant position in key sectors.30 Between 2000 and 2009 the share of SOEs in fixed assets (e.g. land) fell from 55 percent to 45 percent; in bank credit from 45 percent to 27 percent; and in terms of jobs in the enterprise sector from 59 percent to 19 percent. Despite this, the State controls many strategic sectors. It has near- monopoly status in the production of several goods and services including fertilizer (99 percent), coal (97 percent), electricity and gas (94 percent), telecommunications (91 percent), water supply (90 percent), and insurance (88 percent). SOEs have also maintained their presence in several consumer good markets such as beer (41 percent), refined sugar (37 percent), textile (21 percent) and chemicals (21 percent). 101. SOEs are highly inefficient users of factor inputs relative to private enterprises. In 2000, an average SOE required nearly nine units of capital to produce one unit of output (turnover) compared to the industry average. The capital intensity of SOEs has gone up during the past 8 years, making them almost 20 times less efficient in use of capital relative to the rest of the enterprise sector. SOEs also get preferential access to banking credit, procurement contracts, and research and development compared to their peers in the private 30 The information in this paragraph and the following is based on VDR 2012. GOV definition of SOEs is used here i.e. enterprises with 100 percent state equity, or Economic Groups/ General Corporations with mother companies that are 100 percent owned by the State. The current Enterprise Law (passed in 2005) governs all enterprises, including SOEs and equitized firms. The Law on SOEs was removed from July 1, 2010. 42 sector. Research and analysis undertaken by more than 300 government research institutes are exclusively used by SOEs. 102. PRSC 10 supported the adoption of regulations to expedite the equitization of SOEs. Equitization proceeded quickly in the early 2000s, and slowed after 2006 (Charts 28 and 29). Decree 59 and its associated Circulars 196 and 202 helped address some important obstacles in the equitization process, namely valuation of firms and procedures for engagement of strategic investors. There has been some progress in 2012, including Initial Public Offerings for two major SOEs Petrolimex and Vietnam Steel Corp. The Government is also preparing an equitization plan for Vietnam Airlines. Nonetheless, overall progress has been slow with only six SOEs equitized in 2012 out of the Government’s target of 93 SOEs. This is, according to the government, due to the general economic situation, including slowdown in external and domestic private investment, and slump in the stock market. Chart 28: Number of SOEs Equitized Chart 29: Number of SOEs 4500 900 6545 7000 4000 800 6000 5655 3500 700 3000 600 5000 2500 500 4000 2000 3737 3853 3970 400 3384 3000 1500 300 2571 1000 200 2000 1309 1715 500 1094 100 1000 588 0 0 0 2003 2004 2005 2006 2007 1992-2000 2000-2002 2008-2011 1992 2001 2011 Cumulative # of SOEs # of SOEs equitized in given period Source: MOF in “Restructuring of SOEs in Vietnam,â€? Fulbright Economics Teaching Program and Vietnam Program Harvard Kennedy School (March 14, 2012). 103. Prior action 4.1 under EMCC 1 is the adoption of a Prime Ministerial Decision to restructure State Economic Groups (SEGs) and General Corporations (GCs), which includes classification of these groups and general corporations by level of government ownership, and time-bound actions with responsibilities across government agencies (Prime Minister Decision 929/QG-TTg, dated July 17, 2012). The Decision follows several recommendations from the review of SEGs, which was conducted under PRSC 10 with a view to developing a medium-term strategy for SEGs. The Decision adopts a policy on the level of State ownership in SEGs and GCs operating in different sectors. The policy groups SEGs and GCs are organized into four categories: (i) 100 percent state ownership in key sectors like defense, security, and utilities; (ii) dominant shareholding (more than 75 percent) in enterprises that provide public goods, including in more remote regions; (iii) large shareholding (more than 65 percent) in enterprises with major links to the budget, play a leading role in developing technology, and impact on overall balance of the economy; and (iv) minority shareholding in purely commercial businesses. By end of 2012, SEGs and GCs have to prepare restructuring plans (e.g. equitization, corporate governance reform, resolving bad debt, divestment of all non-core businesses by 2015) in accordance with this new policy. 43 104. In parallel, a number of policy and institutional reforms are under way to help facilitate the implementation of SEG and GC restructuring plans. Decision 929 consolidates all the legal and regulatory reforms associated with SOE restructuring, and assigns responsibilities for taking these forward to different ministries and agencies. This builds directly on Decree 59 supported under PRSC 10. One example is Decision 704 adopted recently to strengthen SOE corporate governance including transparency of SOEs. Other measures include: (i) regulations on the roles and responsibilities of the State Capital Investment Corporation (SCIC), which was set up in 2005 to act as government shareholder in SOEs, but progress on implementing its full mandate has been slow due to capacity issues; (ii) restructuring of the Debt and Asset Trading Corporation (DATC), which was set up to help state enterprises deal with bad debt; (iii) granting more delegated responsibility to line agencies for implementing SEG and GC restructuring plans through amendment of Decree 132; and (iv) upgrading the role of the Corporate Finance Department under MOF to help to coordinate the restructuring agenda, which falls under the overall responsibility of the National Steering Committee on Enterprise Reform and Development. There are some concerns that parallel development of reforms on the one hand and SEG and GC restructuring plans on the other could lead to potential inconsistencies. This will require strong inter- agency coordination. 105. There has been some progress in implementing the Prime Minister Decision 929 on SEG and GC restructuring. As of mid-October, around 53 SEGs and GCs have prepared restructuring plans, 26 of which have been approved by the Government. Details of these plans are yet to be published. In October 2012, the Prime Minister ended the pilot of two out of nine SEGs: the Vietnam Industry Construction Group (VNIC) and the Housing Urban Development Group (HUD). Both have now been turned into General Corporations under the Ministry of Construction (i.e. no longer under the Prime Minister) because they did not achieve their objectives established in 2010. This brings the number of SEGs down to 9. The Government has indicated that it expects to reduce this further to 5-7 and also reduce the number of SEGs and GCs that are directly under the control of the Prime Minister. 106. The EMCC dialogue will support follow up actions under Prime Minister Decision 929, including on specific restructuring commitments of SEGs and GCs. EMCC 2 proposes five specific actions: (i) Trigger 4.2 will involve consolidation of all the SEG and GC restructuring plans to update Decision 14 (2011) on the role of the State in different sectors. The revised Decision is expected to have a list of all SEGs and GCs together with restructuring targets; (ii) Trigger 4.3 will be the disclosure of Prime Ministerial Decisions on the restructuring of all SEGs, including time-bound action plans and monitoring mechanisms; (iii) Trigger 4.4 will be the disclosure of financial information of all SEGs; (iv) Trigger 4.5 will involve updating the policy framework for potential retrenchment of employees as a result of SOE restructuring. Under EMCC 3, it is proposed to follow up on EMCC 2 trigger 4.3 with actual implementation of equitization commitments under the Prime Ministerial Decisions for restructuring of SEGs (trigger 4.7). Actual equitization targets for end 2014 will be discussed during the preparation for EMCC 2. Similarly, EMCC 3 will also build on trigger 4.4 from EMCC 2 by launching a formal system to monitor and publish a set of consolidated financial and operational performance indicators for SOEs (trigger 4.8). Finally, to establish a harder budget constraint in relation to state enterprises, EMCC 3 will also support the development of legislation which sets out rules and regulations for state capital investment in state enterprises (trigger 4.8). 44 Objective 5: Enhanced public investment management 107. The Government has prioritized reforms to tackle weaknesses that run the length of its public investment management (PIM) cycle. As noted above, PIM in Vietnam is highly fragmented, with negative impact on the efficiency of capital investments.31 Through the Law on the State Budget (2002) and the Construction Law (2003), PIM has been decentralized to line ministries and provinces for most projects. The MPI is responsible only for screening of large nationally important projects. Institutional capacity for sound PIM however has not kept pace with decentralization – this includes weak appraisal capacity; lack of regulatory framework for private participation in infrastructure; inadequate environmental assessments; and lack of ability to adequately cost projects. 108. The World Bank has supported PIM reform efforts under the PRSC, but also through the first and second PIR DPOs. The PIR series targeted improvements in four areas: project selection, implementation, financial management, and oversight. PIR helped to push through important reforms including: piloting of e-Procurement; rules on land reclamation and compensation; regulations on preparation of Environmental Impact Assessments (EIAs); adoption of updated cost norms to improve project cost estimates; rules on recording and audits of Official Development Assistance (ODA) funds; and certification of independent evaluators of public investment projects.32 109. EMCC 1 will complement some of these efforts by focusing more deeply on reforms to strengthen budgeting for capital projects. One common problem, which PIR tried to address through adoption of updated cost norms, was that provinces under-estimate project costs, which led to a proliferation of under-funded and incomplete projects. But there are other weaknesses with capital budgeting, which were not directly addressed under PIR due to other priorities. These include: (i) a weak link between strategic planning and budgeting as SEDP objectives are medium-term and capital budgets are annual; (ii) separate capital and recurrent budgeting processes, which leads to lack of future provisions for operation and maintenance of capital projects; and (iii) loose budget constraints at sub- national level, which allow provinces to channel part of their over-realized revenue to new projects over the course of the fiscal year. 110. To address some of the above, the Prime Minister issued a Directive 1792 in 2011 to adopt measures that will strengthen capital budgeting.33 Directive 1792 aims to improve project selection based on appraisal and resource availability. It strengthens the oversight role of the central government with MOF and MPI appraising the overall resource availability for provinces, line ministries and agencies. It spells out clearly for the first time individual responsibilities for decisions on public investment. Directive 1792 also requires moving from an annual investment planning cycle to medium-term planning. 31 VDR 2012 – Chapter 3. 32 World Bank, PIR 1 and 2 Implementation Completion and Results Report, June 2012. 33 Directive 1792/CT-TTG (October 15, 2011) by the Prime Minister on Enhancing Management of Investment from State Budget and Government Bonds. 45 111. Prior action 5.1 under EMCC 1 is the submission to the National Assembly a report on the development investment status of 2012 and Medium-Term Investment Plan for the period 2013-2015 to set medium-term investment for the period 2013-2015 to set medium-term capital expenditure priorities in the State Budget and including off- budget bond financing for 2013 (Report 283/BC-CP dated October 19, 2012 - Medium- Term Investment Plan). This plan is based on guidance issued in June 2012 through Prime Ministerial Directive 19 and MPI Official Letter 4726 instructing agencies to formulate their medium-term investment plans. For the first time the government is moving from annual capital budgets to a policy of public investments within a medium-term framework. This has the potential to contribute to improved efficiency of public investment by better linking it to priorities in the SEDP, reducing fragmentation (because it includes investments at all levels of government and funded by the State Budget and off-budget bonds), and accelerating project implementation. The Plan was submitted to the National Assembly in October 2012, which has mandated the government to use this as the basis for setting capital expenditure ceilings for 2013-2015, to be updated on a rolling basis. This whole process will be formalized through the adoption in 2013 of a Decree on the adoption of a Medium-Term Investment Framework. 112. As a follow up to this and reforms initiated under PIR, EMCC 2 has trigger 5.2 on the launch of a Management Information System to Monitor and Evaluate large public investments funded under the State Budget. The new system is being developed following the issuance of Decision 937 in July 2012. This will have specific performance indicators to track, monitor and evaluate large public investment projects funded by the State Budget. Implementing line agencies will have access to the Management Information System (MIS) to input necessary project implementation data. EMCC 3 will follow up on a priority area where Government did not manage to make progress under PIR, which is on the preparation of the Public Investment Law (trigger 5.3). This was meant to establish a clear and consistent regulatory framework for project preparation, appraisal, implementation, and monitoring in the context of decentralization. PILLAR 3: ENABLING BUSINESS ENVIRONMENT 113. Pillar 3 of EMCC will support an enabling business environment through measures that promote a: (i) more efficient business environment by reducing transaction costs; and (ii) more transparent and equitable business environment by creating a more level playing field for all business activity. EMCC 1 will support reforms under the first objective. Reforms under the second objective will be pursued from EMCC 2. Objective 6: More efficient business environment 114. The Government embarked in 2007 on an extensive program to simplify administrative procedures following adoption of its Master Plan of Administrative Procedure Simplification (Project 30).34 This has a direct bearing on competitiveness because of the impact of administrative procedures on the efficiency of engagement with the public sector in general, and the vulnerability to corruption in particular. In the last three years, ministries and provincial authorities have made important progress under Project 30 to 34 Supported by USAID’s Vietnam Competitiveness Initiative (www.vnci.org). 46 simplify administrative procedures (APs). The government has issued 25 thematic decrees to simplify nearly 5,000 administrative procedures across 24 ministries and agencies. These reforms are estimated to generate a saving of VND 30,000 billion for businesses and citizens each year, and reduce compliance costs by nearly 38 percent. These estimates are based on a standard cost model, which IFC helped to develop for assessing ex ante the potential savings from reform measures. Although Project 30 has now closed, the agenda for AP reforms remains quite significant and is being taken forward by the Administrative Procedure Control Agency (APCA). As of September 15, 2012, ministries and agencies have completed the simplification (or made substantial progress on) the simplification of 2,779 APs out of a total of 4,751 APs. 115. Prior action 6.1 under EMCC 1 is the adoption of a Prime Ministerial Decision for ministries and provincial authorities to review the impact of administrative procedures on the business environment, and recommend actions to streamline procedures, avoid duplication, and reduce regulatory burden on the private sector (Decision 263/QD-TTg, dated May 3, 2012). The objective of the Decision is to further reduce by at least 30 percent the cost of compliance with APs. APCA is responsible for managing this process and the inter-ministerial coordination as APs are spread across different government departments. APCA has been moved to MOJ, effective November 19, 2012.35 The Decision adopts a policy to review on a regular basis APs across 24 groups of activities. In 2012-2013, the Government aims to streamline APs related to leasing and/or acquiring land for construction activities. There are currently conflicting provisions in the Land Law, Decree 181, Decree 88 and Circular 14/2009 on the responsibility of state agencies and investors with regards to the cadastral survey process for land assignment and land lease. The proposed reforms would clearly stipulate the roles and responsibility of state agencies in land assignment/land lease procedures. Another specific action under Decision 263 will involve the elimination of procedures related to investment registration, investment evaluation and investment certification – these currently overlap with provisions covered under laws governing the issuance of investment certificate. 116. In addition to the above, simplification of APs related to business registration, customs administration, tax administration, exports and public expenditure – all relevant to EMCC – will be prioritized in the next two years. OOG and other government departments are consulting with the private sector and plan to propose a list of priority APs to address over the coming period. Monitoring follow up will follow a similar model to Project 30, which had an Advisory Review Council that helped review close to two hundred follow- up actions. One of these actions was for example the unification of the business and tax registration codes, a precursor to the upcoming roll out of online business registration, which is one of the triggers proposed under EMCC 1. 117. The Bank will work with the IFC to monitor follow up and implementation of the AP simplification agenda. The IFC is supporting APCA to develop an M&E system for AP simplification. The M&E system will have two components. The first is a scorecard assessment for line ministries and provincial authorities that are responsible for implementing new, simplified APs. This is an internal reporting mechanism to enable APCA to monitor the performance of different line ministries and provincial authorities. The second is a survey of 35 APCA functions and mandates have been transferred to from OOG to MOJ on November 19, 2012, in accordance with Prime Minister’s Decision No 1668/QD-TTg dated November 8, 2012. 47 private businesses, so they can report on the efficiency and effectiveness of APs. The Bank will explore with IFC options to work together on this M&E system through complementary technical assistance. The adoption of the M&E system for administrative procedures simplification reforms is proposed as trigger 6.3 for EMCC 2. 118. In addition to the above, one specific area of AP reform that EMCC will support relates to business registration. Reforms over the past ten years, including through the Enterprise Law (1999, amended in 2005) have helped to simplify requirements for starting a business. A one-stop-shop for business registration was introduced in 2007, integrating several different steps into one. Decree 43/2010/NÄ?-CP issued on April 15, 2010 and Circular 14/2010/TT-BKH issued on June 4, 2010 introduced a unique company identification (Enterprise ID) number when businesses register, which can be used also to file and pay taxes. This has required major IT, training and legal reform efforts. Results from the Provincial Competitiveness Index already show signs of improvement. MPI recently developed the National Business Registration Database containing information on 689,000 businesses that are registered across the country. 119. Despite these developments, there is further scope for improvement. Vietnam ranks 103rd in the 2012 Doing Business report on “starting a business.â€? The current practice of having to physically go to the Business Registration Office (BRO) under the provincial Department of Planning and Investment to register a business provides ample opportunity for corruption at the registration office, which is reportedly still a major problem. This is a particular issue for SMEs for whom the marginal cost of these practices is even higher than for larger enterprises. Additionally, although several steps have been integrated, the need to interface across several different agencies still creates the scope for mistakes and inaccuracies, particularly in terms of maintaining updated information. Decree 43/2010/NÄ?-CP as a result had a provision to introduce online business registration. 120. Prior action 6.2 under EMCC 1 is the issuance of a Circular to enable adoption of e-signature and e-payment procedures to allow the roll out of e-business registration, and the public disclosure of business registration information (Circular 01/2013/TT- BKHDT dated January 21, 2013). This will enable the Government to adopt a policy, which provides three options for business registration: (i) using hardcopy dossiers and submitting at provincial BROs; (ii) using existing e-signatures (public Certified Authority) issued one of six firms that are qualified to issue Certified Authorities; (iii) using business registration accounts provided by the Agency for Business Registration specifically for the purpose of registering an enterprise. Furthermore, the new Circular will consolidate the legal basis for launching the a modern online business registration system, making business registration information available in the public domain; and providing rules and procedures for specific cases such as termination procedures, settlement of violation, and revocation of certificates. 121. The online registration system should be launched in Q2 of 2013. With online registration, businesses will no longer need to physically go to Business Registration Office (BRO) to register – the entire process can be done through a national business registration portal. Once the business registration is submitted online, the information is sent to the tax database of the GDT at MOF, which creates a tax code and sends to the national database so that the BRO can issue a single identification number. MPI hopes to encourage most if not all new business registrations to take place through the online system. 48 122. Further reforms on business registration are envisaged, which the EMCC plans to support in the coming years. A number of these reforms will be captured in the revisions to the Law on Enterprises expected to be approved in 2013-2014 (trigger 7.4). One example would be the separation of Investment certification and Business registration processes, which are currently tied together and thereby create unnecessary delays if changes to one or the other are needed. It is further proposed that the new Law allows the registration of business types, which are currently not regulated by the Law on Enterprises (2005) e.g. foreign enterprises, banks, financial institutions, and science and technology institutions. By expanding the scope to include these firms, the National Business Registration database will be a comprehensive source of information on all enterprises operating in Vietnam market at any time. Table 5: EMCC 1 Prior Actions Objective EMCC 1 Prior Action Status I. MACROECONOMIC STABILITY 1.1 GOV has issued Decision 254/QD-TTg dated March 1, 2012 Completed providing a comprehensive credit institutions restructuring plan and direction on related policy actions including enhancing role of foreign participation in domestic commercial banks, 1.Enhanced incentives for consolidation of banks (especially weak banks) Financial Sector Stability and a plan to deal with non-performing loan (NPLs). 1.2 SBV has issued Circular 02/2013/TT-NHNN dated January Completed 21, 2013 to improve banking supervision through strengthened regulations on asset classification, internal credit rating, and loan loss provisioning to better address credit risks. 2.1 GOV has issued Decision 958/QD-TTg, dated July 27, 2012 Completed 2. Maintenance to strengthen the institutional framework for debt management of Fiscal Discipline and establish prudential debt thresholds for medium-term fiscal sustainability. II. TRANSPARENT, EFFICIENT AND ACCOUNTABLE PUBLIC SECTOR 3.1 GOV has issued Law 27/2012/QH13 dated November 23, Completed 2012, amending Law 55/2005/QH-11, dated November 29, 2005 3. Improved on Anti-Corruption and including stricter transparency Public guidelines in areas and sectors most vulnerable to corruption. Administration 3.2 GOV has issued Law 21/2012/OH13 dated November 20, Completed and 2012, amending Law 78/2006/QH11 dated November 29, 2006 Accountability on Tax Administration, to streamline procedures; introduce advance pricing arrangements; increase risk-based management; and improve transparency. 4.1 GOV has issued Decision 929/QD-TTg dated July 17, 2012 Completed to restructure state economic groups (SEGs) and general 4. Strengthened corporations (GCs), which includes a classification of these State Enterprise Management groups and corporations by level of government ownership, and time-bound actions with responsibilities across government agencies 5.1 GOV has submitted to the National Assembly Report Completed 283/BC-CP dated October 19, 2012, on the development 5. Enhanced investment status of 2012 and medium-term investment plan for Public the period 2013-2015 to set medium-term capital priorities in the Investment Management State Budget and including off-budget bond financing for 2013. III. ENABLING BUSINESS ENVIRONMENT 49 6.1 GOV has issued Decision No. 263/QD-TTg dated March 5, Completed 2012 for ministries and provincial authorities to review the impact of administrative procedures on the business environment and recommend actions to streamline procedures, 6. More Efficient avoid duplication, and reduce regulatory burden on the private Business Environment sector. 6.2 MPI has issued Circular 01/2013/TT dated January 21, 2013 Completed to enable adoption of e-signature and e-payment procedures to allow the roll out of e-business registration and public disclosure of business registration information. Box 3: Good Practice Principles for Conditionality Principle 1: Reinforce Ownership The overall strategic framework and specific policy reforms under EMCC were agreed through extensive consultations with all government counterparts between March and July 2012. The team has been particularly sensitive to ensuring that the Government leads in proposing policy actions. New governance arrangements have been put in place compare to PRSC to strengthen ownership. Principle 2: Agree upfront with the Government and other financial partners on a coordinated accountability framework The overall policy matrix and results indicators were developed together with government counterparts and Development Partners. It builds on the PRSC model, though integrates the policy matrix and results indicators into one table. The Government, Development Partners and the Bank agreed to have an additional table to monitor follow up to prior actions, and milestones to future triggers. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances Implementation and monitoring arrangements have been customized to Vietnam’s own institutional arrangements. The SBV has the role of coordinating ministries and agencies to ensure they fulfill their prior actions. A ministerial level Steering Committee provides overall guidance, and a Technical Working Group takes forward technical analysis and dialogue. Principle 4: Choose only actions critical for achieving results as conditions for disbursement The Government is pursuing a wide range of competitiveness-related reforms. The EMCC policy dialogue has helped to prioritize a few critical actions for disbursement. The criteria used are summarized at the end of section IV and beginning of section V above. The broader program will be monitored by the table in Annex 3. Principle 5: Conduct transparent progress review conducive to predictable and performance-based financial support Implementation progress will be monitored regularly through the Program M&E framework as discussed in Section VI. This will include monitoring progress against the results indicators; reviewing progress against prior action follow up and trigger milestones in Annex 3; and in depth analytical work on specific policy actions. In addition to this independent reviews can be conducted at the Program’s mid-term and end. 50 VI. OPERATION IMPLEMENTATION POVERTY AND SOCIAL IMPACTS 123. Reforms under EMCC are expected to have an overall positive effect on poverty and employment in the long-run by improving productivity across key sectors. Vietnam’s record on poverty reduction has been remarkable. Using a ‘basic needs’ poverty line initially agreed in 1998, the poverty headcount fell from 58 percent in the early 1990s, to 14.5 percent by 2008, and by these standards was estimated to be well under 10 percent by 2010.36 However, lack of competitiveness and low productivity are preventing the creation of higher value-added jobs, leaving most workers in low wage employment. Employment has increased with Vietnam’s impressive growth record. Larger domestic and foreign enterprises pay good wages. But they make up a small proportion of total employment. Moreover, a recent ILO study highlights important concerns over the quality of jobs, which includes income, regularity of work and social protection. Three quarters of workers are assessed to be in ‘vulnerable’ employment.37 Wages for most of these households have not kept pace with inflation. An increasing share of young workers aged 15-24 are entering second choice employment out of compulsion to support their families, and because of lack of alternative opportunities.38 Through competitiveness enhancing reforms, EMCC hopes to encourage investment to expand work opportunities in higher value added sectors over the long-run. 124. In addition to longer-term effects, financial sector, fiscal and public investment policies under EMCC should have positive poverty and social impacts in the short-run by promoting macroeconomic stability. Although unskilled labor is still competitive compared to China, rising inflation in Vietnam between 2008 and 2011 has put enormous pressure on firms to increase wages. There were close to nine hundred strikes in 2011, double the number in 2010.39 At the same time the ILO’s 2010 Employment Trends report finds that in 2009, industry sectors that contributed the most to GDP (42 percent) experience zero average annual increase in labor productivity.40 Macroeconomic instability therefore has negatively impacted firm level competitiveness, and their ability to generate quality employment. These events have also brought considerable challenges for urban residents and have been documented in a number of studies and rapid assessments (Oxfam/ActionAid, 2008, 2011; VASS 2009, 2011; UNDP, 2010). It is estimated that 65 percent of households surveyed in the 2009 Urban Poverty Survey reported higher prices for food and essential items as a source of difficulties, making inflation by far the most common factor among job loss, business slowdowns, natural disasters, health shocks, and others. 36 World Bank, Poverty Assessment 2012. 37 Papola, TS, “Meeting the employment challenge in Vietnam – Towards an employment oriented growth strategy,â€? ILO (December 2011) p.1 and p.29. 38 ILO, MOLISA and EC “Vietnam Employment Trends 2010,â€? (October 2010), p.xv. 39 Financial Times, “Vietnam’s factories grapple with growing unrest,â€? January 19, 2012. 40 ILO, MOLISA and EC “Vietnam Employment Trends 2010,â€? (October 2010), p.xv. 51 125. Rationalizing public investments under the fiscal discipline and public investment management objectives of EMCC could impact negatively on employment in the short run. The Bank will work closely with MOLISA, which has conducted work in this area and found that spending cuts have led to a slight decrease in the number of existing jobs and potential new jobs, particularly in the labor-intensive construction sector. The Government is working on social protection responses, which currently are quite limited. The overall aim under the fiscal discipline and public investment management objectives are to increase the efficiency of public investments so that more growth and employment can be generated for the same dollar spent. 126. Recent government efforts to strengthen its social security system include an unemployment insurance scheme for workers introduced in 2009 as well as some ad-hoc policies like electricity subsidies to the poor. With regards to SOE reform, the Government issued Decree 59/2011/NÄ?-CP on equitization policy including provisions on how to deal with retrenched workers. Yet, a close examination of Vietnam’s current social safety net reveals important gaps that risk hampering the protection of the poor and vulnerable in times of shocks. First, there is a fragmentation of poverty reduction and social assistance programs both from a central design perspective and from the perspective of beneficiaries. Second, there are missing instruments in the system including the absence of a basic social safety net for the chronic poor to help ensure their basic needs and an effective mechanism to provide cash support for those who are highly vulnerable to shocks to help them prevent and overcome a period of transitory poverty. Third, specific “safeguardâ€? policies to address transient adverse impacts of structural reforms maybe insufficient and less specific. 127. The objective on improving SOE management may lead to employee redundancies as part of SEG and GC restructuring. Earlier episodes of SOE restructuring were accompanied with layoffs but the adverse effects were mitigated due to a fast growing economy and a booming private sector. The effects of reforms this time around could be more severe in terms of transitional unemployment because of predictably unfavorable economic situation. However, there is no publicly available study on this issue. EMCC will conduct analytical work to estimate potential number of employees affected by the SOE reforms and examine current policies in place to address this issue. This will feed into a policy framework on dealing with potential retrenched employees, which is a trigger under EMCC 2. 128. Reforms under EMCC to improve the transparency and efficiency of public administration and the business should have positive poverty and social impacts. It should benefit in particular SMEs, which account for the vast majority of formal employment as noted above. But SMEs suffer disproportionately in terms of corruption and the burden of compliance with administrative procedures. This creates an unequal playing field, which is further exacerbated by preferential treatment for SOEs. This will be addressed by the trigger on the Enterprise Law under EMCC 3. A combination of these factors constrains domestic private enterprises from competing, growing, and creating linkages with FDI enterprises, which otherwise could promote more quality employment. 129. Tax administration, CIT and VAT policy reforms supported under EMCC should impact positively on SMEs. Reforms under the Tax Administration Law for example aim to reduce the number of times SMEs have to declare VAT in a year. CIT and 52 VAT reforms are looking at ways to relieve cost pressures on smaller enterprises. The EMCC will also support analytical work to look at the impact of VAT policy changes on households, building on earlier Bank analysis in this area.41 This found that VAT in Vietnam is relatively progressive because poor people produce for many of their own needs rather than purchasing them. But this will change over time as home production becomes relatively less important and these businesses may then need to start paying VAT. Therefore one of the issues that the EMCC will provide analytical work to review the merits of having VAT thresholds for SMEs. 130. The link between gender issues and national competitiveness is discussed further in Annex 3, but in summary EMCC-supported reforms are expected to have a positive impact on gender equality. There are two specific examples: a. The first is with the tax administration reforms. The 2006 IFC Report "Voices of Vietnamese Women Entrepreneurs" notes that Vietnamese women entrepreneurs in their study complained about illogical tax laws and collection practices (creating breeding grounds for "unofficial payments". Lack of access to information on tax regulations and linked to that lack of networks for women entrepreneurs is stated as one of the reasons. In addition, a UNIDO/VCCI study (Gender Related Obstacles to Vietnamese Women Entrepreneurs) found that while 20 percent of male entrepreneurs in their study had paid someone (unofficial) to facilitate taxation, only 9 percent of women entrepreneurs had made unofficial payments to facilitate taxation. Therefore amendments to the Tax Administration Law should help remove obstacles faced by women entrepreneurs. The EMCC will look at including a gender disaggregated indicator to the upcoming tax administration survey. b. The second relates to business registration reforms. There are some indications that women entrepreneurs see business registration procedures as more of an obstacle than their male counterparts. An ILO/VCCI study on Women Entrepreneurship found that 64 percent of female entrepreneurs said their company had a business license compared to 70 percent for male entrepreneurs. This might be explained by limited awareness of women entrepreneurs about registration processes or it may be that a larger percentage of women entrepreneurs plan to keep their businesses small. Further simplification of business registration procedures through adoption of online registration processes should have a positive impact in this area. The EMCC will explore with the Business Registration Office the opportunities to track the gender impact more closely. 131. The findings of the upcoming work on poverty and social impacts will feed into the policy dialogue for EMCC. Based on the analytical studies, actions to protect the poor and the vulnerable from adverse effect of the structural reforms such as adoption of social protection programs are being proposed. Current government policies to assist the population vulnerable to economic structural reforms will be examined. 41 World Bank, “Tax Reform in Vietnam: Toward a More Efficient and Equitable System,â€? September 31, 2011. 53 ENVIRONMENTAL ASPECTS 132. Policy actions supported by the EMCC series are unlikely to have negative effects on the country’s environment and natural resources. Rather, as the operations support measures that contribute to a shift towards macroeconomic stability; transparency, efficiency, and accountability of the public sector; and business enabling framework, the EMCC program may contribute indirectly to positive environmental externalities. 133. The policies supported under this programmatic series address economic management reforms which are critical to competitiveness for a country at Vietnam’s stage of development, and are expected to contribute to higher productivity in Vietnam. In particular, policy actions relating to the restructuring of SOEs have important environmental implications. In Vietnam, SOEs account for a large quantity of public investment but are relatively inefficient in terms of resource use. In the long run, such reforms – supported through the EMCC – should result in better planning and natural resource use, especially in extractive industries; and in productivity and competitiveness gains through the adoption of cleaner production technologies. 134. In addition, it is important to note that that under the World Bank’s Second PIR DPO (Cr 4944-VN and Ln 8053-VN), the Government has carried out a number of regulatory reforms and capacity building initiatives in the areas of environmental impact assessment (EIA) and strategic environmental assessment (SEA) – which are important mechanisms to address environmental impacts of policies and programs. IMPLEMENTATION, MONITORING AND EVALUATION 135. The EMCC will have a three-tiered governance structure as illustrated in Chart 30 below. The Steering Committee chaired by the Deputy Prime Minister would review and endorse the proposed areas of focus for operation. A Technical Working Group (TWG) would lead technical discussions and analysis for triggers and policy actions. The TWG would help oversee the preparation of the operation, discuss the technical elements of policy actions, decide on analytical work, and brief the Steering Committee and Development Partners. This should help build greater ownership for the EMCC operation among the lead technical staff both in Government and among Development Partners. The SBV will be responsible for overall coordination of the program. 54 Chart 30: EMCC governance structure Steering •Annual meeting between SC and Heads of Agencies to review and Committee approve policy reform areas for next two operations (SC) •Guidance on future analytical work & capacity building activities (CBA) •DG/DDG level officials from seven key counterparts, WB EMCC team, 1 Technical representative from each of the co-financiers, and observers from MOJ Working and MOHA. Group (TWG) •Retreat for preparing policy actions for the next two operations •Leading and commissioning analytical work, and implementation of CBA •Trust Funds to assist with coordination and analytical work EMCC •Three technical missions including appraisal Coordination •SBV remains the implementing agency 136. Monitoring and evaluation of the program will also take place through three main channels. The first channel is monitoring progress against the results indicators agreed in the policy matrix. These include indicators that have been drawn directly from the Government’s own strategies, and independent sources and surveys (e.g. Provincial Competitiveness Index and Provincial Governance and Public Administration Index). The second channel is monitoring specific follow-up activities to prior actions, and milestones for future triggers. These will be identified on a regular basis and updated in Annex 3. This responds to earlier concerns that whilst policies may have been adopted, implementation does not follow suit. The third channel will be in depth analytical work on specific policy actions. This will help to identify more precisely ex ante specific issues to monitor during implementation of prior actions. 137. A combination of these channels should help to build a better picture of how the EMCC is contributing to the overall objective of competitiveness and productivity. The operation will aim to consolidate these and report on an annual basis. This will help to ensure that there is regular information on implementation and results of the program. In addition, the Government and Development Partners may want to carry out an independent mid-term and end-of-program review. FIDUCIARY ASPECTS 138. Public Financial Management (PFM). Vietnam’s PFM environment is considered adequate to support this operation. The most recent Country Financial Accountability Assessment (CFAA) conducted in 2007 concluded that ‘the financial management risk to proper use, control and reporting of funds that are managed through the Vietnam’s PFM systems is assessed as moderate.’ The Government has maintained strong ownership of the PFM reform agenda and continues to lead a coordinated reform program in consultation with the donor community. A Strategy for Finance Development of Vietnam for the period 2011- 2020 has recently been approved. The approved State Budget is published on the MOF website just before the start of the Fiscal Year. It includes information on: aggregate revenue and spending; budget financing; planned spending by government function; and domestic revenue sources. MOF publishes quarterly budget execution reports, which include information on spending at central, provincial, and district level, and estimated revenue 55 collection. Audited financial statements are published eighteen months after the end of the Fiscal Year. Progress has been made to implement a range of PFM reforms emanating from the CFAA recommendations (notably in the areas of public debt management, external oversight, fiscal transparency, and the roll-out of the Treasury and Budget Management Information System). However key legislative reforms, such as the revision of the State Budget Law and the State Audit Law are still pending. While the financial management and accountability systems of the government have improved, the risks arising from weak implementation and compliance remain. The quality and extent of independent audit oversight can be further strengthened by updating the audit strategies and methodologies of the State Audit of Vietnam (SAV) to align with international practices, and through the development of an effective internal audit function, which currently is only at an embryonic stage in Vietnam. A number of donors are providing support to the SAV for the implementation of its strategy to 2020, including the Bank which is providing technical assistance to modernize the SAV’s audit standards and methodologies in the area of financial and compliance audits. 139. Foreign Exchange Environment. An IMF safeguards assessment has not been conducted in Vietnam. This assessment would provide information about the foreign exchange control environment of the SBV and integrity of financial information. The SBV is subject to auditing by SAV on an annual basis, however under the current laws the audited financial statements and audit reports of SBV are not made public. 140. Dedicated Account and Audits. To address the potential residual fiduciary risks related to the foreign exchange environment, the Recipient will maintain a dedicated foreign currency deposit account (DA) at SBV in US dollars for the proceeds of the Credit, and will report on the funds flow of the DA. The DA will form part of the country’s official foreign reserves. The government will, if deemed necessary by the Association, allow an independent external audit of the DA. 141. Disbursement. The proposed Credit will follow the Association’s disbursement procedures for development policy lending operations. The Credit proceeds will be disbursed against satisfactory implementation of the Program and not tied to any specific purchases, and no procurement requirements will be needed. The Recipient shall ensure that upon the deposit of the Credit into said account, an equivalent amount in Vietnamese Dong is credited in the Recipient’s budget management system to be used for budget expenditures in a manner acceptable to the Association. If the proceeds of the Credit are used for ineligible purposes as defined in the Financing Agreement (FA), the Association will require the Recipient to refund the amount directly to the Association. Amounts refunded to IDA shall be cancelled. The administration of this Credit will be the responsibility of MOF. 142. Reporting. The Recipient will report to the Association on the amounts deposited in the foreign currency account and credited to the budget management system and on the timing of such deposits and credits. The Recipient will forward the report within one month of receiving the letter from the Association advising of the deposit, and the report will include: (i) statement of the exact sum received into the dedicated DA and the timing of such receipts; (ii) confirmation to Association that all withdrawals are for eligible expenditures; (iii) confirm to the Association details of the Treasury account to which the Vietnamese Dong equivalent of the Credit proceeds will be credited, the credited amount, and their timing, and (iv) a report on receipts and disbursements for the dedicated DA. 56 143. Vietnam’s public procurement reform started in mid 1990s and has made considerable progress particularly in recent years. The Bank’s CPAR (October 2002) identified some major issues in Vietnam’s public procurement system and provided recommendations. Vietnam has since adopted a number of public procurement laws and decrees. The Law on Procurement (Law No. 61/2005/QH11) was adopted in 2005 and amended by Law No. 38/2009/QH12 in 2009. The government has issued implementing regulations for the Law on Procurement through the Decree 85/2009. Public procurement rules are also provided for in the 2003 Law on Construction. In addition, the government has issued guidance on the implementation of the legal framework through many circulars and decisions providing standard documents, templates and detailed instructions for carrying out procurement processes. 144. While Vietnam has developed a comprehensive legal and regulatory framework for public procurement, there remain a number of areas where improvement is necessary, such as the primacy of other laws (e.g., the Law on Construction) over the procurement law, limits applied for direct contracting, use of merit point method in bid evaluation, rejection of bids with prices higher than estimated costs and negotiation of and signing of contracts for procurement, restrictive and cumbersome complaints handling mechanism, and weak control of conflict of interest. The existing Law also does not provide adequate legal framework for some modern and innovative procurement modalities such as e- GP, procurement under public-private partnership arrangement, centralized procurement and framework agreement.42 In addition, Vietnam’s ongoing negotiations to join the Trans- Pacific Partnership Agreement also impose the need to reform its Procurement Law to meet the relevant requirements. Realizing the above issues and demand, the Government has started the drafting of a new law on public procurement and would submit it for National Assembly’s ratification in 2013. 145. The government, through its Public Procurement Agency under MPI has piloted a national electronic procurement system since 2009,43 and is rolling this out for nationwide operations by 2015. Meanwhile, MOF has been testing a centralized procurement system (for common items financed by government expenditures) and plans to scale it up in the next few years. The actual procurement is carried out through a decentralized system by the national government, by the provinces and municipalities, as well as by numerous local governmental entities. In addition, thousands of SOEs participate in government procurement or carry out their own procurements based on government procurement rules and procedures. Significant funding for public procurement also comes from international donors through official development assistance (ODA) under which procurement is carried out largely by following the respective donor’s procurement procedures or in some cases, using the country system. 42 There are however Circulars and Decisions related to some of these areas including: (i) Circular 17/2010/TT- BKH, specifying the piloting of on-line procurement; (ii) Prime Minister’s Decision No. 71/2010/QD-TTg, dated 09/11/2010, on the promulgation of regulations for piloting public private partnerships; (iii) Prime Minister’s Decision No. 179/2007/QD-TTg, dated 26/11/2007 promulgating the regulations on the procurement of goods and assets using State budget through centralized procurement arrangements; (iv) MOF’s Circular No. 22/2008/TT-BTC, dated 10/3/2008 providing guidelines for the implementation of certain provisions of the regulations on centralized procurement of goods and assets using State budget finance. 43 Please see http://muasamcong.mpi.gov.vn 57 146. The Bank has been active in supporting the Government’s efforts in reforming and strengthening its public procurement system, through on-going policy dialogues as well as financial and technical assistance. The Bank has provided a number of IDF Grants since mid-1990s with respective focus on development of the legal framework; implementation, monitoring and evaluation of procurement systems; development of public procurement bulletin (in paper and web/electronic forms); and institutional development and capacity building. Two IDF Grants are currently under implementation, one supports the strengthening of procurement audit capacity, assessment of procurement legal framework and development of a national strategy and roadmap for e-GP; and the other supports the development of the new procurement law and implementing regulations, and provision of training for implementation. The Bank, jointly with other donors, maintains regular policy dialogue with the Government in public procurement and provides the needed advice and assistance. In addition, the Bank has initiated a training needs assessment with a review to help the Government develop a national strategy and implementation plan for long-term institutional and capacity building in public procurement. 147. The above efforts by the Government and supported by the Bank, including the issuance of the new Procurement Law (including the implementation Decree), the further development of e-GP system, the centralized procurement systems, as well as the capacity building, are expected to strengthen and modernize the public procurement system towards a more transparent, efficient and accountable one, hence will make significant contribution to the implementation of the EMCC program. RISKS AND RISK MITIGATION 148. Vietnam faces important short-term domestic macroeconomic management challenges. Whilst foreign exchange reserves have more than doubled in 2012, it is low by international standards. The ongoing domestic credit bust could further worsen both growth prospects and asset quality. Another risk is the authorities’ departure from fiscal and monetary discipline prompting inflation resurgence. This could unravel gains already made and further weaken confidence. A similar outcome, but where potential growth is compromised, could arise from delayed and poor implementation of structural reforms including the resolution of bad debts in banks and SOEs. Vietnam is also vulnerable to the effects of a prolonged global economic slowdown, which could adversely affect exports, remittances, foreign investment, and possibly aid. Although it has managed to navigate the 2008/09 crisis reasonably well through implementation of a large stimulus package, fiscal space is now limited because of high levels of public debt and large contingent liabilities from a weak banking sector and poorly managed SOEs. 149. Mitigation measures include closer monitoring of macroeconomic developments, and increased dialogue with the authorities in collaboration with the IMF to ensure steadfast implementation of reforms already announced and to prepare for new ones . The ongoing work on a FSAP by the World Bank and IMF is expected to provide a comprehensive roadmap for financial sector reform and accelerate implementation. EMCC series itself can be considered as part of a risk mitigation strategy as it underscores the need to reform, builds consensus around challenging issues and helps design appropriate responses. 58 150. A potential lack of leadership and ownership over the EMCC program could ultimately affect its end results. This could be due to lack of incentives to pursue large reforms through EMCC in light of its multi-agency design. The EMCC has developed new governance arrangements to help strengthen government ownership and coordination of the program. A more focused agenda, and dedicated resources to help bring in high quality analytical input should also help to mitigate some of the above risks. But there are also important political economy challenges. Strong political commitment is needed to drive much needed reforms, which can lead to short-term losses to important interest groups. The latter can lead to powerful opposition to tightening of fiscal and monetary policies, but also any change to the status quo the management of SOEs, the banking sector and management of public investments. 151. Finally, whilst the need for reform may be strong, it will be important to adopt policies and institutions that are consistent with implementation capacity. Sophisticated standards will not serve their purpose if there is limited capacity to implement them. The program will maintain a very close dialogue to ensure appropriate sequencing and prioritization of reforms. 59 ANNEX 1. LETTER OF DEVELOPMENT POLICY 60 61 62 ANNEX 2. EMCC POLICY MATRIX 44 Objectives EMCC 1 Prior Action EMCC 2 Trigger EMCC 3 Trigger Results Baseline Target End-2015 I. MACROECONOMIC STABILITY 1.1 GOV has formally 1.3 GOV has amended ï‚· RI-1: Improved ï‚· RI-1 target (end adopted a comprehensive legislation to enable increased economic and 2015) = group 8. Credit Institutions foreign investment, and allow Industry risk score restructuring plan and injection of capital and transfer (grouped 1-10, from direction on related policy of technology and knowledge in lowest to highest), actions including enhancing local commercial banks measured by role of foreign participation (Adoption of amended Decree Banking Industry in domestic commercial 69). Country Risk banks, incentives for Assessments consolidation of banks (BICRA). Baseline (especially weak banks) and (October 2012) = 1) Enhanced a plan to deal with non- group 9 (Standard & Financial performing loan (NPLs) Poor's). Sector Stability (Decision 254/QD-TTg, ï‚· RI-2: Reduced ï‚· RI-2 target (end March 1, 2012) proportion of 2015) = 5 percent or 1.2 SBV has issued a 1.4 GOV has adopted a 1.5 SBV has issued a Circular outstanding loans less. Circular to improve banking comprehensive policy requiring banks to meet capital defined as non- supervision through framework to address the adequacy and other prudential performing. strengthened regulations on problem of Non-Performing thresholds that are consistent Baseline (March asset classification, internal Loans across the banking sector with international standards 2012) = 8.6 percent credit rating, and loan loss (Policy framework approved by (Issuance of SBV Circular on (SBV)45 provisioning to better GOV) international standards) address credit risks (Circular 02/2013/TT- NHNN, January 21, 2013) 2) 2.1 GOV has adopted a 2.2 GOV has adopted a rolling ï‚· RI-3: Number of ï‚· RI-3 target (end Maintenance Decision to strengthen the Medium-Term Debt Strategy to 44 A number of the results indicators draw on two annual surveys: (i) the Provincial Competitiveness Index (PCI) is intended to help assess the quality of different dimensions of economic governance across Vietnam’s 63 provinces (www.pcivietnam.org); (ii) the Provincial Governance and Public Administration Performance Index (PAPI) measures and monitors the performance of governance and the public administration system at the provincial level in Viet Nam (www.papi.vn). 45 Based on Vietnam Accounting Standards. 63 Objectives EMCC 1 Prior Action EMCC 2 Trigger EMCC 3 Trigger Results Baseline Target End-2015 of Fiscal institutional framework for project and monitor costs and years the public debt 2015) = 4. Discipline debt management and risks of the public debt portfolio is below the establish prudential debt and inform financing decisions government target of thresholds for medium-term (Adoption of MTDS). 65 percent of GDP. fiscal sustainability 2.3 GOV has adopted a Decree Baseline (end 2012) (Decision 958/QD-TTg, to establish a Treasury Single = 1 (MOF) July 27, 2012) Account; strengthen cash flow forecasting; and modernize cash management (Issuance of Decree on Modernized cash management) II. TRANSPARENT, EFFICIENT AND ACCOUNTABLE PUBLIC SECTOR 3.1 GOV has issued Law 3.3 GOV has issued Decrees to ï‚· RI-4: Increased ï‚· RI-4 target = 15 by 27/2012/QH13 amending regulate and guide the disclosure of 2013 and 45 by Law 55/2005/QH11 on implementation of the amended information on land 2015.46 Anti-Corruption and stricter Anti-Corruption Law to management. transparency guidelines in strengthen disclosure and Baseline (2010): 6 areas and sectors most transparency; control assets and out of 66 websites vulnerable to corruption income of public officials; and posted maps of (Law 27/2012/QH13 dated strengthen the dealing with current land use 3) Improved November 23, 2012) corrupted activities (Issuance of situations (WB Land Public Decree to replace Decree Information Administration 120/2006/ND-CP, Decree Disclosure Surveys) and replacing Decree 37/2007/ND- ï‚· RI-5: Enhanced ï‚· RI-5 target = 20% of Accountability CP and Decree 68/2011/ND- disclosure of public declarations CP; Decree on Accountability of officials’ income and disclosed by 2013 state agencies ) asset declarations. and 50% by 2015.47 3.2 GOV has issued Law 3.4 GOV has submitted to the Baseline (2012): 21/2012/QH13 amending National Assembly an amended None disclosed Law 78/2006/QH11 on Tax Customs Law to streamline (Annual Anti- Administration to administrative procedures and Corruption Report to streamline procedures; improve operational efficiency National Assembly). introduce Advance Pricing (Submission of Customs Law to 46 Land is among the five most corrupt sectors according the WB-GOV 2012 Anti-Corruption Diagnostic 47 The amended Law on Anti-Corruption requires that asset and income declarations of public officials be disclosed at the office of the filers. 64 Objectives EMCC 1 Prior Action EMCC 2 Trigger EMCC 3 Trigger Results Baseline Target End-2015 Arrangements; increase NA) risk-based management; and improve transparency (Law 21/2012, November 20, 2012 amending Law 78/2006/QH11) 4.1 GOV has issued a 4.2 GOV has formally classified 4.6 GOV has submitted a draft ï‚· RI-6: Number of ï‚· RI-6 target (end Decision to restructure State SEGs and GCs with time bound Law to NA setting out rules, State-owned EGs 2015) = 5 SEGs Economic Groups (SEGs) restructuring targets for regulations and oversight for that have non-core and General Corporations individual SEG and GCs investment of state capital in businesses. Baseline (GCs), which includes a (Adoption of amended Decision State Enterprises (Submission of (end 2012) = 10 classification of these 14) SCI Law to NA) ï‚· RI-7: Accelerate ï‚· RI-7 target (end groups and corporations by 4.3 GOV has disclosed Prime 4.7 GOV has completed its end liquidation of non- 2015) = X% of non- level of ownership, and Ministerial Decisions on 2014 target for equitization of viable SOEs (end viable SOEs time bound actions with restructuring of all SEGs, SEGs. 2012) = X% of non- (Source)48 4) responsibilities across including time bound action viable SOEs Strengthened government agencies plans, and system to monitor (Source) State (Decision 929/QD-TTg, implementation. Enterprise July 17, 2012) 4.4 GOV has started regular 4.8 GOV has launched a system Management disclosure of financial to monitor and publish a set of information of all State consolidated financial and Economic Groups. operational performance indicators for SOEs (Adoption of financial supervision and performance monitoring system for SOEs) 48 Targets will be finalized during preparation of EMCC 2 as Restructuring Plans are finalized by the government. 65 Objectives EMCC 1 Prior Action EMCC 2 Trigger EMCC 3 Trigger Results Baseline Target End-2015 4.9 GOV has updated the policy framework for dealing with potential retrenchment from SOE restructuring (Adoption of Decree on SOE restructuring and labor issues) 5.1 GOV has submitted to 5.2 MPI has launched a new 5.3 GOV has submitted a draft ï‚· RI-8: Reduction in ï‚· RI-8 target (end the National Assembly a Management Information Public Investment Law to NA, ratio capital 2015) = 115 percent Report on the development System to track, monitor, and which establishes a consistent spending to capital investment status of 2012 evaluate large investments framework for appraisal, budget. Baseline and Medium-Term funded through the State Budget budgeting, implementation, (average 2009-2011) 5) Enhanced Investment Plan for the (Launch of new MIS as per monitoring and review of public = 135 percent49 Public period 2013-2015 to set Decision 937/QD-BKHDT, July investment decisions Investment medium-term capital 23, 2012) (Submission of PI Law to NA) Management expenditure priorities in the State Budget and including off-budget bond financing for 2013 (Submission of Report 283/BC-CP, October 19, 2012) III. ENABLING BUSINESS ENVIRONMENT 6.1 GOV has adopted a 6.3 The Administrative 6.4 GOV has submitted to ï‚· RI-9: Reduced ï‚· RI-9 target (end Decision for ministries and Procedures Control Agency has National Assembly a revised percentage of 2015) = 10 percent provincial authorities to adopted a Monitoring and Procurement Law to strengthen domestic firms or less in median review the impact of Evaluation system for transparency and competition in spending over 10 province administrative procedures administrative procedures public procurement (Submission percent of their time 6) More on the business simplification reforms (Adoption to Procurement Law to NA) dealing with Efficient environment and of scorecard and survey bureaucracy or Business recommend actions to methodology) bureaucratic Environment streamline procedures, regulations. Baseline avoid duplication, and (2011 survey) = reduce regulatory burden on 11.26 percent in the private sector (Decision median province 263/QD-TTg, March 5, 49 Including off-budget capital expenditure 66 Objectives EMCC 1 Prior Action EMCC 2 Trigger EMCC 3 Trigger Results Baseline Target End-2015 2012) (Provincial 6.2 MPI has issued a Competitiveness Circular to enable adoption Index) of e-signature and e- payment procedures to allow the roll out of e- business registration, and the public disclosure of business registration information ( Circular 01/2013/TT-BKHDT, January 21, 2013) 7.1 GOV has submitted to 7.2 GOV has submitted to ï‚· RI-10: Reduced time ï‚· RI-10 target (end National Assembly an amended National Assembly an amended needed to comply 2015) = (i) 220 hours Corporate Income Tax Law to VAT Law to adjust the group of with tax payment for VAT; (ii) 150 establish competitive CIT rates, goods and services exempt from requirements. hours for CIT. clarify rules and regulations on VAT, clearly specify the goods Baseline (2012) = (i) transfer pricing, and introduce and services subject 0%VAT 320 hours for VAT; provisions on deductible rate, and apply thresholds as (ii) 217 hours for expenses (Submission of appropriate (Submission of CIT (Paying Taxes amended CIT Law to NA) amended VAT Law to NA) Report) 7.3 GOV has submitted to 7) Greater National Assembly an amended Transparency Competition Law to strengthen and Equity of regulation and sanctioning of Business anti-competitive behavior Environment through updated provisions on price-fixing cartels and notification of mergers (Submission of amended CL to NA) 7.4 GOV has submitted to NA an amended Enterprise Law to promote a level playing field by removing restrictions on business activities for foreign investors (Submission of 67 Objectives EMCC 1 Prior Action EMCC 2 Trigger EMCC 3 Trigger Results Baseline Target End-2015 amended EL to NA) 7.5 GOV has submitted to NA a new Law on Foreign Trade Management to increase transparency of external trade regime through consolidation of rules and regulations on external trade (Submission of new FT Law to NA) 68 ANNEX 3. EMCC MONITORING TABLE The purpose of this annex is to help monitor the overall reform program in each of objective areas under the EMCC. It complements the EMCC policy matrix by identifying specific follow up steps to prior actions (column 2), and milestones for future triggers (column 3). The follow up steps will help to monitor implementation of prior actions, through for example specific outputs or issuance of secondary regulations. The milestones are intermediate steps towards future triggers, to help monitor progress and provide support where necessary. This could for example include technical assistance or analytical work to support development of policies, or achievement of specific administrative steps within Government to make progress towards eventual policy adoption. This annex will be regularly updated. Objectives Follow up to prior actions Milestones for future triggers I. MACROECONOMIC STABILITY 1) Enhanced Financial Sector ï‚· Further publication of banking sector data as per Circular 35. ï‚· Stability 2) Maintenance of Fiscal ï‚· Publish more comprehensive Debt Bulleting twice a year. ï‚· Joint Bank-Fund mission on development of a Medium-Term Discipline Debt Strategy (Q3 2013) II. TRANSPARENT, EFFICIENT AND ACCOUNTABLE PUBLIC SECTOR 3) Improved Public ï‚· Publication of results from Monitoring and Evaluation of ï‚· Complete technical and legal preparations for roll out of Administration and anti-corruption efforts (Q1 2013). Customs Single Window System. Accountability ï‚· Adoption of Decree setting out public servants’ responsibilities in responding to citizen queries on service delivery issues, including penalties for non-compliance (Q4 2013). ï‚· Issuance of regulations for implementation of Advanced Pricing Arrangement (Q3 2013). ï‚· Number of companies filing taxes online increases from 160,000 in 2012 (out of 400,000 currently) to 200,000 by end 2015. 4) Strengthened State ï‚· Revise Decree 132 setting out the rights and duties of the ï‚· Complete review of disclosure requirements for SOEs, and Enterprise Management State in state enterprises to delegate more responsibility to recommendations for reform (Q2 2013). line agencies and accelerate implementation of SOE ï‚· Complete review of potential labor market implications of restructuring plans (Q4 2012) SOE restructuring (Q2 2013). ï‚· Technical Assistance on development of state capital investment legislation. ï‚· Technical Assistance on revision of Decision 14 on state investment in different sectors. 5) Enhanced Public ï‚· Adoption of medium-term capital investment projections, ï‚· Issuance of Prime Minister’s Directive on 69 Objectives Follow up to prior actions Milestones for future triggers Investment Management adopted on an annual basis. III. ENABLING BUSINESS ENVIRONMENT 6) More Efficient Business ï‚· On average two thirds of new businesses registered annually ï‚· Complete the development of the e-procurement system, Environment between 2013 and 2015 use new online business registration accelerate of e-procurement application, so as to enable SMEs system. to participate in Government procurement and tendering ï‚· Launch of business registration portal in 2013. activities. ï‚· Technical Assistance on Procurement Law and preparation of capacity building plan on procurement. 7) Greater Transparency and ï‚· Technical Assistance on review of CIT and VAT policy Equity of Business changes to inform amendments to Laws. Environment ï‚· Inclusion of Competition Law as part of NA legislative calendar for 2014. 70 ANNEX 4. COMPETITIVENESS AND GENDER 1. The World Bank’s World Development Report 2012 on Gender and Development states how gender equality apart from being a core development objective in its own right, is also smart economics, thereby: “enhancing productivity and improving other development outcomes, including prospects for the next generation and for the quality of societal policies and institutions.â€? 50 There is a growing understanding among researchers and policymakers that increasing the degree of economic equality of women and men in most cases correlates positively with the competitiveness and gross national income of a country. 51 2. Women play a crucial role in the transition from a factor to efficiency finally to innovation driven economy, as illustrated by the World Economic Forum’s Global Gender Gap Report 2011. 52 The report illustrates a positive association between competitiveness and gender equality by plotting their Global Gender Gap Index (GGGI) against their Global Competitiveness Index, as shown below: Source: World Economic Forum’s Global Gender Gap Report 2011 3. Vietnam ranks 79th out of 135 countries in WEF’s GGGI for 2011, where the four determining measures are i) economic participation and opportunity, ii) educational attainment, iii) health and survival and iv) political empowerment. In the Economist Intelligence Unit’s Women’s Economic Opportunity Index 2012, Vietnam is ranked slightly lower, at number 87 out of 128 countries. Here the rating is based on indicators in 5 different categories: i) labor policy and practice, ii) access to finance, iii) education and training, iv) women’s legal and social status, and v) general business environment. 4. Whilst Vietnam is ranked higher than a number of other countries at roughly the same level of development, there is still a lot of potential for improving Vietnam’s performance in these global gender equality indices with a focus on economic opportunities, thereby contributing to improving Vietnam’s competitiveness. On Women’s Economic Opportunity 50 World Development Report 2012: “Gender Equality and Developmentâ€? Washington: World Bank. 51 See e.g. World Economic Forum: Global Gender Gap Report 2011. 52 Ibid. 71 Index, countries such as Singapore, Korea, Thailand, Malaysia, China, and the Philippines all rank higher than Vietnam, while the only other East Asian countries in the Index with lower rankings than Vietnam are Cambodia and Laos. 53 5. The WDR 2012 on Gender and Development presents an important framework which captures some of the factors related to women’s (and men’s) economic opportunities. It shows how formal as well as informal institutions, household dynamics and access to markets (labor, credit, land) and networks all influence women’s economic opportunities, even as income growth increases. The framework will be used as reference when looking more into women’s economic opportunities and competitiveness in Vietnam. Source: World Development Report 2012: Gender and Development. Gender and Employment 6. In 2011, The World Bank in Vietnam led the development of a Country Gender Assessment (CGA) looked at gender and employment as one of its three focus areas. According to the CGA, women’s participation in the labor force is relatively high in Vietnam at 72.3 percent in 2009 compared to 81 percent for men. When looking more specifically at the GGGI, which has women’s labor force participation as one of its indicators, this positive trend is also reflected in Vietnam’s ranking at 13 on this particular indicator. 7. Nonetheless, the high ranking on this indicator is outweighed by poorer performance in some of the other indicators. For example, the GGGI includes an indicator on wage equality for similar work, where women’s wages for similar work are recorded to be only 69 53 Vietnam is rated somewhat better on two other Gender equality indices with more emphasis on human development indicators and less emphasis on economic opportunities: the Gender Inequality Index (Vietnam was ranked 48 out of 174 countries in 2011) and the Gender Empowerment Index (Vietnam was ranked 52 out of 155 countries in 2008. 72 percent of men’s in Vietnam. 54 This is similar to the findings of the World Bank’s CGA, which furthermore note that women are still highly segregated by both industry and occupation. If one for example looks at industrial segregation using the Duncan Index, a commonly used measure of job segregation illustrating the percentage of all female workers who would have to switch industries in order to equalize the distribution between men and women, the number for urban areas was 70 in 2008. This means that 70 percent of women would have to switch sectors in order to equalize job distribution with men. In urban areas the number was around 52 percent. Both in rural and urban areas, women are more likely to be in lower paying industries and the proportion of skilled female workers is only half that of skilled male workers. 55 8. The CGA furthermore highlights how women are also in more vulnerable jobs, for example, own-account work and unpaid family labor account. In fact, during the recent economic crisis, women disproportionately left wage employment for more vulnerable jobs. Women also receive less vocational training, and undertake a disproportionate amount of unpaid work, which is seen as a barrier not only to employment, but also to civic participation. As will be discussed more below, the heavy burden caused by unpaid work is also highlighted as one of the impediments for women entrepreneurs in Vietnam. 9. Lower wages, a bigger gender wage gap, and far worse working conditions prevail in small informal family-run enterprises and among casual labor. Particularly disadvantaged are migrant women, widows, older women, ethnic minorities, and women with disabilities. Many of these women are landless or lost their land to industrial parks and urbanization. These are the women who are least able to access the opportunities generated by Vietnam’s integration into the informal economy. Many are also unable to take advantage of targeted training or employment schemes intended for the poor. 10. The CGA presents two central recommendations in relation to gender and employment: 1) increase training and incentives for women to enter a broader range of occupations, 2) address the double work burden through better infrastructure and policy supports. In addition, the CGA presents a recommendation related to promoting participation and women’s leadership – indirectly also related to competitiveness; and 3) equalize the mandatory retirement ages for women and men. 11. In relation to the first recommendation on training and incentives for women to enter a broader range of occupations, the CGA notes that as Vietnam is moving into middle- income status, women are likely to be at a particular disadvantage in gaining access to newly created jobs in higher-tech industries that demand workers with scientific, engineering and technical skills. In addition to attempting to encourage girls to take up these topics, the CGA also suggests that more efforts could also be made to use vocational training to increase productivity of both men and women in the face of changing labor market demands. 54 When looking at individual indicators in the GGGI (there is a total of 14), Vietnam gets the poorest rankings on sex ratio at birth and women in ministerial positions, and the best ratings under the ratio of men/women of professional and technical workers and on healthy life expectancy. 55 World Bank, “Vietnam Country Gender Assessmentâ€? 2011. 73 12. In relation to recommendation number 2 on addressing the double work burden, as Vietnamese women according to the CGA is responsible for the bulk of the household work and care of the family, reducing their choices in the labor market. The CGA suggests to introduce time-related measures such as parental leave (including paternal leave), although this would largely only be relevant to the formal sector. In addition, it is noted how investments in infrastructure, including accessible and affordable care services, expand women’s ability to participate in the labor market. 13. In relation to the third recommendation on equalizing the retirement age, the CGA argues that the mandatory retirement age of 55 (compared to 60 for men) is a significant barrier to increased leadership of women by making women leave the labor force and by lessening the training they receive because of the anticipation of their early retirement. An equal retirement age between men and women would increase women’s leadership role and contribute to closing the wage gap. Women Entrepreneurs 14. Another issue closely linked to Gender and Competitiveness is that of promoting women entrepreneurs. Compared to many other developing countries at similar income levels, Vietnam has a relatively high percentage of female-owned businesses - estimated from 22 percent to 35 percent in 2006. 56 15. In 2006, IFC published a report on Women’s Entrepreneurship in Vietnam, which begins by stating that there are several reasons to be optimistic about women’s entrepreneurship in Vietnam, as the country’s impressive achievements in relation to gender equality and its strong commitment to economic growth and poverty reduction provides a good environment for women’s business activities. 57 Nonetheless, the report highlights a number of areas where women entrepreneurs feel restricted by formal or informal institutions, markets or household dynamics in line with the above mentioned WDR framework on women’s economic opportunities. 58 16. In relation to the formal institutions, women entrepreneurs highlight how “enterprises find the implementation of policies and laws frustrating, unclear and too dependent on the discretion of government officials.â€? The report recommends to a) harmonize laws and procedures, b) that information related to laws, policies and potential changes should be more readily available through channels such as business associations, newspapers, internet and public media, and c) that businesswomen in Vietnam have a more permanent “homeâ€? that allows them to advocate their regulatory and policy concerns to government: “Governments in other countries have implemented high-level advisory dialogue mechanisms for women’s business issues. In Vietnam, where the government already consults the private sector when forming strategic and economic development plans and where the machinery for gender 56 “Voices of Vietnamese Women Entrepreneursâ€?, IFC 2006. 57 Ibid. 58 The report does not use the WDR framework, but is organized along the themes of i) laws and regulations (business environment), ii) access to finance, iii) property and infrastructure, iv) business culture and networking, v) running a business and vi) work-life balance. This links well with the framework, as themes i) and iii) fall under ‘formal institutions’, themes ii and iv) fall under ‘access to markets and networks’ and themes v) and theme vi) fall under ‘informal institutions and household dynamics. 74 equity is rather well-established, such approaches may prove effective in boosting women’s enterprise development.â€? 59 17. The second recommendation on better access to information on procedures is in line with recommendations made by the International Labor Organization (ILO) and Vietnam Chamber of Commerce and Industry (VCCI) in their 2008 report on Women’s entrepreneurship in Vietnam. 60 They suggest that the Vietnam Women Entrepreneurship Council (VWEC) 61 should provide guidance to women operating informal businesses on business registration. Women entrepreneurs need information about the advantages and the potential drawbacks of formalization as well as guidance on the registration process. 18. Another important pillar, or “wheelâ€?, in the WDR framework is the access to markets. Women entrepreneurs interviewed for the IFC Report highlighted access to land as one of the most important impediments to further developing their business. The Report notes how women continue to face obstacles in getting land certificates (re) issued with their names, due to varying degrees of local law enforcement as well as social factors such as traditional family practices: “Ultimately, both the lack of a legal land title and adequate physical space impose serious limitations on women-owned enterprises, especially those involved in agriculture and manufacturing.â€? 62 19. In 1993, Vietnam introduced a Land Law, which began to transfer long-term land use rights to households. However, only 10-12 percent of Land Title Certificates (LTC) were issued to women in the first 10 years after the 1993 Land Law was introduced as the certificates only had space for one name, and they were therefore generally issued to the male head of households. In 2003, the Land Law was revised, which allowed LTCs to have two names and as a result there has since been a gradual increase in female-only and joint land holders for agricultural and residential land. In 2008, the percentage of male-only holders stood at 62 percent, joint holders accounted for 18 percent of LTCs, and female-only land holders accounted for 18 percent. 63 While this represents an important improvement compared to the past, it still shows that there is an important gender gap in land use rights, which represents a significant hindrance to business development and expansion to some women entrepreneurs relative to their male counterparts. 20. The possession of LTCs has major ramifications for access to credit and many of the women entrepreneurs in the IFC study express their frustration with the limited access to credit, often due to not being able to prove land ownership without their name on the LTC. The IFC report furthermore states that: “women also perceive Vietnamese state-owned banks as inflexible and lacking in customer orientation, especially when it comes to SMEs and their needs.â€? 64 In addition, it is mentioned how financial management is difficult because female 59 Related to the formal institutions, women entrepreneurs also mention poor infrastructure as an important limitation, but as mentioned earlier, for selectivity the EMCC does not directly focus on infrastructure so this obstacle to female (and male) entrepreneurs is not discussed here. 60 “Women’s Entrepreneurship Development in Vietnamâ€? 2010, ILO and VCCI. Under the VCCI. 61 “Voices of Vietnamese Women Entrepreneursâ€?, IFC 2006. 62 63 World Bank, Vietnam Country Gender Assessment 2011. “Voices of Vietnamese Women Entrepreneursâ€?, IFC 2006. 64 75 entrepreneurs often lack adequate knowledge and skills and/or competent and trustworthy staff to carry out essential functions. 21. The WDR framework on Women’s economic opportunities links another aspect to the access to markets – the access to networks. Interestingly, according to the women entrepreneurs participating in IFC’s study, one of the biggest obstacles to the success of women business owners in Vietnam, in comparison to that of their male counterparts, is the women’s relative lack of business development and networking opportunities. This includes formal networks as well as more informal network settings - as one female entrepreneur expresses: “everybody knows that 60-70 percent of government-related business transactions or contracts are signed at social gatherings, over drinks. That’s where men have the advantage over women – they can drink and have lots of opportunities to network at social events.â€? 65 22. In terms of recommendations linked to the access to markets and networks, the IFC report emphasizes the need to continue land reforms to improve women’s access to land. 66 In relation to credit, the IFC report notes that: “According to women business owners, the government can improve enterprises’ access to capital by introducing targeted policies that complement its broader economic reforms and efforts to liberalize the banking sector.â€? 67 In the report, women also suggest that the government encourage financial institutions, particularly private ones, to lend more to SMEs and women-owned enterprises. They also mention the need to improve businesswomen’s access to training in the areas of finance, accounting and management to improve their capacity to manage cash flows. In relation to networking, while the positive effect of recently established associations for women such as the Vietnam Women Entrepreneurs Council (VWEC) under VCCI and a number of associations for private companies is highlighted, the IFC report recommends the creation of a more formal and permanent mechanism that focuses specifically on businesswomen. 23. These recommendations are in line with recommendations made by ILO and VCCI in their 2008 report mentioned above. They suggest that the VCCI and VWEC together with international organizations should build the capacity of women business clubs and associations to professionalize their service delivery and that they should facilitate linkages between women's business clubs and specialized business development service providers to create synergies and build on mutual strengths. The report also recommends that VCCI and VWEC together with international organizations should strengthen the role of women entrepreneurs in mixed business associations with a view to a) make their services more relevant for women entrepreneurs and b) ensure that the associations represent men and women entrepreneurs equally, integrating gender equality concerns into training and support programs. 24. Turning to the third pillar/wheel of the WDR Framework, its argument that informal institutions such as social norms and perceptions about women’s roles and responsibilities can be just as important as the formal institutions is backed up by the IFC report. Women in the study note how traditionally business is considered men’s domain in Vietnam and many 65 Ibid. 66 The World Bank’s Land Administration Project is mentioned as a positive example, contributing to a greater share of joint and female-only LTCs, but more work is needed to close the gender gap in this area. 67 “Voices of Vietnamese Women Entrepreneursâ€?, IFC 2006. 76 customs and practices discriminate against women either by restricting women’s participation or excluding them completely. As one businesswoman notes in the report: “if you talked to ten men on the street, eight or nine of them would say that women should stay home. Women entrepreneurs are still considered strange, as if they were breaking the order of things. And although many women are self-employed and run household businesses, they aren’t considered entrepreneurs. Their husbands don’t want them to become businesswomen.â€? 68 The report also notes how many women managers of family enterprises indicate that even though they exercise de facto operational control, it is crucial to have important decisions appear as though they were made by their husband or another man in the family. 25. In terms of recommendations on changing the social norms and perceptions, the IFC report notes that women business owners believe that Government has ample opportunity to reduce discriminatory attitudes and practices in the economic arena – ways of doing this include i) publicly highlighting women’s achievements, and ii) expanding networking opportunities for women. 26. The fourth and final pillar/wheel in the WDR Framework focuses on household dynamics and differential allocation of time and resources between male and female members of the household. This is another constraint highlighted by the women entrepreneurs participating in the IFC study. They express how women are still expected to do most of the housework and caretaking, and that this leaves them with less availability for other activities that may help grow their businesses, such as training, networking and business development. Recommended policy solutions in the report focus on a) investing in infrastructure and services that women need to coordinate their family and professional lives better and b) providing more access to business and management training for women entrepreneurs to better match that of their male counterparts. Potential areas to pursue under EMCC Analytical work: The impact of economic restructuring and macroeconomic shocks on women. ï‚· The impact of SOE restructuring on the female labor force. ï‚· Study on gender and competitiveness for Vietnam along the lines of report by GTZ on Philippines: “Enhancing Competitiveness through Gender Mainstreaming.â€? Policy areas: Gender link to current Policy Actions: ï‚· Include possible gender aspects in relation to tax administration procedures under Policy Action 5, as this is mentioned as a special impediment by women entrepreneurs in IFC Report - would need some prior study on specific tax issues for women entrepreneurs (lack of access to information, perhaps being asked more in bribes because of former point, etc.); ï‚· Include gender aspects related to online business registration under Policy Action 9. Possible future policy actions related to gender: ï‚· Setting up formal and permanent mechanism focusing specifically on promoting businesswomen (along the lines of recommendations in IFC Report). 68 “Voices of Vietnamese Women Entrepreneursâ€?, IFC 2006. 77 ANNEX 5. FUND RELATIONS NOTE 78 79 80 ANNEX 6. COUNTRY AT A GLANCE Vietnam at a glance 4/5/12 East Lo wer Ke y D e v e lo pm e nt Indic a t o rs A sia & middle Vietnam P acific inco me Age distribution, 2010 ( 2 0 10 ) Male Female P o pulatio n, mid-year (millio ns) 86.9 1,962 2,51 9 75- 79 Surface area (tho usand sq. km) 331 16,302 23,579 60- 64 P o pulatio n gro wth (%) 1.0 0.7 1.5 Urban po pulatio n (% o f to tal po pulatio n) 29 46 39 45- 49 30- 34 GNI (A tlas metho d, US$ billio ns) 1 01.1 7,249 4,078 15- 19 GNI per capita (A tlas metho d, US$ ) 1,160 3,696 1,619 GNI per capita (P P P , internatio nal $ ) 3,070 6,657 3,632 0-4 10 5 0 5 10 GDP gro wth (%) 6.8 9.7 6.9 percent of total population GDP per capita gro wth (%) 5.7 8.9 5.3 ( m o s t re c e nt e s t im a t e , 2 0 0 4 – 2 0 10 ) P o verty headco unt ratio at $ 1 .25 a day (P P P , %) 17 14 .. Under-5 mortality rate (per 1,000) P o verty headco unt ratio at $ 2.00 a day (P P P , %) 43 33 .. Life expectancy at birth (years) 75 72 65 60 Infant mo rtality (per 1,000 live births) 19 20 50 Child malnutritio n (% o f children under 5) 20 6 25 50 40 A dult literacy, male (% o f ages 15 and o lder) 95 96 80 30 A dult literacy, female (% o f ages 15 and o lder) 91 91 62 Gro ss primary enro llment, male (% o f age gro up) 109 1 11 110 20 Gro ss primary enro llment, female (% o f age gro up) 103 112 104 10 0 A ccess to an impro ved water so urce (% o f po pulatio n) 95 90 87 1990 1995 2000 2010 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 76 66 47 Vietnam East Asia & Pacific N e t A id F lo ws 19 8 0 19 9 0 2000 2 0 10 (US$ millio ns) Net ODA and o fficial aid 277 181 1,681 2,945 Growth of GDP and GDP per capita (%) To p 3 do no rs (in 2010): Japan 4 1 924 808 12 France 15 12 53 242 10 A ustralia 0 1 36 120 8 6 A id (% o f GNI) .. 3.0 5.5 2.9 A id per capita (US$ ) 5 3 22 34 4 2 Lo ng- T e rm E c o no m ic T re nds 0 95 05 Co nsumer prices (annual % change) .. 36.4 -1.6 9.2 GDP implicit deflato r (annual % change) .. 42.1 3.4 11.9 GDP GDP per capita Exchange rate (annual average, lo cal per US$ ) 0.6 6,482.8 14,167.8 18,612.9 Terms o f trade index (2000 = 100) .. 88 100 1 27 19 8 0 – 9 0 19 9 0 – 2 0 0 0 2 0 0 0 – 10 (average annual gro wth %) P o pulatio n, mid-year (millio ns) 53.7 66.0 77.6 86.9 2.1 1.6 1.1 GDP (US$ millio ns) .. 6,472 31,173 106,427 4.6 7.9 7.5 (% o f GDP ) A griculture .. 38.7 24.5 20.6 2.8 4.3 3.7 Industry .. 22.7 36.7 41.1 4.4 11.9 9.3 M anufacturing .. 12.3 18.6 19.7 1.9 11.2 10.9 Services .. 38.6 38.7 38.3 7.1 7.5 7.5 Ho useho ld final co nsumptio n expenditure .. 84.3 66.4 64.9 .. 5.1 7.7 General go v't final co nsumptio n expenditure .. 12.3 6.4 6.5 .. 3.2 7.9 Gro ss capital fo rmatio n .. 12.6 29.6 38.9 .. 19.8 12.0 Expo rts o f go o ds and services .. 36.0 55.0 77.5 .. 19.2 11.2 Impo rts o f go o ds and services .. 45.3 57.5 87.8 .. 19.5 13.2 Gro ss savings .. -2.3 31.3 29.8 No te: Figures in italics are fo r years o ther than tho se specified. .. indicates data are no t available. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 81 Vietnam B a la nc e o f P a ym e nt s a nd T ra de 2000 2 0 10 Governance indicators, 2000 and 2010 (US$ millio ns) To tal merchandise expo rts (fo b) 14,483 72,191 Voice and accountability To tal merchandise impo rts (cif) 15,637 84,801 Net trade in go o ds and services -173 -7,948 Polit ical stability and absence of violence Current acco unt balance 1,108 -3,999 Regulat ory quality as a % o f GDP 3.6 -3.8 Rule of law Wo rkers' remittances and co mpensatio n o f emplo yees (receipts) 1,340 8,260 Control of corruption Reserves, including go ld 3,030 21,578 0 25 50 75 100 2010 Country's percentile rank (0-100) C e nt ra l G o v e rnm e nt F ina nc e higher values imply better ratings 2000 (% o f GDP ) Source: Worldw ide Governance Indicators (w w w .govindicators.org) Current revenue (including grants) 20.4 26.2 Tax revenue .. .. Current expenditure 15.9 21.2 T e c hno lo gy a nd Inf ra s t ruc t ure 2000 2 0 10 Overall surplus/deficit -2.0 -6.5 P aved ro ads (% o f to tal) 25.1 47.6 Highest marginal tax rate (%) Fixed line and mo bile pho ne Individual .. 35 subscribers (per 1 00 peo ple) 4 196 Co rpo rate 33 25 High techno lo gy expo rts (% o f manufactured expo rts) 11.1 6.2 E xt e rna l D e bt a nd R e s o urc e F lo ws E nv iro nm e nt (US$ millio ns) To tal debt o utstanding and disbursed 12,822 35,139 A gricultural land (% o f land area) 28 33 To tal debt service 1,309 1,372 Fo rest area (% o f land area) 37.7 44.5 Debt relief (HIP C, M DRI) – – Terrestrial pro tected areas (% o f land area) 6.0 6.2 To tal debt (% o f GDP ) 41.1 33.0 Freshwater reso urces per capita (cu. meters) 4,519 4,178 To tal debt service (% o f expo rts) 7.5 1.9 Freshwater withdrawal (% o f internal reso urces) .. 9.3 Fo reign direct investment (net inflo ws) 1,298 8,000 CO2 emissio ns per capita (mt) 0.69 1.5 P o rtfo lio equity (net inflo ws) 0 2,383 GDP per unit o f energy use (2005 P P P $ per kg o f o il equivalent) 3.4 3.7 Composition of total external debt, 2010 Energy use per capita (kg o f o il equivalent) 476 745 IBRD, 700 Short-term, 6,949 IDA, 7,010 Wo rld B a nk G ro up po rt f o lio 2000 2 0 10 IMF, 45 (US$ millio ns) Private, 2,890 Other multi- IB RD lateral, 4,552 To tal debt o utstanding and disbursed 0 700 Disbursements 0 700 P rincipal repayments 0 0 Interest payments 0 5 Bilateral, 12,993 US$ millions IDA To tal debt o utstanding and disbursed 1,113 7,010 Disbursements 174 853 P riv a t e S e c t o r D e v e lo pm e nt 2000 2 0 11 To tal debt service 9 99 Time required to start a business (days) – 44 IFC (fiscal year) Co st to start a business (% o f GNI per capita) – 10.6 To tal disbursed and o utstanding po rtfo lio 223 365 Time required to register pro perty (days) – 57 o f which IFC o wn acco unt 107 334 Disbursements fo r IFC o wn acco unt 25 87 Ranked as a majo r co nstraint to business 2000 2 0 10 P o rtfo lio sales, prepayments and (% o f managers surveyed who agreed) repayments fo r IFC o wn acco unt 18 15 A ccess to /co st o f financing .. 40.5 A ccess to land .. 25.9 M IGA Gro ss expo sure 46 91 Sto ck market capitalizatio n (% o f GDP ) .. 19.2 New guarantees 10 0 B ank capital to asset ratio (%) .. .. No te: Figures in italics are fo r years o ther than tho se specified. 4/5/12 .. indicates data are no t available. – indicates o bservatio n is no t applicable. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 82 Millennium Development Goals Vietnam With selected targets to achieve b etween 1990 and 2015 (estimate clo sest to date sho wn, +/- 2 years) V ie t na m G o a l 1: ha lv e t he ra t e s f o r e xt re m e po v e rt y a nd m a lnut rit io n 19 9 0 19 9 5 2000 2 0 10 P o verty headco unt ratio at $ 1 .25 a day (P P P , % o f po pulatio n) .. 63.7 40.1 16.9 P o verty headco unt ratio at natio nal po verty line (% o f po pulatio n) .. 58.1 28.9 14.5 Share o f inco me o r co nsumptio n to the po o rest qunitile (%) .. 7.8 7.5 7.4 P revalence o f malnutritio n (% o f children under 5) 40.7 40.6 26.7 20.2 G o a l 2 : e ns ure t ha t c hildre n a re a ble t o c o m ple t e prim a ry s c ho o ling P rimary scho o l enro llment (net, %) .. .. 97 98 P rimary co mpletio n rate (% o f relevant age gro up) .. .. 98 98 Seco ndary scho o l enro llment (gro ss, %) 35 .. 64 77 Yo uth literacy rate (% o f peo ple ages 1 5-24) 94 .. 95 97 G o a l 3 : e lim ina t e ge nde r dis pa rit y in e duc a t io n a nd e m po we r wo m e n Ratio o f girls to bo ys in primary and seco ndary educatio n (%) .. .. 93 102 Wo men emplo yed in the no nagricultural secto r (% o f no nagricultural emplo yment) .. 41 41 .. P ro po rtio n o f seats held by wo men in natio nal parliament (%) 18 19 26 26 G o a l 4 : re duc e unde r- 5 m o rt a lit y by t wo - t hirds Under-5 mo rtality rate (per 1 ,000) 51 43 35 23 Infant mo rtality rate (per 1,000 live births) 37 32 27 19 M easles immunizatio n (pro po rtio n o f o ne-year o lds immunized, %) 88 95 97 98 G o a l 5 : re duc e m a t e rna l m o rt a lit y by t hre e - f o urt hs M aternal mo rtality ratio (mo deled estimate, per 1 00,000 live births) 170 120 91 56 B irths attended by skilled health staff (% o f to tal) .. 77 70 88 Co ntraceptive prevalence (% o f wo men ages 1 5-49) 53 65 74 80 G o a l 6 : ha lt a nd be gin t o re v e rs e t he s pre a d o f H IV / A ID S a nd o t he r m a jo r dis e a s e s P revalence o f HIV (% o f po pulatio n ages 1 5-49) 0.1 0.1 0.2 0.4 Incidence o f tuberculo sis (per 100,000 peo ple) 204 204 205 199 Tuberculo sis case detectio n rate (%, all fo rms) 37 37 56 54 G o a l 7 : ha lv e t he pro po rt io n o f pe o ple wit ho ut s us t a ina ble a c c e s s t o ba s ic ne e ds A ccess to an impro ved water so urce (% o f po pulatio n) 57 67 77 95 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 37 46 56 76 Fo rest area (% o f to tal land area) 28.8 .. 37.7 44.5 Terrestrial pro tected areas (% o f land area) 4.5 5.4 6.0 6.2 CO2 emissio ns (metric to ns per capita) 0.3 0.4 0.7 1.5 GDP per unit o f energy use (co nstant 2005 P P P $ per kg o f o il equivalent) 2.5 3.0 3.4 3.7 G o a l 8 : de v e lo p a glo ba l pa rt ne rs hip f o r de v e lo pm e nt Telepho ne mainlines (per 1 00 peo ple) 0.1 1.1 3.3 18.9 M o bile pho ne subscribers (per 1 00 peo ple) 0.0 0.0 1.0 177.2 Internet users (per 1 00 peo ple) 0.0 0.0 0.3 27.9 Co mputer users (per 1 00 peo ple) .. .. .. .. Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 125 100 250 100 200 75 75 150 50 50 100 25 25 0 50 2000 2005 2010 0 0 1990 1995 2000 2010 2000 2005 2010 Pr imary net enrollment ratio Ratio of gir ls to boys in primary & secondary Vietnam East Asia & Pacific Fixed + mobile subscribers Internet users education No te: Figures in italics are fo r years o ther than tho se specified. .. indicates data are no t available. 4/5/12 83 IBRD 33511R1 102°E 104°E To 106°E 108°E 110°E To Babao Kunming To VIETNA M Kaiyuan To Tiandong CHINA Ha Giang Cao Bang 4 PROVINCE CAPITALS 5 To Lao Cai Re Nanning Lai Chau Town 1 d 9 NATIONAL CAPITAL 3 Bac Can 8 22°N 22°N To RIVERS Tuyen Quang 10 Lang Son Hepu Bla 7 Thai 2 c k Yen Bai Nguyen MAIN ROADS 13 Dien Son La Viet Tri 12 Vinh Yen 14 RAILROADS Bien Phu 11 Bac Giang 15 6 Bac Ninh To HANOI 17 Hai Duong Ha Long PROVINCE BOUNDARIES Muang Xai Hoa Binh 16 18 19 Hai Phong 21 Hung Yen 20 INTERNATIONAL BOUNDARIES Ha Nam 22 23 Thai Binh Nam Dinh Ninh Binh 25 Ma 24 20°N 26 20°N To PROVINCES: Luang 1 Lai Chau 32 Da Nang LAO Prabang Thanh Hoa 2 3 Dien Bien Lao Cai 33 34 Quang Nam Quang Ngai P EOPLE'S PEOPLE'S 27 Gulf 4 Ha Giang 35 Kon Tum D EM . REP. of Hainan I. (China) 5 Cao Bang 36 Gia Lai A Vinh Tonk in 6 Son La 37 Binh Dinh 7 Yen Bai 38 Phu Yen n Ha Tinh n 8 Tu Yen Quang 39 Dac Lac 28 a 9 Bac Can 40 Dac Nong 18°N To 18°N Khammouan m 10 Lang Son 41 Khanh Hoa 11 Phu Tho 42 Binh Phuoc 12 Vinh Phuc 43 Lam Dong Dong Hoi C 29 13 Thai Nguyen 44 Ninh Thuan o 14 Bac Giang 45 Tay Ninh r d 15 Quang Ninh 46 Binh Duong Dong Ha To il 16 Ha Noi 47 Dong Nai Savannakhet 30 17 Bac Ninh 48 Binh Thuan THA ILA ND Hue le 18 Hung Yen 49 T.P. Ho Chi Minh r 19 Hai Duong 50 Ba Ria-Vung Tau 31 32 Da Nang a 20 Hai Phong 51 Long An 16°N 16°N 21 Hoa Binh 52 Tien Giang 22 Ha Nam 53 Dong Thap Tam Ky 33 23 Thai Binh 54 Ben Tre 24 Ninh Binh 55 An Giang Quang Ngai 25 Nam Dinh 56 Vinh Long 34 26 Thanh Hoa 57 Tra Vinh Ngoc Linh (3143 m) 27 Nghe An 58 Kien Giang 35 Kon Tum 28 Ha Tinh 59 Can Tho 29 Quang Binh 60 Hau Giang 37 30 Quang Tri 61 Soc Trang 14°N Central Cent ral 14°N Pleiku 31 Thua Thien Hue 62 Bac Lieu 36 Quy Nhon 63 Ca Mau Highlands 38 Tuy Hoa CAMBODIA 39 Buon Ma Thuot 41 40 Nha Trang Gia Nghia 12°N To Da Lat 12°N Kampong Cham 42 To Dong Xoai 43 44 Kampong Chhnang Phan Rang- 45 Thap Cham Mekong Tay Ninh 47 Thu Dau46 Mot 48 Bien Hoa Gu l f 51 49 Ho Chi Minh City Phan Thiet 53 of 55 Cao Lanh Tan An 50 Th a i l a n d Long Xuyen 52 My Tho Vung Tau Phu Vinh Long Ben Tre VIETNAM Quoc 59 56 10°N Rach Gia Can Tho 54 10°N lta 58 60 Tra Vinh Vi Thanh 57 De This map was produced by 61 Soc Trang the Map Design Unit of The g World Bank. The boundaries, 62 n ko Bac Lieu colors, denominations and Me Ca Mau any other information shown 0 50 100 150 200 Kilometers on this map do not imply, on 63 the part of The World Bank Group, any judgment on the legal status of any territory, 0 50 100 150 Miles or any endorsement or acceptance of such boundaries. 104°E 106°E 108°E JANUARY 2010