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Official Gazette

Monday, December 5, 2022

PCI 2012: Confidence in business environment shrinks

Updated: 15:52’ - 29/03/2013

Domestic and foreign firms last year were far more negative about the quality of economic governance and the business environment than in previous years, according to the 2012 Provincial Competitiveness Index (PCI) report released this month.

Conducted annually since 2005, the PCI survey seeks to measure and assess the standards of economic governance in Vietnam’s 63 provinces and cities from the perspective of the private sector, covering business-critical issues of entry costs for business start-up, access to land, time costs of regulatory compliance and informal charges. It also touches upon the quality of governance, including proactivity of provincial leadership, transparency and access to information, business support services, labor training and legal procedures for dispute settlement.

Developed by the Vietnamese Chamber of Commerce and Industry (VCCI) and the US Agency for International Development-supported Vietnam Competitiveness Initiative (USAID/VNCI), the PCI survey is currently the most comprehensive annual survey of local firms about the provincial business environment in Vietnam.

The eighth PCI survey, which reflected the views of 8,053 private businesses and 1,540 foreign-invested enterprises across Vietnam, showed the quality of economic governance had critically declined with all provinces registering plunging scores. For the first time, no province could reach the excellent threshold of 65 points, which had been once reached by such provinces as Binh Duong, Da Nang, Lao Cai, Bac Ninh and Dong Thap. The median score of provinces fell from 59.15 points in 2011 to 56.2 points, the lowest since the index was revised in 2009.

In 2012, Dong Thap topped the order with 63.79 points, followed by An Giang and Lao Cai. Long An and Bac Ninh were also among the best-performing group while previous top performers Da Nang and Binh Duong scored low, going down to the 17th and 19th  positions respectively. Ho Chi Minh City jumped to the 13th rank with 61.19 points from the 20th last year while Hanoi slipped to the disappointing 51st with a mere 53.4 points. A sharp increase in the rankings of Mekong delta provinces with six present in the top-ten performers was seen.

While highlighting reductions in petty corruption, the 2012 PCI provided greater details and empirical evidence of governance areas in need of improvement. In particular, firms registered increased dissatisfaction with the expropriation risk and the inability of land compensation prices to keep pace with market prices, less confidence and usage of provincial legal institutions, and more limited use and less satisfaction with the supply and quality of business support services.

The survey report remarked that local governments’ efforts to reform administrative procedures such as shortening the business registration and licensing time, reducing inspections, speeding up the grant of land use rights certificates and cutting informal charges for administrative formalities, which once made Binh Duong and Da Nang score high, were no longer appreciated by businesses.

This implied that businesses now wanted more reforms vital to their production and business operations such as macro-economic stability which no province had been able to guarantee so far. Drastic changes were also needed in other business-related fields such as reduction of corruption, protection of property rights and improvement of legal institutions.

Some 48% of the surveyed foreign-invested firms agreed macro-economic instability was one of the three primary risks they encountered when doing business in Vietnam, with 36% of them considering it the first primary risk. The rate of businesses fearing for the macro-economic risk had increased 20% after the arrest of several bank leaders last August, the survey report said.

The survey also found contract, policy, labor and corruption risks were other major concerns of foreign investors after the macro-economic risk, which, however, varied from one province to another. While 78% of businesses in Ba Ria-Vung Tau considered policy risk as one of the three primary risks, only 11% in Long An thought so. But 89% of businesses in Long An saw labor as their first primary risk while this rate was only 29% in Hanoi.

Although the survey found petty corruptions had decreased, major corruptions at investment projects tended to rise with 42% of firms having paid unofficial fees to win contracts, up 18 percentage points from 2011.

The construction sector had the most businesses having to pay bribes with 42.5%, a 12 percentage point increase from 2011, according to the report. It was followed by the service and trading sector, with 35.4% of businesses paying commissions to win contracts in 2012, a nearly 50% rise from 2011. Businesses that had relationships with government agencies were more likely to pay under-the-table fees, the PCI report said. Some 20% of FDI businesses had involved in corruption with those operating in the restricted sectors or those that required a special license most likely to pay the bribes.

The survey saw optimism of both local and foreign firms dipped considerably in recent years, from 76% in 2006 before Vietnam’s entry into the World Trade Organization to a record low 33% last year.

According to the survey, the rate of enterprises having plans for business expansion had dropped by 13% from 2011 and by 36% from 2010. Just 32.7% of private businesses and 33% of foreign-invested enterprises planned to expand their business operations compared with 45.5% and 47% respectively in 2011.

Only 60% of foreign-invested enterprises reported profits compared with 74% in 2011. Accordingly, the rate of loss-making businesses rose to 28% in 2012 from 20% in 2011.

Confidence in the business environment also eroded as only 32% of enterprises in the median rank believed local officials worked effectively and just 41% agreed paperwork had been reduced.

Some 29% of businesses thought the risk of loss of business places was high or very high. Concurrently, the rate of enterprises believing they would receive fair compensation for loss of their business places had decreased from 41% in 2007 to 36% now. The rate of enterprises believing in legal protection of land, assets and contracts dropped from 70% in 2011 to 64% in 2012.

“As demonstrated in this year’s report, the PCI continues to provide valuable insights to provincial leaders about their economic governance and how to improve the business environment to foster domestic and foreign investment, jobs, and economic development,” VCCI President Dr. Vu Tien Loc said. “We believe that its key findings and recommendations will generate new ideas for policymakers to take Vietnam to the next level of economic development.”

Loc added that the PCI has been adopted as a primary data source by local governments to assess their socio-economic governance, particularly on policy making to promote growth of the private sector. He noted that local governments’ positive support for the private sector would help create a favorable investment environment for business operations and growth. Statistics showed that firms operating in localities with proactive local leadership were 8% more likely to report profits, 5% less likely to report losses, and 3% more likely to plan business expansion over the next two years.

Obviously, Vietnam was now in the stage of intensive rather than extensive reforms, Loc said, stressing the need for drastic reforms in legal institutions, anti-corruption and improvement of human resource training quality.

“While the economic outlook remains highly uncertain, rigorous analysis of the current challenges is valuable,” USAID Mission Director Joakim Parker said. “Improving economic governance is critical to Vietnam’s sustained growth and competitiveness. It requires commitment of government leaders at different levels to tackle challenges such as infrastructure, administrative reform and corruption.”

Hanoi Mayor Nguyen The Thao was upset about the lowest ranking of Hanoi so far since the launch of PCI, saying the municipal administration would analyze causes and identify responsibilities to improve its performance next year.

Although Bac Ninh was among the top-ten performers, the province had slipped from the second position to the tenth, displeasing People’s Committee chairman Nguyen Nhan Chien who immediately instructed local functional agencies to analyze in detail the PCI result for reporting to him later this month.

Ninh Thuan People’s Committee chairman Nguyen Duc Thanh said the secret to his province’s ranking improvement was its determination of the PCI performance as the motive for attracting resources for development investment.

According to Thai Nguyen People’s Committee chairman Duong Ngoc Long, the ranking of Thai Nguyen, which jumped to the amazing 17th position from the 57th in 2011, truly reflected the province’s performance over the
past year, saying the provincial administration had given specific directions to improve its performance.(VLLF
)-

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