Vietnam: ASEM Country Strategy Note April 2002

Transcription

1 Vietnam: ASEM Country Strategy Note April ASEM Trust Fund resources have become an important source of technical assistance for Vietnam, addressing the key areas of corporate restructuring (state enterprise reform), banking reform, social safety nets, and decentralization. Vietnam has benefited from seven grants under ASEM I, ranging from US$100,000 to US$1.8 million, for a total of US$5.8 million. In addition, three country specific and one regional grant under ASEM II are currently pending the Government s countersignature. It is envisaged that the total amount available for Vietnam under ASEM II will be in the same order as under ASEM I. The grants have been designed so as to maximize the prospects for impact in the key ASEM TF focus areas of banking, corporate restructuring, decentralization, and social protection and to complement other ongoing technical assistance work. Recent Developments Relating to ASEM TF 2. This note provides an updated context for the ASEM TF technical assistance by demonstrating its close links to the Bank s Country Assistance Strategy, which has been prepared in close partnership with the Government of Vietnam, and by highlighting the important development challenges ahead. The note also provides some illustrations of how the trust fund has supported challenging policy changes in Vietnam, notes some of the lessons learned so far in effectively utilizing these resources, and explores the implications for ASEM II. 3. Since the start of the Asian crisis, the Government of Vietnam has been undertaking some important preparatory work for serious reforms in banking and state enterprise management and to create a more supportive environment for private sector activity. The ASEM TF grants are an important element in this diagnostic and design work. 4. Vietnam export growth recovered remarkably fast after the Asian crisis. As a result Vietnam managed to reach GDP growth rates in the range between 5% and 6% in the years following the crisis. In 2001 Vietnam s economy grew by around 5% in real terms which is slightly slower than in The target of doubling GDP by 2010, as put forward in Vietnam s 10-year Socio-Economic Development Strategy, means that Vietnam on average needs to grow by approximately 7% a year in the coming decade. To reach this target, the country must continue and deepen planned reforms relating to the state enterprise sector and banking sectors as well as changing attitudinal problems towards the private sector. 5. In the past two years, some important new measures have been taken and, as noted above, good preparatory work has paved the way for much deeper action in the future. In June 1999, a new Enterprise Law was passed by the National Assembly and became law on January 1, This offers a framework for a much more level playing field than in the past. In response, during the year 2000, the private sector registered

2 more than 14,000 new enterprises followed by an additional 21,000 new registrations in In addition, the process of State-owned enterprise (SOE) reform was stepped up in 2000, with equitization proceeding at an altogether more rapid pace than in the past. The implementation of equitization slowed somewhat in 2001, but recent Government initiatives such as the issuance of decree 63 on transforming SOEs into one-member limited liability companies indicates that the pace of reforms is on its way to a rebound. This process of equitization has been partly made possible by the extensive technical assistance provided through the ASEM TF. 6. In January 2001, the IMF and the World Bank reached agreement in principle with the Government of Vietnam on a package of macro and structural reforms that will be supported by a financial package (consisting of a Poverty Reduction Strategy Credit from IDA, a Poverty Reduction and Growth Facility drawing from the IMF, and bilateral co-financing). The PRGF program was approved by the IMF Board on April 6, 2001 and by the World Bank Board on June 5, The ASEM TF grants have helped to lay the groundwork for reaching this important point in our discussions with the Government. Grants will continue to be important in helping to implement this reform program. 7. In September 2001, the Government took a step forward towards secondgeneration reforms by adopting a master plan for public administration reform. Reforms in this area will complement economic reforms and will help establish a framework for a market-based economy in Vietnam that functions both effectively and efficiently. Reforms in this area have until now taken place without an overall framework for the direction in which the public sector should move. In addition, Vietnam is expected to adopt a strategy for legal and judicial reforms in These commitment to legal reforms, improved governance and increased transparency coupled with the economic reforms are important steps in the right direction towards a market based in economy in Vietnam. 8. These reform measures are part of Vietnam s comprehensive poverty reduction and growth strategy (CPRGS) expected to be approved by the Government in April This strategy will identify actions needed to further reduce the level of poverty in Vietnam. Impacts of and Lessons from ASEM I 9. The Bank is in the process of preparing its next Country Assistance Strategy (CAS) for Vietnam. The CAS will be based on Vietnam s CPRGS which identifies three main themes that are all relevant to the priority focal areas of the ASEM Trust Fund, namely: economic growth and transition towards a market economy, equitable and socially inclusive development and improved governance. 10. Transition to the market economy will, as already mentioned, be central to the CAS, and reforming SOEs is at the heart of this challenge. Vietnam s SOE reform program covers general measures that would increase competition for all enterprises by easing private entry and by liberalizing trade as well as enterprise-specific measures 2

3 aimed at diversifying ownership, reducing losses, and improving the efficiency of SOEs. Equitization and divestiture of individual SOEs will diversify ownership; liquidations will reduce losses of non-viable SOEs; and restructuring and downsizing will improve the efficiency of the SOEs that remain in state hands. 11. Vietnam s banking reform program is another critical aspect on the path towards a market economy. It covers four areas: restructuring of non-state (joint-stock) banks, restructuring of state-owned commercial banks (SOCBs), improving the prudential regulatory and supervisory framework, and leveling the playing-field for all banks. The restructuring of non-state joint-stock banks (JSBs) has picked up momentum after a delayed start. Several JSBs have been closed, merged, or rehabilitated with private shareholders providing additional capital. For three large State-owned commercial banks (Incombank, Vietnam Bank for Agriculture and Rural Development, and the Bank for Investment and Development) detailed restructuring plans were adopted recently. In addition the State Bank of Vietnam has issued a decision that would govern the phased and conditional recapitalization of the State-owned commercial banks. 12. The challenge of promoting social equity remains a central plank of the Government of Vietnam's policy framework. Poverty is declining rapidly in Vietnam, but it still remains a major issue. National surveys show that poverty is a largely rural phenomenon and that it is at much higher and deeper levels among ethnic minorities. Investments in basic infrastructure and social services as well as in generating sustainable rural employment are essential to achieve continued poverty reduction. The SOE reform agenda, however, also raises key social equity issues that must be addressed if these critical economic policy reforms are to be sustainable. 13. Looking ahead, it is clear that the challenge for Vietnam and for the Bank s operations in the country is shifting from appropriate policy formulation to appropriate policy implementation, with the goal of achieving sustainable results. Strong political will is essential for this program, but it also requires strong technical and institutional capacity, which warrants strong support by external donors. 14. The seven ASEMI projects have progressed gradually. The trust funded activities all support priority Government activities, while being directly in line with the ASEM Trust Fund s own focal areas. ASEMI technical assistance grants have helped bring much needed external expertise and has also exposed the Vietnamese policy makers to other countries reform experiences. In addition, the grants has financed studies and other analyses of issues specific to Vietnam to ensure that reform measures are tailored to Vietnam s needs. The trust fund interventions have catalyzed analytical work and fueled policy change in important ways, as illustrated by the examples discussed below. (Again, we are wrapping up ASEMI activities. Please discuss the results of ASEMI activities). 15. State-Enterprise Reform. ASEM TF grants of more than US$2 million (together with Danish, Australian, British, and Japanese grants of US$12 million) are supporting the formulation and initial implementation of the SOE reform program in Vietnam. This support is provided to the National Steering Committee for Enterprise Reform and 3

4 Development (NSCERD) and the SOE Reform Department of the Office of the Government, which are charged with developing overall policy, as well as with coordinating and monitoring implementation. Some support has also been provided to line ministries, such as the Ministry of Industry, the Ministry of Construction, the Ministry of Agriculture and Rural Development and the Ministry of Transport, as well as peoples committees charged with implementing SOE reform. 16. The trust funds support each recipient agency in designing strategies to implement their SOE reform plans; for example, testing alternative legally feasible methods of divestiture; improving the equitization process; identifying different ways of dealing with excess labor; advising on the NSCERD policy framework and operational modalities; assisting in launching the public information campaign regarding SOE reform (which has proved to be most difficult component); and building capacity through on-site training. The work on selected aspects of enterprise reform is benefiting from international best practice transmitted through advisory assistance and training. The European experience in developing programs for excess workers of downsized industries and in safeguarding social services in the cases of enterprise privatization or closure could provide a range of experience including international best practice to the Vietnamese counterparts. Moreover, European experts have extensive experience advising Eastern European transition countries on such issues. Therefore, all international consultants and trainers funded by the grant come from EU countries, mostly France. 17. The activities aim directly at raising competitiveness of the enterprise sector of Vietnam experiencing stagnation due to systemic and organizational problems. The Government counterparts demonstrate full ownership of the project. Hands-on restructuring work at the enterprise level brought about a rich blend of issues in the SOE reform area which the consultants analyze and formulate recommendation as to their resolution. 18. One ASEM fund deals specifically with SOE restructuring of enterprises under the Ministry of Transport (MoT). For this particular fund two separate workshops were conducted in Hanoi, one in mid-may 2001 and another in late-june The first workshop covered the results from the consultant s preliminary review of financial data provided for each of the Ministry s SOEs, focusing on aggregate financial performance and trends in financial performance by Corporation/company group. This workshop also introduced issues associated with the classification of SOEs, and discussed a preliminary framework for SOE classification. The second workshop focused on reform options for the Ministry s SOEs, and developed further a reform classification and prioritization schema that could be applied by the MoT. The project report for this grant has now been finalized. 19. Banking Reform. The State Bank of Vietnam (SBV) and the government of Vietnam are undertaking a significant reform of the financial sector and the implementation of a detailed bank specific restructuring plan is the next critical step in the bank reform program. Three grants under ASEMI have supported these reforms by undertaking activities that can largely be spilt into the following areas: 4

5 Restructuring State-owned Commercial Banks - Advisory services for pre-audit work - Advisory services to implement restructuring plans Restructuring Joint-stock Banks (JSBs) - Assessment of 5 JSBs - Review of risk management procedures and techniques - Help in establishing a management information system - Risk Management training Creating the institutional framework for asset resolution and disposition - Establishing national Asset Management Companies (AMCs) - Training and workshops on AMCs. - Study tours to USA, Canada and Poland. Accounting, Credit Reporting and Supervision and Corporate Governance for Financial Institutions - Review and development of key functions for a Credit Bureau - Workshop on Credit Bureau - Bank corporate governance training - Review of the Banking sector legal and regulatory framework 20. Social Equity and Inclusion. Two types of activity were funded by ASEMI grants aimed at improving social equity and inclusion. The first related to the development of social safety nets for workers that would be declared redundant by SOE reform. The ASEM TF grant of US$100,000 permitted detailed analytical and empirical work for developing a voluntary redundancy package tailor-made to Vietnam s conditions. Using data from the Vietnam Living Standard Survey (VLSS), the size of the redundancy package was based on the calculated loss of lifetime-earnings arising from loss of an SOE job. This package was expected to ensure that it would be accepted voluntarily, thereby reducing the extent of resistance to redundancy. Two workshops have been held (in May 1999 and June 2000) to disseminate the findings and to generate consensus on the package and on the design of the social safety net for SOE workers. The ASEM TF grant for this work has been highly appreciated by the Government of Vietnam. It has enabled a process that brings together many different stakeholders central Government agencies, provincial governments, SOEs, labor unions, and others to develop a shared understanding of how best to approach this very sensitive issue in Vietnam. This TF activity is now completed. 21. The second grant was aimed at the rural poor. This grant of US$497,000 has been made to the Vietnam Ministry of Planning and Investment (MPI) to support preparation of a targeted poverty reduction project. The grant funded technical assistance and essential equipment for MPI to enable it to prepare a project that will provide small grants to about six hundred of Vietnam s poorest communes. (IDA has provided a credit, 5

6 called the Community-based Rural Infrastructure Project, of US$ 103 million to Vietnam to support this small grants program). The grants are to be used to fill gaps in essential public infrastructure, create employment in remote areas, and help establish a demanddriven approach to project planning and implementation. Essential public infrastructure includes basic community access (roads and bridges), primary schools, health centers, drinking water and sanitation systems, and electrification. The communes that will benefit from this assistance are in remote areas with populations dominated by ethnic minorities. Without such targeted assistance, these poor communities would wait a long time for their essential infrastructure needs to be met. 22. Between August 1999 and June 2001, the grant supported preparation of the IDA credit with 16 consultancies, six workshops (five of them in the field), and two study tours to comparable projects assisted by the Bank elsewhere in the region (Indonesia and the Philippines). The six key products of the consultancies were: a social assessment (chosen as a best practice by the Bank s social development family); a training needs assessment (that has become the blueprint for a multi-million dollar training program); a project field manual (that provides detailed and practical guidance on project implementation); a project implementation plan; the project s management information system (MIS); and the Government s own project feasibility study (approved at the level of the Prime Minister). 23. The first round of projects are now closed or approaching its closing date. Some of the key lessons they provided are described below. ASEM II Priorities The process of activating the grants and executing the procurement process has taken a long time. Many of the recipient agencies had not executed World Bank projects before, resulting in a steep learning curve to be overcome in implementing ASEM TF grants. Once underway, the ASEM TF grants are proving very effective in helping Vietnam to access the much-needed external expertise in funding analytical and empirical work that help to tailor reform measures to Vietnam s specific conditions and to disseminate findings from studies to a wider set of stakeholders in the country. 24. In light of this experience, the strategic focus for the ASEM TF portfolio (for ongoing and future projects) should seek to follow-up on and deepen work launched in the areas of corporate or state-enterprise restructuring, banking reform, and implementation of Vietnam s CPRGS. This will ensure that the ASEM Trust Fund resources used in Vietnam have the maximum impact at the lowest cost for three reasons. First, banking and state-enterprise restructuring and reform will be central to Vietnam s growth and poverty-reduction objectives for the next three to five years. If the Government adopts the reform program that has been developed to-date with technical assistance support from ASEM TF and other donors, the implementation of that program 6

7 will require a lot more technical assistance. Second, since the recipient agencies in the affected areas that is, the Bank Restructuring Committee, the state-owned commercial banks, the National Steering Committee for Enterprise Restructuring and Development, the line ministries, and the people s committees have gained experience in implementing World Bank administered grants, ASEM TF support may be used at relatively lower cost than if new agencies were to be brought in for later phase projects. Third, implementation of the CPRGS is essential for Vietnam in lifting more people out of poverty and help them to gain an income level where they are less vulnerable towards unforeseen events such as illness, natural disasters or crop failures. Modalities for programming ASEM II with clients 25. The modalities for programming ASEM II activities with the Government of Vietnam are still under discussion. Initially, the Government has expressed their interest for these discussions to take place within already established Government-donor partnership groups. The discussion on modalities will be continued in the aftermath of the ASEM review meeting on April 19. Which specific ASEM II activities to undertake in Vietnam will be discussed in these meetings under the agreed coordination structure. 7