PCI 2009: Danang Continues To Take The Lead
By Phuong Quynh
In 2009, when the economy encountered enormous challenges, the Government’s ability to fulfill its managerial roles was put to an acid test. The provincial competitiveness index (PCI) (*) offered a yardstick to measure the efficacy of economic governance on a local level, as perceived by the private sector.
The latest PCI ranking (table 1) indicated that Danang continued to take the lead with 75.96 points (upon 100), followed by Binh Duong, the top runner in 2005-2007 (74.01 points). Lao Cai, Dong Thap and Vinh Long also emerged as three of the best performers.
The PCI research team also noted that many localities had exerted tremendous efforts to improve their rankings. They included Ca Mau, Dien Bien, Long An and Thua Thien-Hue. In particular, Dien Bien slashed informal charges substantially, enhanced the proactivity of its leadership and boosted the quality of labor and training. Meanwhile, Ca Mau moved up the ranking table thanks to its lower market entry costs and informal charges. Long An and Thua Thien-Hue fared better in 2009 as both managed to improve transparency, making it easier for locals to gain access to their official documents.
In 2009, the weight assigned to each sub-index was recalculated to reflect the operations of the economy and changes in Vietnam’s institutions (table 2). Sub-indices that left the greatest influence on growth, investment and returns in the private sector were given the highest weight (20%) – namely, transparency as well as labor and training. 2009 was also the fifth consecutive year in which transparency was given the greatest weight although the methods used to calculate PCI were already adjusted to better reflect reality.
Land access and legal institutions, which were given the lowest weight (5%), were actually important. However, since the scores of Vietnamese localities in both aspects were mostly dismal and similar, the impacts of both factors on the development of the private sector were not significant. To improve their scores on both sub-indices, local authorities would need not only initiatives of their own but also broader policy reforms on a national level.
It is noteworthy that bias toward the local State-owned sector was no longer an index. According to the research team, most local State-owned enterprises have been floated and no longer impose barriers to the development of the private sector. This does not mean there has been a level playing field for both private and State-owned businesses in various localities. The current challenge pertains to the incentives offered to subsidiaries under centrally-run State-owned enterprises, especially conglomerates. While this is an important issue with which policymakers must grapple, PCI is not a suitable tool to quantify the factor as the index needs to focus on criteria which local authorities can influence.
Positive trends
According to the latest PCI ranking, the median score continued to rise, showing that local economic governance was remarkably better in 2009. Five of the nine sub-indices posted significant improvement.
Regarding market entry costs, the research showed that the time taken to register business fell from 12.25 days to 10 days. The time cost of regulatory compliance also improved after years of stagnation. The total time taken for business leaders to carry out administrative procedure also dropped from 22% to 15% while the average tax inspection time decreased from eight hours to five hours. In other words, administrative reforms brought about considerable improvements.
The scores on land access, labor and training, and legal institutions also rose drastically.
Remaining challenges
Transparency, which had the highest weight, already made great strides for several years, but a reverse trend arose last year.
Access to provincial documents and plans was diminished in general. The proportion of enterprises which deemed it necessary to foster rapport with authorities to gain access to provincial documents related to their business returned to the level of 2006 (about 61.26%). Similarly, the percentage of enterprises which found the implementation of central laws on provincial levels predictable or which had to negotiate with tax officers resembled that in 2007.
Notably, enterprises found it easier to access legal documents such as decrees and documents guiding the implementation of central laws than to obtain provincial documents such as budgets, zoning and land use plans, as well as incentives.
The research team cited a report by Phan Vinh Quang and John Bently to offer a possible explanation. Both experts observed that the Government started to use official letters instead of legal documents. The Government issued 9,470 official letters relating to legal issues in 2005-2008, three times as much as it did in 1987-2004. Before 2004, a locality had 19 official letters and 81 legal documents on average. The figures have changed to 55 and 45 respectively. Consequently, legal documents have proliferated, making ties with the authorities especially important.
Another sub-index with scant improvement concerns informal changes. Up to 52% of the enterprises in a median province believed that the authorities used its own regulations for their personal benefits. This proportion was higher than in 2008 and 2007 (37%). The result is in line with the above analysis of transparency.
Moreover, 53% of the businesses said that it was necessary to pay commissions when bidding for contracts with government agencies. This finding does not bode well for Vietnam’s business environment. At the same time, scores on the proactivity of local authorities also returned to the level in 2007.
Business thermometer – worrying signs
Business plans fleshed out by enterprises for the following two years are an important part of PCI surveys. PCI 2009 is announced when business sentiments are on the wane despite more upbeat macroeconomic forecasts. According to the surveys, only 65% of the private enterprises plan to expand production and business in the next two years, lower than the figures for 2008 and 2007 (78% and 77%). Small enterprises were more adversely affected by the global economic turmoil, so only 47% of them wanted to scale up their operations.
Enterprises hoping for bigger operations mostly choose Hanoi, HCM City and Danang as the best locations to increase investment thanks to their attractive markets. However, if this factor was not taken into account, Binh Duong and Vinh Phuc would become the preferable choices by virtue of their high quality of economic governance.
(*) PCI was first developed in 2005 and is a joint effort by the Vietnam Chamber of Commerce and Industry and the Vietnam Competitiveness Initiative, funded by the U.S. Agency for International Development. Thoi bao Kinh te Sai Gon has been chosen to announce the results of the survey over the past five years.