The Prime Minister recently requested the Ministry of Planning and Investment, the Ministry of Public Security and the Ministry of Finance to jointly develop an inter-ministerial circular to simplify the business start-up process by streamlining the three main business entry procedures: business registration, company seal registration and tax registration. As is increasingly the case all over the world, the Vietnamese government seems to agree with the assertion made in the “Doing Business 2006” report that if it was easier to start a business then more would be formally set up.

And more formal businesses means more jobs, more investment, more productivity and higher economic growth. “More enterprises will be encouraged to move from the informal to the formal sector, enabling local governments to earn more tax revenues and creating more jobs with higher salaries in the formal sector,” said Mr Vu Quang Thinh, Partner at the Management Consulting Group (MCG) and Consultant to the IFC-MPDF Provincial Simplification Project.

“Moreover, transparency of business procedures will be enhanced, reducing corruption. The business community will also be happier with more simplified procedures because the business entry process will become less complicated, costly and time-consuming.” 

Simplified procedures spur private sector growth

The Enterprise Law of 1999 was a significant reform that made it easier to start a business in Vietnam and led to a surge in new firms being started. Between 2000 and 2005, more than 160,000 new firms entered the market; three times the number of enterprises registered during the previous decade.

Further streamlining the business entry process might yield an even more significant result, if even a small percentage of the estimated two million informal household businesses in Vietnam were to register and join the formal economy. “Simplified business establishment procedures would encourage thousands of households in trade villages to formalise their businesses and grow them,” said Mr Nguyen Phuong Bac,
Deputy Director of Bac Ninh province’s Department of Planning and Investment.

More formally registered enterprises would benefit both businesspeople and the overall economy in three significant ways. First, because formal enterprises have less of a need to hide from government inspectors, they can grow to a more efficient size. On average, according to “Doing Business 2007”, informal enterprises produce 40 per cent less goods and services than their counterparts in the formal economy.

Moreover, registered entrepreneurs can obtain bank credit, use public services (such as the courts to resolve disputes) and export directly. Finally, formal enterprises pay taxes, which increase the government’s revenue base. As more companies move into the formal economy, the government can consider lowering the tax burden on all firms, which would give them more incentives to produce goods and services and expand.

The registration of as many businesses as possible has other benefits. “The internationalisation and globalisation of business activities through increased trade and cross border transactions have also increased the need for a well-functioning business registry that allows business partners to confirm the official legal status of their enterprises and counterparts and thus feel more comfortable with those they deal with,” said Mr John Schjelderup Olaisen, Director of Norway Registers Development AS.

It also has positives in terms of security. “Keeping track of each entrepreneur’s identification-related information can help reduce the number of ‘ghost businesses’ and prevent people with police and criminal records from doing business in sectors that affect public order and security,” said Mr Nguyen Thai Dung from the Department of Administrative Management for Public Order at the General Department of Public Security.

Cumbersome, time consuming and costly

“Doing Business 2007” notes that it takes only two procedures, three days, and 0.9 per cent of annual per capita income to register a private limited liability company in Canada, and only two procedures, two days, and 1.9 per cent to do the same in Australia.

In these top-ranking countries, an investor merely needs to register his or her business with registration and tax agencies before starting operations. By contrast, in Vietnam, it takes 11 procedures, 50 days, and 50 per cent of annual per capita income to register a business. The three main procedures in this process are: applying for a business registration certificate (15 days), obtaining a company seal (14 days), and registering for a tax code and purchasing pre-printed invoices (15 days).

Over the past few months, these processes were studied in several northern provinces and the results were very close to the findings of the “Doing Business” report. Anecdotal evidence also backs up the need for change. “In some provinces we have worked in, a person starting a business has to visit his local administrative authorities at least thirteen times to complete the three first business establishment procedures,” said Mr Thinh. “In one province, the staff at relevant administrative agencies spend 27 days over 98 operational steps to process a business establishment application.

Each administrative agency tends to try and complete its duty without coordinating and communicating with the others. As a result business owners have to run around to fulfill several complicated procedures. Many businesses have to pay informal charges, either directly or indirectly, for the convenience of completing each procedure.”

At the provincial level, three administrative agencies – the Department of Planning and Investment, the provincial Tax Department and the Department of Public Security – are responsible for these procedures. Firms complain that the entire process is disconnected and that the administrative agencies do not communicate with each other.

As a result, i) prospective entrepreneurs have to fill out many different forms containing the same information; ii) they have to perform those steps sequentially (for example, waiting for 10-15 days to get the business registration certificate before starting the process of obtaining a company seal, getting a tax code before purchasing invoices, etc.) rather than in parallel; and iii) most procedures are paper-based, requiring businesspeople to visit each administrative agency at least several times.

Although some provinces have begun piloting online registration, investors are only able to obtain forms and track their applications online; they still have to physically go to the DPI office to submit hard copies of all documents and signatures.

The “one-stop” approach

International experience has shown that efficient coordination among different administrative agencies is critical to achieving effective business start-up reform. Many developing countries have enhanced such coordination, and the lessons from these efforts could be useful for Vietnam.

Successful measures include: i) creating a single entry point through which businesses can conduct all business start-up procedures (having all the interaction between agencies occur behind the scenes so that entrepreneurs would not have to go to each agency separately); ii) introducing a single business registration form through which businesses can provide all the information needed by different agencies; iii) issuing a single identification code to each business (which may mean merging the business registration code with the tax code); and iv) using information technology for business registration (allowing electronic filing, making registration information available to different government offices, developing a national registration database that allows for electronic name search, etc).

In Vietnam, while awaiting a national legal framework that governs inter-agency coordination, some provinces have already taken measures to make business registration easier in order to attract investment. For example, the government of Lao Cai province has pioneered a “three-in-one” approach in which the business registration office within the DPI acts as the single access point for business start-up procedures.

In addition to issuing business registration certificates, the DPI is responsible for interacting with the Tax Department and Public Security Department to obtain tax codes and seal making licences within just 15 days. “The greatest benefit of this model is that it reduces the time to start up a business,” said Mr Vu Kim Quy, Head of the Business Registry at Lao Cai’s Department of Planning and Investment. “It now takes only seven to eight days for businesses to get all the necessary documents (one day for the business registration certificate, five days for the company seal and seven days for the tax code) as some steps can be undertaken simultaneously.

The second benefit is that businesspeople do not have to repeatedly visit many places. The third benefit is that thanks to regular communication among public agencies, especially between DPI and the Tax Department, it is easy for both agencies to track businesses. This is a good starting point for putting into place an efficient post-registration monitoring system.” This streamlined “one-stop” approach has been highly praised by the local business community, and is being considered by other provincial governments. 

But Lao Cai’s example is all too rare. “While the one-door mechanism has officially been implemented by almost all agencies, in practice businesses still have to go through too many doors,” said Mr Nguyen Anh Tuan, Managing Partner at Bizconsult. “As the OSS staff lack sufficient competence to provide businesses with the appropriate guidance, they tend to be rigid when dealing with businesses. For example, they refuse to accept an application if minor information is missing. In many cases, businesses have had to wait seven days to be informed of just one minor mistake.”