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ADB to Help Improve Business Environment for SME Development in Viet Nam

MANILA, PHILIPPINES (21 October 2004) - The Asian Development Bank (ADB) will help create a business environment to support the development of small and medium-sized enterprises (SMEs) in Viet Nam through a loan package approved for US$100 million.

The project, ADB's first policy loan in Viet Nam specifically designed to promote an enabling environment for the SME sector, will undertake intergovernmental coordination and stakeholder consultation to systematically identify and resolve constraints facing business.

The project will enhance the policy and regulatory framework, improve SMEs' access to finance and land use rights, and help increase their access to domestic and international markets by improving industrial and technical standards.

"The Government, ADB, and the aid community agree that it is urgent to support SMEs to sustain economic growth," says Shigeko Hattori, an ADB Senior Financial Sector Specialist.

"The traditional approach to assisting SME development by addressing funding and technical gaps through subsidized credit or services has achieved mixed results. Therefore, SME support programs are increasingly shifting to improving the business environment."

SMEs in Viet Nam, defined as establishments with a registered capital below Dong 10 billion or about $670,000 or with annual permanent employees less than 300, comprise more than 90% of all private enterprises.

The domestic private sector has led the country's economic growth since 2000, with an annual growth rate of almost 20%, but the economy is still dominated by the state sector.

In common with many developing economies in transition, key policy, legal and institutional frameworks in support of business operations have yet to be completed. A policy bias favoring public sector entities also remains.

Formulated after an in-depth analysis and thorough discussions with the Government over nine months, the project will help maintain the momentum of reform in streamlining business registration and simplifying licensing procedures to reduce uncertainty, risks, and costs for business.

It will also assist the Government in establishing a national SME development strategy, which includes defining SMEs more specifically, developing a modern data collection system on SMEs through the National Business Information Network, and formulating an interministerial action program for SME development.

The project will improve access to finance, the most often cited problem of SMEs, by reducing the costs and risks of lending to SMEs through the development of an SME accounting system, increasing the effective use of collateral such as land use rights certificates and movable properties, and improving the operational environment for financial leasing companies.

Since many SME surveys in Viet Nam point to limited access to land as the foremost constraint to growth, the project will complete the legal framework to make land use rights transferable through market-based transactions. The project will also help disseminate information on land use planning and zoning.

Last, the project will help the Government develop industrial and technical standards that conform to international best practices, and assisting in making this information readily available to SMEs through an online database.

A $1.4 million advisory technical assistance grant included in the loan package will provide key technical inputs for the project and institutional capacity building support to implementing agencies. ADB will finance $500,000 of the TA cost, the Danish Consultancy Trust Fund will finance $300,000, and $600,000 will come from the Swiss Consultant Trust Fund.

The project loan is divided into two back-to-back subprograms. The first subprogram, to be undertaken from November 2004 to May 2006, will be financed by a $60 million loan from ADB's concessional Asian Development Fund (ADF). The loan carries a 24-year term with a grace period of 8 years, with interest is set at 1% per annum during the grace period and 1.5% per annum thereafter.

After the successful completion of the first subprogram and based on resource availability, a $40 million loan for the second subprogram will be processed.

The project will be cofinanced by the Agence Francaise de Developpement with €25 million (about $29.8 million), and Kreditanstalt fur Wiederauflbau with €20 million (about $23.8 million).

The Ministry of Planning and Investment will execute the project.

ADB is dedicated to reducing poverty in the Asia and Pacific region through pro-poor sustainable economic growth, social development, and good governance. Established in 1966, it is owned by 63 members - 45 from the region. In 2003, it approved loans and technical assistance amounting to US$6.1 billion and US$177 million, respectively.

More at adb.org/media

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