Donor coordination in sme development in Viet Nam: What has been done and how can it be strengthened?

ctor (in-charge) of the International Cooperation Division, the Agency for SME Development (ASMED), Ministry of Planning and Investment (MPI). PDF created with pdfFactory trial version www.pdffactory.com have been used. Hence, delivering assistance to SMEs that avoids overlaps, converges approaches and iden-tifies best practice has posed a challenge for donors. Therefore, the need for more effective donor coordination has become increasingly important. In Vietnam, there is a regulatory framework for donor coordination and there are also different coordination forums set up by government agencies and the donor community. The Agency for SME Development (ASMED) was established as the "focal point/coordinator in SME support". Apart from the Decree on SME development, the recently-approved SME Development Plan 2006 - 2010 aligns government and donor objectives further and ensures that donor and corresponding national resources go where the highest demand is reported. These factors are actively contributing to efforts in donor coordination for the efficiency of intervention in SME development. Apart from the Introduction and References, this paper is structured into three sections. Section 1 describes the role of Vietnamese SMEs in the national economy and their performance in recent years, and analyzes outstanding issues in SME development. Section 2 looks at what has taken place in donor coordination in the field. Section 3 provides recommendations for improving the process in the years to come. 1. SME development in Vietnam 1.1. SMEs' role in Vietnam's economy The economic renovation (doi moi) process initiated in Vietnam in 1986 brought about not only new basic institutions of a market economy but also the gradual untying of the private sector. The amended Constitution (1992) had for the first time affirmed the important role of the private sector in the national economy. At that time the term "small and medium enterprise" began to be mentioned in Vietnam. But it was not until late 1999, when the Enterprise Law was approved, that the business community could make its real breakthrough: the surge in the number of SMEs throughout the country. Government Decree 90/2001/ND-CP (Decree 90), promulgated in November 2001, provided for the first time an official definition of an SME as "a business establishment with registered capital of no more than VND 10 billion (equivalent to USD 630,000) or with an annual average workforce of no more than 300 employees", and stipulated incentive policies and support measures specifically designed for SMEs. The Comprehensive Poverty Reduction and Growth Strategy (CPRGS) finalized in May 2002 took it one step further by defining the role of SMEs as "contributing to the growth of the national economy, job creation, poverty alleviation and hunger eradication". Vietnam's first SME Development Plan 2006 - 2010 clearly stated the importance of SMEs in economic development and laid out an action plan for government agencies in the context of Vietnam deepening economic integration, particularly World Trade Organization (WTO) accession. In Vietnam, the SME sector has actively contributed to employment and income generation at low cost for the additional one and half million people entering the labor force annually, not to mention its role in maintaining the high mobility of the labor market. Apart from being a dynamic sector in the economy, SMEs play an important role in narrowing the development gap among localities, between urban and rural areas, and helps preserve traditional craft sectors where large-scale industrial production is inefficient. SMEs have also been good partners of foreign-invested enter- prises in support industries and other types of subcontracting. As at the end of March 20071, the total number of registered enterprises in Vietnam ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:... 26 Number 2 Spring 2007VIETNAM ECONOMIC MANAGEMENT REVIEW VEMR PDF created with pdfFactory trial version www.pdffactory.com 27Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR reached nearly 270,000, meaning that more than 100 new entrepreneurs took their first step into the marketplace every day, of which some 97% were SMEs. Statistics show that the SME sector accounts for around 26% of the country's workforce, generates 26% of total GDP, and contributes 31% of total industrial production and 78% of total retail revenue2. As in many other developing countries, SMEs in Vietnam are characterized by internal and external constraints such as shortages of capital, appropriate technology, advanced management skills, and efficient business linkages and representation; difficulties in accessing factor markets; and others. Therefore, it is difficult to cover all SME needs under a single support intervention or to gain immediate results. As a result, the government and donors in Vietnam have been gradually shifting their attention and efforts to a "sector-wide approach" (SWAp). The SME Development Plan 2006 - 2010 also provides the framework necessary for the planning and implementation of a SWAp in the field of SME development. 1.2. Outstanding issues in SME development Before the government identified its own national and provincial SME support institutions, the business community had launched self-support systems that included mostly informal entrepreneur groups or clubs as well as commercial relationships with independent service providers and commercially-run affiliates of business associations in training, consultancy and facilitation. Presently, some 200 major business associations3 are active as demand-driven supporting entities that help member enterprises in facilitating relationships with each other, in supporting same-sector partners, in creating a common and highly representative voice4, in advocating policy changes, and so on. Among these, the Vietnam Chamber of Commerce and Industry (VCCI), the Hanoi and Ho Chi Minh City Union of Associations of Industries and Commerce (HUAIC), the Young Entrepreneurs Association (YEA) and others are among the most prominent. For the government's part, the ASMED under the Ministry of Planning and Investment (MPI) was established in 2002 as a result of Decree 90 and was authorized to be the focal body for all SME development policies and the overseer of implementation of all government-funded SME support programs as well as the counterpart in Official Development Assistance (ODA) projects and programs in the field. Under Decree 90, a high-level advisory body to the Prime Minister on SME development - the SME Promotion Council - is chaired by the Minister for Planning and Investment and draws its membership from 12 Deputy Minister-level officials, major city/province authorities and associations/professional organizations. ASMED is the Secretariat of the Council. The Provincial Departments of Planning and Investment were also assigned to be the focal agency for local SME development, covering policy works, support programs and periodical updates on local SME status. These government focal points at different level of authority indeed need intensive capacity building before they can (and actually must) "catch up" with the whole matrix of business supporters and can contribute to the differentiation of support service provision within a network of SME support institutions. The network contains those providing sector-based support such as the Provincial Industries Agency under the Ministry of Industry, the Agricultural Encouragement Center under the Ministry of Agriculture and Rural Development, the Trade Promotion Agency under Ministry of Trade, and others, or services of a more generic nature, such as those provided by universities. Table 1 illustrates the present situation of different SME support institutions. While institutions in PDF created with pdfFactory trial version www.pdffactory.com 28 Number 2 Spring 2007VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR Table 1: Groups of SME support institutions in Vietnam Group Institution MandateNature I SME Promotion Council NationalAdvisor to the Prime Minister, public-private representation I ASMED NationalSME policy review, formulation, monitoring, provision of information on business regulations for SMEs and similar responsibilities in business registration, SOE restructuring, domestic investment encouragement, government agency for coordination and facilitation, does not get involved in direct service provision, except in regulatory information I Departments of Planning and Investment at provincial level ProvincialSME policy at local level, support programs at local level and monitoring of SMEs and needs at localities, local level policy coordination, does not get involved in BDS or financial service provision II Sector focused Government Agencies Provincial and National Provincial Industrial Promotion Agencies Provincial Investment Promotion Agencies Agriculture Encouragement Center of the Ministry of Agriculture and Rural Development Trade Promotion Agency under the Ministry of Trade Technical Assistance Centers, ASMED/MPI All agencies in this category provide services to SMEs. III Business Associations National and provincial Of a general nature (VCCI, Young Entrepreneurs, etc.) or sector specific Provision of BDS and advocacy functions IV Private BDS Service Providers and Financial Institutions Throughout the country Training and consulting companies, independent consultants in BDS provision State owned and joint stock banks and leasing companies in financial service provision V Universities and Research Institutions Throughout the country Provision of BDS to SMEs, through some SME Offices or Centers, but mostly via their members acting as freelance consultants for SMEs PDF created with pdfFactory trial version www.pdffactory.com 29Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR Group I are responsible for policies and the facili- tation of market development in SME services, institutions in Groups II to V have functions vary- ing from advocacy to business development serv- ice (BDS) and financial service provision. For a longer vision and stronger commitment from the government, the SME Development Plan placed clear emphasis on the State's creation of "a sound policy, legal and institutional environment that ensures fair competition for SMEs so as to mobilize all internal and external resources for development investment". The Plan also stressed the importance of awareness raising for all-level authorities on the role of SMEs and stated a legal binding where "SME development objectives are also to be integrated into national goals and specific socio-economic goals of every region and locality". In addition, the support from the government is expected to be shifted to indirect support over a period of time. The SME Development Plan has come up with ten major tasks in SME development in the coming years, with seven groups of measures to be taken by line ministries: MPI, the Ministry of Finance, the State Bank of Vietnam, the Ministry of Science and Technology, the Ministry of Natural Resources and Environment, and others. SME support work has developed, to some extent, heterogeneously based both on supply- driven and demand-driven ways. Small enterprises do not want to buy services until there is no other solution, and if they do they try to buy familiar, simple products first. To this end, demand-driven human resources training on request has been by far much more popular than, say, quality management consultancy. Many providers compete in providing supply-driven training services without thinking of moving into other business areas such as developing customized solutions. Presently, the commonly available support services from domestic providers are training, partial consulting, marketing, and so on. Looked at from another angle, in order to maintain a sustainable rate of growth in the economy in view of the diminishing contributions from the under-equitization state-owned enterprise sector, the emerging SME sector, with the majority coming from private sector, have to fulfill the higher-than-ever expectations of the government, the people and the international community. One of the most fundamental ways for the sector to best utilize the resources it receives is through better coordination. 1.3. Other issues Among other significant issues is the SME definition as per Decree 905. It can be observed that the definition issue continues to be a concern in developing countries. The reason for this is that the SME definition determines whether information on SMEs can be collected and used efficiently in the policymaking process targeting at developing, and particularly providing, SME suport (promotion) programs and reforming the business environment in the country. Another remaining issue is that Vietnam's statistics on the number of businesses are collected from various sources, leading to discrepancies. The number of registered enterprises (sole proprietorships, partnerships and shareholding companies) is collected/consolidated by the Business Information Center (BIC) under ASMED and reported by provincial DPIs. However, the system does not yet include sufficient information on the number of dissolved enterprises. The General Statistics Office (GSO) reports about 60%6 of the figure obtained by the BIC. The General Department of Taxation (GDT) is a custodian of the records of tax registrations, which are collected through its provincial tax offices. The number of enterprises reported by GDT normally falls between those reported by the BIC and GSO. Additionally, there is approximately three million economic households that have PDF created with pdfFactory trial version www.pdffactory.com semi-formal status. Although market entry in Vietnam has improved tremendously, bankruptcy proceedings are still complicated and not too well accepted socially7. The government has made significant efforts in encouraging the formalization of semi-formal economic households, without jeopardizing their potential for employment creation. Nevertheless, market entry and exit conditions, the way enterprises are taxed, social insurance and security burdens that would accrue to fully formalized businesses are sensitive policy decisions, and without appropriate information about SMEs such decisions are even more difficult to take. Meanwhile, the SME sector unceasingly develops. The Prime Minister expects that Vietnam will have some 500,000 enterprises by the year 2010. Serving this, many SMEs will be much more difficult for government agencies if they do not have a sound strategic orientation, prepare well at least in-synch with the growth of the enterprise population, and focus their efforts according to targeted policies. 2. The donor community and SME development in Vietnam 2.1. The diversified donor community In recent years Vietnam has become one of the major ODArecipients with an average annual commitment of around USD 2.8 billion between 1993 and 20068, including loans and grant programs. Major multilateral funding agencies include the World Bank (WB), the International Monetary Fund (IMF), the Asian Development Bank (ADB), the International Finance Corporation (IFC), the United Nations Development Program (UNDP), and the European Union (EU), and executing agencies such as the United Nations Industrial Development Organization (UNIDO), the International Labor Organization (ILO), and the International Trade Center. Active bilateral donors are Australia/AusAID, Canada/CIDA, Denmark/ DANIDA, France/AFD, Finland, Germany/GTZ- KfW, Italy, Japan/JICA-JBIC, SNV/Netherlands, Norway/NORAD, Sweden/SIDA, Switzerland/ SDC-SECO, the United Kingdom/DFID and the United States/USAID. Multi-donor trust funds such as MPDF and international non-government organizations such as Oxfam (Quebec/UK/Hong Kong/Belgium) etc.. are also active in Vietnam. Donors have various objectives when funding interventions, including those focusing on SME support. They also differ in the implementation modalities they employ in Vietnam. These two differences result in the need for coordination, although there is a discernible willingness among donors to try to converge around common objectives and similar implementation modalities. Over the last few years most donors have been in transition from the donor-execution modality to a more or less national-execution modality. In most projects/programs, donors used to play a greater role and responsibility, including detailed planning, financial management, recruitment of project staff, etc.. Projects could be implemented quickly with full donor support but were sometimes criticized for using large amounts of resources for international consultants, and qualified as "hard-liners", "inefficient" and " unsatisfactory" (by local beneficiaries) for not being demand-driven. Nowadays, donors are moving away from directly planning a project's detailed activities and trying to strike a balance between their interests and the needs of beneficiaries, as proposed by local stakeholders. Countries and international organizations are more and more withdrawing their representatives' authority (communicated by their signature for funds disbursement) and giving their Vietnamese counterpart agencies more ownership in terms of financial management, but they have retained their cost norms and salary levels and maintained 30 Number 2 Spring 2007VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR PDF created with pdfFactory trial version www.pdffactory.com 31Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR independent, external auditing. This modality has not been too successful unless the local counterparts have had the capacity for implementation, including transparent procedures that would ensure accountability. In most cases, national execution has improved ownership in many ways and the sustainability of projects has been better ensured. Over recent years the donors have brought into Vietnam the concept, the awareness and the lessons of experience about supporting SMEs - an issue of great interest to either developed or developing economies over dozens of years. By supporting different interests, donors vary significantly and can be categorized under a number of categories and sub-categories, such as technical approach, location, counterparts, beneficiaries and sector9. The first and foremost categorization for donor interventions in Vietnam is by their technical approaches. Most interventions can be classified as "business enabling environment", "access to BDS", or "access to finance". Under these broad categories, interventions either come under some sub-categories such as direct support to policies through dialogue facilitation and research, institutional capacity building and policy based lending, or a mixture10. It is worth nothing that, for Vietnam, only a few best practices from donors' technical inter-vention can facilitate SME development due to its cross-cutting nature and the characteristics of individual economic sectors. An interesting shift in recent years can be observed with respect to the "locations" or "levels" where donors have been positioning their inter-ventions. In the 1990s, most donors preferred to deliver their support at central levels and were most likely to be found in the capital of Hanoi. Starting from 2000, a significant number of donors have launched interventions in local levels (provinces). This is in line with the priorities of the government, in that policy formulation should be supported with policy implementation and this mostly happens in provinces in Vietnam. As a result of the shift in focus more towards policy implementation, the coordination of the "location" of interventions has gained in importance. This is best done at the stage when interventions are formulated and requires up-front locality-specific research to be conducted jointly by donors, the government and local stakeholders. In addition to this, some donors, especially bilateral ones and more commercially-oriented interventions, focus more on urban areas where a large number of enterprises can help grow bilateral trade and investment cooperation and where fast-growing firms can receive support and play the role of "economic locomotive" and tug the surrounding areas. Some others, especially NGOs, focus on rural areas with a wide range of beneficiaries and contribute to poverty reduction and hunger alleviation efforts in the most needed and critical areas, not to mention in integrated programs to give support to the disadvantaged beneficiaries such as women and farmers. Some particular interest from the inter-national community does exist in terms of a specific region of Vietnam. More NGOs prefer to work in northern, mountainous areas and north-central Vietnam. Bilateral technological support is popular in the south. Meanwhile, gender-specific support is mostly based in central Vietnam. Regions with clusters have also attracted some level of interest from recent interventions. Main offices of programs providing support with credit facilities are primarily located in the two biggest cities of Hanoi and Ho Chi Minh City, although their interventions are nationwide through their partnerships with Vietnamese financial institutions. Because most donor projects involve capacity building elements, a large number of PDF created with pdfFactory trial version www.pdffactory.com projects entirely focus on or have some components that focus on capacity building for the SME support system, including government agencies at all levels (ASMED, provincial people's committees, DPIs), business associations and service providers. Specialized organizations such as commercial banks and universities/institutes receive technical assistance channeled through specific schemes/ components in some integrated programs11. As a result, the selection of government counterpart agencies for donor-funded projects in Vietnam is rather diversified. For many years, VCCI and the Central Institute for Economic Management (CIEM) have been preferred by donors because of their capacity in implementing their respective professional works as well as in handling multiple projects. ASMED, since its establishment, has been recognized as the "right" government focal point in SME development issues and has become the more common counterpart in SME/PSD projects. Currently, each of these three organi-zations acts as partner in 14% of all projects in the SME/PSD field. Other projects chose a wide range of Vietnamese counterpart agencies/implementing agencies such as ministries/governmental agencies, business associations, mass organizations and so on12. Most of the projects' direct beneficiaries are the private sector or SMEs. Many projects explicitly address or have a clear title incorporating "private sector" or "SME", while others provide support to more closely defined/targeted beneficiaries such as women entrepreneurs, small export companies, ceramics households, pro-poor growth, etc. In line with the trend to move towards policy implementation at local levels, SME donors have also started focusing on sector-specific schemes such as cluster development, subcontracting issues, local economic development and, at a broader level, on value - chain development. 2.2. Donor coordination: legal and institu- tional frameworks and what has been done? Donor coordination in Vietnam has largely been regulated by the followings legal provisions (Box 1). It is worth noting that these documents have covered donor coordination but generally aim to enhance the effectiveness of every single inter- vention rather than to consolidate interventions. The SME Development Plan 2006 - 2010 consolidated many efforts to make a unified national strategy in all issues related to SMEs. The Plan, which plays its role in SME development much like the role of the CPRGS in Vietnam's socio-economic development, is expected to set a common framework for donor intervention. Similar to the case in SME development, the regulatory framework for donor coordination is at a preliminary level. Furthermore, coordination is closely related to the goodwill of partners what- ever the regulatory framework may dictate and is difficult to successfully manage. From an institutional framework angle, the Consultative Group (CG) meetings bring together twice a year participants from the Vietnamese Government and representatives of about 50 bilateral and multilateral donors to Vietnam. These meetings provide a forum for discussions between the government, represented by senior officials from key government bodies including MPI, the Ministry of Finance, and the State Bank of Vietnam, and its development partners on economic policy issues, strategies for reducing poverty, and ODA effectiveness. The CG for Vietnam is co-chaired by the MPI and the Country Director of the World Bank in Vietnam. Decree 131/2006/ND-CP states that MPI "be the focal point of the government in making preparations for annual CG Meetings and international forums on ODA". Over the years the CG meeting has been a 32 Number 2 Spring 2007VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR PDF created with pdfFactory trial version www.pdffactory.com 33Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR regular venue for Vietnamese and foreign players in the field of ODA. Over 20 Government-Donor-NGO Partnership Groups have been formed under the CG to give sectoral focus to inputs and to improve coordination. One of these is the "Partnership Group for SME Promotion and Private Sector Development" (SMEPG), which had its first meeting in April 2000 hosted by donors and started being chaired by ASMED in 2003 after the agency's establishment. The SMEPG aims to ensure donor coordination and the effective use of ODA in support of SME development. On the instruction of MPI, Japan and UNIDO initiated the donors' Box 1: Regulatory framework for donor coordination in Vietnam · Decree 131/2006/ND-CP (promulgated by the government in November 2006) replaced its predecessor, Decree 17/2001/ND-CP (promulgated in May 2001), and issued regulations on the management and utilization of ODA. · Decree 61/2003/ND-CP promulgated by the government in June 2003 regulates the mandates, tasks and organizational apparatus of MPI, states that MPI, in regard to the management of ODA, "acts as a contact body for the promotion, coordination and management of ODA funds" and "leads the preparation and organization of ODA promotion and coordination in accordance with ODA promotion and use strategies and plans". · Decision 603/QD-BKH issued by MPI in August 2003 stipulates the mandates, tasks and organizational structure of MPI's Foreign Economic Relations Department (FERD). This Department acts as a focal point in MPI for ODA coordination and management, inter alia, within the responsibilities of MPI. · Decree 90 stipulates that ASMED is responsible for "implementing international cooperation for SME promotion by allocating and balancing resources and raising external funds for SME assistance". This means the mobilization of ODA support for the SME sector is the responsi- bility of ASMED. · Recent developments in donor coordination principles and practices include the Paris Declaration on Aid Effectiveness released in March 2005, which quoted under its section on harmonization that donors should "work together to reduce the number of separate, duplicative missions to the field and promote joint training to share lessons learned and build a community of practice". The localized version of the above Declaration is the Hanoi Core Statement, which states "the Government further strengthens its leadership role in coordinating aid at all levels" and "the Government of Vietnam and donors work together to share other reviews and carry out more joint reviews". · The revised Vietnam Harmonization Action Plan and the ODA Master Plan incorporated better donor coordination and improvements in other ODA issues for the maximum effectiveness of aid efforts. Source: Compiled by the author. PDF created with pdfFactory trial version www.pdffactory.com contribution in co-chairing the SMEPG with ASMED. Presently, the SMEPG meets twice a year, normally a few weeks before the CG meeting. The co-chairs are selected on a rotation basis among key donors in the field. In an attempt to improve the effectiveness of the SMEPG in Vietnam, it agreed to initiate the establishment of thematic working groups under the Partnership at its June 2005 meeting. These working groups were identified as: business regulatory reform at the central level, local economic governance, BDS, sectoral approaches, SME finance, sustainable business practices, and business research and monitoring. These working groups consist of project management staff and professionals instead of representatives of donors (who are members of the SMEPG) and are seeking ways to improve information exchange, coope-ration and coordination of activities at the level of implementation. Results of work conducted through the thematic working groups are then reported at the next meeting of the SMEPG. In addition to the above initiatives, there have been other attempts that aim to simplify the work of donors in Vietnam and/or reduce transaction costs among donors. The Like-Minded Donor Group (LMDG) is an ad hoc grouping of Hanoi- based bilateral donors (Sweden, Denmark, the Netherlands, Canada, Finland, Norway, Switzerland and the United Kingdom) who are drawn together by a common commitment to use the CPRGS as a framework for ODA planning and delivery. The LMDG is based on a single donor taking the lead with pooled financing, significantly reducing the transaction costs among donors and providing faster and more flexible responses to government. The group of five multilateral and bilateral banks (WB, ADB, JBIC, AFD and KfW) has also been sharing strategies, practices and procedures, as and when possible, in implementing common financial projects in Vietnam. Recently the EU worked on a common strategy titled "EU Action Plan for Harmonization of Aid in Support of Private Sector Development", which provides recommendations to be used for all member states for better efficiency in implementing development cooperation projects in Vietnam. As mentioned earlier, for its part, ASMED is the sole government body taking responsibility for SME development, including the task of being the focal point and counterpart in donor-funded projects/programs in the SME field. Established in 2002 and restructured in 2003, ASMED now has seven divisions, three centers and a staff of around 70. The International Cooperation Division, which specifically deals with external relations issues, including donor coordination, has four staff members. Statistics show that ASMED is the national partner in 14% of 58 projects that are currently active or have just finished in the field of SME promotion/PSD13. In every brainstorming or fact- finding working session with donor representatives and consultants, ASMED has welcomed initiatives with a strong emphasis on the need for aid coordination, particularly in terms of location. Orientation has always been provided at an early stage in project formulation regarding the latest priorities in government policy towards the development of the SME sector. At every major donor event, ASMED has continuously conveyed the message of improved donor coordination. Since its establishment, ASMED has chaired the SMEPG meetings with two co-chairs representing the donors. At every SMEPG meeting, ASMED reported on the current status of SME development in Vietnam and clearly stated the government's priorities to an audience of more than 50 representatives from all major Hanoi- based donors/projects in the SME field. ASMED and some major donors initiated and realized the idea of dividing the SMEPG into thematic working groups under this partnership in order to have more 34 Number 2 Spring 2007VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR PDF created with pdfFactory trial version www.pdffactory.com 35Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR specialized cooperation among donors and to get out of the usual time-consuming, less-efficient information exchange by presentations at the meetings. For ASMED-implemented projects listed in Table 2, within the scope of its coordination function, ASMED has facilitated donor coordi- nation in some areas, specifically: · By location, for example, provinces involved in the DANIDA, EU, GTZ and UNIDO program are different. · By technical approach, for example, all SME programs being implemented by ASMED have been requested to collabo- rate with the government-funded Comprehensive Support Program for Human Resources Development for SMEs, when implementing their training components. · By counterpart and beneficiaries, apart from providing recommendations for the best possible subjects in these fields, ASMED has recommended the invol- vement of many relevant agencies while maintaining the focus on capable partners and aid recipients that need more attention. · Regarding sectors, ASMED supports all sector-based initiatives that aim to enhance the competitiveness of the selected sectors given the fact that Vietnam is in the process of deepening its international economic integration. In particular, sectors in which Vietnam has advantages are strongly encouraged. Bearing in mind that, during the process of coordination, developing SMEs is a new task for government agencies, so much capacity building is needed for the support infrastructure at central and local levels. Also, donors are expected to respond to government needs and priorities, at the same time sharing information and discussing with each other before formulating project documents when starting their programs and undertaking initiatives. Donors are discouraged from setting up many and new intermediary structures so that the target beneficiaries (SMEs) can draw more of the benefits. Overlaps and duplication are guaranteed to not occur and gaps are filled in SME development. In most cases, joint efforts are mobilized for best achievements in implementing prioritized work. Finally, it is expected that with the nationally owned (i.e., not dominantly consultant-owned) SME Development Plan 2006 - 2010, ASMED and the donor community will try their best to align or to unify donor support towards the government's priorities. Some donors, including the EU, have agreed with this approach14. However, there is still much to be done in the course of donor coordination. For example, the government-promulgated CPRGS was to be the most comprehensive document providing a common framework for donors, listing the priorities and emphasizing the need for coordination for maximum aid effectiveness in Vietnam. Nonetheless, this does not mean that everything is going well based on the government's priorities. From the government's point of view, it is realized that donor coordination is sometimes very difficult, particularly when the government wants to focus on one area supported by one or a group of donors, but other donors may not be willing to contribute to an area already populated by other donors and may seek their own specific field. Similar to the CPRGS, the SME Development Plan 2006 - 2010 sets the framework for donor coordination in the field of SME Development in Vietnam. While this Plan identifies the priorities, much coordination will be needed in finding common ground and under-standing in implementation practices. A good example is the issue of subsidies in the facilitation of BDS (full or partial subsidies, exit PDF created with pdfFactory trial version www.pdffactory.com 36 Number 2 Spring 2007VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR Donor/project Amount of funding Intervention purpose Time frame ADB SME Development Program Loan (SDPL) and its technical assistance projects. Two co-financiers are France's AFD and Germany's KfW USD 80 million EUR55 million co-funding Supporting ASMED and other line ministries in fulfilling policy conditions to improve the business environment in order to obtain the loan 2005-2008 DANIDA Business Sector Program Support (BSPS) USD 35 million An integrated intervention by addressing the provincial business environment, improved working conditions in four target provinces, global competitiveness of the business sector, commercial conflict resolution, and business research in its five components 2005-2008 EU Vietnam Private Sector Support Program (VPSSP) EUR 9 million Two-fold intervention - two business incubators in two largest cities and business environment enhancement in nine provinces 2004 - 2009 GTZ SME Development Program EUR 8.3 million Extends GTZ support over the past ten years for Vietnam's SME sector by focusing on SME policy, local economic development in four provinces, and advanced testing services for materials 2005 - 2009 Vietnam - India E n t r e p r e n e u r s h i p Development Center USD 200,000 Training and developing entrepreneur training in Vietnam Starting 2005 JICA Dispatching experts to ASMED and providing technical support to ASMED's Technical Assistance Center for SME in Hanoi Since 2003 UNIDO capacity building project (funded by Italy and Finland) titled "Assistance to Establish National and Provincial SME Support Infrastructure" USD 3.81 million Strengthening ASMED's organization and its institutional linkages with central level agencies as well as with five selected provinces. 2004-2007 (first phase) Table 2: Projects implemented by ASMED (in alphabetical order) PDF created with pdfFactory trial version www.pdffactory.com 37Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR strategies, etc.), and many other examples may be found in the policy advice provided for improving the business environment. For instance, should Vietnam abolish as many of its existing business licenses as possible or should it first try to improve the transparency of the process, through which licensing regulations are issued. Another fact is that, after one and half years operating, the SMEPG and its thematic working groups, the focal points of these sub-groups are proposed to merge into six instead of seven, as originally designed. Representatives of donors/ practitioners indicated their own shortcomings in being unable to provide staff to attend all sub-group meetings. Interestingly, donor groups or projects that provide support for SMEs possess some of the characteristics of SMEs: having limited resources and a requirement to prioritize their actions. It is likely that ASMED, as the key player in the field, will closely collaborate with donors to work out an appropriate modality and to flexibly adjust the existing mechanism for the sake of players in the SME support arena. Some may also raise questions on how efficient donors are in trying different types of intervention to support the SME sector in Vietnam, before donor coordination could even be touched upon. And what if most (or many) actions taken by donors in Vietnam do not turn out to be successful and effective? Is it the case that efforts put on donor coordination could be saved for a more in-depth study on how best to deliver the assistance? These questions are relevant to some extent in a country like Vietnam, where SMEs are still in a nascent stage and the task of developing the sector is rather new to the government. But, again, given the cross-cutting nature of SME, these interventions are mostly necessary given the similar challenges faced by many other countries and they will bring an unforeseeable benefit in the long run. Therefore, coordination is absolutely essential in pooling the valuable resources. There may also be a question regarding who should better lead aid coordination. The questionnaires collected by the Mekong Economics for Common Development Framework Evaluation Secretariat in 2002 revealed that donors had different points of view towards this issue, and that the reality showed different levels of success by both government and donors in leading the coor-dination in some sectors15. There are indeed quite a few of players in the field of "donor coordination" itself (like the numerous institutions supporting SMEs), so the issue here is that each player had better focus on their own advantages, with a focal role given to one player so that duplication will also be eliminated in the field of "coordinating donor coordination". 3. Policy recommendations For more effective donor coordination in the coming years, the following recommendations should be taken into account by both government and donors. For the Government · The government should come up with a unified SME strategy (such as the SME Development Plan 2006 - 2010) with a clear, strong focus on donor coordination in line with increasing aid effectiveness. This will facilitate much of the government work and will likely be appreciated by the donor community. · To facilitate the simplest form of coordi-nation, relevant information should be made public for exchange with easy access, preferably through the Internet. This can reduce much time and provide early notification of new initiatives. · In parallel to orientating donors' resources to fit its priorities, the government should PDF created with pdfFactory trial version www.pdffactory.com consider its alignment for harmonizing with international best practice for utilizing ODA and other financial assistance in order to minimize transaction costs for both the government and donors. · The government may not need to intervene too deeply into the works of donors. General guidelines in the field of donor coordination may yield better results than "forced direction" in coordination, since donors also follow market rules and it is better for the government not to entirely rely on donors' resources. For Donors · It is crucial to avoid the coordination of coordination in the SME field and get straight to the point. As mentioned earlier, in Vietnam there are three playing fields with virtually the same purposes hosted by different organizations: the SME Partnership Group by ASMED, the Sectoral Working Group by the EU for its Member States, most of whom have bilateral programs and are members of the SMEPG, and the PRSC Sectoral Working Group by the WB. Much coordination work can be done through these three forums, but hopefully not spending triple the amount of time in the three forums, as is the current practice. · Coordination at preliminary stages, through joint programming, joint research, etc. is always better than trying to coor-dinate when projects start full-scale implementation. This should be only too obvious, since changing approved documents and work plans is always more difficult than making amendment to draft papers. · The thematic Working Groups set up under the SME Partnership Group with regular (bi-monthly or so) meetings that incor-porate and collaborate at the grass roots level all activities done by different SME-related programs/projects have helped coordination to go beyond information sharing to more technical cooperation. Such an initiative (establishing thematic working groups) is needed for more in-depth coordination. · Coordination could be much better if it transformed into a more practical concept - cooperation. This is rather one job for two (and more), not two (or more) jobs to be done at the cost of many. Achieving better-coordinated cooperation is always mentioned at SMEPG meetings. · If donor policy can move toward national direction and fully (or highly) reflects their willingness in meeting the prioritized needs of the government, donor resources plus national resources with minimized transaction costs and joint expertise can yield a much better results. · Last but not least, it really would be the best thing if the need for coordination had to be mentioned less and less, and every stakeholder agreed and practiced coordi-nation before taking action in the SME field. r Notes: 1 Statistics from the Business Information Center, ASMED, MPI 2 First draft, "SME Development Plan 2006 - 2010", ASMED, MPI, 2005. 3 "SME Roadmap", ADB PPTA - Preparing the SME Development Program Loan. 4 "Business Associations in Vietnam: Status, Roles and Performance", Private Sector Discussion No 13, MPDF and Asia Foundation, 2002. 5 Comments taken during the drafting of the SME Development Plan 2006-2010. 38 Number 2 Spring 2007VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR PDF created with pdfFactory trial version www.pdffactory.com 39Number 2 Spring 2007 VIETNAM ECONOMIC MANAGEMENT REVIEW ECONOMIC POLICY DEBATE Donor Coordination in SME Development In Vietnam:...VEMR 6 "Beyond the headline numbers: business registration and start-ups in Vietnam", Private Sector Discussion Paper No 20, MPDF, 2005. 7 "SME Roadmap", ADB PPTA - Preparing SME Development Program Loan. 8 Author's calculations based on figures obtained from the Development Assistance Database, date of log-in 27 March 2007. 9 The classification is based on that in "PSD in Vietnam: an analysis of potential gaps and conflicts in donor interventions", a paper prepared for MPDF and ASMED, 2005. 10 For example, European donors favor supporting measures to improve the business environment, while Japanese donors prefer direct technical support to Vietnamese partners. 11 Some donors such as ADB, USAID, and JBIC have contributed to strengthening the capacity of some commercial banks within the framework of several grant programs, for instance by providing training courses in SME loans appraisal, enhancing SME lending through two-step loans, etc. 12 The analysis on counterpart selection is largely based on that in "PSD in Vietnam: an analysis of potential gaps and conflicts in donor interventions", a paper prepared by MPDF and ASMED, 2005. 13 "PSD in Vietnam: an analysis of potential gaps and conflicts in donor interventions", a paper prepared by MPDF and ASMED, 2005. 14 "EU Action Plan for Harmonization of Aid in Support of Private Sector Development", prepared for EU member states by TDI Group Ltd., 2005. 15 "Government-Donor relations in Vietnam: Changes and Trends", a study done by Mekong Economics Ltd. for the Common Development Framework (CDF) Evaluation Secretariat, June 2002. References: n Agency for SME Development (ASMED) (2006). "SME Development Plan 2006-2010", Ministry of Planning and Investment, 2005-2006. n Asian Development Bank (ADB). "SME Roadmap", ADB TA 4031-VIE, Preparing the SME Development Program Loan. n Asia Pacific Economic Cooperation (APEC) (2002). "Profile of SMEs and SME issues in APEC 1990 - 2000", SME Working Group (SMEWG) and Pacific Economic Cooperation Council (PECC). n Common Development Framework Evaluation Secretariat (2002). "Government-Donors rela- tions in Viet Nam: Changes and Trends", June. n Decree 131/2006/ND-CP on ODA management. n European Commission (EC) Delegation in Vietnam (2005). "EU Action Plan for Harmonization of Aid in Support of Private Sector Development". n Mekong Private Sector Development (MPDF) (2005), "Beyond the headline numbers: business registration and start-up in Viet Nam", Private Sector Discussion Paper No 20.MPDF and ASMED (2005). "PSD in Viet Nam: an analysis of potential gaps and conflicts in donor interventions" n MPDF and Asia Foundation (2002), "Business Associations in Viet Nam: Status, Roles and Performance", Private Sector Discussion No 13. n SME Development Plan 2006-2010, Prime Minister's Decision, 2006. n Statistics Data from Business Information Center, ASMED, MPI. PDF created with pdfFactory trial version www.pdffactory.com