The Asian Development Bank (ADB) will help create an enabling business environment to support the development of small and medium enterprises (SMEs) in Vietnam through a US$100 million loan.

The loan agreement, signed between ADB and the Government of Vietnam in November, is ADB's first policy loan in Vietnam designed specifically to promote an environment conducive to SME sector development. It 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 SME's 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, Senior Financial Sector Specialist of ADB's Mekong Department. "The traditional approach to assisting SME development by addressing funding and technical gaps through subsidised credit or services has achieved mixed results. Therefore, SME-support programs are increasingly shifting to improving the business environment".

SMEs in Vietnam are defined as establishment with a registered capital below VND10 billion (about US$670,000) or with less than 300 annual permanent employees. SMEs comprise more than 90 per cent 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 per cent, but the economy is still dominated by the State sector. Like many developing economies in transition, key policy, legal, and institutional frameworks in support of business operations have yet to be completed. A policy bias favouring public sector entities also prevails.

Formulated after in-depth analysis and thorough discussions with the Government over nine months, the project will help maintain the momentum of reform in streamlining business registrations 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 inter-ministerial action programme 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 through the development of an SME accounting system, and increasing the effective use of collateral such as land use rights certificates.

Since many SME surveys in Vietnam 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. It will also help disseminate information on land use planning and zoning.

The project loan is divided into two back-to-back subprogrammes. The first subprogramme, to be undertaken from November 2004 to May 2006, will be financed by a US$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 at 1 per cent per annum during the grace period and 1.5 per cent per annum thereafter.

The Ministry of Planning and Investment will implement the project.

• Quynh Chi

(Source: Asian Development Bank)