Starting a Business

• Olin McGill and Dang Quang Vinh, Ph.D.• APEC Technical Assistance & Training Facility (TATF)

• October 28, 2013

• Ha Noi

Vietnam Stakeholder Roundtable:

Workshop Overview:

1. Introductions

2. WB Start a Business scoring

3. Lessons Learned globally in regulatory efficiency reforms

4. Going Beyond Doing Business

5. Conclusion: Setting Priorities

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1. Introductions:

• Purpose – APEC Initiative:– APEC initiative: By 2015, 25% Easier, Faster & Cheaper in

Starting a Business, Getting Credit, Enforcing Contracts, Trading Across Borders, Dealing with Construction Permits

– Gather information about problems and priorities in SAB

• Participants:– Who we are, What we do, Our biggest SAB issue

• Doing Business and SAB indicator:– Where Vietnam stands and why it matters

3

Vietnam on DB 2013: 99th of 185

DB 2012 RANK Average PC GDP (2011)

1 – 30 $36,923

31 – 60 $22,986

61 – 90 $10,484

91 – 120 $5,437

121 – 150 $2,241

151 - 183 $1,950

Vietnam GNI Per Capita: $1,270 – DB 2012$1,400 – DB 2013

X

GNI Per Capita Over Time

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Vietnam’s DB 2013 SAB Performance

Starting a Business -- DB 2013

Indictor Score Rank / # Tied

Procedures 10 146/13

Time (Days) 34 139/2

Cost (% of income per capita)

8.7 76

Paid-In minimum capital

0 1 (91)

Overall 99

Vietnam Lags in New Biz Starts

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CountryIncome

per Capita

Cost as % income per

capitaCost

New Start Rate

Vietnam (99) $1,260 8.7% $110 3.0

Malaysia (54) Nominal $8,420

15.10% $1,2712.5

Malaysia Actual 8.2% $690

Hong Kong (6) $35,160 1.90% $668 19.2

New Zealand (1) $36,648 0.40% $147 17.1

Singapore (4) $42,930 0.60% $258 7.4

2. DB Start a Business scoring

• The hypothetical new company

• Review DB scoring of Vietnam– Is it accurate?– What can we streamline?

• Identify SAB priorities

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The Hypothetical New Business:

• Limited liability company (or its legal equivalent). Operates in the economy’s largest business city.

• 100% domestically owned and has 5 owners, all people• Start-up capital 10 times income per capita, paid in

cash.• Performs general industrial or commercial activities• Leases the commercial plant and offices and is not a

proprietor of real estate.• Not qualified for investment incentives or any benefits.• Has 10 to 50 employees 1 month operations start• Has a turnover of at least 100 times income per capita.• Has a company deed 10 pages long.

DB Scoring – Part 1

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# Procedures Days Costs

1

Check the proposed company name; obtain business registration certificate and tax registration certificate from the local business registration office under the Dept. of Planning and Investment

14 days 200,000

2 Make a company seal 6 days165,000 370,000 for bronze

3Registration of the seal sample at the Police Department

1 day 20,000

4 Open a bank account 1 day no charge

5Publish announcement in a daily newspaper

5 days 700,000

DB Scoring – Part 2

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# Procedures Days Costs

* 6 Pay business license tax 1 day1,000,000 (business license tax)

* 7Buy pre-printed VAT invoices from the Municipal Taxation Department or obtain self-printed VAT invoices

10 days200,000 per book

* 8

Register with the local labor office to declare use of labor (Municipal Department for Labor, Invalids and Social Affairs).

1 day no charge

* 9Register employees with the Social Insurance Fund for the payment of health insurance and social insurance.

1 day no charge

* 10

Register for trade union with Vietnam General Confederation of Labour

7 days no charge

3. Global Reform Lessons Learned

• The Staggering Costs of Inefficiency

• Lessons from DB and Georgia:– Ruthless transactional efficiency– Aggressive incrementalism

• Efficiency, Investment & Growth

• Quantifying Costs of Inefficiency

• Efficiency & Transaction Volumes & Values

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Mongolia Meat Exporters CrippledAgency Purpose Required Documents

Mongolian Taxation Agency To certify meat exporter doesn’t owe taxes - Copy of State Registration Certificate

MNCCI Certificate of Origin

- Copy of State Registration Certificate- Copy of Sales Contract- Invoice- Packing list

GASI and the Central Laboratory

test results

- Copy of Certificate of Origin - Copy of State Registration Certificate- Copy of Sales Contract- Application form

GASI Conformity Certificate

- Copy of State Registration Certificate- Certification of Origin- Test Results- Invoice - Application form

NARTAM & Railway Admin. CMR transport documentation- Copy of Sales Contract- Copy of State Registration Certificate

MCGA customs clearance

- Sale of Goods Contract- Copy of State Registration Certificate- Conformity Certificate- CMR- Certification of Origin - Taxation Certificate- Export Certificate

What can DB and Georgia Teach Us?

15Small, incremental changes boost Georgia from 112th to 11th in four years

Impacts on GDP of Top 10 Trade Times

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Economy Rank2010 GDP (Millions)

Days Export

Top 10

Average Increase

Days Import

Top 10

Average Increase

Total GDP

Increase

Chile 62 203,443 21 -14 10,538 20 -13 5,554 16,092

Indonesia 39 706,558 17 -10 46,633 27 -20 26,849 73,482

Malaysia 29 237,804 17 -10 26,158 14 -7 12,984 39,143

Mexico 59 1,039,662 12 -5 48,864 20 -13 45,953 94,817

Peru 56 153,845 12 -5 2,538 17 -10 1,639 4,177

Philippines 51 199,589 15 -8 12,135 14 -7 7,125 19,261

PNG 99 9,480 26 -19 251 29 -22 719 970

PRC 60 5,873,629 21 -14 657,846 24 -17 259,614 917,461

Russia 160 1,479,819 36 -29 163,076 36 -29 52,412 215,488

Thailand 17 318,847 14 -7 19,195 13 -6 5,165 24,360

Vietnam 68 103,572 22 -15 11,963 21 -14 15,370 27,333

Totals   10,326,248     999,198     433,386 1,432,583

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EconomyPopulation

(Thousands)

% Working (15-64)

Unskilled (20%)

(Thousands)

New Jobs in Export

New Jobs in Import

Total New Jobs for Unskilled

Chile 17,114 69 2,348 52,595 125,148 177,744

Indonesia 239,871 67 32,335 808,375 2,004,770 2,813,145

Malaysia 28,401 65 3,686 328,054 286,402 614,456

Mexico 113,423 65 14,654 293,080 858,759 1,151,839

Peru 29,077 64 3,716 15,921 89,184 105,105

Philippines 93,261 61 11,359 381,662 469,127 850,789

PNG 6,858 58 798 11,001 112,095 123,096

PRC 1,338,300 72 193,786 10,038,115 13,177,448 23,215,563

Russia 141,750 72 20,469 1,127,842 2,433,764 3,561,606

Thailand 69,122 71 9,760 225,456 169,824 395,280

Vietnam 86,937 70 12,241 1,083,329 2,433,511 3,516,839

Totals       14,365,430 22,160,032 36,525,462

New Jobs from Top 10 Trade Times

Calculating Traders’ Opportunity Costs

Reductions in time to trade across borders

• Import: from 52 days to 13 days = 39 days saved

• Export: from 54 days to 10 days = 44 days saved

15% = average annual opportunity cost

0.04% = average daily opportunity cost

Savings to traders:

• Import: 39 days X 0.04% X $4.4 billion = $68.6 million

• Export: 44 days X 0.04% X $1.1 billion = $19.4 million

With same capital, trader can do

• 6.75 deals a year at 54 days (365/54)

• 36.5 deals a year at 10 days (365/10)

• Lejava’s First Law: Government should never ask a citizen or business for info it already has.

• Corruption is a technical issue: Every interaction between business and government is an opportunity for corruption. Eliminate every interaction we can.

• Simplicity is Power: Streamline and automate everything. (Control and compliance will both increase.)

Vakhtang LejavaFormer Chief Adviser to the Prime MinisterGovernment of Georgia

Ruthless Transactional Efficiency:

Aggressive Incrementalism:

• “A poor transitional country with no capacity to do anything needs poor transitional laws.”

• Eliminating agencies with no capacity to do their jobs can’t make things worse

• Fix what we can today, every day. Kakha Bendukidze

Former State Minister of Reforms Coordination

Georgia’s Results - 2006 - 2009

• GDP increased 65%• Tax collections increased 121%• FDI increased annually 7 – 20%• 50% increase in total trade turnover• 67% increase in registered businesses• 464% increased in registered individual entrepreneurs• 50% increase in construction sector employment, 65%

increase in salaries• Total deposits grew 34% annually, from $535 million to $2.5

billion (467%)• Private credit grew 39 % annually, from $533 million to $3.1

billion (582%)• Construction lending grew 43% annually, from $28 million to

$195 million (696%)• Mortgage lending grew 66% annually, from $72 million to

$546 million (758%)

Georgia: Efficiency Savings Fuel Growth

$744 million

Annual Savings

to Business and

Government

Annual Return

on USAID’s

Four Year

Investment

-- $57 to $1

• Based on methodology by The Netherlands to quantify administrative burdens on business.

• Monetizing Benefits v. Quantifying Costs

• Benefits /Costs to business = Costs X Quantity

Costs = financial (fees, bribes(?), etc.) + compliance Quantity = number of businesses X frequency per year

• Benefits/Costs to government = Administrative Savings

Savings = hourly rate of gov’t worker X hours saved

Other = rental space, storage space, retrieval time, etc.

Quantifying Costs of Inefficiency

Georgia Business Registry Archives

Unified Business/Tax Registration

1. 92 GEL = average daily net profit of businesses in Georgia * 43,000 business registered annually * 5 days saved by new procedures = 19.78 million GEL

2. 1 day of accountant/lawyer work saved * 45 GEL average daily salary = 1.935 million GEL

3. 22 Tax Department personnel reassigned * 4,500 GEL average annual salary = 99,000 GEL

Total annual savings = 21,814,000 GEL or $ 12.4 million.

Registrations Nearly Double

40,916

77,778

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Taxpayers registered inSeptember 1, 2004 - August

31, 2005

Taxpayers registered inSeptember 1, 2005 - August

31, 2006

Simplified Registration of Individual Taxpayers

1. 11 GEL = average daily salary * 78,000 annual individual registration * 1 day saved by new procedures = 858,000 GEL

2. 5 GEL notary fee eliminated * 78,000 annual individual registrations = 390,000 GEL

3. 0.50 needed to serve each applicant * 78,000 annual applications * 18 GEL average Tax Department employee salary = 88,000 GEL

Total annual savings = 1.336 million GEL or $763,500 USD.

Registrations Increase 4X

7,114

28,077

0

5000

10000

15000

20000

25000

30000

Natural Persons registered in April, May, June (25 days) of 2006

Natural Persons registered in July, August, September (25 days) of 2006

Mongolia’s SAB Reforms

• 220,456,633 – Registration at Tax Office Eliminated*

• 473,862,935 – Notary Requirements Reduced*

• 54,311,442 – GASR reviews reduced from 3 to 2

• 748,631,010 – Total Savings ($448,282) – 03-09/2013– 694,319,567 – Total Savings for Business– 54,311,442 – Total Savings for Government

Business Savings 12.8 Times Government Savings

4. Going Beyond Doing Business

• Why do so many businesses stop, fail, or “disappear”?

• Why so many JSCs, and so few one-shareholder LLCs?

• What are biggest non-compliance issues?

• How to address Business Registry Office resource issues?

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5. Conclusion

Setting Priorities:– Obey Lejava’s First Law?– Empower business start-up professionals?– What else?

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