Assessment of the success of projecte Government of Vietnam''s capacity for external debt management

MID TERM REVIEW PROJECT OF THE GOVERNMENT OF VIET NAMVIE 10/010: CAPACITY DEVELOPMENT FOR EFFECTIVE AND SUSTAINABLE EXTERNAL DEBT MANAGEMENT Executive Summary Objective of Mid-Term Revie

MID TERM REVIEW PROJECT OF THE GOVERNMENT OF VIET NAM

VIE 10/010: CAPACITY DEVELOPMENT FOR EFFECTIVE AND

SUSTAINABLE EXTERNAL DEBT MANAGEMENT

Executive Summary

Objective of Mid-Term Review

The objective of the review is to assess the likely success of VIE 10/010 inmeeting its goal of strengthening the Government of Viet Nam’s capacity for external debt management

Sub-Objective 1: Strengthening the institutional and legal framework for

effective and sustainable external debt management

Interpreted literally, this objective has not yet been met and perhaps will not be met by the end of VIE 10/010 The Decree 90 (1998) still has not been revised in order to be consistent with the new State Budget Law, which makes the Ministry of Finance responsible for external debt management Organisational measures in the External Finance Department to strengthen management of the debt database have yet to be prepared

However, interpreting this objective more broadly, and in accordance with the understanding of this objective by the Deputy National Project Director, the capacity to strengthen the institutional legal framework has been strengthened The initial impetus for this has been the report produced by VIE 10/010 on the institutional and legal framework covering external debt management and

associated workshops for the staff in the technical working group covering this area, and a study tour abroad The report was well-received by the beneficiaries and the national counterpart staff The team is satisfied with the quality of the report and the associated workshops and study tour

A task force has been formed to revise Decree 90 (1998) The process has been slow, however, and the revision is still in first draft stage after several

months of work, the reason being differences in interpretation of the new State Budget Law and the differing perspectives of the participating agencies

Nevertheless, whatever the outcome, it is an achievement that the

representatives of the different agencies are sitting down together and discussing the appropriate legal and institutional framework The issue is also now receivingattention from the policy making bodies in government

Subobjective Two: Strengthening the capacity to formulate public external debt strategy including preparing portfolio reviews, reviewing and updating the

existing draft strategy documents and strengthening the capacity for managing and monitoring non-government external debt.

Capacity has been strengthened in this area through workshops, training and a study tour abroad arranged by VIE 10/010, along with reports on debt portfolio analysis and non-government debt produced by the Project, which were well received by the beneficiaries The Team considers the reports to be of high quality A workshop in February, 2004 on the debt sustainability analysis

software selected by the project was well-received Shortcomings in the database precluded a portfolio review based on actual data, however, and therefore

precluded the development of a revised debt strategy

Whether an actual debt portfolio review takes place before the end of the project and the debt strategy accordingly reviewed will depend largely on whetherthe database is finalized and whether further training will take place, as discussed below Some of the recommendations of the report on non-government debt have implications for the future of DMFAS in SBV; these are discussed below

Subobjective Three: Strengthening the capacity for external debt management in areas with strong fiscal links (such as guarantees, on lending, non-government public debt, and debt service) and in relation to international capital markets

Capacity has been strengthened in this area with the help of a report produced under VIE 10/010 and associated workshops, training and a study tour abroad Beneficiaries in the technical working group covering this area viewed the report and training very favourably in terms of their increased awareness of the importance of understanding the possible adverse fiscal implications of

government guaranteed debt and government on lending The team also

considered the quality of the reports, training and study tour to be high The

report on fiscal links has given added impetus to finalizing the DMFAS database

in External Finance Department through entering data on government guaranteed loans and on-lent loans

The further training being planned by the Project covering risk analysis, credit risk analysis in particular, and portfolio analysis will strengthen the

likelihood of sustainable increase in capacity in this area For example, credit riskanalysis would help determine the appropriate size of a guarantee fee

The preparation of the report was originally scheduled for 2003, but work

did not begin in early 2004, resulting in the report not being finalized until June

At the time of the MTR, the PSC had not reviewed the report’s recommendations (e.g the guarantee fee should be related to risk) To help ensure that the

knowledge gained is used it is important that the recommendations of the report should be quickly reviewed by PSC and decisions made on their implementation Implementation depends partly on changes in the regulatory framework (e.g to allow for linking the size of the guarantee fee to risk), so progress in this area is linked to progress towards achieving sub- objective one

Subobjective Four: Strengthening the capacity to collect, store, process and report on external debt related information, including finalizing and integrating existing DMFAS databases and improving the external information situation regarding external financial data.

Having a comprehensive, accurate and up to date database is a necessary foundation for good external debt management Progress on achieving this objective was made during 2003 with the help of technical support and training missions from UNCTAD under the terms of VIE 10/010 Progress picked up markedly in recent months following the return to EFD of a skilled staff member seconded to UNCTAD as an intern under VIE 10/010 He, and two national consultants contracted under VIE 10/010, have been able to finalise the bilateral debt database, and the guaranteed loan database The multilateral debt database isexpected to be finalized towards the end of 2004 Finalising the on-lent loans database is taking longer, but nevertheless is expected to be substantially finished

by the end of 2004

UNCTAD will continue to support DMFAS in EFD after the end of VIE/10/010, so the sustainability of DMFAS is reasonably assured UNCTAD will upgrade DMFAS to Version 5.3 and has recently negotiated a maintenance agreement with EFD, thus institutionalizing UNCTAD’s assistance to Ministry of Finance

On the government side, the management in EFD needs to focus on ensuring that staff is diligent in keeping the database up to date To achieve this, the EFD should ideally be reorganized in line with international best practice, with a “back office” established, its duties including maintenance of the data base

The Ministry is giving serious thought to this idea and UNCTAD has indicated its readiness to provide assistance Reorganization takes time, however, so, in the short term, it is up to management to ensure diligent attention to the database The returned intern can continue to play a strong role in training and support The EFD should consider retaining the services of the two consultants following the end of the project

Finalising the DMFAS database in SBV is proving to be harder work Substantial progress in incorporating all enterprise data into the system was made during 2003 and this year, with technical support and training from UNCTAD, butnevertheless over 100 enterprise loans have yet to be validated The process is time consuming due to the sheer volume of loans (1600), the quarterly reporting requirement and the continual changing of loan conditions which require

reentering the main parameters into the system

To ease the burden on staff of External Debt Management Division in SBV of maintaining DMFAS, SBV suggested that the MTR team look into the pros and cons of extending DMFAS into provincial branches of SBV, on the grounds that most enterprises report their external debt transactions to these branches The team accordingly visited the SBV branch in Ho Chi Minh city andthree enterprises The Team’s view, however, is that installing and maintaining DMFAS in the branches would be costly and time consuming

In order to determine whether it is worth installing DMFAS in major SBV branches, the Team considers that the whole rationale underlying detailed

reporting by enterprises on their external debt first needs to be reexamined by GOV For macroeconomic and monetary policy making and monitoring

purposes, such detail is not necessary and simpler software packages could be used; alternatively, DMFAS could be used to capture large loans only The risks

of a financial crisis similar to that in other Asian countries in the late 1990s are probably low, given conservative macroeconomic policies, improving prudential central bank supervision of commercial banks, the programme to reform state owned enterprises, the regulatory and monitoring regime governing foreign direct investment, and the continuing restrictions on the capital account of the balance ofpayments

Sub objective Five: Strengthening of human resource capacity for effective and sustainable external debt management.

The reports produced under VIE 10/010, along with the associated

workshops, training and study tours, have increased knowledge, skills and generalawareness of the issues The beneficiaries and staff of the agencies met by the MTR team all testify to this Further technical training planned for the remaining life of VIE 10/010 will further enhance capacity Awareness amongst senior officials in government and the National Assembly has taken some time to

develop, but the recent High Level seminar indicates that it is developing The

Committee for Economic and Budgetary Affairs (CEBA) has, over the past year, begun to exert a much stronger legislative oversight on fiscal policy and

management and this oversight is likely to extend into debt management This oversight will help to induce top policy makers in Government to pay more attention to debt management issues The Research Council in the Prime

Minister’s Office is also taking a stronger interest, as is the Cabinet Office, a representative of whom was a member of the technical working groups under VIE10/010 Representatives of these bodies attended the high level seminar

organized by the Project on August 5

The question of sustainability arises, however No progress has been achieved yet on building capacity to sustain the training effort One of the main components of the Fellowship Programme under the Project is the selecting of key individuals for tailor-made training in debt management This also has not been done The other main component is the building of capacity in domestic institutions to run courses in debt management In this way, new staff in Ministry

of Finance and other agencies can learn about debt management and take over from existing staff who move on in their careers It is important for the

sustainability of the results of VIE 10/010 that Government attempts to reach an arrangement over the remaining life of this project with a domestic institute to provide such courses; such an arrangement might include the contracting of an external institute to build capacity in the domestic institute

Implementing the recommendations of VIE 10/010

VIE 10/010 has made several recommendations on improving debt

management, but few have been implemented yet This is partly due to delays in preparing two reports (fiscal links and non government debt), which were not finalized until July 2004 It is now up to the Project Steering Committee to discuss the recommendations and decide which ones to adopt, perhaps in

modified form

Constraints faced by VIE 10/010 and Lessons Learned

The project got off to a slow start due to delays in recruiting international consultants The logistical problems associated with coordinating the activities

of the consultants, the activities of six technical working groups and arranging meetings of the Project Steering Committee (and comments from the PSC on reports) have also led to delays in implementation The team is satisfied with the quality of the project management

The main lesson to be learned is clearly that the more complex the

structure of a project, the greater the logistical challenge of managing the project and the greater the chances of things going wrong Considering the coordination challenges faced by the project management, leading to slippage in activities in

2003, the project management has done a good job in accelerating the pace of project implementation during 2004

 EFD management to determine how to ensure more allocation of

manpower to the maintenance of DMFAS;

 UNCTAD mission in August determines best way for MPI and SBV to access EFD DMFAS on a read - only basis and identifies need for

procedures manuals in addition to the DMFAS system manual

 The Project prepares a procedures manual for the establishment of a back office in EFD and other assistance in this regard if requested by

Government

 The Government considers transferring the responsibilities for managing ADB and World Bank loans to MOF from SBV

 The Project Steering Committee reviews the recommendations of the

fiscal links and non government debt reports as quickly as possible;

 The Project Steering Committee assesses the desirability of decentralizingDMFAS to the provincial branches of SBV and examines options for simplifying enterprise debt monitoring

 The Project Steering Committee assesses the need for a High Level Advisory Council to oversee strengthening of debt management capacity

 The Project conducts another round of training on the technical aspects ofdebt management (risk analysis, portfolio analysis, capital markets analysis), followed by further training on debt sustainability analysis as part of the debt portfolio and strategy review exercise to be conducted by the beneficiaries after finalization of the database Prior to this exercise, the PSC selects trainees likely to play a strong long term role in debt management

 The Project assists the Government in finding a suitable domestic

institution that can implement courses in debt management and, if

necessary, identifies and arranges external institutions to build training capacity in a domestic institution;

 Preparation of the final report, including a road map for development of adebt management office responsible for both external and domestic debt

To implement these recommendations, the team has prepared the following Action Plan

ACTION PLAN FOR REMAINDER OF PROJECT LIFE

1a EFD to finalize

- UNCTAD mission in August checks progress in updating and validating DMFAS database in EFD & SBV

- UNCTAD mission in August determines best way for MPI and SBV

to access EFD DMFAS on a read - only basis and identifies need for procedures manuals in addition to the DMFAS system manual

- UNCTAD check-up mission in December;

- EFD management prepares plan indicating how it will ensure that staff maintain the DMFAS database and submits to Vice Minister (National Counterpart Director) for comments and approval EFD implements plan.

- Crown Agents prepares procedures manual for the establishment of a back office in EFD and provides other assistance in this regard if requested

in SBV

- multilateral debt database validated by end- August;

- on lent loan database validated by end – December;

- Complete database system in EFD rechecked

by end-December.

- last 2 weeks in August;

- 2 weeks in December

- Implementation of plan begins by end March, 2005

Manual prepared by November

end UNCTAD reassesses sustainability of DMFAS

in SBV during its August visit

- PSC Meeting held by end-December.

- Staff in FED in SBV complete validation of enterprise debt in DMFAS (if decision made to continue DMFAS in SBV)

- Enterprise debt database

in SBV validated by December

- Project Steering Committee identifies trainees (those most likely to continue to have key roles in debt management).

- training courses are implemented.

- Project Office discusses with institution a plan to build training capacity, perhaps with help of an external institution

- If need for support from an external institution identified, Project Office to research possible candidates and approach most suitable ones

- Project Office and external institution develop plan for assistance.

Project Office researches sources of financing for the plan.

review, debt strategy

review and debt

sustainability

analysis.

- Project Office arranges visit of Crown Agents mission and UNCTAD expert on DSM + to assist with this exercise (conditional on database being finalized)

- TDWGs conduct portfolio/strategy review and debt sustainability analysis with assistance of Crown Agents and UNCTAD expert.

and submits draft to

- by end-March

Project Extension

Taking into consideration its findings, the team does not have convincing evidence at the time of writing to justify extension of the project The situation should clearly be kept under review, however, through monitoring of the progress

in implementing the recommendations indicated above

TABLE OF CONTENTS Page

1 Introduction 11

2 Findings 17

2.1 Assessment of Progress in meeting Objectives 17

2.2 Project Management and Implementation 32

2.3 Issues 35

3 Recommendations and Action Plan 35

Appendices 1 Summary of Activities (excluding UNCTAD/DMFAS) 40

2 DMFAS/UNCTAD activities 45

3 Views of Beneficiaries 47

4 Details of Questionnaire and Interviewee response 50

5 Minutes of Meetings 60

6 Working Agenda 75

7 List of People Contacted 78

8 Bibliography 80

1 INTRODUCTION

Project VIE 10/010 (hereinafter referred to as the “Project”) was approved in September, 2001 with a budget of $2.37 million and a time period of three years The Development Objective of the Project is to support the Government of Viet Nam to develop capacity to manage its external debt in order to support

financially sustainable economic development and minimize the risk of financial crises This Objective is in line with national reform priorities aimed at

sustaining high rates of economic growth and development with a socialist

orientation, consistent with maintenance of macroeconomic stability These priorities are enshrined in the Government’s Comprehensive Poverty Reduction and Growth Strategy Paper (2001) derived from its Development Plan for 2001-

2010, and the Resolution of the Ninth Plenum of the Party’s Central Executive Committee (Ninth Congress)1 The emphasis on macroeconomic stability as a necessary condition for sustainable economic development reflects the lessons learned from international experience This has demonstrated time and again thatmacroeconomic instability can disrupt the economic development process throughlarge fluctuations in inflation, interest and exchange rates and dwindling of international reserves Macroeconomic instability has often been induced by excessive borrowing by governments and the enterprises they own

The two main target results at the end of the Project are:

 A strengthened institutional framework exists to manage external debt along with increased capacity to formulate and implement external debt strategies

 A sustainable strategy to finance Viet Nam’s development is adopted

The project is designed to achieve these objectives through five building blocks/immediate objectives, which are linked to the following critical

 Strengthening the capacity for external debt management in areas with strong fiscal links (such as guarantees, on lending, non-

1 See the policy matrix on page 116 of CPRGSP: “External debt policy is to keep the debt service burden at a sustainable level.”

2 As specified in the Project Summary of the Project Document The document specifies another objective: “ Inception and Systems for Monitoring the Project”, but the team has excluded this from the list above, as it is not really an objective.

government public debt, and debt service) and in relation to international capital markets

 Strengthening the capacity to collect, store, process and report on external debt related information, including finalizing and

integrating existing DMFAS databases and improving the external information situation regarding external financial data

 Strengthening of human resource capacity for effective and

sustainable external debt management

Implementation of the project started in late 2002 The pace of activities was initially slow, mainly due to delays in contracting international consultants and thelogistical difficulties of coordinating activities with so many people and agencies involved The pace picked up during the second half of 2003 and has been

sustained since Out of the original budget, about $1.4 million has been

committed, out of which about $1 million has been disbursed,

The project document specifies a mid term review (MTR) in order to assess the progress of the Project in terms of meeting its objectives The Team was contracted to conduct the MTR during 4-20, August, 2004 3 The Team met with the project beneficiaries (namely, representatives of the six Debt Technical Working Groups set up under the Project 4), staff of the participating agencies (Ministry of Finance, Ministry of Planning and Investment, State Bank of

Vietnam, Office of the Government and Ministry of Justice), the Senior

Representative of the IMF, and representatives from the World Bank-financed Public Finance Management Reform Project (PFMRP) A list of officials met is provided in Appendix Seven The relevance of PFMRP is that the third

component of the project covers the strengthening of debt management,

concentrating initially (in light of VIE 10/010) on domestic debt and subsequentlyunifying external and domestic debt management

A wrap-meeting with key GOV/SBV officials was held on 20 August The draft final report was submitted to UNDP on 7 September The final report incorporates the comments of AusAid, UNCTAD and SECO

Assessment Methodology

The team has assessed whether the project is likely to have met the objectives specified above by the end of its life in March, 2005 The assessment has been carried out by a review of the reports and training documents produced by Crown Agents (the company contracted to execute many of the planned activities under the Project), a review of the UNCTAD mission reports, a review of project

documents, interviews with project beneficiaries (primarily, members of the six

3 The team consisted of Peter Fairman (team leader), Ms Hang (national consultant) and Ms Hoa (national consultant)

4 The six TDWGs are: Institutional Issues, Debt Portfolio, Fiscal Links to Debt, Information Systems, Non-Government Debt, and Debt Strategy

technical working groups) national counterpart staff and the project management, and through a questionnaire administered to beneficiaries The questionnaire andinterview forms and the responses thereon are reproduced in Appendices Three and Four The questionnaire methodology was in the form of questions

requesting a ranking (from 1 to 5) of the quality of various aspects of the reports and training as well as written comments The findings are indicated below in terms of each of the five objectives listed above

The improvement in external debt management capacity is in terms of the greater ability of staff at the technical level, the increased awareness of debt issues

by senior policy makers and politicians and a demonstrated willingness of the authorities to make necessary changes to the institutional and legal framework

underpinning external debt management In general, people now have much

greater knowledge of the factors required for efficient and effective external debt

management The increased capacity has been brought about through the four

reports produced by the Project, the seminars, workshops, training and study toursabroad conducted by the Project, and through improvements in the debt database and strengthened capacity to manage it

Nevertheless, although capacity has been strengthened, the permanence of such capacity may not be assured by the end of the project and the issue of

sustainability therefore arises The risks are:

 Delays in finalizing the DMFAS database or failure to maintain it would jeopardize the sustainability of capacity Such delays might be caused by delays in the reallocation of responsibilities in the EFD recommended by the Project in order to better ensure sufficient attention to the database

 Delays/failures to identify individuals with key roles in debt management for further tailor-made training and to establish domestic institutional capacity in training in debt management might result in the increased capacity achieved under the Project not being sustained

 Delays in revising the institutional/legal/regulatory framework to give effect to the new State Budget Law might lead to an impasse over which agency is responsible for external debt management, leading to conflicts over the choice of debt strategy (e.g MOF advocates bond issue, MPI

stresses continued reliance on concessional ODA) Delays might also

hold up implementing of some of the recommendations of the fiscal links report (such as relating guarantee fees to risk)

These risks would be mitigated to the extent that:

 The World Bank Public Finance Management Reform Project takes over from VIE 10/010 in providing technical support and training for DMFAS (particularly the case if DMFAS 5.3 turns out to be suitable for handling domestic debt) and in pushing for a unified debt strategy covering both domestic and external debt and managed by one debt office;

 The Office of the Government and the Committee for Economic and Budgetary Affairs (CEBA) in the National Assembly play stronger roles respectively in leading the formulation of debt management policy and overseeing it

 The participating agencies work together cooperatively even if the institutional/legal framework for debt management has not been changed by the end of the Project This is likely to be the case if the three agencies broadly agree on the macroeconomic framework from which the fiscal framework is derived, and broadly agree on the debt modalities to use in financing the fiscal deficit;

RESULTS ASSESSMENT TABLE Expected Results:

Project Document

1/

Results at MTR

Expected Results at end

Perhaps Achieved State Budget Law

revised after project inception, representing improvement in legal framework Challenge

is to revise supporting legal documentation (particularly Decree 90,

1998, which underpinned previous Budget Law)

- Institutional and Legal

Framework review and

recommendations

submitted to GOV,

Recommendations submitted through report prepared by Project.

Government established task force in late 2003 to revise Decree 90, 1998

- Procedures for regular

dissemination of

regulatory changes in

place

Decree 90 still under revision

Revisions to Decree 90 will be gazetted.

Possibility that the Decree will not have been revised by the end

Achieved

- External debt portfolio

and strategy reviewed

Achieved Delay in finalizing

database delayed portfolio and strategy review to early 2005.

portfolio analysis, capital markets and debt sustainability)

MTR has elaborated further on this

Sub-outcome 3:

Strengthened capacity

for external debt

management in areas

with strong fiscal links

Partially achieved Achieved

Expected Results:

Project Document

1/

Results at MTR Expected Results at end

PSC needs to review recommendations of report on fiscal links Implementation of some recommendations linked to required changes in regulatory framework.

Capacity in dealing with

international capital

markets built

Partially achieved through

workshops/training

Achieved Further training to be

provided during Q4, 2004.

Sub-Outcome 4:

Strengthened capacity

to manage external debt

information

Partially achieved Achieved

- Storage and collection

mechanisms reviewed Done (UNCTAD missions)

Electronic integration not necessary to achieve comprehensive

overview

- Operational

customized DMFAS Partially done Bilateral debt

database fully operational

Fully operational

in EFD Question mark over future of DMFAS in

SBV

- Database for

short-term debt developed Not done Not necessary and not practical to have

detailed database SBV keeps aggregate record through information on Letters of Credit

- Database for

on-lending developed Partially done Done

- Capacity in use and

basic maintenance of

databases in place

Partially done Done Assumes EFD

management ensures allocation of more staff time to database management.

- Comprehensive set of

analytical external debt

documents targeted at

wider public developed

Not done Done Conditional upon the

database being finalised

Sub-outcome 5:

Strengthened Human

Resource Capacity for

Partially achieved Perhaps achieved Government needs to

implement main components of

Expected Results:

Project Document

1/

Results at MTR Expected Results at end

Not done Perhaps done Government has to

identify cadre Project providing further training programmes (as identified above)

identified, action plan

for training of GOV

High Level event on

sustainable financing for

development

Done (March,

2004 in Geneva)

1/ It should be emphasized that achievement of the objectives by the end of the

project will in large part depend on successful implementation of the Action Plan proposed by the team

2 FINDINGS OF THE MID TERM ASSESSMENT

2.1 Assessment of progress of the Project in terms of meeting its objectives

2.1.1 Strengthening the institutional and legal framework for effective and

sustainable external debt management;

Interpreted literally, this objective has not yet been met and perhaps will not be met by the end of VIE 10/010 The Decree 90 (1998) still has not been revised in order to be consistent with the new State Budget Law, which came into effect in January, 2004, and which makes the Ministry of Finance responsible for external debt policy and management A debt management office, responsible for managing both external and domestic debt, has not yet been established

However, interpreting this objective more broadly, and in accordance with the understanding of this objective by the Deputy National Project Director,5 the capacity to strengthen the institutional and legal framework has been

strengthened A taskforce, consisting of representatives of the different debt technical working groups, was established in late 2003 to revise Decree 90

(1998) Senior management in the Ministry of Finance has been debating how to

5 As she emphasised at the wrap-up meeting on 20 August.

ensure timely updating and maintenance of the DMFAS database in the External Finance Department A major impetus has been the Project report on the

institutional and legal framework and associated workshops and study tour for thestaff in the technical working group covering this area

The report is comprehensive in its assessment of the current framework and recommends improvements Foremost is the need to revise Decree 90 (1998)

to bring it into line with the revised State Budget Law Other key

recommendations are the creation of a Debt Management Office, probably, though not necessarily in the MOF, with back, middle and front office functions inline with best international practice, the creation of a High Powered Advisory Committee (HPAC) for the purpose of the political guidance and coordination, and the replacement of the plethora of laws, decrees, decisions and circulars by one law on public debt management

The team was satisfied with the quality of the report and the associated workshops and study tour The beneficiaries have acknowledged to the team the quality of the report and its influence on their thinking Each Participating Agency (PA) produced written comments on the report; these are reproduced in Appendix One Predictably controversial are the recommendations concerning the establishment of a Debt Management Office in MOF (for example, not met with enthusiasm by MPI, which considers it still has a major say in debt policy making) and the creation of a HPAC (the latter would probably not be effective and is out of tune with current practices) Some reviewers took issue with the report’s interpretation of the previous framework and the implications of the new law In particular they emphasized that GOV only has to monitor government andexplicitly guaranteed enterprise debt and that enterprise debt is outside the scope

of the State Budget Law

The process of revising Decree 90 (1998) has been slow and the revision

is still in first draft stage after several months of work The main reasons are the differences in interpretation of the new State Budget Law and the differing

perspectives of the participating agencies The differences in interpretation derivefrom the ambiguity of Section 21 of the Law, the reluctance of MPI to give up its responsibility for the debt strategy, decrees issued after the enactment of the new State Budget Law, which preserve a role for MPI and SBV in external debt

management (Decrees 61 and 52, 2003 respectively), and the SBV law (2002), which states a role for SBV in management of enterprise debt The ambiguity of Section 21 lies in the definition of “national debt”, for which MOF is responsible for in the new Law This could be interpreted to mean all debt, or Government debt and debt guaranteed by the Government MPI claims the latter is the case, which, if correct, means the SBV law is not inconsistent with the SBL The PSC,

in its comments on the report, highlighted the need for the revised Decree 90 to clearly define the meaning of national debt in terms of the State Budget Law

At the wrap up meeting of the MTR (20 August) the Government

representatives emphasized the importance of ensuring that the revised Decree is correct in every respect and was to the satisfaction of all parties The report produced by the Project was important as it had introduced many new ideas, the consideration of which should take time Overall, therefore, the revision was going to be a time consuming process

Whatever the outcome of the revision of Decree 90, the MOF will have a pivotal role in external debt management The database and debt sustainability software reside there and much of debt policy derives from fiscal policy But fiscal policy is part of the overall macroeconomic framework, the formulation of which will continue to require the involvement of MPI and SBV Therefore, theseagencies would still continue to be involved, in collaboration with MOF, in the formulation of the external debt strategy

Regarding the location of an eventual Debt Management Office covering both external and domestic debt, MPI and OOG have expressed reservations about it being located in MOF However, at Vietnam’s stage of development, it is hard to see where else it should be Some developed countries have institutionallyseparate debt management offices, including the ones visited by the study tour (Sweden and Hungary), but in many developed countries the debt management office has remained in the Ministry of Finance

Regarding the HPAC recommended by the Project, some beneficiaries clearly have reservations, as indicated in the comments on the project report and expressed at the High Level Seminar on August 5 The Team considers that the body that may be best suited for this role is the Office of the Government (OOG) This falls under the Prime Minister and already has responsibility for coordinatingeconomic policy in general and approving external loans in particular As

mentioned above, a senior representative from OOG has participated regularly in the DTWGs

In conclusion the Team considers that capacity for improving the

institutional and legal framework has strengthened, partly as a result of the

activities of the Project To cement this strengthened capacity, the team

recommends:

 The Project prepares a procedural manual for strengthening the External Finance Department in the Ministry of Finance through the initial creation of a “back office” in line with international practice It should also prepare a road map to guide the development of a Debt Management Office with responsibility for both domestic and external debt

 The Project Steering Committee discusses the issue of whether a High Powered Advisory Council is necessary and whether in fact the OOG could play this role

2.1.2 Subobjective Two: Strengthening the capacity to formulate public external debt strategy including preparing portfolio reviews, reviewing and updating the existing draft strategy documents and strengthening the capacity for managing and monitoring non-government external debt.

Debt Portfolio and Debt Strategy Analysis

Capacity has been strengthened with the assistance of the Project, through workshops, training, a study tour abroad and a report prepared on Vietnam’s debt portfolio Shortcomings in the database precluded a portfolio review based on actual data, however, and therefore precluded a review of the Government’s debt strategy Whether an actual debt portfolio and strategy review takes place before the end of the Project will depend partly on whether the database is finalized and whether further training takes place

Prior to the preparing of the debt portfolio review (DPR) report, a training workshop in anticipation of the review was conducted during May/June, 2003 The Team reviewed the training material and was satisfied with its quality Specific comments of beneficiaries are included in Appendix Four

The DPR was conducted by the Project during 24 September – 16

October, 2003, taking into account the report on the institutional and legal

framework The DPR is the first step of a review of the Government’s debt strategy The purposes of the DPR were to: (i) assess Vietnam’s indebtedness anddebt servicing costs; (ii) suggest improvements to the debt portfolio in terms of reducing cost at a prudent level of risk; and (iii) recommend improvements in reporting procedures and accountability Due to deficiencies in the database the findings and recommendations were indicative only and it was agreed with GOV officials to treat the DPR in part as a methodology template for future use,

particularly for preparing Annual Debt Reports The project conducted a

workshop on the DPR on 13 October, 2003

The analysis looked at the four main types of indicators burden,

liquidity, solvency and dynamic – and also a simple measure of currency risk Allthe indicators showed that Vietnam’s debt was at sustainable levels, mainly as a result of agreements concluded with Russia and with the London and Paris Clubs during the 1990s This confirms the findings of the debt sustainability exercises conducted by the IMF (2003) and World Bank (2004) The report indicated that the debt burden could potentially be reduced further through GOV renegotiating the refinancing of expensive loans and debt-equity conversions for FDI loans The transactions costs of doing so might, however, be prohibitive (for example, refinancing might involve prepayment penalties being invoked)

The report’s recommendations included: (i) ensuring the debt database is kept up to date and validated; (ii) developing a more complete set of

macroeconomic data, which are necessary inputs into a review of the debt

strategy; without good macroeconomic data, debt indicators have limited

meaning; (iii) the authorities should then update the DPR, once the two

recommendations above have been implemented, produce an annual debt

management report and carry out a comprehensive DPR every five years,

covering domestic debt as well

The Team reviewed the DPR and considers it to be of good quality, thoughthe macroeconomic analysis is a little thin The eventual review should cover thisground more rigorously The report is really only an introduction to the

techniques necessary for government staff to handle more difficult types of borrowing, such as international bond issues

The interviews conducted by the team and the questionnaire responses indicated that the DPR was rated highly (Appendix Four) Nevertheless, the Deputy National Counterpart Director and the beneficiaries have indicated that they would like training on the more complex aspects of debt management in order to be able to confidently prepare a technically rigorous annual report on Vietnam’s external debt for submission to the National Assembly More training would also be helpful in the event that the government decides to borrow on the international capital markets, such borrowing being more technically difficult thanODA-type borrowing

The Team therefore recommends another round of training, focusing on risk and cost assessment, the more technical aspects of portfolio analysis and the technical issues related to borrowing on international capital markets Such training could be part of the tailor-made training programme for key individuals,

as envisaged under the Fellowship Programme component of the Project, as discussed below under Sub-objective Five The Project Steering Committee therefore needs to carefully select the individuals who would participate in this training

The extra training should enable staff to prepare a DPR following

finalization of the database In turn, this would facilitate a review of the

Government’s external debt strategy, partly through using the debt sustainability analysis model (DSM +) demonstrated by the Project in February, 2004 The review would examine risks arising from factors such as fluctuations in

international commodity prices, interest rates and exchange rates and Vietnam’s planned entry into WTO It would also examine the sustainability implications ofpossible borrowings by the Government from the international capital markets Moreover the review would, as a training exercise within a methodological framework, help to strengthen capacity in itself The beneficiaries who

attended the DSM + training workshop in February, 2004 rated it as very good and therefore should be in good shape to use this (perhaps with a training review) during the first quarter of 2005

Managing and Monitoring of Non-Government External Debt

The report on non government external debt was completed in July, 2004 (also delayed from 2003) Key recommendations include: (i) With regard to the sharp increase in foreign currency denominated domestic lending, enforce stricter matching rules by banks by requiring that a minimum of 10-15 percent of all demand deposits in foreign currency be invested in liquid foreign assets in order

to safeguard against a shortage of liquid assets in the event of sudden repatriation

of foreign exchange deposits; (ii) abolish the aggregate ceilings on external enterprise debt, while maintaining company ceilings; the current external debt level is favourable and the still regulated capital account as well as the regulatory and monitoring system covering foreign direct investment imply little chance of a financial crisis similar to that experienced by other Asian countries in the late 1990s; (iii) Monitor enterprise debt on an aggregate basis rather than on a detailedloan by loan basis, as the former is all that is needed in order to monitor balance

of payments developments This implies a monitoring system less cumbersome than DMFAS

As elaborated on below under Sub- objective Four, the team further addressed this issue in the context of a proposal by SBV headquarters in Hanoi to decentralize DMFAS to the provincial branches in line with the further planned devolvement of authority to the SBV branches from the centre

The Project also conducted workshops on the subject These are included

in the Appendix of the report on fiscal links The team has reviewed both the report and the workshop material and considers them to be of high quality The beneficiaries also appreciated the report and the workshops (Appendices Three and Four)

2.1.3 Sub-objective Three: Strengthening the capacity for external debt

management in areas with strong fiscal links (such as guarantees, on lending, non-government public debt, and debt service) and in relation to international capital markets

Capacity has been strengthened in this areas with the assistance of

knowledge gained from a report produced by the Project on fiscal links, and associated workshops, training and a study tour abroad The report on fiscal links,finalized in July, 2004, has stimulated the finalizing of the DMFAS database in EFD through entering data on government guaranteed loans and on-lent loans The awareness of the importance of understanding the possible adverse fiscal implications of government guaranteed debt and government on lending has increased not just amongst TDWG beneficiaries but also amongst policy makers and legislative oversight bodies As in the case of the institutional and legal

framework, this awareness was in evidence at the High Level Seminar held by theProject on August 5

The fiscal links report stresses the importance of the Government assessing fiscal risks prior to agreeing to guarantee loans or on-lend loans The report’s main recommendations are: (i) the need for credit risk assessment by Government and the basing of guarantee fees on credit risk; 6 (ii) SOEs pay market interest rates on the funds provided to them by Government plus a credit risk fee; (iii) The subsidy element in subsidised credit should be transparent and explicitly budgeted for; (iv) The National Assembly should approve guarantees and on-lending; (v) DAF should not borrow domestically but be funded by MOF;and (vi) The Accumulation Fund should be merged into a Single Treasury

Account for purposes of efficient cash management

The report was preceded by training workshops and a preliminary assessment report The workshops during January 5-16, 2004 covered a

framework for contingent liabilities and on-lending, public liabilities

management, introduction of basic statistics and quantitative management, and management of government guarantees and on-lending The assessment report was produced in February This was discussed with stakeholders, following which a mission visited Hanoi during 19 April – 4 June to prepare the full report The report included case studies and was accompanied by two half-day

workshops on credit risk assessment techniques

The Team assesses the report as very good, the best of the four reports, and was well-supported through the training programme and study tour Usefully,

it includes the training presentations delivered during workshops in January, 2004 and June, 2004 The June session arose from a request from the working group for additional advanced training on the quantitative aspects of contingent

liabilities, including training on credit risk assessment techniques and application

in regard to Vietnamese case studies (a thermo electric plant, two cement

companies and a water supply company) Beneficiaries viewed the reports and training favourably, though some considered that the recommendations did not take the situation in Vietnam sufficiently into account (Appendix Three)

The main problem with the fiscal links report was the timing The report was originally programmed for 2003, but was delayed until 2004, for reasons identified in the section below on project management As the report was not finalized until July, 2004, the several recommendations have not yet been

analysed and consolidated by the PSC, though comments (generally favourable) were received from the beneficiaries The delay decreases the chances of the recommendations being implemented by the end of the project

6 Under the present regulation on guarantees, the size of the fee is determined by sector: 0.5 percent for infrastructure loans, 1 percent for industry loans and 0 percent for “mixed” loans A risk factor is not part

of the equation but clearly should be the main determinant

The further training being planned by the Project covering risk and portfolio analysis (discussed under sub-objective five below) will strengthen the likelihood of sustainable increase in capacity in this area For example, credit riskanalysis would help determine the appropriate size of a guarantee fee

In summary, the Team considers that attaining the sub-objective is possible

by the end of the project, particularly if the further training being planned by the

Project is implemented (as discussed under sub-objective two above) In order

for the increased capacity to have permanent impact it is important that the report’s recommendations be implemented as far as possible The team therefore recommends the timely review of the report’s recommendations by the PSC and timely decisions made on implementing them To some extent, the ability to implement the recommendations is linked to changes in the regulatory framework (e.g the linking of the size of the guarantee fee to credit risk) and therefore the benefits of increased capacity under this sub-objective are linked to progress in achieving sub-objective one

2.1.4 Subobjective Four: Strengthening the capacity to collect, store, process and report on external debt related information, including finalizing and

integrating existing DMFAS databases and improving the external information situation regarding external financial data.

Having a comprehensive, accurate and up to date database is a necessary foundation for good external debt management At the macro level, it is difficult

to produce and execute an external debt strategy unless one knows what the amount of debt is.7 At the micro/technical level, inadequate coverage and

accuracy of external debt makes it more difficult to negotiate lending terms in the best interests of the borrower, taking into account cost and risk

Progress picked up markedly in recent months following the return to EFD

of a skilled staff member seconded to UNCTAD in Geneva for three months as anintern under the Fellowship Programme component of the Project He, and two national consultants contracted under the Project, have been able to finalise the bilateral debt database (data input and validation), and the guaranteed loan

database The multilateral debt is expected to be finalized towards the end of

7 As quoted from the UNCTAD mission in February, 2004 (on training on the debt sustainability model),

“Inadequate debt information could produce wrong results and consequently ineffective recommendations

in the implementation of debt strategies.”

2004; all the data has been inputted and the validation exercise is underway Finalising the on-lent loans (mainly to DAF) database is taking longer, but

nevertheless is expected to be finished by the end of 2004 at least with regard to loan information and disbursements, and to the loans channeled to commercial banks rather than DAF This is a big exercise as 40 percent of external loans to GOV is on-lent An issue is that EFD still does not have ready access to

information on debt servicing of on-lent loans A mission from UNCTAD during August 23 - September 4 reviewed progress towards finalizing the database

Particularly encouraging was the rapid progress in entering and validating data on government guaranteed loans EFD now has two sources of information, the lender and the final borrower, facilitating both data input and validation and reconciliation.8 As indicated above, the training conducted prior to the fiscal links report may have provided some impetus to this

An UNCTAD mission visited Hanoi during the week of 23 August Its key purpose was to evaluate the progress in finalising the DMFAS database

Reasons for the slow progress in finalizing the database

1) The organization of the External Finance Department (EFD) in the Ministry of Finance (MOF) along lending institution lines rather than functional lines This tends to militate against accurate maintenance of the data base The

officers covering each institution are responsible for all aspects of debt

management, ranging from loan negotiations down to data entry, accounting and reporting They tend not to have enough time for paying attention to the data base The academic disciplines of the officers are also more conducive to dealingwith the more exciting aspects of debt management, such as loan negotiation, rather than the more mundane aspects of database management

To help address this problem, the Project has recommended the reorganization of the EFD along functional lines in accordance with current international practice A typical debt management office (DMO) is divided into afront office, which forms the main interface between the borrower and lender, a middle office, in charge of debt strategy and management of risks and a back office, responsible for managing the data base, payments, accounting and

reporting A typical DMO covers both external and domestic debt, as a

sustainable external debt strategy can only be derived from an overall public debt strategy

In Vietnam’s context, where the institutional and legal framework for debt management is still being debated, a start on reorganization could be achieved through management of EFD ensuring that sufficient staff time is allocated to maintenance of the database The returned UNCTAD intern and the two

8 It can also request data from SBV, which collects data on enterprise debt, including debt guaranteed by GOV

consultants could provide on-the-job training support Full reorganization wouldtake longer, requiring the preparing of a plan, new job descriptions and the

approval of the Minister of Finance

Is management of DFMAS in EFD sustainable after the end of the

Project? The answer is yes, a major reason being that UNCTAD will continue to support DMFAS in EFD after the end of VIE/10/010 Provided that the database

is finalized, UNCTAD plans to install DMFAS 5.3 early in 2005 in place of DMFAS 5.2 It is also institutionalizing its assistance to Ministry of Finance through a recently negotiated a maintenance agreement for DMFAS A decision

by the World Bank to use DMFAS 5.3 for managing domestic debt under PFMRP would also help the sustainability of DMFAS

Sustainability also requires that EFD management allocates sufficient stafftime to maintaining DFMAS and that the returned intern and the two consultants continue to provide useful support In this regard, the Ministry of Finance shouldconsider budgeting for the retaining of the services of the two consultants The Ministry is giving serious thought to the concept of a Back Office and UNCTAD

is ready and willing to provide assistance Reorganization takes time, however,

so, in the short term, it is up to management to ensure diligent attention to the database

2) Institutional and Technical factors concerning the handling of ADB loans

ADB loans are handled by SBV rather than the Ministry of Finance The ADB provides data on its loan transactions only to the SBV, which is then

supposed to relay the information to EFD Invariably, though, delays arise, complicating validation, and the scope for errors is increased due to the extra stage involved The information is available directly on the ADB’s website, but optimally, it should be provided directly The SBV also manages loans from the World Bank, but the Bank provides copies of loans transactions to the EFD, thus facilitating validation Another complicating factor is that the structure of ADB loans is relatively complex, creating technical problems with inputting and

validating the information (Appendix Two)

ADB and World Bank loans finance government expenditure, just like bilateral agency loans, and so the placing of these loans under SBV jurisdiction is irrational Changing the arrangement would, however, require a decision from the Prime Minister, and, given the pressing weight of other government business, this might not be forthcoming in the near future

3) On-lent loan data: The problem with entering data on on-lent debt appears to

be a decision taken some time ago to let the borrowing agencies (mainly DAF) collect the data Therefore EFD stopped collecting it Catching up is taking considerable time

Finalisation of the database by end-December would permit staff to conduct a debt portfolio and debt strategy review during the first quarter of 2005.

Finalising DMFAS database in SBV

Finalising the DMFAS database in SBV’s External Debt Management Division (EDMD) is proving to be harder work Substantial progress in

incorporating all enterprise data into the system was made during 2003 and this year, with technical support and training from UNCTAD, but nevertheless over

100 enterprise loans have yet to be validated.9 The process is time consuming due to the sheer volume of loans (1600), the quarterly reporting requirement (under Regulation 3 of Decree 90, 1998) and corresponding updating of DMFAS, combined with the frequent renegotiating of loan conditions, which require reregistration of the loan with SBV and reentering the main parameters and data into the system The monitoring of debt agreements where debt payment is in kind (commodities) is difficult to capture under DMFAS Adding to the time burden is the placing into Excel format of the enterprise reports by the SBV branches and then their transmission to Hanoi; thus the data is entered twice, onceinto Excel and then into DMFAS

To ease the burden on staff, EDMD has considered the idea of provincial branches of SBV taking over DMFAS, and suggested that the Team look into this.10 A major advantage would be the avoidance of the double entry of data Staff in the provincial branch would be responsible for all the data input and then would electronically submit the information to EDMD for input into its DMFAS,

so that additional time of EDMD staff would be minimal Another reason for the idea is that all enterprises have to report their external debt transactions to SBV provincial branches with effect from January, 2005, regardless of the size of their external loans (under regulation 3 of Decree 98, enterprises with loans less than

$10 million report quarterly to SBV and enterprises with loans above $10 million report to SBV headquarters directly) In practice, this is a less important factor, asmost loans are reported to the SBV branch

The team’s view, after visiting the SBV’s branch in Ho Chi Minh City (HCMC) and three enterprises 11 during August 11-12, is that installing and maintaining DMFAS in the branches would be costly and time consuming,

probably representing a significant extra workload for branch staff The SBV branch in HCMC is the biggest outside Hanoi, but it appears to be nowhere near set up for handling DMFAS The foreign exchange management division has only two computers, which are used for other purposes as well as receiving the quarterly debt reports of enterprises There are no security controls to prevent

9 As indicated in more detail in Appendix Two, 1140 loans out of about 1600 had been captured on SBV’s DMFAS by March, 2003 with UNCTAD’s assistance Over the following six months, a further 218 loans were captured.

10 The idea of extending DMFAS into the provincial branches of SBV is not a new one; it appeared in the Inception Report.

11 Riverside Hotel, Garden Plaza Hotel and Furukawa Automotive Parts.

people from tampering with the data submitted by enterprises The SBV HQ’s problems in managing DMFAS are likely to be multiplied in the provincial

branches

Is decentralizing DMFAS worth the effort? To answer this question, the Team considers that the whole rationale underlying detailed reporting by

enterprises on their external debt needs to be reexamined by GOV For

macroeconomic and monetary policy making and monitoring purposes, such detail is not necessary and more aggregated information flows would be

sufficient, using simpler software packages The desire to avoid an Asian-style financial crisis has been mentioned as a justification for requiring detailed loan byloan reporting.12 However, the risks of such a crisis are probably low, given prudent macroeconomic policies, improving prudential central bank supervision

of commercial banks, the programme to reform state owned enterprises, the regulatory and monitoring regime governing foreign direct investment, and the continuing restrictions on the capital account of the balance of payments

The ability of DMFAS to generate debt service projections is also considered as a justification for quarterly reporting of enterprise debt The projections are helpful to MPI in preparing and monitoring the external debt strategy But, in this regard, annual data would suffice In any case, exact

projections derived from DMFAS are not necessary; indicative projections can be made, on the basis of the registration information, just using simple Excel

formulae Also, projections are bound to be approximations only, as future external debt service payments will reflect currently unknown investments and loans

Extending the analysis even further back to basics, the government’s external debt strategy is derived from a fiscal deficit target derived from a

macroeconomic framework Too high a fiscal deficit financed by borrowing could result in crowding out of funding of private sector investment (domestic financing of the deficit crowds out domestic financing of private investment through higher real interest rates, while external financing of the deficit can lead

to real exchange rate appreciation as well as real interest rate increases, thereby also crowding out private sector investment) Therefore, the most important challenge is to keep the fiscal deficit and contingent liabilities (government guaranteed loans) under control Tracking and projecting enterprise debt on a loan by loan basis is not necessary

Monitoring enterprise debt for macroeconomic and monetary policy making and monitoring purposes can be conducted more simply than through using the DMFAS system Apart from the quarterly forms enterprises submit to SBV, the Team discovered that they routinely submit data on their activities to

12 Thus central banks in Philippines, Malaysia and Indonesia monitor enterprise debt on a loan by loan basis These countries were severely affected by the Asian financial crisis of 1997/98, far more so than Vietnam.

other agencies They submit quarterly itemized balance sheet and operating income and expenditure reports to the Department of General Taxation (GTD) and

to the Statistics Office (SO) and six monthly reports to MPI and the Statistics

Office on project performance, which show, inter alia, sources of funding,

including foreign loans, revenue and profits Another form is submitted semi annually to the Foreign Investment Division of SBV, indicating actual equity and loan financing activities in comparison with what was planned 13 In the case of State Owned Enterprises, quarterly financial statements are sent to Corporate Finance Department (CFD) in MOF, along with an annual report focusing on enterprise debt in particular 14

The provision by enterprises of debt information directly to MPI, as well

as to GTD and SO, would appear to further obviate the need to use DMFAS as a database for enterprise debt In addition, the finalization of EFD’s database on government-guaranteed debt means that EFD does not have to rely on SBV’s DMFAS to provide this information

In summary, in considering whether to decentralise DMFAS to provincial branches of SBV, MPI and SBV need to ask themselves exactly why they need data on enterprise debt and the detail they want this in.15 The team recommends that the PSC convene a meeting to determine the user requirements for enterprise debt data This would help to determine whether it is worthwhile to continue withDMFAS in SBV, or at least whether the burden of maintaining it can be reduced

An option would be to require detailed reporting only by large companies, which probably would account for most of the debt; one estimate is that 20 percent of companies in Vietnam hold 80 percent of enterprise external debt The decision would then be whether to continue with DMFAS or to use a simpler system 16

Other Issues

The project document mentions three other aspects of strengthening information flows which the Project was supposed to have addressed: integrating existing debt databases, developing a short-term debt data base and developing a comprehensive set of analytical external debt documents targeted at the wider public These have not been achieved With regard to integration of EFD and

13 The team also asked SBV whether the formats used by commercial banks to report to SBV’s Accounts Department enable tracking of external loans to enterprises and debt service payments on these loans The formats, although they are sectoralised according to transactions between residents and non residents, do not distinguish sufficiently between the different types of transactions, e.g inflows from abroad do not distinguish between loans and other types of inflows

14 CFD does not share its information with SBV and neither does SBV consult with CFD before giving its opinion on enterprise borrowing plans, a state of affairs that can surely be improved upon (as remarked in the Project’s report on nongovernment debt).

15 Quoting from one of the workshops delivered by the consultants, “ DMFAS is a debt management system not built for administering currency regulations or for producing balance of payments statistics”.

16 Some representatives of the Government who participated at the wrap-up meeting for the MTR

expressed reservations on DMFAS in SBV, namely that it was too complex for the user requirements (“using a hammer to beat a fly”).

SBV databases, this has not been possible because of the delays in finalizing the databases In any case, integration would be a complex exercise A simpler solution would be for each database to have read only access to the other, either through direct electronic connection or over the internet The current UNCAD mission will examine this question more closely

With regard to short term debt data, this is no longer necessary via

DMFAS Data can be captured through the normal commercial bank reports to SBV, primarily the data on letters of credit

2.1.5 Sub objective Five: Strengthening of human resource capacity for effective and sustainable external debt management.

The reports produced by the Project, along with the associated workshops,training, study tours and meetings, have increased knowledge, skills and general awareness of the issues The beneficiaries and staff of the agencies met by the Team all testify to this Of course, it is not possible to please everybody, with some beneficiaries commenting that the training has been too basic, not

sufficiently oriented towards Vietnamese circumstances, and has not allowed sufficient time for discussions But not everybody is starting out on the same basis, and therefore starting at a basic level is almost inevitable Insufficient time for questions and discussions is common to many projects of this nature in many countries Scheduling and coordination problems (discussed in the Section below) on project management, compounded by the numbers of agencies

involved, and the demands of everyday job responsibilities of participants meant that time for questions and discussions was limited

Increased capacity cannot be judged solely from the viewpoint of those responsible for preparing and executing debt management policies Increased capacity is also necessary from the point of view of users, namely the senior policy makers and legislative oversight bodies This has taken some time to develop, but the High Level seminar on August 5 indicates that progress is being made The Committee for Economic and Budgetary Affairs (CEBA) in the National Assembly has, over the past year, begun to exert a much stronger

legislative oversight on fiscal policy and management in line with the provisions

of the new State Budget Law As indicated by CEBA at the high level seminar, this oversight should extend into debt management, thereby inducing top policy makers in Government to pay more attention to debt management issues The Research Council in the Prime Minister’s Office is also taking a stronger interest,

as is the Office of the Government, a representative of which is a member of the technical working groups under the Project and the task force revising Decree 90 (1998)

The training, and the comments thereon, were successful in pointing the way forward to further training requirements in the more technical aspects of debtmanagement (risk, portfolio analysis and aspects of preparing to borrow on

international capital market terms) The Team supports the efforts of the Project

to prepare further such training during the last quarter of 2004

Is the increase in capacity sustainable?

The question of sustainability arises, however The training so far has been broad-based and has covered many people, who are not necessarily involved

in debt management full time Under the Fellowship Programme component of the Project, the Government was supposed to identify specific individuals with full time roles to play in debt management who would receive tailor-made

training, either in-country or abroad This has not happened yet, with the

exception of the two staff (one from EFD in MOF, the other from EDMD in SBV), who worked as interns with UNCTAD for two months earlier this year and have since returned and are assisting with in-house training on DMFAS These

internships were very successful and another internship is being negotiated

between UNCTAD and MOF/SBV

Another component of the Fellowship Programme, as identified in the Project document, is the building of capacity in domestic institutions (for

example, the Financial Academy, which falls under Ministry of Finance, the National Academy of Public Administration, National Economics University) to run courses in debt management In this way, new staff in Ministry of Finance and other agencies can learn about debt management and take over from existing staff who move on in their careers But no progress has been made in this area either

The Project has attempted to kick-start the Fellowship Programme, but with little success, apart from the internships in Geneva Draft terms of referencewere presented to PSC by the Project in late 2003, including identification of key areas of debt management to be addressed, criteria for the selection of the fellows and identification of possible courses and internships The PSC discussed these TOR in Q1 2004 and agreed on a mix of overseas and in-country customized courses

Accordingly the Project submitted a proposal to the PSC in May, 2004, recommending: (i) Coordination of training with the PFMPR; (ii) Selection of government officials for training on the basis of their actual role in debt

management; (iii) All training should take place in Vietnam, on the basis of cost and value for money, unless free courses could be identified abroad; and (iv) Training should focus on debt strategy, borrowing policy and risk management, but could also include debt sustainability analysis, portfolio analysis and

international capital markets The proposal also pointed out that technical

training was not sufficient, if not accompanied by training in report writing, time management and staff management skills 17

17 The opinions of each agency differed somewhat For example, MOF emphasised training in Vietnam whereas MPI emphasised in-depth training outside the country

The proposal has yet to be agreed upon by the PSC One potential source of delay is the selection of personnel by the Government Another issue isthe possible lack of capacity of local training institutions to deliver technical training programmes; initial discussions with some institutions have indicated thatthis might be a problem

The Project has approached some external agencies to determine the availability of courses geared towards improving debt management capacity in developing/transitional economies For example, the Project identified a World Bank Institute course, which sounded almost ideal, the only disadvantage being that it would be located in Washington However, the Bank has written to the Project (July) to the effect that officials from countries receiving assistance from the Bank on IDA terms are not eligible for these courses To get around this problem, the Bank agreed in principle to organize a regional workshop in Vietnam

on risk modeling, but this idea has since fallen through, mainly due to the

logistical difficulties involved The Project has explored the possibility of

arranging for internships in debt management offices in developed countries, but such offices are not set up for these, mainly concentrating on short tours of about

4 hours each, clearly not long enough to have a lasting impact on capacity

The Project is still making concerted efforts to identify training

programmes which would have a lasting impact For example, it requested (lettersent on August 16, 2004) a UK consulting company (the same company

contracted to prepare the reports and training programmes under the Project) for assistance in preparing a two week training course in credit risk assessment and use of derivative instruments , to be held in Vietnam It has also been in contact with the external adviser for the debt component of PFMRP, with regard to a possible study tour to New Zealand to study the functions of a mid office in a typical Debt Management Office, with focus on risk management The initial proposal is for two weeks, for 10 –15 people

It is important for the sustainability of the results of the Project that

Government addresses these two aspects of the Fellowship Programme over the remaining life of this project The Project can assist with the identification of a domestic institute and the development of a curriculum in debt management, possibly as part of a broader course in public finance If insufficient capacity is available to deliver such a curriculum, the Project can assist with the identifying

of an external institute to build capacity in the domestic institute

2.2 Project Management and Implementation Issues

The beneficiaries and counterpart staff expressed to the Team their generalsatisfaction with the management of the project They recognized the logistical and organizational challenges in the form of organizing consultants’ visits, study

tours, seminars/workshops and training, meetings of DTWGs, PSC meetings, and getting beneficiaries to comment on reports

The Project Manager testified to the team the logistical challenges that the project posed The Team Leader’s experience in other countries also suggested that such challenges are common in many countries Capable officials in

developing country governments are usually kept very busy by their managers in the day-to-day process of running a government and it is difficult to release them for seminars and training Managers themselves are kept very busy Various personnel changes also hampered the effectiveness of DTWGs During 2003, the SBV members of PSC and DTWGs were replaced, more than twice in the case of the PSC These challenges should not be underestimated in designing a project

The PSC itself has only been able to meet infrequently One of its

functions is to coordinate and review the comments received from DTWGs on thereports produced and submit the comments to the Project, but has only managed

to do so for the institutional and legal framework report (the fiscal links and non government debt reports were only finished recently, and the comments from the DTWGs have only been recently submitted to PSC)

One factor that struck the team was the number of DTWGs that were formed Perhaps a smaller number may have been more manageable For example, the fiscal links and non government debt groups could have been

merged into one group, or merged into the portfolio review group, as the topics overlapped considerably (for example, assessment of guarantee fees involves assessment of risk, a topic under the portfolio review group) Indeed, to permit a holistic view of debt management, just one DTWG might have been possible, covering all topics Of course, this would have posed the challenge of keeping the numbers of staff in the group to manageable limits The solution might have been for the Project to run the same seminar (covering all topics) for two or three different groups of people at different times

The membership of the DTWGs could have given more weight to the State Treasury Department (STD), which had only one representative This omission seemed strange to the Team, given that the STD has been the MOF agency responsible for pushing for the issuance of an international bond through its Capital Mobilisation Department Indeed this department was active in the mid 1990s in helping the Government prepare for a bond issue, using external assistance This idea went into abeyance after 1998 in the wake of the Asian financial crisis, but nevertheless, the department has, in collaboration with State Budget Department, continued to work closely with external credit rating

agencies, which have now produced a number of reports on Viet Nam Most recently, in June the STD participated in a workshop in Hanoi on credit rating methodology, financed by the Investors Association of Viet Nam, a private sector organization

This apparent disconnect between the activities of the STD and the

activities of the Project is regrettable Closer involvement of STD with the Project could have benefited both sides Staff in other departments might have benefited from participation in the workshop in June on credit rating methodologyhad they been informed of it

2.3 Other Issues

2.3.1 High Level Policy Advisory Committee

The success of the Project depends to a large extent on political support for the recommendations The various councils and committees established by the Prime Minister are a potentially useful avenue of support, and this explains theProject’s recommendation that a High Level Advisory Council be established to oversee debt policy However, these committees/councils are numerous covering many different areas Emphasising the importance of issues and getting decisions made is therefore not easy

In the Project’s case, the National Financial Monetary Policy Advisory Council (NFMPAC) was supposed to be the main avenue for obtaining political support and approval of the project’s recommendations The Council, however, has dissolved, which is why the Project suggested the creation of a high level council in its place Such a council has not been established, and, even if it is, may go the same fate as its predecessor Many beneficiaries, in their comments

on the reports and during the High Level seminar, indicated reservations on this recommendation

The Team recommends that the PSC give some thought to this issue Perhaps the OOG itself could play this function, given that it already plays a coordinating and decision- making role in debt policy and management, a role that remains under the new State Budget Law Moreover, a senior official in OOG sits on a number of the DTWGs

2.3.2 Monitoring and Evaluation System

On the basis of two UNCTAD missions and a Baseline Survey, a report onestablishing an MES was submitted to GOV on 12 July, 2003, following a

seminar in April, 2003 The MES contains outputs, activities and performance standards and indicators It is supposed to be a project management tool and an instrument to assist government officials to measure the status and improvement

in external debt management capacity over time The MES is supposed to be updated semi annually, with information provided partly by beneficiaries A second MES was produced in November, 2003, but this is the last one It is well-done, but too long ago to be of use today

According to the Project Manager, preparation of an updated report has not even begun One reason is the difficulty in obtaining inputs from the

TDWGs for the same reasons as discussed above under the section of Project Management Nevertheless, the Team considers that perhaps more effort could have been made by the Project to drive the preparing of a second MES report; indeed it would have been useful input to this study Countering this reservation

to some extent is the Team’s observation that the MES matrix could have been simplified to make it more user- friendly, and also the regular quarterly production

of progress reports by the Project The team reviewed these reports for June, 2003 and the same period in 2004 They are of good quality

January-2.3.3 Quarterly Newsletter

The Project has produced a quarterly newsletter on the progress of the project for the beneficiaries and representatives of participating agencies The newsletter is of good quality and is a very useful device for enhancing awareness about the project Unfortunately, the Project neglected to send a copy to CEBA,

on the grounds that CEBA would not be interested in much of the material CEBA, however, is exactly the type of agency, which the Project should be targeting in order to increase awareness The team advised the Project that it should not try to prejudge what the readers of the newsletter might or might not

be interested in, and to put CEBA on the distribution list for the newsletter

3.0 RECOMMENDATIONS AND ACTION PLAN

On the basis of the findings presented above, the team has the following recommendations:

 EFD finalises the DMFAS database in EFD as soon as possible, with technical and training support from the Project through UNCTAD;

 EFD management to determine how to ensure more allocation of

manpower to the maintenance of DMFAS;

 UNCTAD mission in August determines the best way for MPI and SBV

to access EFD DMFAS on a read – only basis and identifies need for procedures manuals in addition to the DMFAS system manual

 The Project prepares a procedures manual for the establishment of a back office in EFD and other assistance in this regard if requested by

 The Project Steering Committee reviews the recommendations of the

fiscal links and non government debt reports as quickly as possible;

 The Project Steering Committee assesses the need for a High Level Advisory Council to oversee strengthening of debt management capacity.

 The Project conducts another round of training on the technical aspects ofdebt management (risk analysis, portfolio analysis, capital markets analysis), followed by further training on debt sustainability analysis as part of the portfolio and strategy review exercise to be conducted by the beneficiaries after finalization of the database Prior to this training, the PSC selects trainees likely to play a strong long term role in debt

management

 The Project assists the Government in finding a suitable domestic

institution that can implement courses in debt management and, if

necessary, identifies and arranges external institutions to build training capacity in a domestic institution;

 Preparation of the final report, including a road map for development of adebt management office responsible for both external and domestic debt

To guide the implementing of these recommendations, the Team has preparedthe following Action Plan:

ACTION PLAN FOR REMAINDER OF PROJECT LIFE

1a EFD to finalize

- UNCTAD mission in August checks progress in updating and validating DMFAS database in EFD & SBV

- UNCTAD mission in August determines best way for MPI and SBV

to access EFD DMFAS on read – only basis and identifies need for

procedures manuals in addition to the DMFAS system manual

- UNCTAD check-up mission in December;

- EFD management prepares plan indicating how it will ensure that staff maintain the DMFAS database and submits to Vice Minister (National Counterpart Director) for comments and approval EFD implements plan.

- Crown Agents prepares procedures manual for the establishment of a back office in EFD and provides other assistance in this regard if requested

by Government.

- Government consider transferring the responsibilities for managing ADB and World Bank loans to Ministry of Finance from SBV

- Project office organizes special PSC meeting (with UNCTAD rep

- multilateral debt database validated by end- August;

- on lent loan database validated by end – December;

- Complete database system in EFD rechecked

by end-December.

- last 2 weeks in August;

- 2 weeks in December

- Implementation of plan begins by end March, 2005

Manual prepared by November

end UNCTAD reassesses sustainability of DMFAS

in SBV during its August

reassessed attending) to assess desirability of

maintaining DMFAS in SBV with respect to user requirements of data and possible simpler options PSC makes decision on future of DMFAS

in SBV

- Staff in FED in SBV complete validation of enterprise debt in DMFAS (if decision made to continue DMFAS in SBV)

visit

- PSC Meeting held by end-December.

- Enterprise debt database

in SBV validated by December

- Project Steering Committee identifies trainees (those most likely to continue to have key roles in debt management).

- training courses are implemented.

- Project Office discusses with institution a plan to build training capacity, perhaps with help of an external institution

- If need for support from an external institution identified, Project Office to research possible candidates and approach most suitable ones

- Project Office and external institution develop plan for assistance.

Project Office researches sources of financing for the plan.

review, debt strategy

review and debt

sustainability

analysis.

- Project Office arranges visit of Crown Agents mission and UNCTAD expert on DSM + to assist with this exercise (conditional on database being finalized)

- TDWGs conduct portfolio/strategy review and debt sustainability analysis

- by end – December

- by end- March

with assistance of Crown Agents and UNCTAD expert.

5 Task force on

revising Decree 90

completes its work

and submits draft to

- by end-March

APPENDIX ONE

SUMMARY OF PROJECT ACTIVITIES (excluding those related to

DFMFAS/UNCTAD)

Reports Prepared by the Project

The reports produced by the Project during 2003 were the Debt Portfolio Review and the Institutional and Legal Framework Report The other planned reports could not be undertaken or undertaken as planned due to delays in

mobilizing the international consultants (partly due to the SARS epidemic) and the inadequacy of the data base Thus the Debt Strategy Review, Fiscal Links and non government debt reports were delayed until early 2004

Debt Portfolio Review (DPW) Group

In preparation for the DPR, training was conducted via workshops during May/June 2003, attended by 40 officials from PSC, relevant TDWGs and

Participating Agencies (PAs) The training components were: Linkages between the macroeconomy, aid and debt; loan cycle and the features of loans and bonds; short term debt; capital flows; liabilities management; portfolio review and analysis; best practices in debt management The macroeconomic and debt data requirements for conducting the DPR were indicated Examples of reports and data to be produced from DMFAS or taken from budget and national account sources were provided to the participants in order to facilitate the collection of data prior to the actual DPR

The DPR was conducted from September 24 to October 17, 2003 The aims were to assess Vietnam’s recent indebtedness and debt servicing costs, analyse the performance of the debt portfolio and recommend possible ways to reduce costs at a prudent level of risk, and review and improve on the institutionalframework, reporting procedures, transparency and accountability The DPR would eventually become an annual exercise in the form of an annual Debt Management Report, available to government officials, the National Assembly and the international community

In addition, seven government officials attended the Fourth Inter Regional Debt Management Conference, the General Assembly of the World Association ofDebt Management Offices and the DMFAS advisory group meeting in Geneva during 10-14 November, 2003

The DPR and associated training was regarded as relatively successful Nevertheless, constraints on the availability of data – because of inadequate communication flows between SBV and MOF – limited the usefulness of the