The Role of Official Development Assistance on the Development of Economic Infrastructure in Vietnam45288

This paper focuses on analyzing the role of ODA on economic infrastructure development in Vietnam and its consequences from 2010 to 2017 based on the database of donors' projects in Viet

The Role of Official Development Assistance on the Development of Economic Infrastructure in Vietnam Nguyen Thi Vu Ha (1)*

(1) VNU University of Economics and Business, Vietnam National University, Hanoi, Vietnam

*Correspondence: hantv@vnu.edu.vn

Abstract: Official Development Assistance (ODA) is a significant external financial resource

in Vietnam This aid has made meaningful contributions to the socio-economic development and poverty reduction in Vietnam ODA is one of the capital that belongs to the State budget and is prioritized to improve social and economic infrastructure in Vietnam as infrastructure

is the engine for economic growth The international donor community spent about 15.79 billion U.S dollars in economic infrastructure development in Vietnam in the period of 2010-2017, which helped to improve economic conditions in Vietnam However, ODA projects on economic infrastructure development have been usually prolonged, raised capital and then cause debt burden for Vietnam Besides, this financial resource has been decreasing since Vietnam became a low middle-income country in 2010 and achieved the millennium development goals in 2015 This paper focuses on analyzing the role of ODA on economic infrastructure development in Vietnam and its consequences from 2010 to 2017 based on the database of donors' projects in Vietnam published on the OECD's website

Keywords: Official Development Assistance (ODA); infrastructure; transportation; energy;

Vietnam

1 Introduction

Official development assistance (ODA) is defined by OECD as government aid aimed to foster the economic development and welfare of developing countries This financial help is provided by official agencies, including state and local governments, or by their executive agencies According to Asteriou (2009), Karras (2006) and Van Dan D et al (2019), ODA has positive and significant impacts on economic growth in developing countries

ODA can take the form of types such as (i) grants, where financial resources are provided to developing countries free of interest and with no provision for repayment; (ii) soft loans, which have to be repaid with interest, albeit at a significantly lower rate than if developing countries borrowed from commercial banks; (iii) the provision of technical assistance Donors may provide ODA to the recipient directly or through a multilateral development agency such as the United Nations or the World Bank

Each transaction of ODA is concessional and conveys a grant element of at least 25 per cent of the total (calculated at a rate of discount of 10 per cent) Moreover, ODA loans

have a prolonged loan maturity and an extended grace period Then, one of the

characteristics of ODA is preferential For instance, ODA provided by WB has the loan

maturity of 40 years and a grace period of 10 years (World Bank 2017) Another characteristic

of ODA is compulsory Namely, Japan requires that Japanese ODA must be in Japanese Yen

(Ministry of Foreign Affairs 1998) At least 19% of aid from countries of the OECD Development Committee (DAC) is tired aid that required recipients to purchase goods and

services from the donor countries (Oliveira et al 2018) Last, ODA can cause debt burden if

the recipient country does not use this financial flow effectively, especially in the area of economic infrastructure A large amount of assistance being disbursed does not directly guarantee aid effectiveness and undoubtedly leads to a heavy debt burden on aid recipient countries when the assistance takes the form of (low-interest) loans (Iimi, A Rev Ind Organ 2006) Moreover, ODA projects on economic infrastructure development are usually prolonged and raised budget

Vietnam has become a model for achieving rapid economic development and an important element in this success has been the ODA that the country has received from around the world (Feasel E.M 2013) ODA supported the socio-economic development and poverty reduction in Vietnam much In particular, the social and economic infrastructure was the area that received ODA the most The international donor community spent about 15.79 billion U.S dollars in economic infrastructure development in Vietnam in the period

of 2010-2017 [compiled by the author from OECD (2018a)], which helped to improve economic conditions in Vietnam According to ADB et al (2005), developing infrastructure could promote business activities particularly in industrial production and help raise the incomes of the poor, reduce infant mortality, increase school attendance rates, and extend hours of learning However, concerns have been raised about the impact of infrastructure development on the environment and local communities, about waste through corruption

in public spending and private contracts, and about the appropriate roles of the public and private sectors in infrastructure financing, ownership and management

ODA has been decreasing since Vietnam became a low middle-income country in

2010 and achieved the millennium development goals in 2015 In 2017, according to World Bank conditions, Vietnam will no longer receive concessional loans from the International Development Association (IDA) This paper has three sections Section 1 provides an overview picture of ODA in Vietnam from 2010 to 2017 Section 2 analyses the role of ODA

in economic infrastructure development in Vietnam Section 3 draws some conclusions and discusses specific issues caused by ODA in Vietnam

2 Overview of ODA in Vietnam from 2010 to 2017

ODA is an essential external resource in Vietnam Since Vietnam became a

low-middle-income country in 2010, the total ODA commitment reached nearly 39.15 billion USD from

2010 to 2017 Vietnam disbursed over 33.13 billion USD, approximated 84.64% of total ODA commitment [compiled by the author from OECD (2018a)] Although the ratio of ODA to Vietnam's GDP was small, about 3% of GDP each year [compiled by the author from OECD

(2018a)], this resource has been playing an essential role in social and economic development since the budget for growth was still limited in Vietnam

The ODA disbursement in Vietnam increased from 2010 to 2014 but declined from 2015 to

2017 Besides, from 01/7/2017, Vietnam has officially graduated from ODA under WB benchmarks,

which means that Vietnam no longer receives concessional loans from the IDA The Asian Development Bank (ADB) also ranks Vietnam in group B, a group for Blend countries, not

in Group A, among those that only receive preferential loans However, Vietnam has succeeded in negotiating and constructing a mechanism to support the transformation of ODA graduation in 3 years [World Bank, 2018]

Figure 1 Total ODA commitment and disbursement to Vietnam from 2010 to 2017

(million USD) (Source: OECD 2018b)

The ratio of ODA to total national income (GNI) kept decreasing in Vietnam, but ODA per capita is continuously increasing In 2010, ODA disbursement reached 2.64% of GNI, but by

2017, this figure dropped to 1.11% of Vietnam's GNI ODA per capita in 2014 was 45.55 USD, but by 2017, it plummeted to only 24.87 USD [compiled by the author from OECD (2018a)] Although it is known as an essential and planned external resource, the contribution of ODA

to GNI of Vietnam is quite modest However, this source of capital plays a vital role in development investment in the context of the limited state budget and high demand for developing socio-economic infrastructure

ODA into Vietnam is mainly in the form of ODA grants and ODA loans, in which ODA loans tend to increase and account for a more significant proportion compared to ODA grants Throughout the whole period, ODA loans took up 77.8% of total ODA

disbursement, especially in 3 years from 2014-2016, when ODA loans accounted for over 80% of total ODA commitment [compiled by the author from OECD (2018a)] In terms of disbursement/ commitment ratio, ODA grants to Vietnam always has a very high figure, up

to 97.43% for the whole period of 2010-2016, 17% higher than this ratio for ODA loans

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However, the worrying point is that the disbursement/commitment rate of ODA loans kept decreasing, from 84% in 2010 to only 67.7% in 2016 (except for 2014, when it reached 128% due to accrued accumulation from previous years) [compiled by the author from OECD (2018b)] Because of the gradual increase of ODA loans proportion, the amount of ODA loan repayment in Vietnam has increased over the years, reflecting the increasing ODA burden

on the economy From 2010 to 2017, Vietnam had to pay more than 5.83 billion USD for ODA's repayment and more than 2.3 billion for ODA's interest, reaching nearly 8.15 billion USD in total (equivalent to 24.6% of total ODA disbursement) [compiled by the author from OECD (2018b)] Besides these two forms of ODA (ODA grants and ODA loans), there is another form of ODA to Vietnam, which is ODA invested in assets (Equity Investment) However, this form accounts for a tiny proportion (0.43% of total ODA to Vietnam for the whole period of 2010-2017) with a value of approximately 142.54 million USD for the entire period [compiled by the author from OECD (2018b)]

Countries in the OECD Development Assistance Committee (DAC) and international multilateral organizations are the main ODA donors of Vietnam, accounted for 62.2% and 37.56%,

respectively, of total ODA disbursement for the whole 2010-2017 period [compiled by the

author from OECD (2018b)] However, the amount of ODA from DAC countries is currently

decreasing in proportion to the amount of ODA from multilateral organizations to Vietnam The

trend of donor partners of Vietnam in the upcoming time seems to be multilateral

organizations, not individual countries Among donors who are multilateral organizations,

ODA from IDA accounted for the most significant proportion (24.63% of total ODA for the whole period) However, the proportion of ODA from these organizations is declining as Vietnam has become a middle-income country In 2010, the percentage of ODA from IDA into Vietnam took up 26% of ODA capital while in 2016, this figure was only 20% before dropping to 22% in 2017 Asian Development Bank is the second-largest donor in the group

of multilateral donors to Vietnam with the proportion of ODA, accounting for 8.57% from

2010 to 2017 [compiled by the author from OECD (2018b)]. ODA from ADB to Vietnam increased sharply from 2010 to 2014 before showing a decreasing trend in recent years Japan

is the biggest donor to Vietnam since the ODA from Japan to Vietnam usually took about 32% of the total Japan’ODA is not only to help the Vietnamese economy but also to improve physical connectivity within ASEAN to deepen integration, increase the stability and prosperity of the region (Bobowski S 2019)

The allocation of ODA to economic regions in Vietnam has changed In the early 2000s,

ODA was most distributed to the South, then to the Central and finally to the North of Vietnam Recently, the allocation of ODA to the Central region was the lowest ODA to the interregional areas has been increasing and accounting for a significant proportion In the 2006-2010 period, ODA allocated to the inter-region area accounted for 54% of the total ODA signed compared with this ration in the 2011-2015 period was 47% (Prime Minister 2016) Hence, the ODA flows are not focused on a specific area but for interregional regions

ODA can be transferred via channels such as public sector; Non-governmental organizations and civil society; public-private partnerships; multilateral organizations; teaching institutions, research institutes and think-tanks; private sector institutions and other organizations In Vietnam,

89.56% of ODA is through public sector; 2.8% is through multilateral organizations; 2.41%

is through non-governmental and civil society; 2.27% through other organizations and 1.7% through; teaching institutions, research institutes and think-tanks Other channels account for less than 0.2% of total ODA However, it is worth noting that the level of ODA disbursement through the public sector is only 84.66% ODA commitment (the second-lowest among the channels of ODA to Vietnam) The second-lowest level of expenditure is through multilateral organizations (reaching 72.83% of ODA commitment)2 Besides, in terms of ODA channels, 98.86% of ODA loans are through the public sector or in other words, only the public sector has access to ODA loans As for ODA grants, 57.56% of ODA grants to Vietnam is via Public Sector; 12.41% is through multilateral organizations; 7.8% is through teaching institutions, research institutes and think-tanks [compiled by the author from OECD (2018b)] Then, Vietnam should pay attention to when setting up schemes to attract ODA

Based on the implementation goals, ODA projects are allocated into 11 field groups They

are:

 Group 1: Social infrastructure and services

 Group 2: Economic infrastructure and services

 Group 3: Production sectors

 Group 4: Multi-Sector/Cross-Cutting

 Group 5: Commodity aid/General program assistance

 Group 6: Action relating to debt

 Group 7: Humanitarian aid

 Group 8: Administrative costs of donors

 Group 9: Support to NGOs

 Group 10: Refugees in donor countries

 Group 11: Unallocated/Unspecified

From 2010 to 2017, Economic infrastructure and services accounted for the highest

percentage with approximately 15.77 billion USD (taking up 47.6% of total ODA

disbursement for the whole period) The second place is Social infrastructure and service with 9.3 billion USD, accounting for 28.11% Multi-Sector/Cross-Cutting ranked third with 3.89 billion USD (11.76%) while Production sectors ranked fourth with 2.67 billion USD (8%)

[compiled by the author from OECD (2018b)] ODA has supported the construction and

development of a few key industries and fields in Vietnam, such as transportation and

storage; energy (energy policy, renewable energy, energy distribution policy); water supply and sanitation; education; multi-sectors; environmental protection; agriculture, forestry and fishery; government and civil society; medical; budget support; financial and banking services; manufacturing, mining and construction

However, ODA flows to the sectors of Transportation and the Energy are mainly loans

with an increasing amount In 2010, 93.94% of ODA for transportation was ODA loans, and

in 2017, this figure rose to 97.95% Similarly, ODA loans for the Energy sector in 2010 and

2017 was 95.57% and 96.73%, respectively ODA for water supply and sanitation also consisted of 82.62% of ODA loan As for Education, nearly half of the ODA in this field came

from ODA grants (47.74%) Environmental Protection and the multi-sector areas both had over 30% of ODA grants

3 Role of ODA in economic infrastructure development in Vietnam

Infrastructure is the engine for economic growth, so it is the sector that received the most substantial proportion of ODA in Vietnam This sector includes: 1) Transportation and storage; 2) Communication; 3) Energy (policy, renewable energy, non-renewable energy, thermal power plants, nuclear power plants, energy distribution); 4) Banking and financial services; 5) Business and other services

From 2010 to 2017, Transportation and storage is the sector that received ODA most (9.76 billion USD in the whole period); followed by Energy (4.67 billion USD) and Financial

Services and Banking with 820 million USD Business and other services and Communications accounted for about 347 million USD and 167 million USD

respectively

However, similar to the general trend of ODA to Vietnam, the total ODA to the economic infrastructure sector in Vietnam has declined sharply In 2014 the total ODA disbursement of this sector was more than 2.63 billion USD, decreasing by 44.3% to 1.46 billion USD in 2017 (see figure 2)

Figure 2 ODA disbursement in economic infrastructure in Vietnam during

the period 2010-2017 (million US$) (Source: OECD 2018b) Most of the ODA from organizations and countries for Vietnam to build infrastructure are preferential loans with low-interest rates and extended maturity This demonstrates the great efforts of Vietnam and donors in improving and harmonizing

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processes, procedures, institutional improvement, skill enhancement at all stages of resource mobilization as well as the trust of donors to Vietnam Among the total ODA allocated to the infrastructure sector from 2010 to 2017, 95.4% of which is borrowed from major donor partners like Japan, IDA, ADB, Korea Japan is the largest donor with nearly 8.85 billion USD (accounting for 56.1% of total ODA for the infrastructure sector) with almost 8.64 billion USD of ODA loans and 209.8 million USD of ODA grants (the second-largest ODA grants donors) Coming in second is IDA, a World Bank representative that provides preferential loans to developing countries, with approximately 3.3 billion USD (all loans) The third rank is ADB with over 1.15 billion USD of ODA, in which 1,143 billion USD

in ODA loans Australia is the largest donor of ODA grants to Vietnam in the infrastructure sector with nearly 236.8 million USD

Table 1 Top 10 largest ODA donors in the infrastructure sector in

the period of 2010-2017 (USD million) Donors Total ODA grants ODA loans ODA equity

investment Japan 8847.83 209.80 8638.03

ADB 1153.83 10.68 1143.16

South Korea 831.70 21.80 809.90

France 491.13 4.92 486.22

Germany 431.86 24.02 361.28 46.56 Australia 236.80 236.80

European institutions 113.66 3.81 109.85

Source: Compiled by the author from OECD (2018b)

Because Transport and Energy are the two sectors that receive ODA the most then

next part will further analyze ODA in these two sectors

3.1 Transportation

to meet the development requirements of the national economy” Therefore, transportation has received much supports from ODA

From 2010 to 2017, total ODA disbursement to Transportation and storage reached 9.76 billion USD, accounting for nearly 62% of total ODA disbursement in the Infrastructure sector This capital was mainly allocated to the road transport (6444 million USD, equivalent to 61, 89%), followed by rail transport (1378 million USD, 14%); water transport (1121 million USD, 11%) and air transport (563 million USD, 6%) (See Figure 3) More than 95% of total ODA for transportation infrastructure was

from ODA loans [compiled by the author from OECD (2018b)]

Figure 3 ODA commitment and ODA disbursement structure in the Transport and storage sector

in the period of 2010-2017 (USD million) (Source: OECD 2018b)

Thanks to ODA capital, the system of roads, railways, inland waterways, seaports and airways of Vietnam has developed significantly

For road infrastructure, ODA focused on developing and upgrading highway and

expressway network, significant bridges, provincial roads, rural roads Typical projects are Nhat Tan Bridge Project, Hanoi City Ring Road No.3 project from Japanese ODA, Mekong Delta Transport Infrastructure Development Project from World Bank's ODA Thanks to ODA, the critical highways on the North-South axis were put into use in 2016 The highway connected the two key economic regions of the North and the South with gateway ports and national border gates, including Ho Chi Minh City - Trung Luong; Phap Van - Ninh Binh; Lien Khuong - Da Lat; Hanoi City Ring Road No.3; Thang Long Boulevard; Hanoi - Thai Nguyen; Noi Bai - Lao Cai; Noi Bai - Nhat Tan; Ho Chi Minh City - Dau Giay; Hanoi - Hai Phong Vietnam was in the top 3 countries with the most significant and most modern expressways in Southeast Asia (Bidding Newspaper 2016) As of 2017, the country has 13 expressways, 146 main national highways with a total length of 23,816 km, of which mostly asphalt roads (Ministry of Industry and Trade 2017)

Regarding railway infrastructure, ODA focused on the maintenance and development

of the North-South railway line It also helped to build some elevated railway lines in Hanoi and Ho Chi Minh City and a high-speed railway linking the two regions Moreover, ODA projects upgraded and modernized the signal information system on major railway lines, focused in modern and high pulling power locomotives Major projects in this field, for example, are Ben Thanh-Suoi Tien metro line project, Ho Chi Minh City Urban Railway Construction Project, Ben Thanh - Suoi Tien Section Due to the heavily degraded infrastructure and outdated technology, the demand for investment in the railway sector is enormous, but the budget is too limited, so ODA capital is indispensable However, in the past few years, ODA attracted to railways sector remained at a low level (only 1.38 billion

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USD from 2010 to 2017) The main reason is that this sector needs an intensive amount of investment capital Therefore, it requires co-sponsoring, but each donor has a different point

of view and technologies, so reaching a consensus for an investment project is not easy

On the other hand, difficulties in synchronizing the system between donors and the recipient have a significant impact on the efficiency of ODA's projects Moreover, for railway infrastructure constructions (except for new invested routes), construction and transport operations often happen at the same time Therefore, the construction period is long; the cost of ensuring traffic operation is high, and the process of disbursement is slow

For air transport infrastructure, in recent years, airports in Vietnam have been

upgraded thanks to the contribution of ODA Many major investment projects at Noi Bai,

Da Nang and Tan Son Nhat international airport that used ODA are effective and achieve high quality ODA also contributed to compile training textbooks, improve the operating skills of high-tech machinery and equipment of aviation officials and employees, to follow international standards through equipment procurement and technology transfer contracts,

to facilitate the integration process in the aviation sector

For waterways infrastructure, thanks to ODA, many vital projects in the maritime

industry have been built and upgraded By the end of 2015, Vietnam has improved national and local seaports such as Cai Lan Port, Hai Phong Port, Cua Lo Port, Vung Ang Port, Tien

Sa Port, Quy Nhon Port, Nha Trang Port, Saigon Port, Can Tho port These seaports had met the demand for goods trade, creating more jobs, increasing income for labour in rural areas and localities with port facilities Besides, to facilitate waterway and road transport, thanks

to ODA, Cai Mep-Thi Vai port project has been carried out to turn it into an international transhipment port

Besides the above fields, ODA also supports the strengthening of traffic development planning, improving sector management capacity as well as awareness, legal education and traffic safety in society Furthermore, technical assistance projects have contributed to the staff's specialized training for expressway construction in Vietnam, sea and river transport ODA for these projects is mainly from ODA grants

Overall, the contribution of ODA to the transportation sector is enormous as it minimized the stress on capital for development investment of the industry At the same time, the level of science and technology as well as management skills of each sub-sector has also been upgraded, gradually approaching international standards ODA helped to enhance transport capacities such as improving driving speed on roads, shortening running time on railways and inland waterways, increasing the number of goods through ports; improving cargo flow through airports and satisfying travel needs in Vietnam Because of this development, Vietnam's logistics service industry is thriving at a rate of 15-16%/year According to the World Bank LPI Performance Index in 2014 and 2016, Vietnam ranked 53 and 64/160 countries, respectively, ranking 4th among ASEAN countries, after Singapore, Malaysia and Thailand [Cafef.vn et al 2017] According to Report of the World Economic Forum, Vietnam's transport infrastructure in the period 2010 - 2015 has increased

by 36 steps (from 103 to 67) (Schwab 2017), but by 2018, it decreased to rank 75th (Vietnam National Assembly 2018)

Despite the significant contributions from ODA, transport infrastructure has not been developed accordingly with the potential and has not met the demand Some urban areas are densely populated, especially in big cities such as Hanoi, Ho Chi Minh City Transport infrastructure still cannot keep up the pace of economic development of the cities, and traffic jams happen frequently Some remote areas, rural mountainous regions are always difficult to access Many roads, bridges have been downgraded or severely damaged, but there has not been enough fund to repair or build new ones The delivery of counterpart funding plan was deficient, which has dramatically affected the implementation progress of the projects, possibly causing complaints and grievances from foreign contractors leading to compensation This is also one of the reasons for the slow disbursement of ODA compared to the commitment schedule with international donors

3.2 Energy Sector

Energy is a field that has an essential role in promoting economic development Therefore, this is also an area that receives a lot of ODA in the Economic Infrastructure group (only after the Transportation Sector) in Vietnam ODA has been instrumental in promoting many renewables and efficiency projects that would possibly have not been implemented in developing countries without these flows (Gomez-Echeverri L 2018)

In the 2010-2017 period, total ODA disbursement to energy sector was 4676 million USD, accounting for 29.65% of total ODA invested in Vietnam's infrastructure In particular, the most considerable amount of ODA capital is for coal-fired electric power plants construction projects, with over 1.6 billion USD (equivalent to 34.31% of ODA values

in the Energy sector); followed by Electric power transmission and distribution Projects with nearly 1.43 billion USD (accounting for 30.58%) Projects of Energy generation, non-renewable sources, unspecified from 2010 to 2017 reached 718 million USD of ODA disbursement, equivalent to 15.37% ODA for Energy policy and administrative management projects is relatively high compared to other fields, taking up 6.33% of the total ODA for the energy sector, equivalent to 295.95 million USD Projects related to Hydro-electric power plants reached 210.81 million USD ODA disbursement for the whole period (accounting for 4.51%) (see Figure 4) Beside, ODA for the energy sector has also supported projects for solar energy, wind energy, gas distribution and biofuel-fired power plants, but the value is still shallow