IMPROVING THE EFFECTIVENESS OF ODA MANAGEMENT IN VIETNAM CASE OF RURAL FINANCE PROJECT FUNDED BY WORLD BANK AT TRANSACTION CENTER III BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM

MASTER 2 IN FINANCIAL MANAGEMENTIMPROVING THE EFFECTIVENESS OF ODA MANAGEMENT IN VIETNAM: CASE OF RURAL FINANCE PROJECT FUNDED BY WORLD BANK AT TRANSACTION CENTER III BANK FOR INVESTM

MASTER 2 IN FINANCIAL MANAGEMENT

IMPROVING THE EFFECTIVENESS OF

ODA MANAGEMENT IN VIETNAM:

CASE OF RURAL FINANCE PROJECT

FUNDED BY WORLD BANK AT TRANSACTION CENTER III BANK FOR INVESTMENT AND

DEVELOPMENT OF VIETNAM

Tutor : Ms Céline Barrédy Student : Nguyen Thu Huong Intake 3 : 2012- 2013

Hanoi, October 2013

LIST OF TABLES AND FIGURES

Fig 1.1 Project cycle 11

Fig 2.1 Participating partners under Rural Finance Project 22

Fig.2.2 for the implementation structure and stakeholders of RFPII 24

Tab 2.1 Key Performance Indicators and Baselines of RFP II 26

Tab 2.2 Credit lines to PFIs (As of 31 st Dec.,2008) 29

Tab 2.3 Compliance of PFIs with accreditation criteria at Project Completion 30

Tab 2.4 Key Performance Indicators and Results of RDFII 31

Tab 2.5 Disbursement of RDF through PFIs (As of 31 st Dec., 2008) 33

Fig 2.3 Cumulative Planned and actual disbursement progress 35

Fig 2.4 Possible causes to problems of project performance under RFP II 41

TABLE OF CONTENT

INTRODUCTION 1

1 The thesis necessity 1

2 Objective of the thesis 2

3 Scope of thesis 2

4 Research methodology and approaches 3

5 Data sources 3

6 Significance 3

7 Expected result 3

8 The thesis structure 3

CHAPTER 1: The effectiveness of ODA management – general theoretical issues 5

1.1 The overview of Official Development Assistance (ODA) 5

1.1.1 Official Development Assistance Definition 5

1.1.2 The duality of ODA 5

1.1.3 Forms of ODA provision: 8

1.2 Content of ODA management 9

1.2.1 The need for ODA management 9

1.2.2 Content of ODA management 10

1.3 Efficiency of ODA management 13

1.3.1 The concept of ODA management efficiency 13

1.3.2 The basic criteria for evaluating the efficiency of ODA management: 13

1.4 Experience of some countries on managing ODA project and the lesson towards Vietnam 15

1.4.1 Philippines 15

1.4.2 China 16

1.4.3 Malaysia 16

1.4.4 The lesson towards Vietnam 17

CHAPTER 2: Case study and findings – the actual situation of managing WB’s capital funding for Rural finance project II at TC III BIDV 19

2.1 Overview of Rural Finance Project funded by WB 19

2.1.1 Brief of ideas and objective of RFP II and RFP III 19

2.1.2 Some main information and elements of RFP II and RFP III 20

2.1.3 Modus operand of RDF under RFP II and RFP III 21

2.1.4 Criteria and baselines for RFP management 25

2.1.5 Factors affect the management of Rural financial fund 27

2.2 General results and overall evaluation of RFPII ’s performance 29

2.2.1 Achievements 29

2.2.2 Credit lines 29

2.2.3 Key performance indicators 30

2.2.4 Disbursement 32

2.2.5 The socio-economic impact: 34

2.3 Real situation and Problems: 35

2.3.1 Unsatisfactory performance: 36

2.3.2 Problems in project management progress: 37

2.4 Causes of project management problems: 41

2.4.1 Incompetent Human capacity: 41

2.4.2 Inadequate and inefficient Management Information System 42

2.4.3 Inadequate Budget 43

CHAPTER 3: Solutions and recommendations for developing necessary conditions and capacities management of RFP 44

3.1 Solution for attracting ODA capital of WB into Vietnam 44

3.1.1 Stablize economy, politics and maintain national security 44

3.1.2 Promote investment with sponsors 45

3.1.3 Complete legal frame in term of management and use of ODA 45

3.2 Improve quality of management to main contents of rural finance project 46

3.2.1 Enhance training for qualified officers 46

3.2.2 Improving material and technical facilities for the bank 48

3.2.3 Completing operation process 48

3.3 Building strategy of whole sales of Rural Finance at Transaction Office III 49

3.4 Building finance project in accordance with the real situation of Vietnam 51

CONCLUSION 52

REFERENCES 53

APPENDIX 54

1 The thesis necessity

In 2012, Vietnamese economy has continued to grow at an average rate of 5.25%, themacro economy has improved especially public debt which, at about 55.4% of GDP, is atsafety level Facing with the demand of making use of different resources to boost socio-economic development in whole country, Vietnam has broadened internationalrelationship, focusing on attracting, receiving and managing well Official DevelopmentAssistant (ODA) projects funded by international financial organizations such as WorldBank (WB), Asia Development Bank (ADB), European Investment Bank (EIB), ect.Actually, WB is the earliest donor; the World Bank’s funded projects are by far the largestcapital projects with high degree of influence and thus are most extensive in typical field ofmanagement of ODA projects in Vietnam

Thanks to many open and incentive policies by the Government recent time, this growingeconomy with steady increasing GDP is acquiring a great amount of investment capital Inresponse to this demand, besides capital accumulated internally, an increasing flow ofofficial development assistance capital (from US$ 1,810 million and US$410 million ofcommitted and disbursed amount respectively in 1993 to more than US$ 6,486 million andUS$ 3.9 million in 2012) has been pumped into various aspects of Vietnamese economy byinternational donors and non-governmental organizations through DevelopmentAgreements with the Government of Vietnam

ODA capital played a positive role for Vietnam’s socioeconomic development,transforming Vietnam from a poor country with GDP per capita per year of only US$140in1992 to a middle-income country with GDP per capita per year of US$1,600 in 2012.Vietnam has disbursed more than US$37 billion worth in ODA However, this figure hasnot satisfied international donors and the Vietnamese Government Vietnam is still in thefirst period of the middle-income country and faces difficulties due to weakness ininfrastructure, low national competitiveness, unsustainable poverty reduction and the risk

of severe consequences from global climate change Therefore, improving ODAdisbursement and increasing ODA effectiveness are the Vietnam’s goals in the near future.The Rural Finance Projects under Development Credit Agreements in 2003 and 2009 forCredit NO 3648-VN (US$ mil 200 equivalent) and 3884-VN (US$ mil.200 equivalent)

respectively entered into the Government of Socialist Republic of Vietnam (SRV) andInternational Development Association (IDA) with objective of assisting Vietnam in itseffort to improve living conditions in the rural areas are three of the most biggest projects

of the same kind in Vietnam The two projects have been implemented in the form ofwholesale banking operation (WBO) They have introduced the concept of WBO for thefirst time Vietnam Because of this new nature, the project management has become a veryessential activity to a successful project performance It is project management unit (PMU)nominated by Bank for Investment and Development of Vietnam (BIDV) calledTransaction Center III (TCIII) responsible for managing both Rural Finance Project II(RFPII) and Rural Finance Project III (RFPIII)

RFP II is one project that has unsatisfactory performance at completion with 21 monthsdelay although it was assessed satisfactory in terms of achieving all its objectives Thesimilar RFPIII came into effect in April 2009 and has been in it ending phase Theproject’s management now faces the challenge of implementing this project satisfactoryand on schedule

For the above existing reasons, a research on ODA management is very important to asuccessful performance of not only Rural Finance Projects funded by World Bank but alsofor the alike, which have been getting increased in numbers recently

2 Objective of the thesis

This study aims at reviewing, analyzing Management method of RFPII to find out itsproblems that have affected adversely to project performance and drawing lessons forimprovement of the system contributing to better performance of RFP III and the alike.These objectives will be achieved by performing the following tasks:

- Making clear the concept of ODA management

- Analyzing RFPII management to find out its obstacles and problems in project implementation

- Proposing suggestions for improving ODA projects management efficiency

3 Scope of thesis

This study focuses on examining RFP II management method mainly at projectmanagement unit in terms of its process, impact factors, standard criteria in projectimplementation stage to identify its problems

4 Research methodology and approaches

ODA management is discussed in general and then applied to analyze current status ofmanagement efficiency and problems occurred during implementation of the RuralFinancial Projects and after that, recommendations will be made upon findings Secondarydata and primary data are used to conduct this study

Secondary data is gathered from external resources like textbooks, government documentsand internal resources like progress reports, project documents Primary data is collected

by conduct qualitative research The qualitative research objective is to obtain information

on the obstacles of RFP II management and requirements for RFP III from interviewingPMU’s staff and managers Managers and staff of PMU have been interviewed on howthey used information for making decision in project implementation, what obstacles theyencountered, what they can do to improve management effectiveness for better projectperformance

5 Data sources

The literature review and collection of secondary data has been performed by researchbooks, reports, newspapers and internet sources; by exchange information with managersand staff form WBO, PMU in project PFIs

6 Significance

By reviewing the issues on project management and understanding, findings the commonproblems through case study analysis, the thesis benefits the implementing agency andPFIs in providing appropriate recommendations to improve project management of RFDIII as well as applies in other cases in Vietnam Thank to the weakness found from RFPII’s performance, author will propose practical solutions and recommendations to helpimprove management of other similar projects

7 Expected result

The result of this thesis is to improve project management for further development ofBIDV and PFIs who involving in WB projects; to be expected effectively applied in thecase study of other projects funded by different donors

8 The thesis structure

The thesis started with the introduction part, following by three chapters and theconclusion part:

Chapter 1 will introduce general theoretical framework for ODA management.

Chapter 2 provides an overview and performance of RFP II that is one of ODA projects in

Vietnam funded by WB in finance field and implemented by BIDV through projectdocuments Basing on this overview, framework discussed in chapter 1 is applied to thisspecific case to find out obstacles during project management process and the possiblecauses leading to the unsatisfactory project performance

Chapter 3 will address some recommendation to improve the effectiveness of ODA

project management in TC III and in Vietnam in general

CHAPTER 1: THE EFFECTIVENESS OF ODA MANAGEMENT – GENERAL

THEORETICAL ISSUES

1.1 The overview of Official Development Assistance (ODA)

1.1.1 Official Development Assistance Definition

ODA stands for Official Development Assistance

According to Decree No 131/2006/ND-CP issued by the Government on 9th Nov 2006about Regulation on Management and Utilization of Official Development Assistance, thedefinition of ODA is:

“Official Development Assistance (ODA) in this Regulation is construed as thedevelopment cooperation activities between the State or the Government of the SocialistRepublic of Vietnam and the donors, which are foreign governments; bilateral donors andmultilateral or inter-state organizations

Notion of ODA refers to (i) the relationship in development cooperation between countriesthat aims at the promotion of the socio-economic development (ii) in the form of officialfinancing aid between the State or the Government level and the Foreign Governmentslevel, bilateral donor and multilateral or inter-state organizations This (ODA) relationshiphas formed and developed in the form of non-refundable concessional loan that included inannual ODA that one country pledge to assist other The grant element should reach atleast 25% for untied loans

1.1.2 The duality of ODA

Analyzing the duality of ODA is essential in order to have appropriate managing strategyfor ODA It is necessary to not only policy-making body, but also individual/ people whoreuse this assistance By understanding its duality, the process of ODA management meetsthe requirement: quick and accurate ODA disbursement, increase grant element, efficientuse and constantly improve the repayment capacity

a Strengths of ODA

- Supplement medium and long-term to the development investments

The terms of ODA loans are usually from 30 to 40 years repayment period including 8 –

10 years grace period There is no interest rate, but commitment fees and service fees areapplied and they add up to around 0.75% to 2% per annum Because of these advantageous

characters, the grant element in the form of non-refundable loan is at least 25% to 100%,and it becomes important, stable and long-term capital that supplement to development andinvestment in developing countries Especially at developing countries where commercialbanking system performs poorly, and is incompetent to mobilize the large amount ofmedium to long term capital for economic and social infrastructure development;Government bonds are not attractive to investors in the international capital markets andthe weakness of the stock market in mobilizing development and investment resources

- Promote and attract Foreign Direct Investment (FDI)

When the system of economic and social infrastructures are solid improved, ODA plays animportant role in appealing individual investment in business in that country To countrieswho commit to embark on its economic reforms with open-door policies by receivingODA the reform contributes to strengthen its belief and encourage individual investment(FDI)

- Support strengthening institutional capacity and promote economic policy reform

In each ODA, recipient countries are always required to conducting strengtheninginstitutional capacity activities and economic policy reform Their purpose is to facilitatethe funds and technology transfer from developed countries to developing countries bytraining, experiment and applying new technologies These activities will help ODArecipient countries to improve their strategic planning capacity, program and planeconomic development policy that help foreign investment in general and ODA inparticular to be distributed more efficiently

- ODA is one of the important sources of foreign currency supplements and tocompensate for the balance of payment deficit

Developing countries have huge demand for foreign currency in order to push up theirprocess of industrialization and modernization, while their interior foreign currencysources are insufficient because of the weak financial system and the Government’sunprogressive foreign currency mobilization tools Therefore, ODA is one of the importantforeign currency sources that help to compensate those deficits

Besides, goods and services, modern equipments and high technologies will be importedinto developing countries in order to support for the implementation of industrializationand modernization, social and economic infrastructure development

- ODA plays a part in guarantee for the Government essential expenditure withoutcausing inflation.

Government spending is limited by ability of budget reimbursement, especially in theGovernment of developing countries Hence, they have to print more money to compensatethe deficit Yet the amount of money that has been issued do not based on the volumegrowth of products and services, it leads to the currency depreciation, then inflation Themore money supply, the higher inflation rate and it finally end up with financial crisis Thisaction will be denominated as a violation to circulation currency In short, the cash outflowfrom foreign investment will satisfy Government spending without printing more money,

b Weaknesses of ODA

- In some case, ODA associated with political elements rather than economic elements

To avoid the political constraint by receiving ODA, The Government issued Decree

No.20-CP on 15th March 1994 and affirmed that: “The Government of the Socialist Republic ofVietnam welcomes all foreign governments and organizations to support Vietnam byproviding Official Development Aids on the principles of respecting its independence andsovereignty.”

- ODA associates with economic benefits of donor countries

Nowadays, the trend of ODA donors is to reduce non-refundable aid and increase ODAloan with conditions that constrain recipient countries to purchase their goods and services.That is a spotlight in actual state of foreign aid in the world, however the level of constraintare different from countries

- Foreign exchange risk

Most of the ODA have been received in strong foreign currency that might cause exchangerisks such as: US dollar, pound, euro… while the escalation of domestic currency (e.g.Vietnam dong) happens over time So the longer time of the loan is, the higher the variance

of exchange rate between foreign currency and domestic currency are This variance will

be borne and compensated by the State budget Thus, recipient countries should have anappropriate loan management policy if no they will face insolvency

- ODA can become debt burden of recipient countries in the future

The Government often uses these loans to build up social and economic infrastructure andits short-term profitability is extremely low, even zero Therefore, if the infrastructure areinvested and used but work inefficiently, it will become a latent debt burden in the future

1.1.3 Forms of ODA provision:

a ODA in the form of a non-refundable grant

Is form of ODA provision which is not refundable to the donor (or the grant element for agrand is 100%) Non-refundable ODA which is denominated as technical assistance is aninseparable part of ODA This fund is used mainly to develop human resource, institution,knowledge and technology transfer that recipient countries cannot implement bythemselves

b ODA in the form of concessional loan

Is form of ODA provision which is assistance through a loan with concessional conditions

in interest rate, grace period and debt-payment term The grant element should be at least35% for tied loans and 25% for untied loans

c Mixed ODA loan

Is assistance that includes a grant or a concessional loan provided simultaneously withother commercial loans, but as a whole, its “grant element” should reach at least 35% fortied loans, and 25% for untied loans

1.1.4 Key modalities of ODA delivery:

a Program support

Program support is a term that is used to describe the grant to investment in balance ofpayment and State budget It comes with the conditions of how the Government uses theaid and conditions that related to the policy reform

Support for program includes: balance of payments support, budget support, sector budgetsupport and reducing debt.

b Project support

Project support is the grant that aim at specific purpose Activities and expenses of theproject will be elaborated and frequently do not have additional condition A developproject includes a series of separate activities with its definite goal, budget and result, aswell as thorough project management There are three modes:

- Aid project managed by the Government

Aid project that managed by the Government is a project where the Government ofrecipient countries are responsible for managing the project and control the fund usage Inthis case, the fund will be disbursed directly to government’s account and the Government

of recipients has to record their usage explicitly Besides, donors also provide suggestion

of how to use the fund

- Aid project managed by the donor

Is a project where the donor will take the control and manage operation and finance of theproject In this case, the donor establishes management board responsible for projectimplementation and fund management Fund will be disbursed and recorded by the donor.This project is not a part of program and regular budget of government This fundingmethod is often seen at the bilateral donors and its clearly example is non-refundable grant

in term of technical assistance

- Aid project managed by NGOs

This is one of the popular grant methods that donors can assist NGOs by proposingappropriate project The donor will sign a contract with NGO that list all activities,conditions of using the fund, as well as finance and accounting requirements

1.2 Content of ODA management

1.2.1 The need for ODA management

a From the standpoint of the providers of ODA (donors)

Derived from funding, including ODA grant and ODA for concessional lending, both ofwhich are extracted a portion from the gross national product - GNP of donor countries toimplement “obligations" with regard to poor countries through the way of officialdevelopment assistance ODA Meanwhile, the countries’ GNP are primarily formed from

taxes, charges and fees , which are contributed by their people So, activities of providingODA to the poor countries by the rich ones are, in essence, that they are making long-term

“investment” in the poor countries in order to benefits in many different forms, whether inlikely economic or in political way to strengthen alliances Therefore, to manage theinvestments, the donors often offer forms or modes of providing ODA provided asdescribed above in order to manage their investments Together with the forms andmethods of providing ODA, donors also put forth a copy of the legal norms to closelymanage the turnover of capital flows One of the highest legal documents that multilateraland bilateral providing institutions of ODA applied to manage such credit funds is "LoanAgreement" (Loan agreement)

b From the standpoint of the countries approaching ODA (recipient countries)

Starting from the specific characteristics of ODA, which is outside elements of assistingthe poor countries in capital for their economic development, ODA is also tied to politicalfactors in the borrowing-loaning relationships Therefore, only a minute change in thepolitical relationship between the two political parties, which would immediately has effectover trends to increase or decrease in reducing ODA funding Even if the borrowers fail toreturn a part of principal or interest as committed, also it will immediately affect the trends

of increasing or decreasing in ODA, and donors even can stop providing ODA in a giventime In particular, this relationship not only has a direct impact on the bilateralrelationship between donor countries to recipient countries, but also affect the community

of donors Therefore, setting out requirements for strict management with respect to thesefunds of the recipient countries are urgently needed

Moreover, ODA as a source of foreign borrowings of borrowing country’s government toaim at support the balance of payments, interim budget deficits of government, especially

to support for investment and development activities, policy reforms Accordingly, tomaintain the liquidity of a country in each period, such government itself should bringforward managerial regulations in order to closely manage these aid loans, therebycontribute to improve capital efficiency and national liquidity

1.2.2 Content of ODA management

Derived from nature and specificities of ODA compared to other conventional sources that

is the ODA loan-borrowing relationships which only arise between the State and the Statelevels i.e between the governments of borrowing countries and those of the lending

countries, or with multilateral financial institutions So to ensure compliance with the pay principles, the recipient countries also provide a series of strict regulations for eachstage, each segment of loaning The whole management contents of ODA programs,projects are mainly based on "Project cycle" (Project circle) The Project cycle consisting

loan-of 6 stages can be described in the following figure:

b Project preparation

On the basis of the idea of project design, annually, Vietnam carries out to develop the list

of feasible projects scheduled to loan ODA sources for targets of investment and economicdevelopment The list of projects proposed by ministries, branches and localities should be

approved by the Government Next, the projects will be presented for loaning mobilization

in the Consultative Group meeting of donors, which is held annually in December, for theborrowing country The role of state management for this stage is to review and approve(pre-appraise) the list of highly feasible projects on technical aspect as well as the financialcapacity to for loaning mobilization

c Appraisal and approval of project content

After the project preparation, the subsequent stage is appraisal and approval of projects’content Subject to the scope, scale and nature of the project, the Government mayauthorize Ministries , branches and localities to conduct appraisal and present assessmentresults to the Government for consideration and approval

Management content with respect to this phase is a comprehensive management processfor the evaluation and approval of the project content , including technical, economic,financial organizational and performance evaluation of the project If the evaluation results

of the borrowing country are consistent with those of the donors, the project will beapproved by the parties as planned Besides, if such results are good, of high quality andtechnical, financial, economic and organizational accuracy Upon being kicked off, theproject will bring high economic efficiency while ensuring the repayment capacity of theproject in the future

d Negotiation , conclusion , approval or ratification of international conventions

Depending on the content of the project, the Government may authorize the competentauthorities on behalf of the Government to carry out negotiations , sign the LoanAgreement with the donor and submit the International Convention on ODA to thegovernment for approval after it has been signed by the parties

Management content for this stage is to manage all the contents related to the loan put forth

to negotiate with donors and decision-making process to establish negotiation missions.Results greatly depend on the preparation of the contents which will be negotiated and aswell on the capacity and qualifications , negotiating skills , knowledge of laws , practicesand conventions on ODA of the members of the negotiating mission

e Development and implementation of the project

After the loan is concluded and the Loan Agreement is declared effective by the WorldBank, the Vietnam enters a period of organization and implementation of the project.Mnagement content of this phase is the management of (i) the process of disbursement of

loans, (ii) the use of loans, (iii) procurement of goods and consulting services in theframework of the project, (iv ) bidding for work items, (v) auditing, (vi) reporting, (vii)development of organizational models of project management accordance with theprovisions of the two parties.

f Project evaluation and completion

Evaluation and completion of project are the end of the disbursement period of the last capital amount from loan account to project one After the World Bank declares to close books with regard to loans, it is time the parties make declaration on the completion of the project and enter the evaluation stage of management effectiveness and use efficiency of the Vietnam’s loans in over time

Management content for this stage is the process of implementation, investigation, survey,statistical data analysis, comprehensive evaluation of aspects of the project through a set ofidentifiable quantitative and qualitative indicators according to the regulations of the twoparties Assessments should be regular, irregular or periodic depending on the decision ofthe parties, in order to clarify the achieved results and cause obstacling to the stages of theproject Through assessment, the drawing lessons of success and failure will be disclosed

in public to use as a lesson for the subsequent phases of the project or for the otherprojects

1.3 Efficiency of ODA management

1.3.1 The concept of ODA management efficiency

Efficiency of ODA management is effective in all operations of activities related toprocesses of planning, project design, appraisal, loan approval, negotiation, signing andapproval of international conventions, implementation, and evaluation and completion ofthe project ends with the policies of state management of ODA such as Laws,Ordinances, Decrees, Circulars and Guidelines, Resolutions and Directives ; and system

of such management policy mechanisms are always getting the interest of the public ofboth the donor countries and recipient countries It is the goal of efficiency of ODAmanagement

1.3.2 The basic criteria for evaluating the efficiency of ODA management:

a The quantitative criteria

• The quantitative criteria with nature macro:

Management of external debts in general and ODA source in particular in any othercountry in the world, especially in developing countries such as Vietnam, the purpose withregard to foreign debt management aims at 2 basic goals as follows: (i) Improvingefficiency of using loans, (ii) Maintaining external debt at a rate equivalent to the nationalliquidity (safety margin).

Starting from practice of aid loaning of countries, a number of international financialinstitutions such as the International Monetary (IMF), World Bank (WB) havesummarized and given some basically quantitative indicators with consistent and macronature to evaluate the effectiveness of foreign debt management of a number of countries

in certain periods, as follows:

In addition to the general criteria above, managers have given a number of otherquantitative indicators such as: the repayment ability of the budget, investment / GDP,export growth, gross national reserves ratio in comparison with long-term liabilites plus totalshort-term debt during the year, the ratio between short-term debt compared to total debt, totaldomestic investment / GDP, total national savings / GDP, budget deficit / GDP

• The specific quantitative indicators (micro) in each ODA program, project:

Subject to the nature and content of each ODA program, project, donors may give differentmanagement objectives, as measured by the quantitative indicators set out in the LoanAgreements, in particular as follows:

- ODA contribution to GDP growth

- The increase in GDP per capita

- Improvement of environmental conditions through a number of indicators of reducingpollution of water resources, air and land

- The social indicators: the poverty rate, number of jobs created,

- The ability to absorb the ODA subject to sectors, fields

For example: for the Rural Finance Project funded by the World Bank, the criteria oftenfocus on specific and basic indicators as follows: The rate of disbursement of the project,number of banks participating whether or not assure quality according to internationalstandards set out jobs created, the income rate of the borrower

b The qualitative criteria:

Some requirements may be considered as the qualitative basic criteria for assessment ofState management effeciency of foreign aid loans as follows:

- Implementation of economic policies brought echoes and effective use of aid loans;

- With sense of responsibility to the public and without corruption;

- Compliance with the rule of law and human rights;

- Call for participation in large, in public with regard to all classes in society, including thepoor and disadvantaged people in the process of developing the policies

1.4 Experience of some countries on managing ODA project and the lesson towards Vietnam

1.4.1 Philippines

In August 1985, Philippines Central Bank deployed the implementation of Agriculture loanfund (ALF) sponsored by WB In the framework of this project, WB sponsored 100 millionUSD, United States Agency for Internatiol Development (USAID) made a non-refundableaid of 20 million USD; and the Project was deployed according to the mechanism that theCentral bank received the capital and carried out lending 102 PFIs of partiicaption finance(before the financial crisis of the area), it was only 64 PFIs after the financial crisis of thearea In 1991, after nearly 5 years of implementation, the Central bank transfered theProject to LandBank due to WB’s request; activity of the Project must follow themechanism of making profit From 1989, Philippines Central Bank started implementingthe reorganization, accordingly the Central bank must cut down its role as well as function

in allocating credit directly and manage credit programs When transfering, the Project wasstill not disbursed the capital resources but it had the biggest advantage of the high saferate of capital; the report information was timely and accurate; and if there was the arising

in problems, inspector of the Central bank would take part in dealing with immediately Receiving the Project from 1991 to 1999, LandBank recieved 990,1 million USD of thefinancing for projects and relending credit programs During the implementation process,the bank was supported by Government as well as the Central bank The capital resourcesdisbursed were closely managed from the phase of receiving till taking the capital backfrom borrower and the refunding to organizations Becuase of having the managementcoordination between functional agencies and the bank, caiptal resources which Landbankreceived from the international financial institutios sponsoring Philippines were reasonablyused, reached the financing target; in which, Country loan fund I, II, III of Landbank(CLF) with the value of 400 million USD was regarded as one of the most effectivelyimplemented finance investment and support programs of foreign country in the country

1.4.2 China

As well as other ODA capital resources, China has implemented the management of capitalresources sponsored by international financial institutions according to the method “Focusmanagement, non-focus implemenation”

Summarizing the reason for the success of managing and using the sponsored capitalresources in China, there have been some outstanding points such as: good cooperationstrategy, good establishment of projects, good implemenation and allocation mechanism,close monitoring and supervision mechanism China has specially dignified the role ofmanagement and supervision The received capital resources have been given to the banksfor carrying out the disbursement to the end borrower, projects but still managed by twocentral management agencies of China named Ministry of Finance (MoF) and NationalDevelopment and Reform Commission (NDRA) MoF could ask Local departments offinance to take the regular check towards project’s activities, coordinate with the bank toreceive the capital and coordinate with WB to evaluate each project Local governingministries and departments have also played the important role in the implementation andcoordination with the bank for supervising the captal usage Refunding capital in China isaccording to the way “who enjoys the profits will pay the debts” This regulation hasforced the borrower and user to pay attention to finding out the solution to make profits forpaying the bank, and the bank has looked after the capital resources borrowed frominternational financial institutions

1.4.3 Malaysia

Malaysia has the viewpoint: “coordinate closely with sponsors to inspect and evaluate” InMalaysia, financing capital resources are concentratively managed in a clue point namedEconomic and Planning Office This is the agency making the plan at central level, taking

in charge of approving project program and deciding to distribute the budget for servingthe national development target All capital resources financed by internationalorganizations have been spent on implementing projects of eliminating hunger andreducing poverty by this country Malaysia has highly appreciated the technical supportfrom sponsors The biggest purpose of Malaysia is receiving the technical suport in order

to strengthen the human’s capacity via the training classes Malaysia recognizes that they

have not had the standard supervision method yet, but the Governmnet has paid muchattention to the monitoring and evaluating work The monitoring and evaluating plan hasestablished from making the plan of project to the deployment at lending bank to borrower,projects Malaysia expecially pays attention to the sponsoring unit in activities ofinspection and supervision Evaluation method of this country is encouraging theevaluation coordiaation between sponsors and the country receiving the aid (the bank andthe agency in charge of) by making the evaluation system of both sides harmonious Theevaluation contents focus on the efficiency of the project in comparison to the policy andstrategy, raising the implementation work and paying attention to the result Monitoringand evaluating activities are regularly carried out not only at the banks serving thedisbursement of capital resources but also borrower Malaysia believes that the monitoringand evaluating work does not obstruct the project, it will help enhance the transparency aswell as reduce the waste by contrast

1.4.4 The lesson towards Vietnam

Each country has each different management way, no matter how it is, the biggest targetwhich they set up and gain is protecting the capital resources in maximum and serving thebest to the society as well as the people’s welfare Some expereinces drawn in order tomanage the project’s capital are:

Firtsly, the management of ODA projetc must focus on a clue “Focus management, focus implemenation” This is different from Vietnam where activity of managing ODAprojects is still very scattered at present

non-Project’s capital resources must be closely managed from the phase of receiving to takingthe capital back from borrowers and refunding to the sponsor, must have the cooridnationand bear the management responsibility between the functional agencies and the projectmanagement board itseft, the project’s capital resources can be reasonably used, reachingthe financing target

Besides, the world’s expereicne shows that when the financial capacity of the lending bankand PFIs of partiicaption finance is weakness and shortcoming, it will impact thesustainablity of the project Therefore, another important factor is trainging a cadre line-upwith qualifications and ability to appraise, enhance the capacity for the bank, unify the

viewpoint; projects are only approved with the condition that the financial capacity of thebank is wholesome, and only choose PFIs with real financial capacity

These lessons are high valuable experiences which Vietnam can learn from in the process

of managing and using capital resources of ODA project

Above are only the theoritical issues of management activity of ODA project In Chapter I

of the disseration, the following issues are mentioned: (i) what is ODA? Strong points andweak points of ODA capital resources, supply forms and modes of ODA aid; (ii)Management contents of ODA project; (iii) Make the evaluation criterions on qualitativeand quantitative for analysis, evaluation of the process of managing and using ODA capitalresources; (iii) Finally is the experence of some countries and lessons for Vietnam

How this activity is in the reality, we will find out about the real situation of financialproject management at Transaction Center III BIDV

CHAPTER 2: CASE STUDY AND FINDINGS – THE ACTUAL SITUATION OF MANAGING WB’S CAPITAL FUNDING FOR RURAL FINANCE PROJECT II

AT TCIII BIDV 2.1 Overview of Rural Finance Project funded by WB

2.1.1 Brief of ideas and objective of RFP II and RFP III

Aiming at support key components of the IDA’s Country Assistance Strategy (1995) of (i)assist transition to a market economy; (ii) strengthen the rural finance system throughfinance targeted to agriculture and small and medium enterprises in rural areas,accompanied by technical assistance; and (iii) reduction of poverty through promotinggrowth and enabling the poor to respond to opportunities to improve their welfare withpremises that the financial sector of Vietnam is too underdeveloped and market conditionsare still too imperfect to allow an adequate flow of credit to the rural sector, after RFP I in

1997, RFP II was designed and then came into effect in 2002 with two wholesale fundsnamed Rural Development Fund (RDF) and Micro-finance Loan Fund (MFL) objecting toassist SRV in its effort to improve living conditions in the rural areas though followinggoals which in line with those of Government: (a) encouraging private sector investmentsespecially farm household and private rural entrepreneurs; (b) strengthening the bankingsystem’s capacity to finance private sector investments; (c) increasing access of the ruralpoor to financial services

 RDF III with a credit of USD 200 million equivalent was negotiated on 9th Sept

2007 between IDA and SRV It was effective on 14th Feb 2009 and expected to beimplemented for 5 years aiming at supporting Vietnamese Government in promotingdevelopment of rural economy and improving living condition in rural area through thesame objectives as those of the RFP II

These objectives would be achieved through the provision of:

- Further assistance to the Rural Development Fund by extending additional mediumand long term financial resources, through the banking system, for the financing of privateinvestments in rural areas

- Further support to the government in its effort to alleviate rural poverty through theextension of financial and institutional support to the Micro-finance Loan Fund (MLF) andits implementation agency (MFIs)

- Institutional support to strengthen the BIDV (the project Apex bank) as a wholesalefinancial institution serving the rural areas

- Help to enforce financial discipline on the project’s Participating FinancialInstitutions (PFIs)

2.1.2. Some main information and elements of RFP II and RFP III

Credit No.3648-VN

RDF IIICredit No.3884-VNCredit amount

IDASRV4010

14 Apr.,2003

30 Sep.,2009

5 yearsSBVTCIII of BIDV25

SDR mil 127.7 (USD mil.200)

IDASRV4010

14 Feb.,2009

13 Dec.,2013

5 yearsSBVTCIII of BIDVCredit components

Institution Building

(a) RDF II: USD mil 167.4on- lent by BIDV to PFIs tore-lend to end borrowerswhose sub-project areeligible as stipulated

(b) MLF: USD mil.28 lending to MFIs to relend toend borrowers whose sub-projects are eligible asstipulated under this fund(c) Institution Building forBIDV and PFIs/MFIs: USDmil 4.6

on-(d) RDF III: USD mil 175on- lent by BIDV to PFIs tore-lend to end borrowerswhose sub-project areeligible as stipulated

(e) MLF: USD mil.10 lending to MFIs to relend toend borrowers whose sub-projects are eligible asstipulated under this fund(f) Institution Building forBIDV and PFIs/MFIs: USDmil 15

on-Project Scopes The project would finance

eligible sub-project all over

VN except in the urban areas

of Hanoi, HCMC, Haiphong,Danang

The project would financeeligible sub-project all over

VN except in the urban areas

of Hanoi (include Hatay),HCMC, Haiphong, Danang.All Key Performance Indicators (KPIs) of RFP III:

- Supporting rural development through financing of viable investments (number ofsub-loans, total sub-project investments, and estimated incremental jobs created)

- Strengthen BIDV’s capacity to manage wholesale banking operations and financeprivate sector investment (real increase in equity, private deposit mobilization, upgradinglending quality, and improving information and control system)

- Upgrading the operational capacity of MFIs/PFIs to provide financial services o therural poor (number of participating MFIs/PFIs, cumulative amount lent through them to therural poor, and cumulative numbers of rural poor borrowers

- Accomplishment International Development Plans by MFIs/PFIs

2.1.3 Modus operand of RDF under RFP II and RFP III

The two projects are rather similar to each other Actually, the second project can be seen

as next phase of the first one

Fig 2.1 : Participating partners under Rural Finance Project

Project activities coordinators and influencers(Professional associations, sociopolitical unions: Women Union, Farmer Union)

Local Project result influencers(Local authorities, Natural Resource and Environment Departments)The RDF/MLF is implemented as a Wholesale Banking Operation (WBO) There havebeen three main participants: the wholesaler (an Apex bank) which is TC III (BIDV) whohas been assigned to manage RDFII and RDFIII as a part of its normal operation agreed byIDA and Vietnamese Government under RFPII and RFPIII respectively, PFIs- who havesigned a Subsidiary Loan Agreement with BIDV acceptable to IDA and carried out retailactivity on their regular commercial basis, and the end-borrowers (PFI’s client) who singedsub-contracts with PFIs to borrow project funds which has no allocation made by crop ortype of investment to finance their own sub-project investments

Under the scheme, BIDV has disbursed the proceeds of the IDA credit to accredited PFIs(against their eligible expenditures) for approved sub-loans to sub-borrowers ThePFIs/MFIs then add their financing share of at least 10% of total sub-project cost, and thefinal borrowers contributed at least 15% of total sub-project cost in cash or in kindsincluding labor, but excluding land The rest has been financed by IDA but limited to 75%

of the cost of any RDF and MLF sub-project

With regard to the associated risk, BIDV bore the credit risk at the level of the PFIs/MFIs;the PFIs/MFIs undertook the credit risk associated with their sub-loans, and thegovernment assumed the foreign exchange risk associated with SDR/dollars disbursement

The PFIs/MFIs are free to: (i) select their eligible en-borrowers; (ii) set out their lendingrate along the lines of Government/SBV rules and regulations Maturity of PFIs/MFIsloans were conformed to the composite maturity of related sub-loans.

IDA funds were on lent by BIDV to the PFIs/MFIs at a variable interest rate, adjustablequarterly and equal to the latest quarterly weighted average cost of loan able funds in thebanking system and equivalent to the price that PFIs/MFIs would pay if funds weremobilized in the market

Proceeds accrued from the repayment of the principal of the subsidiary loans by PFIs/MFIswould be used to establish and maintain a revolving fund for on lending for the samepurposed and under the same terms and conditions as those for on-lending under the IDAcredit The sum of the proceeds of the IDA Credit and of the revolving fund would beknown as the RDFII, RDFIII and MLF

Refer Fig.2.2 for the implementation structure and stakeholders of RFPII.

2.1.4 Criteria and baselines for RFP management.

Basing on objectives and scope of RFP, the following criteria and indicators wereidentified to help the project achieve the best performance: (Refer Tab 2.1 for KPIs andBaselines):

(i) Encouraging private sector development: This objective is measured by KeyPerformance Indicators of:

- The number of private sector end-borrowers,

- Volume of loans granted to small, medium and large sized end-borrowers and

- The proportion of each as a percentage of total lending under the project,

- Number of participating private banks and their credit lines in total lending under RDF.(ii) Strengthening the Rural Finance System: This objective is measured by:

- The number of accredited banks for participating under the project,

- Number of actively participating banks under the project,

- Accomplishment of IDPs including the following IDPs Indicators:

(a) Capital adequacy ratio (equity to risk assets ratio);

(b) Liquidity ratio (liquid assets to short-term liabilities ratio);

(c) Profitability and efficiency which would be include the following financial indicators:interest spread between loans and deposits, net income/average equity, net income/averagetotal assets, and net operating income/gross income;

(d) Quality of loan portfolio (over-due loans/total loans, restructured loans/total loans,over-due loans/total loans that were due;

(e) Adequacy of provision for loan losses (total provision/over-due loans plus restructuredloans, and total provision as a percentage of total loan portfolio); and

(f) Number of training courses and participants

(iii) Poverty alleviation: a household income and expenditure survey on a sample basiswould set a baseline against which impact on rural poverty would be regularly measured.The survey would pay particular attention to ethnic groups and the relatively poorerdistricts, including the north-eastern upland and the central highland