Accessibility of private sector to the official development assistance funds for infrastructures development in vietnam

..Vrfrl'^^.^ MASTER PROGRAM IN PUBLIC MANAGEMENT ""I'rL.^, UNIVERSITET -^u^^^ MASTER THESIS OF MPPM Accessibility of private sector to t/ie Official Development Assistance funds for i

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V\^^

UNIVERSITY OF ECONOMIC AND BUSINESS - VNU

UPPSALA UNIVERSITY - SWEDEN

Vrfrl'^^.^ MASTER PROGRAM IN PUBLIC MANAGEMENT ""I'rL.^,

UNIVERSITET -^u^^^

MASTER THESIS OF MPPM

Accessibility of private sector to t/ie Official

Development Assistance funds for infrastructures

development in Vietnam

Author: Trirang Tan Lam Supervisor: Dr Sven-Erik Svard Local Supervisor: Dr Nguyen Anh Thu

Class: MPPM - Intake 6 - Group 19

Hanoi, May 2013

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Chapter 2: Frame of reference 10

2.1 Definition of Terms 10

2.1.1 ODAfund 10

2.1.2 Infrastructure 10

2.2 Past researches on ODA in Vietnam 11

2.3 Researches on private sector 12

Chapter 3: Methodology 13

3.1 SWOT model 13

3.2 Contents of analysis 14

Chapter 4: Analys Results 15

4.1 Situation of management and use of ODA in current public sector 15

4.1.1 Strengths 15 4.1.2 Weaknesses 15 4.1.3 Opportunities T^

4.1.4 Threats 17

4.2 Private sector access to ODA funds 18

4.2.1 The first reason i8 4.2.2 The second reason ^0 4.2.3 The third reason 22 4.2.4 The fourth reason 26 4.2.5 Limitation and challenges 31

4.3 Solutions for the private sector to approach ODA capital 32

4.3.1 Current legal conditions ^2 4.3.2 Creating enabling conditions ^^

4.3.3 Creating business opportunities ^-f 4.3.4 Pilot projects 35

Chapter 5: Findings and Conclusions ^^

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Student: Truong Tan Lam

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Abbreviations and Acronyms Page 2

Abbreviations and Acronyms

Asia Development Bank World Bank

Federation Internationale Des Ingenieurs-Conseils Japan Bank for International Cooperation

Commercial Interest Reference Rates Build - Operate - Transfer

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Abstract of Thesis PageJ Abstract of Thesis

Title: Accessibility of private sector to the Official Development

Assistance funds for infrastructures development in Vietnam

Level: Final assignment for Master Program in Public

Management

Author: Trwong Tan Lam

Supervisors:

Swedish Supervisor: Dr Sven-Erik Svard

Local Supervisor: Dr Nguyen Anh Thu

Date when the thesis is presented: May 18, 2013

Aim:

Shortage of public financial resources for investment and development of

infrastructure is a challenge threatening the development model called "East

Asian Miracle" In that circumstance, this study aims to clarify the benefits of

accessibility of private sector to the Official Development Assistance funds to

invest the infrastructure projects and prove that this is the solutions for the

story of deficiency and wastefulness of public financial resources in current

infrastructure investment in Vietnam

Method:

The SWOT model is used to analyze the existing situation of ODA

funds management and utilization The result of SWOT analys will be used

to study on the direction of repairing the weaknesses, mitigating the threats,

developing strengths and salvaging the opportunities On these basis of the

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Abstract of Thesis Paee 4

study to point out the benefits from the accessibility of the private sector to the ODA funds for infrastructure development projects The SWOT analysis

is conducted according to the qualitative method of secondary data sources collected

Result & Conclusions:

The study demonstrate the from the accessibility of the private sector to the ODA funds for infrastructure development projects There are four main reasons for ODA shift from the public to the private sector found in this study including: The first reason is to limit the extemal challenge coming from the development agencies in the trend of these agencies as ODA sponsors which have strategies focusing direction on the private sector The second reason is

to prevent the public debt risk of Vietnam beyond the safety threshold The third reasons to overcome the weakness of slow progress and slow disbursement of ODA in the public sector today The fourth reason is to overcome the weakness of ODA waste in the public sector as the consequence

of inefficient management and rampant corruption

Suggestions for future research:

This research has a limitation when the SWOT model has been chosen

to analysis the collected secondary data This study was only to clarify the weakness and threats of ODA management in existing public sector that is not enough data to analyze on the positive aspects as strengths and opportunities This limitation opens for further research in the future that is to select the model from the quantitative analysis of primarx' data collected directly in a number of public sector specific ODA projects that has been caiTied out Based on the method of monitoring and evaluating ODA projects developed by a number of organizations such as World Bank, ADB, JBIC

with the theory Result-based monitoring and evaluating system b\ Jody

Kusek and Ray Rist will give a full assessment results more adequately and

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Abstract of Thesis Page 5

more accurately

Contribution of the thesis:

This study has shown the benefits from the accessibility of the private sector to the ODA funds for infrastructure development projects In the context of difficulty of public finance resource today, this is a new way to make a breakthrough and the prospects for infrastructure development in Vietnam in the future

Key words:

Infrastructure challenge, ODA, private sector, public sector, efficiency, deficiency

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n Development Bank, etc, pay attention on many different aspects related to infrastructure development

In the book Connecting East Asia: A New Framework for

Infrastructure]o\n\.\y published by World Bank, Asia Development Bank and Japan Bank for International Cooperation in 2005, the infrastructure development raised as a challenge to East Asia Among them, the public finance resources for infrastructure is one of the leading challenges To meet the demand of infrastructure services East Asia erea must spend at least 6,2%

of GDP for investment in the critical infrastructure group each year includes electricity, telecommunications, water supply and environment, sanitation, primary traffic network Of these, approximately 65% of budget is for new investment and 35% for the maintenance the existing systems

Vietnam, a country located in the dynamic region with the annual average over 7% of economic growth rate in the past two decades are also facing difficulties as investment infrastructure needs is beyond the adapting scope of public financial resources In recent years, Vietnam has annually spent an average 10% of GDP for infrastructure de\elopment investment

(Figure 1)

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Chapter I: Introduction Page 7

Figure 1 Infrastructure Investment In Viet Nam

Figure I: Infrastructure Investment in Vietnam (source: General Statistics Office)

The question is that the investment resource issues, an important aspect in overall of the infrastructure development in East Asia area See the

investment finance structure for infrastructure of Vietnam (Boxl) shows a

very high ratio (61%) of investment flinds from the State budget, the government bonds and ODA, in which ODA funds rate is more than one third

of total investment funds for infrastructure That's demonstrated that investment resource depends heavily on ODA

Box 1: Infrastructure financing for Vietnam in 2002 Total investment for infrastructure in 2002 is US$ 3.3 billion

In which, 28% from state budget 14% from users, 37% from ODA and private sector financing 28%

Source: General Statistics Office

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Chapter 1: Introduction

/'age 8

1.2 Research Purpose

There are many studies from local and oversea related on the solutions

of the shortage problem of financial resources for the investment infrastructure development needs In general, these studies are discussed in a general solution is to increase the participation of the private sector For Vietnam, the context in which the participation of the private sector is in very faint role, infrastructure investment finance is mainly depends on ODA funds

Efficiency and performance in public investment for infrastructure have

so much drawbacks, especially using of ODA funds, an important funds resource for many poor countries till remained inadequately I personally believe that the infrastructure development matter in Vietnam despite own its characteristics, but also is not outside of rules and the general relationship of the East Asian issues And the road for infrastructure development in Vietnam could not lack the two leveraged factors which contributed to the "East Asian

Miracle" called the private sector and ODA funds The institutional reform in

investment to maximum exploit the advantages of both the factors, especially,

to facilitate for interaction of two factors will create the important catalytic and promote the great benefit In this case, the goxemment should consider the mechanism to allow the private sector to access to ODA funds through some kinds in which I would like to emphasize the public private partnership (PPP) for the investment of infrastructure development projects

Therefore, this study aims to clarify the anah sis of the benefits to the private sector that is able to access to ODA funds inxestment in the infrastructure development projects and to prove that are solutions for the budget deficiency and resources wasting in current infrastructure investment,

as well as to confirm that these solutions bring good prospects for infrastructure development in Vietnam

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Chapter 1: Introduction Page 9

1.3 Research Questions

For the purpose of above research, the questions posed are:

- Question I: What are the benefits to the private sector accessing

ODA funds to invest infrastructure development projects?

- Question 2: Which measures and proposals were given to the private sector accessing ODA funds to become realistic and effective?

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Chapter 2: Frame of reference Page 10

Chapter 2: Frame of reference

According to Vietnamese regulations, ODA comprises non-refundable aid ODA and loan ODA Non-refundable aid ODA is a way of ODA financing without refundment to the donors Loan ODA is the way of refundable financing ODA with concessional conditions on interest, grace period and refundment period assuring a grant element of at least 35 percent

for the tied loans and 25% for the untied loans (Article 5, Decree

38/2013/ND-CP, issued on April 24, 2013)

2.1.2 Infrastructure

According to definition of Investorwords.com, ''infrastructure is the

basic phvsical svstems of a count?y*s or community^'s population, including roads, utilities, water, sewage, etc These systems are considered essential for enabling productivity^ in the economy Developing infrastructure often

http://stats.occd.org/gIossar\'

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Chapter 2: Frame of reference

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requires large initial investment, but the economies of scale tend to be significant "'^

In Vietnam, The Construction Law issued in 2003 defined the

infrastructure as follows: "Infrastructure work system comprise

transportation system, communications, power supply public lighting, water supply, sewage, disposal treatment and other works "

In the limit of this paper the term of infrastructure are understood as infrastructure work system defined in Construction Law 2003

2.2 Past researches on ODA in Vietnam

From till now, there is also a number of researches on ODA in Vietnam but mostly in terms of research on the relationship between ODA and economic development in general or economic development in some specific sectors Some researches mention to the situation and solutions to effectively manage ODA by improving the existing public sector These include a

number of such researches: Research by Ho Huu Tien in 2009, Discussion on

ODA management in Vietnam, Bulletin of Science and Technology - Danang

University, N 2(31); Phan Trung Chinh, Characters of ODA and Situations in

Management of this Fund in Vietnam, Bank Bulletin No 7, April 2008; Tan

Due, ODA: Effectiveness is still not management target, Economics and

Forecast Bulletin, No 14/2008 Those researches focus on analysing situation and proposing solutions to use ODA more effectively but only limit in improving method management, training human resources, strengthening supervision without referring to an important approach which is to increase the participation of the private sector to impro\e the efficiency of ODA

The research on ODA in the expertise areas must be listed is the

research by Pham Thu Hien (2007), 777t' Effects of ODA in Infrastructure in

' htlp://www.invcslorwords.com

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Chapter 2: Frame of reference Page 12

FDI Inflows in Provinces in Vietnam 2002 -2004, Vietnam Development Forum in Tokyo, The 39^*" Workshop This research focuses on the relationship between ODA in infrastructure to attract FDI, proving that ODA play an important role in improve infrastructure, workforce and upgrading

local market scope thereby contributing to attracting FDI

2.3 Researches on private sector

It is hard to deny that to make '*East Asian Miracle" is the participation

of the private sector Once the demand for infrastructure investment beyond the response of public financial resources, the role of private sector participation is very important The developing countries in East Asia are getting lots of ODA financing from development agencies, among contributions are from the two multilateral development agencies of World Bank and Asian Development Bank Therefore, this paper also use some

findings about private sector related to ODA financing in the book Private

Sector Development Strategy is published by Asian De\'elopment Bank in

2000 and Private Development Strategy - Directions for the World Bank Group published by World Bank in 2002 These findings are used to analyse the ODA financing in Vietnam on the aspect of how efficient when pri\ ate sector is permitted to access ODA

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Chapter 3: Methodolo^ Page 13

In the public sector, SWOT model is commonly used to assess the internal factors and extemal impact of the public organization, find out the strengths, weaknesses, opportunities and challenges, thereby improve situation of the organization

For qualitative research method based on the collection of secondary data as in this paper, the application of SWOT to analysis is completely suitable

Figure 3: SWOT Model

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Chapter 3: Methodology />^„^ ]4

3.2 Contents of analysis

The SWOT model is used to analyse the existing situation of ODA funds management and ufilizafion The result of SWOT analys will be used to study on the direction of repairing the weaknesses, mitigating the threats, developing strengths and salvaging the opportunities On these basis of the study to point out the benefits to the private sector access to ODA investment projects funds of infrastructure development

The SWOT analysis is conducted according to the qualitative method

of secondary data sources collected

From evaluation management and use of ODA funds investment for the infrastructure from the public sector in Vietnam at present, provide the convincing arguments, evidence of the ability to improve efficiency, the project investment performance as allowing the private sector to access ODA funds Assess and propose a legal framework conditions, the government agencies capacity, the related officials to facilitate support and encourage the participation of private sector efficiency From then to make conclusions about the prospects for infrastructure development in Vietnam when this mechanism is widely applied

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Chapter 4: Analys Results p^„^ j 5

Chapter 4: Analys Results

4.L Situation of management and use of ODA in current public sector

4,1.1 Strengths

- On the scale, in the period from 1992 to 2012, total of committed ODA funds for Vietnam reached neariy USD 70 billion Invested by ODA funds is 12% of total social investment funds, 28% of investment from the

State budget, 50% of Government investment credit for development (Ho

4.L2 Weaknesses

- ODA funds disbursement is slow; disbursement rate/average budget

signed in past years only was about 50% (Figure 4):

Implementation and annual disbursement schedule of ODA in Vietnam

is low in comparison to the regional and international average rate For the ODA from WB, disbursement rate of Vietnam is 1 1,6% where the regional rate of 19.4; ODA from Japan is also with the rate of 13.6% comparing to 16.6% of international rate Some sponsors have high rate of existing capital like WB with 6.128 billion USD, Japan 5.981 billion USD, ADB 4.575 billion USD

- The preparation process and proposal for project is too slow, it usually takes about 3 years since preparation stage to the appro\al obtained

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Chapter 4: Analys Results p

i/ Many projects is too slow in comparison with the target progress, extension for implementation is required Such as:

There are 6 important projects in urban sector financed by ODA in Hanoi with three are in preparation period and three are in progress of implementation However, there are 5 among these projects facing with

problem of schedule delay (Hanoi Department of Plan and Investment)

Ministry of Transportafion is implementing 36 ODA projects with investment amount of 16 billion USD Among them, many large projects can not meet the requirement of planned schedule Hanoi - Thai Nguyen Highway Project was started in 2008 and the remaining time is only 20 months but the completed work amount at present is only 25% of the total; Hanoi - Thai Nguyen Highway Project was started in July 2009 and expected

to finish in 2013 but total completed work is only 5.5% and the disbursement

is of 19.4%; The project of road network upgrading has been slow compared

to the original 3 year agreement and renewal agreement also extends to the expiration 31/3/2012; Hanoi - Ho Chi Minh City Railway Safety Improvement Project with investment amount of 3,791 billion VND from Japan ODA is too slow with disbursement rate of 22% on total ODA fund and 18%) on counteipart fund; For Nhat Tan Bridge Project, the approved schedule is from 2007 to 2010 but all contracts are behind the plan The Contract No 1 is delayed 20 months Contract No 2 delased 24 months and

Contract No 3 delayed 22 months (Plan and Investment Department

-Ministry of Transportation)

- Being wasteful in investment due to delays progress and corruption: Nhat Tan Bridge Project is invested 3,150 billion VND from Japan ODA Recently, Tokyu Company, the main Contractor which undertakes the contract of access road to the bridge has claimed Ministr) of Transportation

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Chapter 4: Analys Results Page 17

to compensate 200 billion VND because Vietnam government's mistake in delay of 1.5 years in site clearance

- The monitoring and evaluation has not been focused

- ODA funds managed by intermediaries rather than managed by the capital owners result in less efficiency of capital using and the debt repayment occurs difficulties

- Vietnam is a country with economy in transition, with the political situation, stable economic growth, the social life of the people, especially the poor and improve attention should be getting a lot of interest of the organization for development cooperation both multilateral and bilateral

4.1.4 Threats

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Chapter 4: Analys Results />™^ ] g

- ODA Strategy of development agencies is to encourage the participation from private sector, public sector ODA increasingly reduced and ODA funds investment should be increased in the private sector

- ODA contributes to increase the nafional debt

- ODA funds usually requires along with some disadvantages commitment for Vietnam

- Vietnam has become a medium/average income country- so that according to international donors practice, the preferential ODA funds resource with the low interest would be cut down gradually and it to be replaced by ordinary capital resource loans includes higher interest rate and the shorter grace period to be provided

4.2 Private sector access to ODA funds

There are plenty of reasons to impulse as well as there are many benefits brought when the private sector access to ODA for investment of infrastructure development project The below are critical four reasons to speed up this process takes place

4.2.1 The first reason

The first reason for the private sector approaches ODA funds is to constrain the unprejudiced challenges from the development agencies as SWOT analysis foregoing The approach trends of the multilateral and bilateral development cooperation agencies is towards more and more participating from the private sector It is confirmed in these almost agencies' strategy Therefore, in the scope of infrastructure development, a new challenge set for Vietnam that is ODA funds for the public sector is decreasing, but also an opportunity to transfer ODA investment into the private sector should be increased, creating conditions to the private sector

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Chapter 4: Analys Results Page 19

would be its strengths improved As shown in the below chart (Figure 5), in

general the Government budget and in particular ODA funds for infrastructure investments tends to decrease and the private sector would be increasingly larger role ODA funds is no longer major investment source for investment of physical infrastructure but that become the catalyst to leverage for attracting other commercial capital resource in co-financing ADB estimates that every USD 1 of ODA fund financed to the private sector's infrastructure project as catalyst they would be ability to attract more USD 8 from other investment capital commercial sources for this project This is a good prospect for the infrastructure projects in Vietnam in the shortage of fijnds context

2010

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Chapter 4: Analys Results p 20

Figure 5: Infrastructure Financing for Vietnam (General Statistics Office)

4.2.2 The second reason

The second reason is to constrain the challenges of ODA contributing

to raise the national debt Although Vietnam's public debt is being evaluated

in the safety threshold under international practice, but in the public debt crisis aspect is a hot issue in the world today, there is also some concerns are raised on Vietnam debt risk beyond the safety threshold

Box 2: ODA and Public Debt

As of December 31, 2010, Vietnam's foreign debt amounted USD 32,5 billion, it is around 42,2% of GDP Of these, 62%

of Government's foreign debt and 38% of the company's foreign debt ODA make up around 74% among total Government's debt

Source: Ministry of Finance, Public Debt Bulletin No 1

One of the contribution factors to maintain the Vietnam's public debt in

the safety threshold due to the advantages of ODA loans withhold a large ratio among total Government's debt while the ODA loans have the long grace period and low interest rates (fluctuation from 1 to 2,99%/year) Vietnam will not maintain this advantage after 2010 As a medium income country, the concessional ODA with low interest rates will be cut down and replaced by ordinary loans of higher interest rates and shorter grace period Although the threshold reference to start applying the ordinar} loans of each development agencies are difference, but generally in the range approximately USD 1,000 of GDP per capita/year The World Bank is the

first Development Agency official announced to apply ordinar> loan mechanism to Vietnam in 2010, when GDP per capita/year reach $ 1,050 as calculated by the World Bank Upon this challenge, to help to retain the public debt in safety margin but still take advantage of the valuable ODA to

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Chapter 4: Analys Results ^ ^ p^„g 21

create incentives for economic development, the creation of mechanisms for the private sector to borrow ODA funds is a good solution It means that, the borrower is also the owner of loans and is the private enterprises The credit guarantee of the government will be replaced by the Credit Guarantee Fund of ODA in combined with a number of other sources This mechanism will help

to reduce the guarantee pressure from the government and promote the dynamism and efficiency of private sector in respects of cost recovery and repay

Box 3: Debt of public sector enterprices

Currently, there are not only ODA projects but also so many overseas loans for the public sector in general is facing difficulties in repayment The government as a guarantor has to pay for 8 projects that can not solvency the foreign loans, it is 9.2% of total (8/87 projects) guaranteed projects

The insolvent projects with outstanding loans is 5,9% of total foreign debt from the guaranteed projects as of August 31,

2011, of which, three mixed ODA project loans is guaranteed by the Government for partial ordinary loan under ODA credit package

Source: Ministry of Finance Letter no OLN

17164/BTC-In the aspect of reduce pressure investment from government budget to keep the debt levels in the safety threshold, the public private partnership model (PPP), particular the private sector participates in BOT projects and the government will utilize ODA funds for additional investment auxiliary infrastructure items of low cost recovery is a typical example for the efficiency in this aspect In this model, the private sector will access to ODA

in an indirect way as beneficiaiy from the additional investment by the government's ODA as a catalyst and risk sharing with major infrastructure investment by the private sector There are many examples of PPP models such as the private sector can invest n power generation plant, the public

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Chapter 4: Analys Results

Page 22

sector investment the transmission systems from the plant to the power consumption area The government invests a breakwater to support for a private container port project

For example, when the private sector invest a toll express highway with return ftind through fee collection from users Risk factor here is the traffic passing vehicles will not be dense enough for cost recovery when this express highway not connected to the residential, industrial or other intercity routes If private investors pay more budgets to invest these secondary roads then likely the lower cost recovery Therefore, the govemment must be involved in this project by using ODA to invest above auxiliary roads to share risks with private investors Thus, only a small amount of catalytic ODA fund investment but have created a manyfold infrastructure utihty help to solve the problem of public resources and public debts

4.2.3 The third reason

The third reason to overcome the disadvantages of implementation progress, slow disbursement of ODA in the public sector There are a lot of causes but mostly related to the public sector that when transfer ODA funds to the private sector could be overcome

+ The first cause is the capacity, qualifications of staffs from ODA project management and implement agencies can not meet the requirements

of the jobs resulted in slow resolving or redo many times due to errors Works characteristics in the ODA project requires staffs have excellence in foreign language, with expertise and good skills, understanding of international practices and regulations of the donor Meanwhile, with low salar\, it is constrained by salary mechanism for officer that is stipulated by govemment, incentive mechanism is unclear, it is difficult to recruit good employees meet the job requirements A typical example is in an ODA project, a staff of a

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Chapter 4: Analys Results p 9-5

Project Management Unit under the public sector carry out assignments equivalent to a staff works for the consulting company under the private sector implements the ongoing projects but employees of the private sector are paid ten times the salary of public sector employees The lack of incentives, low income levels lead to lower work efficiency and ease of corruption arise This drawback can be overcome when the private sector to assume the role management and implementation of ODA projects Incentives

of the private sector better, not limited, bound by the rules of rigid wages of the public sector so they can recruit the best staff, to meet the requirements and get payment according to the work efficiency, it is an issue that the public sector do not act yet As a result is the project implementation progress was improved

+ The second cause is defined by the long delays in the approval procedures from project owner As a stipulation, the project owners is the Provincial People's Committee/City People's Committee control the ODA projects for local or lines ministries, ministries level agencies for ODA according to sectors The cause for delaying the approval process from the agency are due to these authorities have no professional departments with good knowledge on ODA project implementation, therefore need to consult with the third party prior to approval thus it resulted in long delays This issue could be overcome if the ODA is directly transferred to the private sector owners direct manages it The private sector should be responsible and ensure efficient use of capital and loan repayment for donors Meanwhile, a number

of approval procedures will be eliminated or minimized resulting in shortened project implementation process

+ The third cause is not maintained the clear reward and punishment mechanism for ODA projects public sector management agencies One simple reason for delayed project implementation because of the good project

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progress obtained the management authorities will not receive any awards and slowly progress would not be any penalty on them The truth is in 20 years of attracting and using ODA in Vietnam has not witnessed any ODA projects management implement agency penalized or rewarded due to slow progress implementation or quickly made In some cases, the slow project implementation is sometimes benefits to employees from ODA project management agencies means they will continue to work and continue to receive salary, if the project finished they to be faced with the risk of unemployment For example, a road construction contract under an ODA project was signed by one party as a contractor and the other is the ODA project management agency Normally, these contracts are prepared with the terms under FIDIC contract forms, including clear indicated on rewards and punishments according to the good progress contract or slowly contract However, the award for quickly implements contract are often \er>' low, not enough to encourage contractors When the contract is delayed, the contractor usually not difficult to find a fault that belongs to the ODA management agencies such as the site clearance delayed, approval process, payment delayed etc thus penalty the contractor could not be made for the delayed contract Furthermore, slow progress implemented by contractors not any affect their economic interests when the long-time contract always accompanied by a price adjustment clause according to the Consumer Price Index or Construction Price Index With the average actual Construction Price Index increase in Vietnam about 20%/year, the prolonged course of a year, means the contractor plus 20% inflation cost payment tor their bills So there

is no excuse for the contractor to accelerate progress or e\en implement as proposed schedule The situation will be improved when ODA projects managed by the private sector As the owner of ODA capital and debt, they will have to calculate and provide clear awards and punishments mechanism

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to encourage speeding up, increase project efficiency Since the rapid progress made, the works come into use soon the payback/revenue would be faster, the cost savings may be caused by inflation

+ The fourth cause is shortage and slow supply of the counterpart fund Normally, the counterpart fund rate of an ODA project is about 20% of its total investment This capital part is mostly used for compensating in order to clear the ground and resettle In an infrastructure project, the ground area is often large and the work premises go through many residential compounds, sometimes through provinces like the transportation project and electricity transmit If there is not enough the counterpart fund to clear the ground, the impending difficulty is delay of work commence and slow progress Next, the approved compensation price will become out of date and inappropriate to the market price while waiting one or two years for payment When money is mobilized, people who are compensated will not agree with that price So we

have to restart the approval procedure, which wastes more time The lack o{ the counterpart fund begins from the bad planning step o\^ the local

authorities Only an impact, like the budget not reaching estimate or high expenditure for urgent activities related to prevent local natural disaster, can lead to the lack of the counterpart fund for the ODA project Especially in the current difficulty of public financial resource, the risk of lacking the counterpart fund is higher ODA for private sector also helps deal with this problem Before borrowing ODA, the financial capacity of the private investors shall be assessed, including the factor of supplying enough the counterpart fund The private businesses are actixe and know when to get opportunities and to turn situations fast In addition, they are guaranteed by the system of the enterprise credit and guarantee funds; therefore, the risk of lackinu the counterpart fund is clearly lower than that of public sectors

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Chapter 4: Analys Results p^ae 26

-I- The fifth cause is complicated payment procedure and too many organizations of controlling expenditure A procedure of disburdening ODA capital in the public sector currently passes many steps The payment file for

a infrastructure work is often checked by the supervising and consulting unit, then by the project managing organization, by the treasury of controlling expenditure, then moved to the Department of Finance, and finally to the ODA sponsor Each of these organizations can have poor ability, lack understanding of disbursement regulated by the sponsors, be afraid of responsibilities or any of other problems; as a result, disbursement is delayed

In such procedure chain, if there is only a mistake, it shall have to be start again and need much time Sometime it needs some months to complete a payment procedure It doesn't mention that this complicated procedure can cause difficulty requiring lubrication and corruption The advantages of the

private sector are simple paperwork created from self-control, self-sense o{

responsibility to each capital coin Only passing an authorized unit of assessing the payment file, it can be directly moved to ODA sponsors It skips many intennediary steps, so the progress of disbursement is sped up

4,2.4 The fourth reason

The fourth reason is to improve the wasteful disadvantage of ODA in the public sector The following are some analyses of wastetlil aspects:

+ Wastefulness due to slow progress:

According to the analyzing results in the Section 3,2.3, many causes connecting closely with characters of the public sector lead to the slow progress of implementing and disburdening ODA capital The biggest impact

of the slow progress is wastefulness

First of all, talking about aspect of beneficiar> people, the slow progress for operation of infrastructure utilities increases opportunity cost in

their life and livelihood (Box 4)

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Chapter 4: Analys Results p^oe 27

Box 4: The project of Hai Van Tunnel

According to the data of assessing EIRR for the Hai Van

Tunnel Project financed by Japanese ODA capital, we have

saved 22,8 million USD of the total expense for operating

vehicles through this tunnel since it was officially used, and

the saved time is equivalent to 25,05 million USD every

year It means that we will waste 57,85 million USD per

year on average (not naming other wasteful factors) if it is

slow to bring this work to use

Resource: Ministry of Communications and Transportation, Assessment of Japanese ODA Projects

Talking about contractors that deal with the infrastructure projects, the slow progress will cause decrease in profit due to increased input expenses, slow time of capital turnover, and loss of new trade opportunities

Talking about bon-owers of ODA capital, the slow progress will increase the project expenses Though the ODA capital has low interest rate (ranging 1-2,99% per year), it needs the guarantee expense which is often 0,75% per year for capital not disburdened The lower the disbursement capital is, the more the borrowers have to pay for the guarantee expense Moreover, most of the infrastructure contracts are signed with the article that prices are adjusted in accordance with the construction index The average increase in the construction index is currently about 20%/ year, so under the slow progress, the borrowers waste 20% of investment expense per year

Wastefulness due to the slow progress in the ODA projects has become

a common stoiy in Vietnam The key problem is that there is no one willing

to take responsibility for this wastefulness; therefore, the slow-progress projects are still extended and the projects lacking capital continue being

considered for capital addition without re-assessment of its effectiveness

when the output is the same, but more money is needed because of spiraling

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prices and increased input expenses caused from slow progress If, in the private businesses, people are not called for working to get more profit, all will die together As a result, if borrowing ODA capital, the private businesses have to find way to call for using it effectively without any wastefulness While the private businesses are thirsty for capital, the public sector in general and the govemment businesses in particular are using cheap ODA capital wastefully and ineffectively According to the research result in Secfion 3.2.3, moving ODA capital to the private sector is the optimal choice

to deal with the slow progress which is the wasteftilness problem of investing ODA in the public sector

+ Wastefulness due to corruption:

Corruption in ODA investment of the public sector not only causes waste of money for unofficial expenses through giveback, bribery, fraudulent, peculation but also leads to much more waste which has bad effects on making decision and limiting competition The following are some analyses

of wastefulness due to corruption in infrastructure investment in the sector ODA:

public-In the period of approving and choosing projects, the corruption can have negative effects on selection In this period, people who have rights to make decision of project approval can remove the projects with economic and high effectiveness in order to move the investment resources to the low-efficiency ones that can give them giveback and some political guarantee

In period of designing projects, the corruption leads to choosing capacity units that will design, study possibility, and prepare document of bidding invitation and technical standards At this time, these consultancy units can increase the value and design of the projects on purpose in order to make more chances of corruption in the period of project implementation Consultancy can also control and set up projects with standards suitable to a

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group of suppliers, consultants, and contractors of implementation period so that these units can have better conditions of unfair competition and then get illegal benefits which will be shared later

In period of bidding, the corruption causes formalistic organizations of bidding without real compefition There is short-time preparation of bidding document, limited bidding announcement, collusion between bidding inviters and some contractors creating unfair advantages for a group of some contractors and suppliers and getting their giveback Consequently, the tendering price is sometimes higher than the market prices causing high waste

In period of negofiating contracts, the corruption can lead to the fact that authorized people in the public sector give the articles beneficial for the partners to share benefits These articles always follow the rules of increasing contract expenses but decreasing responsibilities of contractors This is also a form of wastefulness

In period of construction, the corruption makes the quality of equipment and goods supply or buildings lower than requirement in the contract By bribing public staff who are in charge of performance supervision for confirming that the buildings are built in compliance with technical standards or for incorrect increase in mass and payment of equipment items, materials or services that are not supplied in reality They are asked for skipping some checking procedures or pretending not to know quality mistakes which should be corrected with the contractors' money The expenses for paying work are increased while the quality doesn't meet requirement Once more wastefulness is the impact of low-quality buildings, resulting in cost for later repair, decreased longevity, and low investment effectiveness

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Page 30

Box 5: Corruption in infrastructure-investing ODA

Mr Huynh Ngoc Si - the Director of West-East Avenue ODA Project was sentenced to 20 years because he received a US$ 262,000 corruption Having checked the

I hanh Tri bridge project and the southern line of Ha Noi third belt, the total investment was 270 USD millions from ODA capital, the government inspectors confirmed that the price of construction and installation was increased 30-40%

higher than the general one in Vietnam Similarly the Phuoc Hao irrigation project which had the total investment

of above 260USD million were discovered with many mistakes in the period of drawing documents of bidding invitation The bidding price was increased 17-26%

Resources: Vietnamnet

Restricting corruption or preventing wastefulness in ODA investment

in the public sector is a complicated procedure Two key factors that mainly appear during research of this problem are increasing explanation responsibility and speeding up competition during preparation and implementation of the infrastructure projects Supplying infrastructure services and project investment has long been done by the public sector exclusively The main problem in the ODA projects of the public sector is now there are too many organizations taking responsibilities concerned, but organization of taking final responsibility is not clearly indentified Corruption can be caused from many causes, but the private sector can help deal with this, starting its incident characteristics The owners of ODA capitals in the private sector are the main and final ones that take responsibilities for all procedures of making decisions and limiting bad effects on decision- making in order to prexent from wastefulness It is because that these ODA-capital owners cannot gi\e decisions that damage their benefits, hi the other hand, the public representatives and statT can do this since the ODA capital is not theirs and they don't ha\c to pa) for debts

Master Thesis: Muster Program in Public Management

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Page 31

The responsibility of explanation will be raised when there is competition during choosing private contractors for ODA finance and vice versa Therefore, the private sector is the best choice and the answer for the problem

of corruption and waste in ODA-financed infrastructure projects of the public sector

4.2.5 Limitation and challenges of the private sector accessibility to ODA

Although it is possible for the private sector to approach ODA capital for infrastructure investment, it is not an absolutely pinky picture and there are some limits and challenges Vietnam is a country with transmitting economy The private economy has begun developing since the early 90s Most private businesses have small scale and haven't gained many experiences and modern managing skills In the infrastructure field, the advantage has long belonged to the public businesses This limit can be corrected by privatization of the public businesses, which has been implemented during business privatization by the govemment There are so many public enterprises that have being operating for 30-40 years After being privatized, they operate very well These enterprises are good ones able

to participate in ODA projects The private businesses that ha\e enough conditions to get ODA capital will also get opportunities of gaining more capacity though technical support carried out with the public-sector ODA

One more challenge is lack of cun-ent explicitly and publicity of financial management in many Vietnamese private businesses Many private businesses haven't implemented yet or deficiently implemented the regulated financial reports The financial reports sent to the organizations of business registration are also ver>' cursor}' and formalistic with inaccurate and deficient data This challenge can also corrected by carefully choosing enterprises with clear financial conditions

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Chapter 4: Analys Results Page 32

The ODA capital is like catalysis and lever, so the private businesses need to mobilize more commercial capital resources to invest into the infrastructure projects But the current Vietnamese market hasn't developed perfectly yet

With the economy newly changing to the market system, the subsidization for infrastructure in Vietnam still sticks social awareness closely; therefore, people are not willing to pay higher fees for infrastructure services supplied by the private sector Financial risks of capital withdrawal for PPP projects are still high

4.3 Solutions for the private sector to approach ODA capital

4.3.1 Current legal conditions

Perfecting insfitution and legality is the first condition so that ODA capital can be given to the private sector really and effectively Approaching the ODA capital by the private businesses is mostly to participate in ODA projects as contractors and suppliers of goods, services and work Recently, the Govemment has issued a Decree No 38/2013/ND-CP on 24/4/2013 about ODA management and use as well as favorable borrowing capital resources for sponsors However, there is a far step of perfecting legal procedure so that the private businesses can approach the ODA At the present, the Decree No 78/2010/ND-CP dated 14/7/2010 about borrowing the foreign capital resources again by the Govemment is still in effect and the private businesses can only borrow the ODA capital in accordance this regulation with many limits That is the lent project has to be approved to use ODA capital by the Govemment and the interest rate is high (2/3 of reference commercial interest rate) The most important thing is the private businesses are not allowed to get the technical support package through the unretumable sponsoring capital in order to increase the performance capacity as done with the ODA in the

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Chapter 4: Analys Results pg^e 33

public sector The current legal conditions are not enough perfect so that the private businesses can approach the ODA capital serving the infrastructure development adequately and fair

Box 6: Forms that the private businesses are allowed to

approach the ODA capital

1 Borrowing from the domestic financial and credit organizations through programs and projects with credit limits or components financed by the ODA capital and through favorable capital in order

to implement activities appropriate to international regulations of this capital resource and to take lending advantages of financial and credit organizations

2 Participating in implementing programs and projects that are favored to use the ODA capital and favorable capitals of the Government in form of the Government Budget lent again

3 Taking part in carrying out programs and projects as public and private partners, of which the Government makes a contnbution of ODA capital and favorable capital loan

4 Participating in implementing programs and projects that have targets to support the private businesses of the organizations controlling those programs and projects

Extract Atiicle 9, Decree No 38/2013/ND-CP issued on 24/4/2013

4.3.2 Creating enabling conditions

Developing the intrastructure, though enhancement of approaching the ODA capital for the private sector, is a narrow field in the social - economic development However, to create enabling conditions for this field to develop,

it needs overall refomis through appropriate macroscopic policies

First of all, the legal refomi in direction of creating good competition environment, trade - investment liberalization to help the private sector have a fair playground as that of the public sector in term of managing and using the ODA capital The public sector, especially the organizations of managing and

Master Viesis: Master Program in Public Management

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planning projects, need to be compacted and decreased role as owners and producers, specializing in the coordination as a leader with new idea Moving the management and implementation of the ODA projects in direction of exterior hire though the managing consultancy contracts from competition between public and private capable organizations With the neatened managing organization, there are conditions to train and raise capacit>' of these labor resources so that they can coordinate and plan policies of the infrastructure ODA better, ensuring the market runs effectively and protecting the public benefits The tax and expense reforms in the infrastructure makes the governmental subsidization decreased so that businesses supplying the current infrastructure services of the public sector are moved to operate with self control, creating a competitive environment of infrastructure supplying service And then, it forms a new trend of investing in infrastructure in orientation that service using people have to pay instead of payment by taxpayers as currently

Creating the legal corridor is to refomi the capital and financial market

of infrastructure, to encourage set-up of funds for infrastructure investment, loan guarantee, and risk guarantee Now, the development organizations ha\e been giving many programs and projects to support this field The Govemment need to take this chance to make a breakthrough in the guarantee field and capital market for infrastructure to help businesses, especially the private ones, approach capital (first of alK the ODA capital) with role as enticement capital, and then speed up attraction of other commercial capital

as analyzed in Section 3.2 L

4.3.3 Creating business opportunities

It must create real business opportunities tor infrastructure operating enterprises Beginning with chances to become contractors, suppliers and

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Chapter 4: Analys Results pagg 35

managing consultants in the public ODA projects, through process of gaining experiences; these enterprises, especially the private ones, will get deeper to become investors financed by the ODA and commercial capital This time, these enterprises will resign opportunities to other businesses which will become contractors, suppliers and managing consultants later In consequence, an infrastructure trading environment will be gradually formed with many trading chances for all businesses with different scales The enterprises with low qualification and small capital and technique scale will take part in some simple steps through subcontracts Larger businesses will be the main contractors Finally, the businesses will get enough capital, techniques, and experiences to become the infrastmcture investors and service suppliers

4.3.4 Pilot projects

A model that wants to succeed shall have to pass pilot period in order

to leam from experience and continue perfection The pilot project must be small-scale infrastmcture project with high possibility, enough factors of big project In the fiiture, it will be sharing of risks and benefits between the private and public sectors The ODA capital is used as the enticement capital creating catalysis which attracts other commercial capital to the project through the investment contribution

During the pilot program of public and private cooperation set up by the Govemment recently though issuing the Decree No 71/2010/QD=TTg on 9/11/2010 about promulgating the pilot regulations of public-private cooperation, most projects faced difficulties The main cause is the projects had high commerce, low feasibility of capital withdrawal and financial risk The high possibility has long been chosen to invest in form of BOT out which most businesses have been carrying out The other projects that were chosen

Master Thesis: Ma.ster Program in Public Management

.•student: Truong Tan Lam

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Chapter 4: Analys Re.sults Page 36

for pilot application were not attractive to the private investors although there are support of such development organizations as JBIC, ADB and WB

A pilot project with large scale and total investment of nearly 1 billion USD that is considered feasible is the Long Thanh - Phan Thiet Highway A chosen private investor is BITEXCO Company with 60% of capital contribution This investor was guaranteed by The International Reconstruction and Development Bank (an organization of WB) to get the ODA capital through the govemment guarantee for implementing the project Five years later, it hasn't found the other investor that can make contribution

to 40% of the remaining capital

Box 7: The ODA - financed PPP pilot projects

Five beginning pilot projects in form of PPP, the favorably chosen ones, are the Project of constructing the fourth belt

of Ha Noi Capital, the Project of investing and building the above highway No 1 in Ho Chi Minh City, the Project of building the clean-water supplying factory in Hau River No

1, the Project of investing and building Ha Long - Hai Phong connecting road, and the Project of Nguyet Vien - Thanh Hoa Bridge

After assessment, there are two projects, including the Project of constructing the fourth belt of Ha Noi Capital and the Project of investing and building Ha Long - Hai Phong connecting road, that were moved to BT forms (Government capital) by the local authority Two other projects are still considered

Resource: Report of PPP group - The Ministry

Therefore, it is important to select and suggest the pilot projects The failure lesson from some above pilot projects again confirms that it is necessary to suggest the feasible and attractive projects, and then it creates pervasive and positive effects of model

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Chapter 5: Findings and Conclusions p^^^ 37

Chapter 5: Findings and Conclusions

5.1 Findings

Through the analysis in chapter 4, the study results basically answered the first questions is that it demonstrated the benefits when the private sector access to ODA to invest in infrastmcture development projects There are four main reasons for ODA shift from the public to the private sector found in this study including:

The first reason is to limit the extemal challenge coming from the development agencies in the trend of these agencies as ODA sponsors which have strategies focusing direcfion on the private sector, increasing participation of the private sector and shifting the ODA to the private sector The fact that we have the change policy in line with sponsors' strategies is what we should do as ODA recipient countries

The second reason is to prevent the public debt risk of Vietnam beyond the safety threshold In the context of the public debt crisis in Europe is becoming a serious and profound impact on the global economy, this findings are very important

The third reasons to overcome the weakness of slow progress and slow disbursement of ODA in the public sector today, a relatively simple disease that can not be overcome during the past two decades

The fourth reason is to overcome the weakness of ODA waste in the public sector as the consequence of inefficient management and rampant corruption That is one drawback eroding the confidence of ODA donors, the taxpayers of donor countries as well as people in the countr>' as the payee

For the second research question is the solutions to access ODA of the private sector becoming a reality and being effective This study suggests three main groups of solutions that is to create the favorable environment

Master Tfiesis: Master Program in Public Management

StudetU: Truong Tan Lam

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Chapter 5: Findings and Conclusions p 33

which including the conditions for legal reform, creating the legal framework

as the basic for this process to take place, creating business opportunities for the private sector to self-foster and self-accumulate experience, techniques and financial resources for becoming investors, providers of service and infrastmcture and ultimately is to choose and successfully demonstrate the pilot projects to generate pervasion and gradually improve conditions for the success of this model in the future

5.2 Limitations and directions for further research

This research has a limitation of the choice of model analysis With the SWOT analysis method to data from secondary sources collected, this study was only to clarify the disadvantages and challenges of ODA management in existing public sector that is now not enough data to analyze on the positive aspects and advantages This limitation opens the door for further research in the future that is to select the model from the quantitative analysis of primar\^ data collected directly in a number of public sector specific ODA projects that has been carried out Based on the method of monitoring and evaluating ODA projects developed by a number of organizations such as World Bank, ADB,

JBIC with the theory Result-based monitoring and evaluating system by Jody

Kusck and Ray Rist will give a full assessment results more adequately and more accurately However, this method requires investment of time and effon

in research

Another limitation is that for the second research question, the solution proposed just only stop at general level, can not go deeply to analyse the specific solutions so that the access of ODA of the private sector come true and effective

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Chapter 5: Findings and Conclusions Page 39

5.3 Conclusion

Although there are still some limitations as noted above, this study has shown the benefits to the private sector in accessing to ODA capital to invest the infrastructure development projects In the context of difficulty of public finance resource today, this is a new way to make a break through and the prospects for infrastmcture development in Vietnam in the ftjture

JlJ^Thesis: Master Program in Public Management

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