Nguyen Dung Thuy
School of International and Public Policy, Hitotsubashi University (Public Economic Program)

A. Fact findings

The Vietnamese Government's new Socio Economic Development Plan 2006-2010 (SEDP) calls for a large increase in investment. In order to achieve the goals under the SEDP 2006-2010 and to ensure an average annual economic growth rate of 7 percent, the total investment required is estimated at US$ 140-160 billions. Out of the total investment capital requirements, it is estimated that the national capital will account for 65 percent and foreign capital for 35 percent. ODA is an important source of external capital and in order to balance the external funding sources for investment, the ODA that needs to be disbursed in 2006-2010 is estimated to be around US$ 11 billion. In order to disburse that amount, total ODA commitment needs to reach US$19-21 billions.

The donors are supporting the implementation of the SEDP priorities and in 2007 responded with the record ODA commitment of US$5.4 billion. This reflects the donors' confidence in the poverty reduction and growth performance of Vietnam. However, most of the donors, in particular the Five Banks (WB, JBIC, ADB, KfW, AFD), whose commitments represent approximately 80 percent of the total ODA commitments, have found it increasingly difficult to make further new commitments when the utilization of existing resources is lagging so far behind commitments.

By the end of 2006, the Five Banks have committed nearly US$ 19 billion to finance projects to support Vietnam's economic and social development needs. Meanwhile, the cumulative disbursements financed by the 5 Banks during 1998-2006 amounted to around US$8.8 billion. Between 2005 and 2006, US$ 2.4 billion was disbursed. As shown in the chart below, the disbursements have increased proportionally, yet not as fast as the new commitment.

After declining for 2 years 2002 and 2003, the disbursements of the 5 Banks have increased somewhat but still remained at around US$ 1.1 and 1.2 billion over the next four years. The ADB's disbursements declined due to project start-up delays, particularly on the recruitment of consultants. The stagnant disbursement performance combined with the large increases in new commitments has resulted in a downward trend of the disbursement ratio of the 5 Banks (see Table 1 below).

Table 1：Five Banks' Disbursement Ratio（％）

A comparison of performance shows that while the disbursement ratio improved for AFD and JBIC, ADB's , KfW's and WB's ratios declined. The disbursement ratios are still far below the regional average for ABD, JBIC and WB, for instance the disbursement ration for the WB was 12.5 percent for the Fiscal year 2006 against an average of about 20 percent in the East Asia Pacific Region over the same period.

Lagging in ODA Implementation is also exposed by the number of project requiring extension and the amount of loan cancellation. Besides, US$ 84.5 million of loan was cancelled in 2006. Partial cancellation of a loan may occur for a number of reasons: The loan may have some unused contingency, a mis-procurement may be identified, or an amount of the loan remains undisbursed after the closing date.

Such notoriously slow pace of Project Implementation is the Vietnamese Government's growingly serious concern with disbursement performance lagging far behind other countries in the region and with undisbursed balances of highly loan increasing. The Government is recognizing that slow implementation of projects has significant consequences on the achievements of Vietnam's development objectives, as well as on the costs of investments. Slow project implementation matters as it generates a vicious circle of lower disbursement and lower actual investment. It will also result in lower commitments, thereby affecting the growth performance and the attainment of the SEDP poverty reduction targets. Project implementation delays lead to delayed project benefits to the intended beneficiaries as well as likely increases in operational and project costs. Delays also incur additional costs to the Government as the price of inputs to investments, in the case of ADB and WB, the Government also has to pay commitment charges for un-disbursed funds.

Delays in ODA investment projects have real impacts on the Government's effort in attaining economic growth speed and reducing poverty. For example, The Growth Research connected to the Comprehensive Poverty Reduction and Growth Strategy (CPRGS) chapter on infrastructure suggests that increasing disbursement rates from 10 percent to 20 percent could increase growth rates by up to 0.3 percent over the next five years. The estimate surely gives a feel for the possible impacts on Vietnam's development of failing to utilize commitments into disbursement effectively.

There are several reasons to explain why ODA program and project implementation was delayed. First, very often it took a long time for ODA projects and programs to get off the ground. About 50% of ODA sources in Vietnam to infrastructure projects, which need more time to implement and even finish three or five years longer than projects in other sectors, also leads to the slow disbursement. Second, the ability of Vietnamese personnel to manage ODA projects and programs, particularly when it came to local government involvement, was disappointing. Third, existing investment and construction, bidding, management and ODA utilization laws are inconsistent and are inconsistently interpreted. Furthermore, the difference in manner between Vietnamese personnel and international donor implementation of projects was oftentimes great and this hindered project implementation. More details of these fact findings can be found in my Consulting Report (in Japanese only).

B. Policy Proposal

The demand to increase the speed of ODA implementation is responsibility of both the Vietnamese government and donor community. In general, from the Vietnamese side, the government should simplify ODA rules and procedures, strengthen legal framework, improve institutional arrangement, strengthen human capacity and boost decentralization. From the donor side, harmonization and simplification of aid procedures with the Vietnamese government are also needed to ensure effective implementation progress. In more details, the following measures should be considered.

Strengthen legal framework for the ODA projects especially for Public Procurement.

There is a huge concern about the implementation impacts of the conflicting instructions on procurement management from Vietnamese line ministries in important areas such as methods for selection of contractors and consultants, principles for costing, bid evaluation methods and types of contracts etc. With the issuance of the new Procurement Law in November 2005, the fragmentation of the legal framework has been removed. The law and its Implementation decree also introduced a number of important improvements such as preference for open competitive bidding; procurement planning; publishing of procurement plans; bidding opportunities and detail of contract awards; and the establishment of a procurement complaint handling process. However, despite these significant achievements, there are several areas of the legal and institutional framework that would require further strengthening to improve transparency and ease of concerns regarding fiduciary risks.

Further Decentralization

Decentralized organizational structures for the management and utilization of ODA have been implemented and achieved significant improvements, such as the expansion of ODA beneficiaries or the respect of leadership and ownership of local governments. However, the decentralization of ODA has not met the requirements of the reform in public resources management. Decentralized policy in ODA management and utilization is not consistent between the central and local governments. Limited capacity of the local government staff in projects management and language skills is a factor hindering the ODA decentralization and the effectiveness of many ODA projects. Poor coordination between the central government and the local government, between the government and donors leads to delays in various steps of project design and implementation. This is the kind of situation that can easily lead to waste and inefficiencies. In order to improve ODA effectiveness, a greater investment in capacity building in local administration and management will be necessary. Vietnam should consider which the level of ODA decentralization is suitable and which ODA project is decentralized. From this perspective, experiences of ODA decentralization, which has been carried out, need to be examined. A criteria system for ODA decentralization which includes the duration and costs of projects, the capacity of ODA management and the effectiveness of projects, also needs to be developed.

Strengthen human capacity

Human capacity for the management and implementation of ODA is still weak and has not yet met the requirements for improved ODA effectiveness. Government project staff members should be given training prior to the implementation of a project, to familiarize them with donors' various guidelines and procedures for project implementation. Besides, the recent leakage and corruption in some Project Management Unit (PMU) is example of the weak ODA management and monitoring. Therefore, reinforcing the government's anti-corruption efforts is also needed to ensure transparency and accountability of aid management on the Vietnamese side.

Identify Inconsistencies between the Government's Regulations and Five Banks' Guidelines; Continue Harmonization Effort and Issue Clear Guidance on How to Deal with Remaining Conflicts.

The legal agreements clearly state which rules will apply and how the Procurement Law includes a provision that allows donor guidelines to prevail over national regulations. However, during implementation breaking the Government regulations carries significant risks for line agencies as inspectors and auditors are reviewing their decisions in light of compliance with national legislation. The long term solution is the harmonization and alignment of government and donor procedures. In short term, clearer communication and support is required from the central government agencies on the terms and implications of legal agreement so that project agencies, particularly at the provincial level can implement the projects.

Strengthening Financial Management Systems.

Financial and accounting software with M&E systems should be integrated to provide the basis for more effective budget updating and monitoring of financial performance. Line Agencies/Project Owners should develop and apply standard accounting software for all projects within their sector/sub-sector. It would be also important to develop cost effective maintenance and support arrangements, as well as capacity building support for implementing and operating the financial management software.

An internal auditing system to provide internal reviews of operations and financial management with assessments and feedback to management should be developed within Ministries to strengthen the internal oversight. Roles and responsibilities of implementing units and agencies, such as State Treasury and banks and streamline processes should also be clarified.

The above solutions might not sufficiently solve every problem that caused the delay in ODA disbursement but I hope that they will provide a more thorough and systematic approach to dealing and enhancing ODA projects implementation and disbursement performance in Vietnam.