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Document of The World Bank
FOR OFFIC IAL USE ONLY
Report No: 39500 - V N
INTERNATION L DEVE OPMENT ASSOCIATION
PROGRAM DOCUMENT
FOR
A PROPOSED CREDIT
IN THE AMOUNT OF SDR 114.8 MILLION
(US$175.0 MILLION EQUIVALENT)
TO
THE SOCIALIST REPUBLIC OF VIETNAM
FOR A SIXTH POVERTY REDUCTION SUPPORT OPERATION
M a y 22,2007
Poverty Reduction and Economic Management Unit East Asia and Pacific Region
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s content may not otherwise be disclosed without World Bank authorization
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ADB BOT C F A A C G CPAR CPIA CPRGS CPS DA DFID DSA EIA F D I FSQL GDP GSO IDA IMF IOSCO IPPC JSAN L U C MARD MDG M O E T MOF MOH M O H A M O J M O L I S A MONRE MOT M P I MTEF N G O N P L NSC ODA OOG oss P C U PEC PEFA
Government Fiscal Year January 1 to December 3 1
Currency Equivalents Currency unit = Dong
One US$ = 16,015 Dong (May 2007)
ACRONYMS AND ABBREVIATIONS
Asian Development Bank B u ild-Operate-Transfer Country Financial Accountability Assessment Consultative Group Country Procurement Assessment Review Country Policy and Institutional Assessment Comprehensive Poverty Reduction and Growth Strategy Country Partnership Strategy Deposit Account Department for International Development Debt Sustainability Assessment Environmental Impact Assessment Foreign Direct Investment Fundamental School Quality Level Gross Domestic Product General Statistics Office International Development Association International Monetary Fund International Organization o f Securities Commissions International Plant Protection Convention Joint Staff Advisory Note Land-Use Right Certificate Ministry of Agriculture and Rural Development Millennium Development Goals Ministry o f Education and Training Ministry o f Finance Ministry o f Health Ministry o f Home Affairs Ministry o f Justice Ministry of Labor, Invalids, and Social Affairs Ministry o f Natural Resources and the Environment Ministry o f Trade Ministry o f Planning and Investment Medium-Term Expenditure Framework Non-Governmental Organization Non-Performing Loan National Steering Committee Official Development Assistance Office o f Government One-Stop Shop Program Coordination Unit Party’s Economic Commission Public Expenditure and Financial Accountability
FOR OFFICIAL USE ONLY
PER-IFA PRGF PRSC PWD SAV SBV SCIC SEA SEDP SFE SOCB SOE SPS ssc TABMIS UNDP VASS VBF VDB VDG VHLSS vss WTO
Public Expenditure Review-Integrated Fiduciary Assessment Poverty Reduction and Growth Facility Poverty Reduction Support Credit People Living with Disabilities State Audit o f Vietnam State Bank o f Vietnam State Capital Investment Corporation Strategic Environment Assessment Socio-Economic Development Plan State Forestry Enterprise State-Owned Commercial Bank State-Owned Enterprise Sanitary and Phyto-Sanitary State Securities Commission Treasury and Budget Management Information System United Nations Development Program Vietnam Academy o f Social Sciences Vietnam Business Forum Vietnam Development Bank Vietnam Development Goals Vietnam Household Living Standards Survey Vietnam Social Security World Trade Organization
I V ice President - James W. Adams. EAPVP Country Director (acting) - Martin Rama, EASPR Chief Economist and Sector Director (acting) - Deepak Bhattasali, EASPR
1 Task Manager - Martin Rama, EASPR
This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.
SOCIALIST REPUBLIC OF VIETNAM
SIXTH POVERTY REDUCTION SUPPORT CREDIT
Table o f Contents
V.
I. INTRODUCTION ........................................................................................................................... 1
11. THE FIVE-YEAR PLAN 2006-2010............................................. ............................. 3
111. PROGRESS OVER THE PREVIOUS CYCLE ....................................................................... 7
A. OVERALL MACROECONOMIC PERFORMANCE.. ..... ........... 7
B. ECONOMIC GROWTH AND POVERTY REDUCTION ................................................ 8
C. OTHER DEVELOPMENT OUTCOMES ..................... ............................ 10
THE CONTRIBUTION OF PRSCs ............................................................................................. 10
A. RESOURCES MOBILIZED .................................... ....................... 10
B. LESSONS LEARNED ........................................... ........................ 13
THE NEW PRSC CYCLE .......................................................................................................... 15
A. ANALYTICAL UNDERPINNINGS ......................... B. STRATEGIC FOCUS .............................................................................. 17
C. MONITORING FRAMEWORK .................................................................. 19
THE PROPOSED CREDIT .......................................................................................................... 19
A. BUSINESS DEVELOPMENT .................................................................... 20
B. SOCIAL INCLUSION ... . . . . . . ...................................... ............. 21
C. NATURAL RESOURCES ............................................................................. 22
D. MODERN GOVERNANCE .................................................. ....................... 23
E. TRIGGERS FOR PRSC 7 ................................................................................................ 24
VII. OPERATION IMPLEMENTATION .......................................................................................... 28
A. POVERTY AND SOCIAL IMPACTS .......................................................... 28
B. ENVIRONMENTAL ASPECTS.. .. ....................................................... ..29
C. STEERING AND MONITORING ........................... ............. 30
D. ADMINISTRATION .............................................................................. 31
E. BENEFITS AND RISKS ............................................... ..32
COORDINATION WITH DONORS AND STAKEHOLDERS ............................................... 33
A. THE IMF ........................................................................................................................... 33
B. OTHER MULTILATERAL AND BILATERAL DONORS..
C. CIVIL SOCIETY .....................................................................
IV.
VI.
VIII.
I
ANNEXES
Ai inex 1: Annex 2: Annex 3 : A m e x 4: Annex 5: Annex 6 : Annex 7:
IMF Letter o f Assessment . . . . .... . . .. ... . . .. . . . . . . . ... . . . . . . . . . . . . . . ... . . . . . .... . .... ..36 Pol icy Actioi is over the N e w PRSC Cycle.. . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . . . ... . . . . . ... 37 Moni to r ing Progress towards Development Outcomes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 Letter f rom the Government o n the Reform Program.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..56 Supporting Documentation fo r Prior Actions in PRSC 6.. . . . . . . . .... . . . . . . . . . . . . . ... 58 Vietnam at a Glance ... .... .. . .. ... ...... ... ... ... ... ... ... . .. .. . . .. . . . . . . . .. . .. .. . ... .. ... 63 M a p (IBRD 3351 1R) .... ... ... ... ... ...... ... ...... ... ... .. . .. . . .. .. . . .. ... . .. ...... ...... 65
TABLES IN TEXT
TABLE 1 : KEY ECONOMIC INDICATORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
TABLE 2: PROGRESS TOWARDS THE MILLENNIUM DEVELOPMENT GOALS.. . . . . . . . . . . . . . .... . . . . . . . .11
TABLE 3: GENERAL BUDGET SUPPORT OVERTIME ...................................................... 12
TABLE 4: GENERAL BUDGET AND THE FINANCING GAP ................................................ 13
TABLE 5 : PROGRESS ACCOMPLISHED BY POLICY AREA.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . .14
TABLE 6: KEY PRIOR ACTIONS FOR PRSC ..................................................................
TABLE 7: AGREED TRIGGERS FOR PRSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
TABLE 8: DONOR SUPPORTTO PRSC 6............... ..................................................... 34
FIGURES IN TEXT
FIGURE 1 : VIETNAM’S PERFORMANCE IN REGIONAL PERSPECTIVE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
FIGURE 2: SUPPORTING THE IMPLEMENTATION OF THE SEDP 2006-20 l o . . . . . . . . . . . . . . . . ... . . . . . . . . .16
BOXES IN TEXT
BOX 1 : GOOD PRACTICE IN POLICY LENDING OPERATIONS.. . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... 18
Task Team
Core Team: Martin Rama (task manager), Vivek Suri (eo-task manager), Hoi-Chun Nguyen (senior legal counsel).
Contributors: Noritaka Akamatsu, Maria DelJina Alcaide Garrido, Soren Baunsgaard, Dan Biller, Viet Tuan Dinh, Quang Hong Doan, Hoonae Kim, Severin Kodderitzsch, Samuel S Lieberman, Simon Lucas, Thanh Thi Mai, Robin Mearns, Dzung The Nguyen, Minh Van Nguyen, Nga Nguyet Nguyen, William D. 0. Paterson, Due Minh Pham, Cuong Hung Pham, Hoa Thi Mong Phani, Richard Spencer, Jennifer Thomson, Thang-Long Ton, Viet Quoc Trieu, Carolyn Turk, Binh Thanh Vu, Jeflrey Waite.
Peer Reviewers: Satu Kristiina Kahkonen and Stefan G. Koeberle.
Team Assistants: Hang Thu Nguyen and Dung Thi Ngoc Tran.
.. 11
SOCIALIST REPUBLIC OF VIETNAM:
SIXTH POVERTY REDUCTION SUPPORT CREDIT
Credit and Program Summary
Borrower: The Socialist Republic o f Vietnam.
Amount: SDRl l4 .8 mill ion (US$175.0 mi l l ion equivalent).
Terms: Standard IDA terms: 40-year maturity with a 10-year grace period.
Description: A sixth Poverty Reduction Support Credit (PRSC 6), as the f i rst operation i n a cycle aimed at implementing Vietnam’s Socio-Economic Development Plan (SEDP) 2006-20 10, approved in June 2006.
Benefits: The present operation provides further support to Vietnam’s reform program. The current cycle o f PRSCs i s a vehicle for the World Bank, and the donor community more broadly, to stay engaged with a client that has delivered an outstanding performance in terms o f economic growth and poverty reduction. It also recognizes the commitment o f the government to pursue and deepen i t s reform strategy, as reflected over the last few months i n major milestones, including the entry into the World Trade Organization (WTO), the approval o f an ambitious banking reform roadmap and the adoption o f a determined stance in the fight against corruption.
Active engagement should strengthen the coherence o f the program, especially because tlie effectiveness of sectoral policy actions hinges on the success o f more fundamental governance reforms in areas such public financial management, public administration reform and legal and judiciary development. Engagement should also help improve tlie content o f specific policy actions, to ensure the timeliness o f their adoption, and to monitor the impact o f the overall program on broader development outcomes.
This engagement i s all the more important given that this could be the last cycle o f general budget support operations on concessional terms, hence providing an exceptional window for high-level policy access in a country that i s not aid dependent.
Risks: At the same time, i t s own success confronts Vietnam wi th new challenges. The reform agenda has not progressed at the same pace across al l fronts, and private sector response has been much stronger i n some areas than in others. As a result, the country i s facing potentially dangerous imbalances. The biggest risks faced by Vietnam are related to tlie sustainability o f i t s remarkable performance, economically, socially and institutionally.
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I n the short term, the biggest vulnerability stems from possible turbulence in the financial sector, which could in turn undermine Vietnam’s gains in the fight against poverty. The development o f capital markets has vastly outpaced that o f the supervisory and regulatory capacity o f monetary authorities. This calls for a rapid upgrading o f policies related to the banking sector, the securities market and the management o f public debt, all o f which are part o f the proposed reform program.
Success i n global integration, resulting in massive inflows o f Foreign Direct Investment (FDI) to the growth poles o f the country and increased competition i n formally protected sectors, may also test the abil ity o f Vietnam to preserve social inclusion. There i s a risk that some groups could lose in the short term, and a clear prospect o f a widening urban-rural gap i n the medium term. Rapid feedback channels f rom affected stakeholders, inclusive policies in the social sectors, and transparent mechanisms to transfer resources to the poorer regions are among the mitigating measures supported by the proposed series o f operations.
Other imbalances are related to rapid urbanization and infrastructure development, i n a context where transparency in land zoning conversion and compensation are s t i l l partial. Cases o f corruption and social strife are increasingly related to land. Tackling th is risk requires rapid progress in transparency at various levels, from regional planning to infrastructure networks to land use to appropriate taxation to the monitoring o f assets o f the relevant civi I servants. These are also areas receiving special attention in the proposed series o f operations.
Disbursement: The credit will be disbursed upon declaration o f effectiveness.
Co-financing : Numerous bilateral and multilateral donors have expressed their support to the PRSC process in Vietnam. Nineteen o f them have participated in the preparation o f PRSC operations in Vietnam, including this credit, and have been actively involved in the policy dialogue in the areas where they are stronger. Subject to confirmation, the following donors expressed their intention to contribute resources to this operation, either through grant finance or through parallel lending: the Asian Development Bank (ADB), Australia, Canada, Denmark, the European Commission, Germany, Ireland, Japan, the Netherlands, Spain and the United Kingdom. Others may j o i n in the months following credit approval.
Project ID number: P 10 1724.
iv
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROPOSED CREDIT
TO THE SOCIALIST REPUBLIC OF VIETNAM FOR
A SIXTH POVERTY REDUCTION SUPPORT OPERATION
I. INTRODUCTION
1. Vietnam has been on a sustained path of economic reform since the launching of i ts Doi M o i (renovation) process, in 1986. Tlie overall principle has been t l ie increased reliance on market mechanisms, while maintaining a socialist orientation. The latter can be interpreted as focusing on social inclusion while preserving a leading role for t l ie state. Beyond this general principle, the process lias involved a systematic piloting o f reforms, followed by some form o f evaluation, an effort to forge consensus among relevant stakeholders, and finally the scaling up o f reportedly successful initiatives. The drive towards reform started before the collapse o f the Soviet Union. In i t s aftermath, it also involved important departures f rom the dominant approach to economic transition. Until recently, reform moves were especially cautious (if not outright slow) i n relation to the privatization o f state-owned enterprises (SOEs) and t l ie restructuring o f the banking sector. Gradualism might have prevented a collapse o f economic activity and o f government revenue in the early stages o f transition, and probably resulted in a more limited concentration o f wealth. I t might have also resulted in a milder impact o f t l ie East Asian crisis. On t l ie other hand, gradualism in the reform o f the state sector raises concerns regarding the potential buildup o f government liabilities.
2. Comprehensive economic reforms have led to rapid economic growth and remarkable progress on development outcomes. Vietnam has been among t l ie fastest-growing economies in the world for almost two decades. The Gross Domestic Product (GDP) per capita Iias increased at roughly 6.9 percent per year in real terms. Given tlie very low level o f domestic prices at the inception o f tlie reform process, and the subsequent appreciation as the economy develops, the average growth rate o f per capita GDP measured in dollar terms has been wel l into two-digit figures. What i s more remarkable, amidst such rapid economic transformation, has been the relative stability o f inequality indicators. Tlie Gini index increased from 0.34 in 1993, tlie year o f the f i rst representative household expenditure survey, to 0.37 in 2004. This stability probably reflects tlie priority given to rural development in the initial phases o f economic transition, especially through a relatively egalitarian redistribution o f collective agricultural land to individual households and the liberalization o f trade in agricultural products. The modest increase in inequality lias resulted in a dramatic reduction in poverty. Based on a consumption basket o f food and non-food i tems sustaining an intake o f 2,100 calories per person per day, the poverty headcount declined from 5 8 percent in 1993 to less than 20 percent i n 2004. Other social indicators, including child mortality, have shown equally remarkable improvements.
3 . There was a considerable acceleration of reforms around 2001, justifying the first series of PRSCs, and then again in 2006. The former involved the passing o f an enterprise law that greatly facilitated business registration and operation, the signing o f a bilateral trade agreement with t l ie United States that strengthened global integration and resulted in important legal improvements, the adoption o f the f i r s t serious steps towards SOE divestiture and the
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strengthening o f public financial management. The latter was crowned by the accession to the WTO, the adoption o f an ambitious banking reform roadmap, a new resolve to equitize large SOEs and transfer the exercise o f state ownership rights out o f line ministries and provincial governments, the drive towards introducing universal programs for social protection, and the adoption o f a determined anti-corruption drive. There i s little dissent regarding the direction for economic reforms, and internal debates are increasingly focusing on strengthening the mechanisms for citizen’s feedback aiid government accountability.
4. Emerging from massive poverty less than two decades ago, the vision now i s to attain middle-income status by 2010. If current growth trends were to continue, GDP per capita could cross the US$lOOO benchmark in three years time. This would be an impressive accomplishment for a country whose economy was s t i l l dilapidated by decades o f war, with incentives distorted by central planning, in the early 1990s. However, attaining middle-income status i s seen as more than a quantitative goal. Referring to such status, rather than to any specific growth rate or threshold for GDP per capita, i s a way to emphasize the need for a different, more sophisticated set o f economic institutions. Vietnam has by now a much more diversified economy, involving an increasing number o f stakeholders, aiid requiring finer steering mechanisms. Reaching middle-income status requires further financial deepening to support capital mobilization, the regulation o f access to and pricing o f infrastructure services, the gradual development o f modern social insurance, more effective tools for environmental protection, legal atid judiciary reforms, atid the effective containment o f corruption, among others.
5 . The new SEDP 2006-2010 articulates this vision, reflecting the transition towards strategic planning for a market economy. The SEDP, approved in June 2006, illustrates the depth o f Vietnam’s transition. Unlike previous five-year plans, which focused on quantitative targets as if the state was s t i l l in charge o f producing most goods and services, the SEDP emphasizes development outcomes, and the policy reforms needed to attain them. It relies on data analysis, rather than administrative reporting, to substantiate i ts diagnostics and recommendations. It has also led to the adoption o f a framework to monitor progress towards attaining development outcomes. The process through which the SEDP was prepared was more encompassing than i n the past. Extensive consultations were held, going beyond the boundaries o f government, aiid involving businesses, grassroots communities, overseas Vietnamese and donors. This was the f i rs t t ime a five-year plan was declassified and discussed b y the National Assembly before being considered by the Party.
6. The donor community has decided to align its efforts behind the SEDP, while acknowledging that other key documents will shape reforms in the coming years. Such alignment i s a testimony to the strong ownership o f the reform program by the government o f Vietnam. It also reflects satisfaction wi th the process through which the SEDP was prepared. Above all, the SEDP i s seen as both a credible and a sustainable strategy to foster economic growth and poverty reduction. It i s credible because o f the ambitious policy reforms it proposes. Those reforms are organized around three pillars: supporting business development, keeping growth inclusive and better managing natural resources; a fourth, underlying pillar concerns the need to modernize institutions so as to deliver on the other three fronts. The SEDP i s also seen as sustainable because it should lead to manageable levels o f public debt by 2010, in spite o f a massive effort to develop large-scale infrastructure. In the case o f the World Bank, the Joint Staff Advisory Note (JSAN) submitted to the Board in December 2006, atid the Country Partnership Strategy (CPS) submitted in January 2007 concluded that the SEDP had incorporated the necessary Poverty Reduction Strategy principles, was broadly sound and was a plan that could both deliver growth and reduce poverty.
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7 . At the same time, donors recognize that some of the reforms needed will be challenging, requiring attention to their content and timeliness. The SEDP represents a sustainable development strategy only provided that macroeconomic management remains prudent aiid state sector reform i s not unnecessarily delayed. The international commitments made by Vietnam in i t s drive to accede to tlie W T O can help, by imposing clear deadlines for the adoption o f specific measures. But implementing W T O commitments from a “development approach”, as opposed to a inere “compliance approach”, wi l l require strong cross-sectoral coordination. Moreover, the l i s t o f policy reforms considered by tlie SEDP i s remarkably broad, which makes prioritization and sequencing a priority. There i s conselisus that supporting the reform agenda o f Vietnam does not entail favoring one o f the SEDP pillars over the others. But it requires being selective within each o f the pillars, and paying attention to the content o f the most important measures.
8. The proposed credit i s the first in a five-year cycle aimed at supporting the implementation of the SEDP. PRSCs are well-suited to address the chal letiges mentioned above. The cross-cutting nature o f the policy dialogue they support strengthens coordination among line ministries and government agencies. Their emphasis on a selected number o f policy actions facilitates an in-depth discussion o f their content. Their otherwise demanding annual sequence, combined with the forward-looking nature o f t l ie triggers used to launch the preparation o f the next operation in tlie cycle, helps keeping the pace o f reform. Meanwhile, the progress made on public financial management over the last decade mitigates the risks associated wi th direct budget support. However, unlike other developing countries wi th aii ongoing PRSC process, Vietnam i s not dependent on t l ie resources contributed by donors t o finance government spending. Overall, and in spite o f their large number o f co-financiers, PRSC operations in Vietnam amount to less than 2 percent o f public expenditures and about a third o f the additional cost o f economic reforms. The fact that PRSC resources are not essential for tlie operation o f the Vietnamese government raises tlie bar for tlie policy dialogue, giving especial relevance to i t s analytical underpinnings.
9. Engagement at this stage i s seen as essential to lay the foundations of a modern and inclusive market economy, supporting sustained growth in the longer term. If Vietnam succeeds in attaining middle-income status before 20 10, the cycle o f PRSCs associated with the SEDP will be the last one to be supported by IDA. The concessional component o f donor co- financing may also decline over time. Therefore, the five-year period ahead represents a critically important window for engagement by the international community. Such engagement i s a l l the more relevant because Vietnam’s ability to sustain i t s remarkable growth trajectory over several more decades, and eventually become an industrial country, may be determined during this period. The reforms associated with attaining middle-income status are more complex than those needed to move away from central planning. Active engagement should contribute to improving the content aiid coherence o f such reforms.
11. THE FIVE-YEAR PLAN 2006-2010
I O . The SEDP 2006-2010 i s a milestone in the modernization o f planning in Vietnam, justifying the alignment o f donor support to its implementation. Approved in June, 2006, it outlines tlie policy measures needed for Vietnam to advance to middle-income status by the end o f the decade. Following an established practice, the SEDP sets the framework for government action and resource allocation. But th is framework i s much more focused on attaining
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development outcomes than in the past. Until recently, five-year plans entertained the fiction that government was s t i l l i n direct control o f delivering goods and services, which resulted in the compilation o f large numbers o f production targets. Consultation processes involved government agencies only, whereas self-reporting and administrative data substituted for a genuine assessment o f results. By contrast, the framework for the SEDP was influenced by consultations outside government, from grassroots communities to the overseas Vietnamese. And for the f i rs t t ime the government’s primary planning document will also be used as a basis for guiding and allocating Official Development Assistance (ODA).
11. The preparation SEDP 2006-2010 built on the experience with the Comprehensive Poverty Reduction and Growth Strategy (CPRGS). Since the late 1990s, several initiatives had been undertaken to support the modernization o f planning processes. I n June 2001, recognizing the limitation o f both traditional five-year plans and targeted poverty reduction programs, the Minister o f Planning and Investment (MPI) was given the responsibility to produce a broader document, addressing poverty issues in a comprehensive way. I n preparing this document, consultation and debate beyond were extended beyond govern tnent boundaries, reaching out to poor communities. The new document represented an important step in terms o f content as well. Rather than relying on administrative records, the analysis combined high- quality quantitative and qualitative data into the discussion. This led to a better coverage o f sensitive issues, including the challenge o f combating ethnic minority poverty and the problems faced by urban migrants in accessing basic services. In parallel, there was a shift away from the description o f inputs and the setting o f targets towards the statement o f development objectives. As part o f th i s process, the Milletinium Development Goals (MDGs) were localized into a clearly defined set o f Vietnam Development Goals (VDGs). There were also efforts to connect policy actions and resource allocation, with a rudimentary “costing” exercise for the VDGs.
12. CPRGS provided the foundation for the first series o f PRSC operations in Vietnam, while also playing an important demonstration effect. The new document was approved i t1
M a y 2002, covering a three-year period. Subsequently, government officials, donors and NGOs discussed the sequence o f policy actions needed to attain the CPRGS objectives. This exercise, jo int ly with subsequent analytical work by the World Bank and ADB towards the Vietnam Development Report 2003, laid the foundations for a series o f direct budget support operations. Since June 2003 an increasingly large number o f donors channel resources to the government through annual PRSC operations, i t1 recognition o f the progress made in the implementation o f the CPRGS agenda. The allocation o f those resources i s decided by government and their spending i s processed through Vietnamese procedures. But the triggers to proceed with the following operatioii in the cycle were related to the adoption o f the key policy measures to deliver on the CPRGS objectives. By strengthening the coherence o f reforms across sectors, improving their content and timeliness, and mobilizing donor resources in their support, this process showed that strategic planning for development made sense in a market economy, but was quite different a process from the one leading to traditional five-year plans.
13. This approach was workable thanks to the considerable progress made in public financial management over the years. Important steps in the process included the introduction o f a single treasury account, the adoption o f international public accounting standards, and the establishment o f the State Audi t o f Vietnam (SAV) as an agency under the National Assembly. An obvious follow-up to the “costing” o f CPRGS was the preparation o f Medium-Term Expenditure Frameworks (MTEFs). The first pilot MTEF reports, covering education, health, transport, and agriculture and rural development, were submitted to the Ministry o f Finance (MOF) at the end o f the previous five-year cycle. Four provincial MTEFs are also under preparation. These pilots have now been extended and have been complemented by regulations that set annual budgets within a multi-year framework. While the submission and approval o f the
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budget by the National Assembly continues to be done on an annual basis, they have to be based on a multi-year framework. Init ially covering three years, this framework has by now been extended to the entire planning cycle. A further link between planning and budgeting processes resulted from the introduction o f norms for allocating resources to provinces. Those norms concerned recurrent budget expenditures first, and capital expenditures more recently. They became fully operational in 2007. Mainly based on population figures, these norms also incorporate poverty measures into their formulas and should lead to additional resources for poorer parts o f the country.
14. However, CPRGS also needed to be adjusted over time, especially in relation to its treatment of large-scale infrastructure. Planning documents for a command economy emphasized massive investment projects, whereas CPRGS focused on expenditures related to human development and social protection. At a deeper level, there were also diverging views in relation to the main drivers o f poverty reduction, with the East Asian experience attaching more importance to large-scale infrastructure than the more microeconomic (or grassroots) poverty analyses underlying CPRGS. At times, this gap translated into a debate on whether ODA resources should be channeled to investment projects or rather to the government budget. Subsequent experience clearly showed the complementary o f these two vehicles for ODA. Aware o f the need to bridge the gap, the government proposed to “expand” the CPRGS so that it wou Id more appropriately address the role o f large-scale infrastructure in economic growth and poverty reduction. This was done in December 2003.
15. A more important shortcoming of CPRGS was its sitting outside the mainstream decision-making processes used by the government of Vietnam. The CPRGS was neither the five-year plan nor a recognized sectoral strategy. This unclear status subsequently generated some confusion among officials, who found it diff icult to judge what their obligations were in relation to the document. Conveying the CPRGS approach and messages to authorities at local levels was most difficult. Wi th the progress made in decentralization i n Vietnam, almost ha l f o f public expenditures are allocated by government officials in provinces, districts and communes. But few local officials knew about CPRGS or considered that it had direct implications for their daily work. T o redress th i s shortcoming, an initiative to rollout the CPRGS approach to the provinces was launched in April 2004. Over time, two dozen provincial governments experimented with the preparation o f strategic plans. Their efforts were supported b y donors in a decentralized fashion, each local government choosing i t s own approach to bring together the various departments involved and come up with a renovated provincial plan. The experience was rich in terms o f learning, but diverse if measured in terms o f success on the ground.
16. These gaps and shortcomings highlighted the importance of working through the normal planning processes o f Vietnam. Towards the end o f the five-year cycle that just finished, the need to mainstream the CPRGS approach was obvious to government and donors alike. I n September 2004 the Prime Minister issued a directive stating that the new five-year plan would be drafted according to the same principles that had governed the preparation o f the CPRGS. Guidelines subsequently issued by M P I to line ministries and provinces emphasized the importance o f using a broad range o f data (including participatory poverty assessments, survey data and research carried out by local institutes and international organizations) to underpin planning objectives. The guidelines required an open process, specifically involving the publication o f draft plans. They also specified the need to identify indicators linked to the VDGs and to include a resource dimension into the plan.
17. The process leading to the preparation of the SEDP 2006-2010 had important strengths compared to its predecessors. There was a serious effort to collect inputs from different groups o f the Vietnamese society. In addition to internal discussions within
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government, consultation workshops were held with local officials, groups o f academics, the domestic business sector, iiiteriiational and local non-governmental organizations (NGOs), people l iv ing wi th disabilities (PWD), overseas Vietnamese, women and women’s groups, aiid donors. A series o f participatory research exercises involving local experts and international NGOs also helped to gather feedback from poor communities in 17 sites across the country. Tlie draft SEDP was declassified for the first time ever, and it was discussed by the National Assembly in November 2005, a departure from previous practice which scl~eduled National Assembly discussion after the Party Congress. This innovation gave members o f parliament more influence over t l ie content o f the document than in previous planning cycles. There was also a second round o f consultations within government and with donors and NGOs fol lowing the f i rs t discussion at tlie National Assembly.
18. There i s also considerable progress in relation to the use o f data and the set up o f a credible monitoring and evaluation framework. Reliable data from representative l~ouse l~o ld surveys i s used by the SEDP 2006-2010 to present a comprehensive analysis o f poverty in Vietnam. Tlie text includes candid discussions about disadvantaged groups and regions and about t l ie challenges presented by the emergence o f a growing gap between socioeconomic groups. Issues o f social inclusion are no longer restricted to the discussion o f targeted programs but are instead tackled in the sectoral sections o f the plan. A results framework was recently completed by MPI. This framework i s structured logically around a results chain from inputs to outcomes. It includes a substantial pillar that refers to measuring progress in the promotion o f good governance, committing the government to measuring progress in improving transparency and participation, strengthening decentralization, managing public resources better aiid reducing corruption. The framework also recognizes that much o f the information on results will need to be provided or verified tlirougli independent surveys.
19. I n the SEDP, the government sets out intended actions that fall broadly into four main areas: (a) the promotion o f growth and transition to a market economy; (b) reducing poverty atid ensuring social inclusion; (c) managing the environment aiid natural resources in a sustainable manner; and, (d) building institutions that can support the strategy. The f i rs t three pillars are explicitly listed i n t l ie SEDP, whereas the fourth one i s introduced in the monitoring and evaluation framework as the foundation to make progress on the other three. Taken together, intended actions under these four pillars can pave the way for Vietnam to become a middle- income country by the end o f the period.
20. The SEDP 2006-2010 i s also fiscally sustainable, despite the high level o f public investment associated with the development of large-scale infrastructure. The baseline scenario o f the most recent Debt Sustainability Assessment (DSA) by the World Bank and the IMF i s broadly in line with tlie investment and growth outlook o f the SEDP. It estimates public and publicly-guaranteed debt to increase from nearly 44 percent o f the GDP in 2005 to around 51 percent by 201 1, This increase, though significant, i s s t i l l considered wel l wi th in manageable l im i t s , especially since more than hal f o f it will remain on highly concessional terms. Tlie concessiotial component o f Vietnam’s debt, embodied in long repayment periods and l o w interest rates, i s reflected in the gap between the nominal level o f public debt and i t s net present value. External debt, both public and private, i s projected to decline somewhat: f rom a l itt le over 32 percent o f GDP to just under 3 1 percent. The ratio o f external debt service payments to exports i s estimated to remain below 6 percent during 2005 to 201 1. Vietnam should thus remain at l o w risk o f external debt distress.
2 I. Reform programs are not cast in stone, however, and the SEDP 2006-2010 i s bound to be complemented by other strategic documents and policy developments over time. The importance o f planning should not be over-emphasized, especially in a market economy. Change
6
also happens outside documents produced every five years. For instance, some o f the most important decisions over the last cycle, from the acceleration o f negotiations to accede to the W T O to the adoption o f the banking reform roadmap to the approval o f the Anti-Corruption Law, were not foreseen as such in the previous five-year plan or in the CPRGS. Also, the plan i s at times a follower, more than a leader, to the extent that it records and scales up provincial innovations. In approaching the proposed series o f operations, it i s therefore important to keep in mind that there will be departures from the SEDP 2006-2010, especially in the outer years o f the program. One o f the reasons for active engagement i s precisely to encourage and support departures that could further deepen the reform process o f Vietnam.
22. With a sound and sustainable strategy at hand, the challenge now lies in implementation. Substantive progress will require prioritizing the many policy actions identified i n the SEDP, clarifying their sequence and timing and assessing their possible cost. There i s agreement that prioritization should involve selecting the key reforms within each o f the SEDP pillars, rather than choosing across pillars. It i s also clear that protecting the prudence that has characterized macroeconomic policy over the last few years and delivering on state sector reform will be essential to contain the growth o f explicit and implicit government liabilities and keep the overall approach to development financially sustainable. Besides, effective implementation will also require sound reporting systems that can identify and acknowledge shortcomings, supported by processes for adjusting policies accordingly. The experience with policy reforms over the previous cycle i s especially relevant in th is respect.
111. PROGRESS OVER THE PREVIOUS CYCLE
A. OVERALL MACROECONOMIC PERFORMANCE
23. While neither the SEDP 2001-2005 nor CPRGS had a monitoring framework attached to it, progress can be gauged along a set o f standard indicators. A sound macroeconomic management i s a prerequisite for sustainable growth, and Vietnam did reasonably wel l in th is respect (Table 1). Economic growth rates have been on a slightly upward trend over the five-year period. This i s not the result o f expansionary policies. Both government spending and government revenue have gradually increased over time, but the budget balance has remained fairly stable, at modest levels. Exports have grown vigorously, bringing the overall trade balance back to equilibrium after a sizeable deficit towards the middle o f the five-year period. Rapidly growing FDI, coupled with an expanding O D A program and increased remittances from overseas Vietnamese have resulted in a current account surplus and a larger volume o f international reserves. While inflation accelerated in 2004, this was mainly the result o f supply shocks, including higher prices for o i l and construction materials as wel l as higher food prices f rom the f irst avian influenza outbreak. Since then, the growth rate o f banking credit has been on a decelerating path, mainly due to efforts to improve the quality o f loan portfolios, and the inflation rate i s gradually subsiding.
7
TABLE 1: KEY ECONOMIC INDICATORS
Indicator
Real GDP (percent change)
Industrial output value (percent change) Inflation (percent, by year end) Nominal depreciation (percent, by year end) Credit to the economv (percent change) General government budget (percent o f GDP)
Total revenues and grants Total expenditure (including interest)
Current expenditure Capital expenditure
Budget balance (excluding on-lending) Extra-budgetary outlays (percent o f GDP)
On-lending o f O D A On-lending o f domestic resources (DAF) On-lending o f sovereign bond Off-budget investment speiiditie
Current account balance (in US$ billion) Current account balance (in percent o f GDP) Export growth (nominal, percent change) Imports growth (nominal, percent change) Total external debt (US$ billion)
Total external debt (percent o f GDP) Debt service ratio (percent o f exports)
Reserves, including gold (US$ billion) Reserves (in weeks o f goods i imorts)
2001 2002 2003 2004 2005 2006e
6.9 7.0 7.3 7.8 8.4 8.2
14.6 14.5 16.1 16.0 17.2 17.0
0.7 4.0 2.9 9.5 8.4 6.6
3.9 2.0 1.6 I .5 0.7 1 .o 21.4 22.2 28.4 41.6 31.7 22.0
21.6 22.7 24.9 26.7 25.9 26.8
24.4 24.2 26.1 25.8 27.1 27.5
16.0 15.7 16.7 16.9 18.5 18.7
8.4 8.4 9.4 8.9 8.6 8.8 -2.8 -1.4 -1.2 0.9 -1.2 -0.7
1 .o 0.9 1.5 0.9 1 .o 1.2
1.2 1.5 1.7 1 .o 0.5 0.8
0.0 0.0 0.0 0.0 1.4 0.0
0.0 0.0 1.6 1 .o 2.0 2.0
0.7 -0.4 -1.9 -1.6 0.2 1.2
2.0 -1.1 -4.9 -3.4 0.4 2.0
4.0 11.2 20.6 31.4 22.5 22.1
2.3 22.1 28.0 26.6 15.7 20.1
12.5 12.3 13.5 15.4 16.9 19.0 38.5 35.2 34.2 33.9 32.0 31.3 10.6 8.3 7.5 5.9 5.5 5.5
~ ~ ~~~~~ ~ ~~
3.4 3.7 5.6 6.3 8.6 11.2 10.0 8.6 10.3 9.9 11.0 13.0
Source: World Bank. Figures for 2006 are preliminary estimates.
B. ECONOMIC GROWTH AND POVERTY REDUCTION
24. Vietnam’s strong economic performance over the last five years i s not a mere reflection of a more favorable international environment. It could indeed be argued that the regional recovery from the East Asian crisis, rather than homegrown reforms, were the main determinants o f success. One way to assess the validity o f this hypothesis i s t o compare Vietnam’s growth rate to that o f other countries in the region. To i ron out the effect o f short-term fluctuations and measurement error, three-year moving averages can be used. Also, to take changes in relative prices into account, several definitions o f output can be used, such as GDP per
8
capita i n local currency at constant prices, in U S dollars at current prices, or in PPP dollars at constant prices. The results o f th is exercise are unambiguous: Vietnam’s relative position improves quite steadily over time, climbing six or seven positions in just a few years (Figure 1, left panel). A similar exercise, at the worldwide level, shows that China and a few oil-rich countries s t i l l do better, but Vietnam climbed some 40 to 60 positions, depending on how growth i s measured.
50 -
- 40 w c
FIGURE 1 : VIETNAM’S PERFORMANCE IN REGIONAL PERSPECTIVE
- - - a EastAsiaandPacific
- -Thailand Indonesia I
~~ ~
0
1
2
r 3 Y
2 4
5 6
7
1 8 9
10
- ,$ 30 ~-
20 -
10 --
Vietnam in East Asia and the Pacific
1999 2000 2001 2002 2003 2004 2005
, Roportion of people living wi th less than 1 PPP $ per day
I -44etnam -China
-Per capita income ~ change (constant LCUj
~ - -e - Percapitaincome change (constant us$)
change (PPP constant) -----Percapita incomce
~ __
- - - / - - - , 0 1 8 8 ’
1990 1992 1994 1996 1998 2000 2002 2004
Source: World Bank.
25. Vietnam’s performance i s even stronger in relation to poverty reduction, with no other country registering faster progress. Admittedly, poverty comparisons across countries raise important methodological difficulties, stemming from the fact that both the structure o f consumption bundles and the prices o f goods and services differ considerably f rom one place to another. One usual shortcut i s to set the poverty line at some intuitively appealing level, such as one PPP dollar per day. Based on th is measure, between 1990 and 2004 the percentage o f the population living in poverty i n Vietnam fel l by roughly 3 percentage points per year, twice the rate o f China (Figure 1, right panel). Adjustments to PPP exchange rates might somewhat modify these results, but they are unlikely to lead to substantially different country rankings. Moreover, in Vietnam’s case the trend i s confirmed when using a comparable poverty line, related to the consumption bundle (including food and non-food items) necessary to secure a daily food intake o f 2,100 calories per person per day.
26. Remarkably, the pace at which poverty rates fell accelerated over the last few years. As the poverty rate declines, reducing it further becomes more difficult, so that a gradual deceleration o f the process could be expected. However, after a slowdown between 1998 and 2002, the pace at which Vietnam i s reducing poverty picked up again. This acceleration could to some extent have been amplified by a quirk o f the data. The 2002 household expenditure survey was much larger in scale than previous ones, and was conducted with less supervision and training o f enumerators. While the 2004 survey was already o f a better quality, there i s a
9
possibility that poverty was over-estimated in 2002. However, it could have been under- estimated as well. And in any event, t l ie apparent acceleration in poverty reduction i s consistent with other developments during t l ie period. Output grew faster, the prices o f commodities which are essential to sustain farmers’ livelihoods (such as coffee and rice) increased, and tlie volume o f resources transferred to poorer provinces in tlie context o f decentralization expanded.
27. However, progress in poverty reduction has been slower for Vietnam’s ethnic minorities. Using a domestic poverty line that reflects basic calorie and non-food needs, poverty among ethnic minorities in Vietnam was s t i l l 61 percent in 2004, compared to 14 percent o f the Kinli and Chinese majority. I n some parts o f the country, such as t l ie South Central Coast, poverty rates among ethnic minorities are above 90 percent. In 2004, more than one third o f a l l ethnic minorities in Vietnam lived in hunger and was unable to meet basic calorie needs.
C. OTHER DEVELOPMENT OUTCOMES
28. Vietnam has also outperformed many other countries in terms of progress towards achieving the MDGs. Five o f tlie ten main MDG targets set for 201 5 have already been attained, and another four could be reached ahead o f time (Table 2). However, Vietnam might only partially achieve the target 011 reversing the loss o f environmental resources. Also, it should be noted that alongside a remarkable performance on nearly al l o f tlie MDGs, important disparities i n achievement remain between t l ie Kinli majority and ethnic minority groups. For example, fewer ethnic minority cliildren are enrolled in school, especially girls. Also maternal mortality and child mortality rates are much higher in mountainous areas where many ethnic minorities live than in tlie rest o f Vietnam.
IV. THE CONTRIBUTION OF PRSCs
A. RESOURCES MOBILIZED
29. Five PRSCs supported the implementation of the economic reforms, including the CPRGS agenda, over the previous five-year cycle. PRSC 1, a two-tranclie operation for 250 US dollars million, was approved by t l ie Board o f Directors o f the World Bank in June 2001. I t s focus was mainly on tlie structural reform agenda. The second tranche o f PRSC 1 was released in December 2002. PRSC 2, a one-tranche operation for 100 mi l l ion U S dollars, was approved in June 2003. By then, CPRGS liad already been issued, making it possible to broaden considerably t l ie range o f reforms supported by t l ie international community. In addition to the mainly structural aspects covered by PRSC 1, th is second credit included various policy actions aimed at keeping development inclusive and building modern governance. PRSCs 3 to 5 were also one- tranche operations o f 100 mi l l ion US dolalrs each. These were approved in June 2004, 2005 and 2006 respectively and liad a broad sectoral coverage too. In addition to providing resources to the budget, PRSC operations served as an effective coordination device, supported by an increasingly large number o f donors. PRSCs have been co-financed by bilateral and multilateral agencies, either through grants or through parallel lending. More importantly, the process saw a transition in the role o f co-financiers, f rom providers o f finance to partners substantially engaged in tlie preparation o f tlie operations and tlie policy dialogue with government. This dialogue i s
10
organized by policy areas, in which donors engage selectively, based on their interests and technical capacity on the ground.
Goal 1
Target 1
Target 2
TABLE 2: PROGRESS TOWARDS THE MILLENNIUM DEVELOPMENT GOALS
Eradicate extreme poverty and hunger Progress Status
Halve between 1990 and 20 15 the proportion of people living in poverty
Halve between 1990 and 2015, the proportion who suffer from hunger
Poverty reduced by two thirds between 1993 and 2004
Proportion reduced by more than two thirds between 1993 and 2004
Already achieved
Already achieved
Target 3
Goal 3
Target 4
1 Goal 2 I Achieve universal primary education I Progress I Status I By 201 5 boys and girls to complete a full course o f primary schooling has reached 89 percent achieved
Already achieved
Grade 5 completion rate has risen Likely to be
Promote gender equality Progress Status
Eliminate gender gaps in primary and secondary education no later than 201 5
Gender equality at all school levels, except for ethnic minorities
Target 6
Goal 6
Target 7
I Goal4 I Reduce child mortality I Progress 1 Status I
Reduce maternal mortality by three quarters, between 1990 and 201 5 Combat HIViAIDS and other diseases Progress Status
By 20 15 have halted and begun to reverse the spread of HIViAIDS
Fell by two thirds, from 250 per 100,000 births in 1990 to 85 now
Likely to be achieved
Infection rate went up from 0.34 percent in 2001 to 0.44 in 2005
Likely to be achieved
I Likelyto achieved be I Reduce by two thirds between 1990 Reduced by 60 percent between and 20 15, the under-five mortality rate 1990 and 2002, now at 2311 000
Target 9
Target 10
1 Goal 5 I improve maternal health I Progress I Status I
Embrace sustainability and reverse the Uncertain to loss o f environmental resources canopy forest and biodiversity achieve
Halve, by 20 1 5 the share of people Likely to be without drinking water and sanitation achieved
Forest cover up but loss in closed-
Share without improved water source fe l l by almost three quarters
By 2015 halted and reverse the incidence o f malaria and other diseases
Malaria cases severely reduced Already achieved
I Goal 7 I Ensure environmental sustainability I Progress 1 Status 1
30. The PRSC process led to disbursements to the budget on an annual basis, thus meeting the objective of aligning aid to domestic budget cycles. Since PRSC 2, commitments were made in June o f each year, which i s the time when the preparation o f the budget starts. The budget i s approved by the National Assembly towards November, for the following calendar year. The submission to the National Assembly already factors in the amount o f resources expected from PRSCs. Because such credits are disbursed fully within a few months o f their signature, PRSCs have been a relatively predictable source o f funds. Disbursements by co- financiers, either under the form o f grants or parallel lending, take place over a longer period o f t ime. But there was progress in speeding up those disbursements (Table 3). Because o f the concessional terms o f the loans involved, and the grant nature o f much o f the co-financing, a
11
large fraction o f the resources transferred do not need to be paid back by Vietnam. The total grant fraction was three quarters towards the end o f the cycle.
Operation
PRSCl (I)
PRSCl (11)
PRSC2
PRSC3
PRSC4
PRSC5
TABLE 3: GENERAL BUDGET SUPPORT OVER TIME
Committed (US% million)
World Bank
150
100
100
100
100
100
co- inanciers
22
27
31
116
118
154
Total
172
127
131
216
218
254
Grant Element (percent)
66
69
70
75
73
75
Year
2001
2002
2003
2004
2005
2006
2007
Disbursed (US$ million)
World Bank
150
100
100
100
100
100
co- financiers
0
22
27
67
80
113
159
Source: World Bank.
3 1. I n spite o f the increasingly large volume of aid resources disbursed through PRSC operations, the amount was modest compared to financing needs. Some o f the reforms supported through the PRSC process entail substantial costs to the budget. The restructuring o f state-owned commercial banks (SOCBs) initiated under PRSC 1 led to a phased-in re- capitalization financed by government bonds. The social safety net to assist workers who become redundant as a result o f SOE equitization and restructuring became more active over time. The PRSC process also supported additional spending in the social areas, under the form o f funding for health expenditures among the poor, and a steady increase in the budget for education. Even if all other policy actions under the PRSC process had been budget-neutral, the additional cost o f the reforms would be in the range o f 300 to 600 mi l l ion US dollars per year. The total resource contribution by PRSCs represents less than hal f o f th i s amount (Table 4). From th is perspective, general budget support operations can be seen as a cost-sharing arrangement between the government o f Vietnam and the donor community. The contribution o f general budget support operations i s even more modest when compared to government spending at the aggregate level. The resources provided represent less than 20 percent o f the total budget deficit, except in 2004, and less than 2 percent o f total government spending in Vietnam.
12
TABLE 4: GENERAL BUDGET SUPPORT AND THE FINANCING GAP
Cost o f key reforms (US$ million) SOCB Recapitalization Social safety net
Health care funds
2002 2003 2004 2005 2006 307 292 101 0 0 2 34 83 I78 104 0 33 46 48 91
Education budget Total PRSC contribution (percent)
0 46 160 3 62 537
309 405 389 587 73 1
2002 2003 2004 2005 2006
B. LESSONS LEARNED
Cost o f key reforms Budget deficit Government expenditure
32. The main contribution of PRSCs has been their ability to serve as a platform for a continued policy dialogue on a broad range of issues with key government counterparts. However, given the encompassing nature o f Vietnam’s reform program in general, and o f the CPRGS agenda in particular, progress was not even across a l l policy areas. Identifying strong and weak areas in policy making i s essential to ensure the sustainability o f this success over time. Starting with PRSC 3, a set o f indicators covering a broad range o f policy areas was used to assess progress. The set o f indicators chosen for this exercise can be questioned. Neither the previous five-year plan nor the CPRGS had a monitoring and evaluation framework to build upon. Indicators were then derived from the text o f those documents and from other relevant sectoral strategies and policy statements.
33. Overall, progress was slower in policy areas characterized by limited political will, conflicting institutional responsibilities or insufficient analytical work (Table 5). The speed at which progress was made across policy areas within each o f these pillars depended on the political wi l l to implement the reforms. The contrast between rapid progress in the integration wi th the wor ld economy and slow reform in the banking sector i s revealing in th is respect. To some extent, t h i s contrast may reflect a deliberate choice, whereby rapidly moving towards WTO accession would be a way to “lock-in” the need for subsequent reforms in the banking sector. In other cases, as in water, limited progress reflects institutional overlap and unclear delimitation o f competencies across several ministries or agencies. In the case o f corruption, the commitment to fight it i s undeniable but it i s more recent. This i s one area where progress on inputs (such as laws, or coordinating bodies) may take quite some time to translate intro progress on outputs and outcomes. Beyond the specifics, the classification o f policy areas depending on the progress made i s consistent with the ratings prepared for the Country Policy and Institutional Assessment (CPIA). Those ratings are above the regional average in relation to macro-economic management and social inclusion. They are below in relation to the financial sector, labor and social protection, and transparency and anti-corruption.
39.5 31.3 42.9 30.7 29.1 14.9 11.8 72.6 17.1 22.6 1.4 1.2 1.4 1.3 1.3
13
TABLE 5: PROGRESS ACCOMPLISHED BY POLICY AREA
Policv area Trade SOE reform
Private sector development Infrastructure
Health Education
Land
Water
Planning process
Public financial management
Policv area Banking reform
Water
Environment
Legal development
Anti-corruption
Policv areas with clear urogress over 2001-2005 Indicator
Ratio o f exports to GDP Share of outstanding banking credit going to SOEs Wage employment in the formal private sector People living within 2 km of an all- weather road Infant mortality rate Net lower secondary school enrolment
Households having a land use certificate for their agricultural land
Population with access to an improved water source Planning documents become more results-oriented Detailed budget information publicly available
Value as of 2001 47 percent 42 percent
1.3 million
76 percent
3711000 62 percent (in 1998)
42 percent ( in 1998)
76 percent (in 2002) Focus on
production targets Partial access
only
Policy areas with more limited progress over 2001-2005 . -
Indicator Ratio of non-performing loans (NPLs) in banking system
Integrated river basin planning
Preservation o f highly bio-diverse forests, wetlands and coral reefs
Legal system in place with the ‘rule o f law’ replacing the ‘rule o f man’ Reduced corruption as measured by independent monitors
Value as o f 2001 15 percent
Limited coordination Widespread degradation
Limited legal transparency Widespread corruption
Most recent 61 percent 32 percent
3.6 million
84 percent
18/1000 80 percent
72 percent
79 percent
Results-based M&E framework Full disclosure o f
central budget
Most recent Maybe 8 to 10
percent
Institutional conflicts
Degradation continues
Good strategies, l i t t le action
Progress difficult to assess
Source: World Bank
34. One o f the key lessons learned from the previous series o f operations IS the need to have a comprehensive approach to economic reform. There are important linkages between pol icy actions across sectors, so that a piecemeal approach or an excessive selectivity would end up being less effective. For instance, improving the delivery o f social services requires a better balancing o f recurrent and capital expenditures on the supply side as well as a gradual move towards demand-side financing, especially for the poor. Public financial management reform i s thus crucial t o deliver better outcomes in education or health. There are also differences in the readiness o f leadership to embrace change in different areas, with the time o f openings and accelerations being diff icult to predict. This calls for readiness across the entire policy spectrum, accumulating the various technical building blocks necessary to support more ambitious change whenever the government endorses it. Finally, the fact that PRSCs are the only vehicle for high-
14
level policy dialogue in Vietnam puts a higher burden on the contents o f these operations, which need to serve as a one-stop shop for the interaction between the government and the donor community.
V. THE NEW PRSC CYCLE
A. ANALYTICAL UNDERPINNINGS
35. The SEDP 2006-2010 clearly spells out the government’s priorities and approach to development for the next five years. It might not be a perfect document, but it i s good enough for the international community to use it as the strategic vision to guide their support to Vietnam. Indeed, the process leading to the preparation o f the SEDP was open and consultative, the analysis in the document has a strong focus on social inclusion and poverty reduction, the social and economic targets established in the document are ambitious but achievable, and a monitoring framework was set up for the first t ime. The SEDP 2006-2010 thus offers an opportunity for upstream harmonization, whereby government and the international community share a common view o f what needs to be done, in the spirit o f the Hanoi Core Statement on aid effectiveness. Accordingly, the major donors i n Vietnam have pledged to align their support strategies to the SEDP and to assess the results o f their assistance using the government’s monitoring framework. Support to the SEDP wil l involve using a combination o f instruments, i n addition to PRSCs, including analytical work, sectoral work and technical assistance (Figure 2).
36. However, the SEDP is also a comprehensive and ambitious document, dealing with almost every aspect o f economic reform in Vietnam. Over i t s more than 300 pages (without counting the monitoring framework) it discusses development orientations for al l sectors and fields, with varying degrees o f analytical depth and detail. As a result, aligning to a nationally owned strategy i s not as simple in practice as it may sound. A careful analytical “reading” o f the SEDP i s critical to translate it into a concrete set o f policy actions to be implemented during the new PRSC cycle. Prioritization, sequencing and monitoring are part o f such “reading”.
37. The Vietnam Development Report 2007, co-signed by 16 donors, provides the main analytical underpinnings for the new PRSC series. The preparation o f this report, entitled Aiming High, started shortly after the approval o f the SEDP by the National Assembly. The report was submitted to the Consultative Group (CG) meeting o f December, 2006 as a contribution o f the international community to the implementation o f the SEDP. The report built on the analytical work done over the previous PRSC cycle, on structural reforms (as summarized in the Vietnam Development Report 2006, on Business), institutional modernization (Vietnam Development Report 2005, on Governance) and on social inclusion (Vietnam Development Report 2004, on Poverty). While the process was led by the World Bank, a large number o f donors participated in it, with several o f them contributing extensive written inputs. Participants included the co-financiers o f the first PRSC series but also other donors not formally involved in direct budget support, including the United Nations agencies and international NGOs. A Reviewing Committee o f recognized Vietnamese experts and policy makers advised on each o f the policy areas and on the overall thrust o f the report. A background, independent evaluation o f the f i r s t series o f PRSCs, was also commissioned as part o f this process.
15
-D
T
4 I
-0 ro I
.: 2
s e a
LL
4 I I
T
4 I
.-() c
B. STRATEGIC FOCUS
38. The main objective o f the proposed series o f operations i s to help Vietnam develop the economic policies and institutions needed to become a middle-income country. The goal set by the SEDP 2006-201 0 should not be interpreted merely in quantitative terms, but rather as laying out regulatory frameworks and monitoring mechanisms wel l suited to steering a much more complex and sophisticated economy, wi th a much broader number o f stakeholders. As the transition to a market economy i s gradually being completed, the focus needs to shift f rom basic structural reforms to second- generation reforms, reflecting both the s h i f t in the role o f government in relation to production and the changing relationship between state and society. Thus, priority goes to measures aimed at strengthening the supervision o f financial markets, at regulating access to and pricing o f infrastructure services, at building inclusive and financially viable social insurance systems, at better managing natural resources and protecting the environment, and at increasing transparency and accountability at all levels.
39. One difficult question faced in preparing the new PRSC series was whether to focus on selected SEDP pillars or to cover all four. One possible interpretation o f Vietnam’s recent development experience holds that success in the long term crucially depends on the acceleration o f structural reforms. Another possible interpretation i s more optimistic about Vietnam’s ability to deliver on the structural reform agenda, but less so in relation to the governance agenda. However, fostering business development, keeping growth inclusive, ensuring environmental sustainability and improving governance are all priorities for Vietnam. One o f the strengths o f the reform agenda embraced as a result o f Doi Moi has been i t s comprehensive nature. Adopting an “either-or” approach in relation to those key priorities would be as questionable as choosing between economic reforms and the development o f large-scale infrastructure i n the early stages o f the previous PRSC cycle. Back then, the government o f Vietnam avoided the pitfall o f such “either-or” approach by pushing towards the integration o f policy reforms and infrastructure development, through the “expansion” o f CPRGS. The new PRSC cycle builds o n a similar integration o f perspectives. The Vietnam Development Report 2007 argues that alignment should not be about emphasizing one pil lar o f the SEDP over the others, but rather be about preserving one o f the main strengths o f Vietnam’s reform process, namely i ts comprehensive, cross-sectoral nature.
40. Supporting the implementation of Vietnam’s reform agenda across its four pillars requires being selective within each of them. The SEDP contains long l is ts o f policy actions to be adopted over the five-year cycle. I t i s unlikely that all those actions have the same strategic importance, and even among priority actions, appropriate sequencing may be the key to success. The previous five-year cycle provided clear illustrations o f t h i s principle, wi th accession to the W T O being a pre-requisite to make politically more diff icult decisions in banking a necessity. At a more practical level, there are capacity constraints, both on the government side and on the donor side. It i s often argued that limited government capacity i s one o f the main bottlenecks in the implementation o f development programs in Vietnam. But donor resources (financial and technical) are limited too, and thus cannot possibly support the full range o f initiatives set out in the SEDP and related plans and strategic documents.
17
BOX 1 : GOOD PRACTICE IN POLICY LENDING OPERATIONS
The preparation o f this credit, and the broader series of budget support operations for the implementation o f the SEDP 2006-201 0, follows good practice principles on development policy lending. In particular, the following issues were considered:
Government ownership. The objectives o f the proposed series o f credits are aligned to those o f the SEDP 2006-2010, a strategic document which i s part o f mainstream planning processes at national level. The SEDP outlines the policy measures needed for Vietnam to advance to middle-income status by the end o f the decade. The proposed series o f credits involves no effectiveness conditions, with all policy actions being completed by the time of submission to the Board. One of the key criteria to retain an action as part of the program i s that i t can be traced back to the SEDP or other key strategic document or plan o f the government. Triggers for the next operation in the series are discussed with government, and agreed upon as a mechanism to focus the policy dialogue, not as disbursement conditions.
Analytical input. The “translation” o f the very comprehensive SEDP into a concrete set o f policy actions to be implemented during the new PRSC cycle required careful prioritization, sequencing and monitoring. The large analytical program supported by the World Bank and other donors, summarized in the annual Vietnam Development Reports (VDRs), was used to this effect. After several VDRs addressed in greath depth the issues faced by Vietnam in relation to Poverty, Governance and Business, the VDR 2007, co- signed by 16 donors, provides the main analytical underpinnings for the new PRSC series. Analytical work on the social impacts o f global integration, on gender, and on environmental issues was also used for the design o f the proposed PRSC series.
Accountability framework. The size o f policy matrices was kept to the minimum compatible with an active policy dialogue across the four pillars of the SEDP. The Financing Agreement for PRSC 6 refers to 12 actions, compared to 15 under PRSC 5 and 14 under PRSC 4. The total number o f prior actions i s similar to that o f previous operations. While this number i s higher than in other countries, this i s justified in Vietnam, given the breadth o f i ts reform program and the maturity reached by the PRSC process. With two dozen line ministries and government agencies and a dozen co-financiers, drastically narrowing the focus o f the policy dialogue, concentrating on just a few policy actions would amount to demobilizing a large portion of the constituency for economic reform. The Bank and all co-financiers use the same policy matrix to decide on their level o f support, thereby providing a single harmonized platform for the policy dialogue and disbursements.
Performance orientation. The proposed series o f credits i s fully aligned with the budget cycle o f Vietnam. Commitments wi l l be made in June o f each year, which i s when the preparation o f the budget starts. The budget i s approved by the National Assembly towards November, for the following calendar year. The submission to the National Assembly already factors in the amount of resources expected from PRSCs. Progress in the implementation o f the reform agenda wi l l be monitored through a well defined set o f development indicators, with the same framework employed by all co-financiers. Those indicators are based on the monitoring framework for the SEDP, although they are fewer in number and have a relatively stronger emphasis on governance. The timing for assessments wi l l be aligned to that o f the government, including the annual report to the National Assembly on the implementation of SEDP, and the mid- and end-cycle reviews o f progress in development outcomes.
41. As in the previous PRSC cycle, the policy dialogue between donors and government i s broad in nature, encompassing all major policy areas. This comprehensive approach i s justif ied in Vietnam, where the PRSC process has reached considerable maturity. With two dozen line ministries and government agencies and almost 20 donors participating in it, drastically narrowing the focus o f the policy dialogue, concentrating on just a few policy actions would amount to demobilizing a large portion
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o f the constituency for economic reform. Entire sectors could not have any particular anchor to focus their efforts on, and technical and human resources could end up being under-utilized.
42. However, having a broad sectoral coverage i s not incompatible with identifying a core set o f about a dozen policy actions to be followed much more closely in each operation. The analyses in the Vietnam Development Report 2007 indicate a series o f priority areas where progress i s critically needed for Vietnam to become a middle-income country and put itself on a sustainable growth path. Actions i n these areas are the only ones included in the Development Credit Agreement. The remaining ones are discussed in the Program Document, and appropriately documented by government but do not have legal status. As in previous PRSCs, this compromise allows reconciling a focus on a limited number o f priorities with the need to make progress across a broader front in order to fu l ly support Vietnam’s ambitious reform agenda.
C. MONITORING FRAMEWORK
43. I n parallel, progress in the implementation o f the reform agenda will be monitored through a well defined set of development indicators. Those indicators are based 011 the monitoring framework for the SEDP but they are fewer in number (Annex 3). In some areas, the set o f indicators proposed in the Vietnam Development Report actually goes beyond the SEDP monitoring framework. This i s the case in relation to governance, where the monitoring experience i s more limited and there i s a more l imited experience in the use o f enterprise and household surveys, as opposed to administrative self-reporting. However, because reliable data need to be collected from surveys and other sources with demanding implementation requirements, the monitoring o f progress towards development outcomes cannot be conducted on an annual basis. I t i s expected that the new PRSC cycle will involve some annual monitoring but only two in-depth assessments, towards the middle o f the cycle and at the end o f it.
VI. THE PROPOSED CREDIT
44. Over the year elapsed since the last operation in the series, the government o f Vietnam made considerable progress in its reform agenda, across all policy areas. Some o f the actions undertaken during th i s period are deemed to be more strategic, because o f their potential impact on development outcomes over time. Those are the actions reported in the Credit Agreement for each o f the operations (Table 6). However, as in the previous cycle, each operation highlights through a comprehensive policy matrix all o f the actions that were part o f the PRSC policy dialogue over the preceding year and were completed by the time the negotiation o f the credit took place (Annex 2 for the l is t and Annex 5 for the supporting documentation). This broader set o f actions does not reflect the use o f conditionality. I t reporting i s rather intended to convey the breadth and scope o f the reforms being undertaken b y the government o f Vietnam, year after year. By providing a more comprehensive picture o f developments iii each policy area, th i s matrix allows a better understanding o f the progress being made in each o f the four pillars o f the reform program.
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TABLE 6: KEY PRIOR ACTIONS UNDER P R S C 6
I Pillar I: Business development I Further restrict l i s t o f sectors where 100-percent state ownership i s to be retained.
0 Require public disclosure o f financial statements o f SOCBs in line wi th internationally accepted
Decentralize investment ownership to better integrate capital and recurrent budgets in the road
0 Clarify contract specifications, investor qualifications and treatment o f unsolicited proposals for
standards.
transport sector.
BOT projects. Pillar 11: Social inclusion
0 Extend performance standards for primary teachers nationwide, including evidence-based assessments
0 Adopt H IV /A IDS law and prepare action plans to scale up harm reduction, fight stigma and discrimination.
0 Unify legal framework to address gender disparities and increase women’s participation in decision making.
Pillar 111: Natural resources Issue strategy to strengthen linkages between protective and economic functions o f forests, and promote local ownership.
Pillar IV: Modern governance 0 Allocate state capital expenditure transparently, using criteria l ike population, poverty and ethnicity 0 Disclose results o f audits conducted by the S A V and i t s annual audit plan 0 Establish separate legal, judicial, economic, and budget committees to strengthen National
Operationalize Steering Committee against corruption with power to suspend high level officials if Assembly’s supervisory role
suspected.
Note: The prior actions listed in t h i s table are those included in the Financing Agreement for the current operation. The complete set o f prior actions agreed upon between government and donors for PRSC 6 can be found in Annex 2.
A. BUSINESS DEVELOPMENT
45. The drive to integrate further in the global economy remains one o f the most important sources o f reform momentum in Vietnam. I n i ts initial stages, this drive focused mainly on reducing barriers to trade in goods, first regionally and then with key trade partners in the industrial world. Subsequently, the Bilateral Trade Agreement with the United States led to increased coinpetition in services and considerable legal reform. The trend was furthered deepened, on a multilateral basis, with the accession to the WTO, which was completed during the period covered by this operation. The most important prior actions i n relation to global integration, under PRSC 6, were the granting o f trading and distribution rights to all foreign firms, in line with international commitments, and the issuance o f regulations to guide the intellectual property law, with adequate enforcement mechanisms.
46. The period covered by this operation witnessed progress in SOE reform, under the form of more divestiture and better monitoring of performance. The l i s t o f sectors where 100-percent state ownership i s to be retained was further restricted from 29 to 19, and by now covers mainly activities that can be deemed strategic. This should lead to more SOEs being divested, wi th the use o f share auctions
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now retained as the main mechanism for equitization, and the participation o f foreign strategic investors allowed. To the extent that the state s t i l l retains a share o f the capital in many sectors and enterprises, additional steps have been taken to ensure that they are managed efficiently. By now, al l SOEs are classified according to their performance, based on their turnover, profitability, servicing o f debts and compliance with the law, and the results o f th i s classification are published. Meanwhile, the exercise o f ownership rights on behalf o f the state i s being transferred from line ministries and provincial governments to the State Capital Investment Corporation (SCIC), a for-profit organization under the Prime Minister. This transfer o f ownership should resolve the conflict o f interest that ministries and provinces used to face, as they formulated and implemented policies affecting the enterprises they ran.
47. The implementation of the ambitious banking reform strategy adopted under the previous operation focuses for now on strengthening the commercial orientation of SOCBs, which s t i l l dominate the market at present. The strategy assumed that regulation and technical upgrades alone would not be sufficient to overcome the interference o f non-commercial objectives in lending decisions, especially at provincial levels. Introducing private capital in SOCBs, with the participation o f strategic foreign investors with recognized resources and expertise, was seen as necessary to accomplish this transformation. Prior actions under th i s operation prepared the ground for the equitization o f two SOCBs, including one o f the largest ones, over the next year. The equity stake allowed to foreign strategic investors was increased, while all SOCBs were required to disclose their financial statements in line with internationally accepted standards.
48. Policies to support the development o f the already vibrant private sector remain centered around the removal o f administrative barriers to entry. Under this operation, processing times were reduced and the fee structure for business registration was rationalized. The authority to issue investment certificates was clarified, more detail was provided 011 sectors where investment is conditional, and the documentation for investment registration or evaluation was standardized. A consultative mechanism to streamline I icenses and oversee the implementation o f new investment-enterprise regime was established, and guidelines and options were issued for foreign investors to transition to such regime. The single- window mechanism was adopted for businesses to cover registration, tax, and seal formalities in selected provinces. In parallel a monitoring mechanism to assess the constraints faced by businesses was set up, under the form o f an investment climate module attached to the enterprise survey every two years. The sample used for th is module i s representative at the provincial level, facilitating comparisons in business friendliness across local authorities.
49. I n infrastructure, mechanisms are being set up to increase the efficiency of public resources and increase the volume of private funding. In relation to public resources, the decentralization o f investment ownership should lead to a better integration o f capital and recurrent budgets in the road transport sector. About 40 projects will be transferred to the Vietnam Roads Authority, the entity which thus far has been responsible for only the maintenance budget. The transfer o f investment ownership i s expected to strengthen the Ministry o f Transport’s oversight function, b y separating i t s earlier roles o f both owner aiid supervisor o f projects. The adoption o f wastewater charges based on cost recovery should also contribute to the sustainability o f investments in water and sanitation. This measure i s accompanied by appropriate caps to protect the poor. As for private funding, i ts mobilization for infrastructure projects should be facilitated by the newly issued BOT decree, which clarifies contract specifications, investor qualifications aiid treatment o f unsolicited proposals.
B. SOCIAL INCLUSION
50. In education, the government strategy expanded coverage of high-quality schooling at lower levels with competition and incentives for excellence at higher level. While the coverage o f primary
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education has continued to expand, quality remains an issue, with children i n poorer areas being at a disadvantage. After having introduced Fundamental Quality Standard Levels for schools, under the previous PRSC cycle, a key prior action under th i s operation extends performance standards for primary teachers nationwide. The implementation o f such standards will rely on evidence-based assessments o f teacher performance, as opposed to diplomas and seniority. At the higher end, transparent criteria have been adopted to decide on university admission quotas on a pi lot basis.
5 1. A fundamental transformation in the government’s approach to HIV/AIDS has taken place in recent years and i s being consolidated at present. Risky behaviors, including the practice o f commercial sex and the use o f intravenous drugs were traditionally labeled as “social evils”, often resulting in stigma and discrimination for the affected populations. But the approach changed considerably under the previous cycle, with a new strategy emphasizing prevention and treatment over repression. This public health approach i s reflected in the H IV /A IDS law passed under th is operation, and the subsequent preparation o f a comprehensive set o f action plans to scale up harm reduction. These action plans foresee the introduction o f needle exchange and methadone substitution programs. Meanwhile, across tlie health sector as a whole, an effort was undertaken to improve the budgetary balance between health infrastructure, human resources, subsidies and preventive care.
52. The design o f the pension program was improved, so as to extend i t s coverage and make i t s compulsory component financially viable. Until tlie mid-l990s, only public sector workers were entitled to old-age, disability and survivor benefits, under a non contributory program funded out o f general government resources. This program was subsequently extended on a contributory basis to a l l formal sector workers, but old-age pension benefits remained determined by average salaries in the years preceding retirement. The period covered by th i s credit saw the passing o f the first ever Social Insurance Law was passed, which makes pension benefits for private sector workers depend on the average salary over all the years o f contribution. I n a rapidly growing economy, th is average salary i s substantially lower than the salary in the years preceding retirement, so that the law drainatically improved the financial viabil ity o f the system. It also introduced a voluntary pension program for farmers and informal sector workers, making it possible to gradually extend the coverage o f the social insurance system. This voluntary program i s currently in i ts design phase. However, the stronger financial viabil ity o f the system and i t s potentially broader coverage should not hide the shortcomings o f current pension formulas. Under the new law, there are considerable gaps between the level o f benefits for men and women, and for public and private sector workers. Also, benefits are far removed from the actuarial benchmark, which encourages relatively short periods o f contribution and the under-reporting o f earnings.
53. While gender equality indicators are better in Vietnam than in many other developing countries, steps are being taken to narrow the remaining gaps. The passing o f a law on gender equality, a prior action under th i s operation, i s an important step in th is direction. It i s recognized that regulation alone cannot be sufficient, as abuses go often unreported and enforcement capacities are limited. But the new law unifies legal framework to address gender disparities and increases women’s participation in decision making.
C. NATURAL RESOURCES
54. The SEDP gave increase prominence to development sustainability, and the latter hinges to a large extent on the management of natural resources. Two main issues stand out i n relation to land. First, i s the management o f forests, which are s t i l l to a large extent under the control o f SFEs. This has resulted in a blurring o f commercial and protective functions, but there i s also a risk that SFE restructuring could lead to the encroaching o f forest land by outsiders, to the detriment o f local
22
populations (especially from ethnic minorities) whose livelihoods depend to a large extent on the use o f forests as a public good. To address t h i s risk, under this operation the government issued a strategy to strengthen linkages between protective and economic functions o f forests, and to promote ownership by local households and communities.
5 5 . The second critical issue faced by Vietnam in relation to land management concerns conversion, reclamation and resettlement, in the context o f a rapid urbanization process. Close to one mi l l ion people may be moving every year to urban and peri-urban areas, and entire swatches o f land are being cleared for infrastructure development or to host industrial parks. Lack o f transparency in reclamation and conversion plans may result in sizeable capital gains for those with access to t l ie relevant information. Insufficient compensation for the affected populations i s leading to recurrent social unrest. The Land Law, approved under the previous PRSC series, paved the way for the use o f market prices as the basis for compensation. But gaps remained in relation to land occupants who do not have appropriate documentation for their tenure, something common in a country where the handing over o f land to households and firms i s s t i l l an ongoing process. Under this operation, resettlement and compensation procedures have been clarified for cases where occupants lack a land-use right certificate (LUCs), and meclianisms have been set up to handle complaints.
56. Development sustainability also hinges on the appropriate control o f pollution and environmental damage resulting from business activity, be it by the public or the private sector. Considerable progress was made during the previous cycle on the use o f Environmental Impact Assessments (EIA) for large investment projects. Under this operation, consultation with the communities where projects are to be located became mandatory, and the local feedback needs to be incorporated when reporting back to the relevant authorities.
D. MODERN GOVERNANCE
57. The transformation of planning processes, from the direct allocation of resources to the strategic steering o f the economy, has continued during this period. In t l ie command and control economy, M P I would play the role o f an arbiter in the selection o f investment projects submitted by various government bodies. With investment decisions devolved to the National Assembly and People’s Counci Is, the role o f M P I has shifted towards the allocation o f the budget envelope available for capital expenditures. In the period covered by this operation, norms were adopted to allocate state capital expenditure transparently across provinces, using criteria like population, poverty and ethnicity. These norms make a considerably larger amount o f resources available to the poorer provinces in the country. Also during th i s period regulations were adopted for the preparation o f regional development plans, specifying responsibilities and requiring disclosure. Under the new regulations, infrastructure master plans will have to be based on the broader, regional development plans. Thanks to the new approach, issues such as comparative advantage, land use and population flows are expected to gain more prominence in choosing the layout for infrastructure networks.
58. Public financial management reform, one of the cornerstones of the Vietnamese program, has focused on strengthening systems and increasing transparency. The State Audit o f Vietnam had been established as a specialized agency under the National Assembly towards the end o f the previous cycle. Under this operation, for the f i rs t time t l ie results o f SAV audits and i ts annual audit plan were disclosed. This period also witnessed the publication o f the report on budget execution for the current year and tlie budget plan for forthcoming year, which wi l l happen on an annual basis hereafter. In the same spirit, regulations were issued for the periodic disclosure o f external public debt and i t s composition. This signals an increased emphasis on the management o f resources and liabilities,
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compared to a previous focus on public expenditures. Thus, a regulation to guide the establishment and issuance o f benchmark government bonds was implemented, and the administration procedures for a l l taxes were consolidated into a single law, modernizing assessment and enforcement methods.
59. Increased oversight of government actions, at both national and local levels, has been a common theme underlying the legal reforms adopted under this operation. The National Assembly has become increasingly active in i ts supervisory role, especially since the passing o f the Budget L a w o f 2002. This trend was reinforced recently with the establishment o f separate legal, judicial, economic, and budget committees. These committees are also expected to include a greater proportion o f permanent members than in the past. A similar trend i s noticeable at local levels. A new ordinance on grassroots democracy strengthens information disclosure, public participation, and accountability o f officials in the preparation and implementation o f commune level policies. Recent legal developments have also aimed at promoting access to justice and recognizing c iv i l society organizations. Under this operation, legal aid mechanisms for marginalized and vulnerable groups were simplified and broadened, whereas policies were adopted to encourage the participation o f non-state establishments in the delivery o f public services.
60. The determined approach taken by the government in relation to corruption i s at present moving into an implementation phase. Key legal documents, including the pivotal Anti-Corruption Law, have been passed by now, and the issue i s how to translate a clear resolve into concrete action. Several measures adopted during the period covered by this credit go in that direction. A Steering Committee against corruption, headed by the Prime Minister, has been set up. The committee has the power to suspend high-level officials if suspected o f wrongdoing. It i s already engaged in investigating certain high profile cases, and the findings are to be made public. The results o f investigations against corruption for cases overseen by the Government Inspectorate were disclosed. A legal framework has also been established to protect and reward whistle blowing on corrupt activities.
E. TRIGGERS FOR PRSC 7
61. The negotiation o f the proposed credit included reaching an agreement on a l i s t o f measures that will in principle be supported by PRSC 7. These measures are inspired i n the SEDP 2006-2010 and other key documents and strategies (last column in Annex 2). But among that broader set, the measures discussed at the negotiation phase stand out by their strategic importance to attain the SEDP objectives towards the end o f the five-year cycle (Table 7). Those priority measures, or “triggers”, should not be interpreted as conditions. They rather serve as a guide to focus the policy dialogue towards PRSC 7. Progress towards meeting the triggers will be assessed towards the end o f 2007 in order to launch the formal preparation o f the next operation i n the series. It i s understood that the assessment will be holistic, recognizing that some triggers may not be fully m e t while other may be exceeded.
62. Establish early warning mechanisms to address the social and environmental impacts of W T O accession. While the entry o f Vietnam into the WTO i s bound to accelerate economic growth, it may do so at uneven paces across regions and sectors. Early analytical work on the possible social impacts o f accession showed how diff icult it i s to predict which specific groups stand to lose, or to be left behind. In the few cases where adverse impacts can be anticipated with a relative degree o f precision, complementary measures to protect those who could be affected should be part o f the action plans to implement W T O commitments. Such action plans are currently under preparation and should be completed by end-2007. I n most cases, however, it i s easier to identify the groups which stand to lose than to determine how much they could lose (or even whether they would actually lose). In those cases, the action plans sl~ould establish effective communication channels wi th the relevant stakeholders, to inform them about the possible impacts o f W T O and collect timely feedback from them.
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TABLE 7: AGREED TRIGGERS FOR PRSC 7
Pillar I: Business development 0 Establish early warning mechanisms to address the social and environmental impacts o f W T O
0 Assess transparency and scope o f related lending and affiliated party transactions o f Economic
Complete equitization o f two SOCBs, wi th participation o f strategic investors Adopt market based pricing systems for cost estimates related to state-funded c i v i l engineering
accession
Groups
investments Pillar 11: Social inclusion
Revise tuit ion fees at secondary and tertiary levels, better reflecting market conditions while
0 Establish affordable health insurance premiums based on user-group demand and address adverse
Introduce voluntary pension program for farmers and informal sector, wi th support for the poor Adopt guidelines for Gender Equality Law identifying responsibilities, resources and monitoring
protecting the poor
selection problem
mechanisms Pillar 111: Natural resources
Issue guidelines for forest development based on participatory land-use planning and independent monitoring Enact legal and institutional framework for integrated river basin management Develop unified national sanitation strategy and encourage greater commune and private participation in sanitation
Pillar IV: Modern governance Establish clear criteria for selecting public investment projects and mechanisms for their financing and monitoring Issue disclosure regulations on content and timing o f S A V report including audits o f individual entities Implement asset declaration b y senior officials and their immediate families with penalties for non- comuliance
63. Assess transparency and scope of related lending and affiliated party transactions of Economic Groups. The reform o f the state sector has been effective in introducing private capital in SOEs, improving their governance, and removing the exercise o f state rights in them from pol icy agencies to a profit-oriented asset manager (the SCIC). But several large economic groups directly reporting to the Prime Minister, by virtue o f their size and sectoral diversification, potentially raise new corporate governance problems that need to be carefully assessed. Of particular concern i s the possibility o f affiliated party transactions within the groups, especially as some o f them want to take savings deposits directly f rom the public. This could lead to financial transactions not fall ing under the direct oversight of either SBV or the State Securities Commission (SSC). Also, some o f these groups are organized around infrastructure networks, as i n the case o f electricity and telecommunications. Promoting competition in sectors wi th network externalities requires a deliberate effort to create a market, and progress i s uneven in th i s respect.
64. The equitization o f a l l SOCBs i s part o f the banking reform strategy. But it may fail to strengthen their
Complete equitization of two SOCBs, with participation of strategic investors.
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commercial orientation if private ownership i s scattered across a large number o f small investors. Strategic investors with a solid trajectory in banking are needed to strengthen the credit culture inside the SOCBs and counteract the pressures for directed lending they often face at local levels. The l o w ceilings i n force for participation by individual foreign investors could be dissuasive in a different economic environment. But Vietnam’s dynamism could s t i l l make a minority stake i n an SOCB valuable enough to attract interest by reputable international banks. The government could further encourage their involvetnent by raising the ceiling for individual foreign investors to i t s allowed maximum.
65. Adopt market based pricing systems for cost estimates related t o state-funded civil engineering investments. A vibrant private sector has emerged in recent years, but the market for c iv i l works remains dominated by SOEs (equitized or not). As a result, collusion i s diff icult to avoid, even when competitive bidding i s used to allocate contracts. Equally important, SOEs and former SOEs tend to use the cost norms o f the public sector when formulating their bids. This results in limited price variation across bids, which cannot be easily distinguished from deliberate coll~ision. Because the cost norms are outdated, they also lead to the exclusion o f higher-quality bids. The acceptance o f such proposals requires exceptions which are i n turn vulnerable to corruption. The revision o f the cost norms system, so that cost estimates better reflect market conditions, i s a crucial measure to make the market for c iv i l works more competitive and transparent.
66. Revise tuition fees at secondary and tertiary levels, better reflecting market conditions while protecting the poor. The education strategy o f Vietnam combines broad access to high-quality schooling at primary and lower secondary levels, with increased competition and a drive for excellence at higher levels. However, for higher-level institutions to be able to provide quality education, they need more resources than the education budget can afford, and stronger performance incentives than it can provide. At the same time, there i s a clear recognition that mechanisms need to be set up to exempt the poor f rom higher tuition fees and to provide scholarships for talented children from disadvantaged backgrounds.
67. Establish affordable health insurance premiums based on user-group demand and address adverse selection problem. The strategy for the reform o f the health sector rel ies on a move from supply- to demand-side financing o f health care providers, with budget funding for the poor and partial subsidies for the near poor. The expansion o f the health insurance program, and in particular the passing o f the Health Insurance L a w currently under preparation, are cornerstones i n this process. For t h i s strategy to work in practice, however, the Health Insurance L a w needs to strengthen provider payment mechanisms, so as to create incentives for the containment o f health costs. At present, reimbursement to providers i s on a fee-for-service basis. The new Law should also set the contribution rate towards health insurance at a level that does not penalize formal sector employment, resisting the temptation to balance the books through an excessively high rate. Last but not least, the adverse selection problem faced by the voluntary health insurance program needs to be addressed, which probably requires greater reliance on group enrollment and a more active role o f local authorities and inass organizations in promoting participation in the system.
68. Introduce voluntary pension program for farmers and informal sector, with support for the poor. The development o f a modern social insurance system i s less advanced in relation to old-age, survivor and disability pensions than it i s in relation to health insurance. However a similar approach i s gradually taking shape, as reflected in the first ever Social Insurance L a w in mid-2006. This law made the compulsory pension system financially viable, although this was at the price o f sizeable gaps between the level o f benefits allowed and what an actuarially fair program would provide. The Social Insurance Law also introduced a voluntary pension program for farmers and informal sector workers, whose specifics wi l l need to be spelled out i n the coming months. T w o main challenges stand out. The f i r s t one i s to make the program “portable”, as Vietnam wil l most l ikely experience a considerable formalization o f
26
employment as it develops. Tlie second challenge i s to allow for subsidies or incentives to encourage the participation o f the poor, a vast majority o f whom would otherwise remain uncovered.
69. Adopt guidelines for Gender Equality Law identifying responsibilities, resources and monitoring mechanisms. Tlie law passed under this operation redresses gender gaps in existing regulations and increases participation by women in decision making. I t would be unrealistic to expect that a legal framework can on i ts own solve problems that go often unreported and are diff icult to monitor. However, there i s a clear expectation that the law can make a difference if properly implemented. This requires identifying clearly which agencies are in charge, allocating resources so that they can conduct their tasks, and establishing mechanisms to assess progress.
70. Issue guidelines for forest development based on participatory land-use planning and independent monitoring. Environmental sustainability will depend not only on the control o f pollution but also, crucially, on the adequate management o f natural resources. Forest land i s among the most sensitive o f such resources, wi th implications for both biodiversity and the livelihoods o f local populations. After tlie adoption o f the forest strategy, the next step i s to involve local stakeholders in land- use planning to reach consensus on tlie location o f plantations, allocation o f forest land, and to identify boundaries with other uses o f land. Better site mapping and species matching, as wel l as improved monitoring o f forest cover and quality will be additional areas o f importance.
71. Enact legal and institutional framework for integrated river basin management and develop unified national sanitation strategy and encourage greater commune and private participation in sanitation. Adequate management o f water resources i s another priority, as potential tensions exist between their upstream and downstream uses. The most serious obstacle in this respect i s institutional, as actions by various ministries, agencies and provinces need to be coordinated in each case. It i s thus necessary to clarify the legal and institutional framework through which a l l o f them must operate. The forthcoming decree on integrated river basin management will be a key milestone in th is process. Sanitation represents the only MDG where progress has been less than expected. Previous operations supported actions in the area o f rural sanitation. However, in a rapidly urbanizing economy fringe areas are emerging where the urban-rural divide i s blurred. In order to adequately respond to the sanitation needs o f a l l groups and regions a unified national strategy i s currently under development. The strategy entails close cooperation among various ministries, and also aims to attract private participation in the provision o f sanitation services.
72. Establish clear criteria for selecting public investment projects and mechanisms for their financing and monitoring. In recent years there has been a sustained trend towards transferring responsibilities for public investment decisions outside o f MPI, to ministries, provinces and elected bodies. However, a common framework for the preparation, appraisal, financing and implementation o f public investment projects i s s t i l l missing. Such framework should strengthen the project cycle at a l l levels, from the consistency wi th broader master plans, to the reliance on some form o f cost-benefit analysis, to the estimation o f operation and maintenance costs, to the enforcement o f safeguard mechanisms in relation to the environment and affected populations, to transparency in funding and financial management and to the monitoring and supervision o f works.
73 . Issue disclosure regulations on content and timing o f SAV report including audits of individual entities. While t l ie results o f audits conducted by the SAV and i t s annual audit plan were disclosed for the f i rst time under the current operation, a regular routine s t i l l needs to be established and the extent o f disclosure needs to be enhanced. Among other issues, such routine should ensure access by authorized agencies, including the media, for the detailed audit report, including the audits o f individual entities .
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74. Implement asset declaration by senior officials and their immediate families with penalties for non-compliance. The Anti-Corruption L a w passed under the previous operation in the cycle introduced an asset monitoring mechanism, whose specifics were spelled out more recently in a decree on asset an income declaration. While th i s could be a critically important tool to identify wrongdoers and dissuade corrupt behavior, i t s effectiveness will very much depend on i t s implementation in practice. One important unknown i s the number o f declarers to monitor; if the number i s unmanageably large, the declaration process may simply amount to paperwork. Equally important i s to determine whether those in charge o f verification are sufficiently removed from the declarers so as to avoid a conflict o f interest.
VII. OPERATION IMPLEMENTATION
A. POVERTY AND SOCIAL IMPACTS
75. A reform program as ambitious and comprehensive as the one envisioned by Vietnam for the next five years could have adverse impacts on specific groups. I n the short run, activities which were previously protected may stand to suffer f rom increased competition. In the medium to long term, some groups could benefit more than others f rom accelerated economic growth. However, while both possibilities are compelling, clearly identifying which groups stand to lose, or to gain less, i s not straightforward. For instance, a thorough review o f findings in relation to the impacts o f WTO accession, conducted as part o f the Vietnam Development Report 2006, on Business, showed that most o f the predicted impacts were not robust. This inability t o clearly anticipate who the potential losers are raised important methodological issues in relation to the handling o f the poverty and social impacts o f the economic reform program being supported.
76. T o address this fundamental uncertainty, a combination of preventive measures and rapid response mechanisms has been gradually established. One important preventive measure i s the extension o f the safety ne t for redundant SOE workers beyond i t s initial expiration date, in 2006. This safety net, whose operation has received positive evaluations, i s also being extended to other categories o f public sector personnel, namely redundant workers in state-owned farmers, forests and plantations. Another preventive measure i s the creation o f an unemployment insurance program by the first ever Social Insurance Law, passed in 2006. This program i s not scheduled to be formally launched until 2010. But i n the event o f an unexpected increase in the unemployment rate, it should be feasible to accelerate i t s implementation, and to grandfather workers who lose their jobs as a result o f restructuring, even if they had not contributed to the program, or had not contributed long enough.
77. Rapid response mechanisms rely on a more robust measurement o f poverty rates, a better understanding of its determinants, and the availability o f budget allocation norms channeling more resources to poorer areas. The last poverty assessment led by the donor community was the Vietnam Development Report 2004, on Poverty. Since then, the responsibility for such assessments has been gradually handed over to a team o f local researchers and practitioners, led by the Vietnamese Academy o f Social Sciences (VAS’S). This team i s also the main advisor on the implementation o f WTO commitments and will be working on identifying the most appropriate complementary measures to mitigate potentially adverse effects o f those commitments. The task also involves establishing clear procedures to collect feedback from relevant stakeholders in each case. Local analytical work on poverty has been accompanied by a strengthening o f i t s measurement at various levels, resulting in poverty rates which are reliable at the province level, and improving at district and commune levels. Meanwhile, a system o f norms to allocate budget resources to provinces was completed in 2006. These norms are
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sensitive to poverty, making it possible to channel more government resources to areas which are adversely hit, or simply lag behind in terms o f poverty.
78 . I n the medium to long term, addressing the potentially adverse social impacts o f rapid economic reforms requires a strengthening of government systems. One o f the objectives o f the five- year period ahead i s to develop a modern social insurance system, starting by health benefits and gradually moving to old-age pensions, disability pensions and the like. The approach in this respect i s to aim for universal coverage, relying on programs with the same structure o f benefits for all population groups, but with the contributions or premia o f the poor being paid out o f the state budget. Another area where progress i s expected concerns regional planning. Until recently, regional planning was not too different from producing infrastructure master plans. But there i s now a clear determination to ground regional planning inore firmly on considerations related to comparative advantage, land and water use, labor migration and the like. If done properly, th i s work should result in more coherent regional development policies, helping the laggard areas to catch up with inore prosperous neighbors.
B. ENVIRONMENTAL ASPECTS
79 . The proposed PRSC series supports a number o f diverse policy actions which could have effects on the country’s environment, forests and other natural resources. Most o f those effects are expected to be positive, but some could be negative. Among the actions with the largest potential impact on environmental quality are those related to private sector development, SOE reform, trade integration, and planning processes. Rather than trying to address those potential impacts one by one, the approach taken in Vietnam i s to mainstream environmental objectives in the PRSC process. This approach has led to the adoption and implementation o f legal framework for land (Land Law, 2003), forests (Forest Protection and Development Law, 2005) and environmental inanageinent (amended Law on Environmental Protection, 2006). The next series o f PRSCs wi l l strengthen the iinpleinentation o f these legal frameworks to ensure greater impact on the ground.
80. Supporting analytical work has been engaged to identify and address gaps in the existing arrangements and incentives for environmental governance. A Poverty-Environment Nexus analysis helped raise awareness on the interaction between environmental issues and poverty. I t s findings have resulted in increased attention on pollution in rural areas and i t s impact on people‘s health. The Country Environniental Analysis highlighted the need to regulate non-state rural enterprises contributing to water pollution. The Environment Monitor series provides a regular snapshot by thematic area, including solid waste, biodiversity and water quality in river basins. Other studies by the World Bank and other donors have helped fill the gap between SEDP objectives and policy actions supported by the PRSC process.
81. Among the policy actions being adopted, several focus directly on pollution control, others on natural resource management and others on investment planning. The general decree to guide iinpleinentation o f the Law on Environmental Protection was been issued in August 2006, during the period covered by t h i s operation. The decree focuses on the application o f national environmental standards, and allocates responsibilities for environmental protection in the production and service sectors, as well as in relation to hazardous waste management. The Circular on Wastewater Pollution Coefficients, identifying the volume o f pollutants in industrial wastewater as a basis for fees to be levied in application o f the “polluter pays” principle, also came into force during the period covered by t h i s operation, in July 2006. A Decree on solid waste management was approved in early 2007, and a new decree on wastewater disposal for urban areas and industrial zones i s expected to be issued soon.
82. In relation to natural resources management, an important step towards implementing the 2005 Forest Protection and Development Law i s the approval o f the National Forest Development Strategy for
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2006-20 10 which strengthens the linkages between protection and economic functions o f forests. This i s accomplished through improved forestland tenure, particularly for communities, an enhanced contribution o f forestry to economic growth and local livelihoods, and a more sustainable management and conservation o f the forest estate. A country-wide reclassification o f forest, coupled with the reform o f state forestry enterprises (SFEs), i s underway, sliould lead to the handover o f a larger area o f production forest to local households and communities. Accompanying policies for production forests are also under the preparation. Participatory land-use planning wil l be used to ensure that the expanded production forest estate i s allocated equitably, managed in a sustainable way, and contributes to environment protection. Furthermore, the Five Mi l l ion Hectare Program i s being revised to better balance forest protection, multi-purpose forestry and incentives for farmer participation.
83. I n the water sector, steady progress i s being made on promoting integrated river basin management. One o f the major obstacles to progress in th i s area was the overlap i n responsibilities between government agencies. Those responsibilities were clarified i n 2007, when the Ministry o f Natural Resources and the Environment (MONRE) was given the coordinating role and the mandates o f the Ministry o f Home Affairs (MOHA), M O N R E and the Ministry o f Agriculture and Rural Development (MARD) were revised accordingly. It i s expected that the decree formalizing the new, streamlined institutional framework for integrated river basin management will be enacted it1 the second hal f o f 2007. Lessons from the pilots will be incorporated into the development o f detailed implementation guidelines for strategic environment assessments (SEAS). Downstream, mandatory consultation with local communities has been introduced during t h i s PRSC period for investment projects requiring an EIA. Consultation guidelines are in preparation for hydropower projects.
84. The government i s undertaking a substantial p rog ram of environmental capacity building. This program includes institutional strengthening, environmental and land use planning, and physical investment projects addressing environmental issues. Donor assistance to Vietnam i s strong in these areas, particularly for some o f the issues addressed through the PRSC process, such as improvements in environmental policies and their implementation, pollution prevention and control, and sustainable management o f forest and water resources.
C. STEERING AND MONITORING
85. The National Steering Committee (NSC) for the implementation o f PRSC operations was established in 2002. I t i s chaired by the first Deputy Prime Minister, Nguyen S i n h Hung, and brings together representatives from key economic ministries and agencies, such as MOF, the Ministry o f Trade (MOT), the State Bank o f Vietnam (SBV), the Ministry o f Labor, Invalids and Social Affairs (MOLISA), the Ministry o f Justice (MOJ), M A R D , the Ministry o f Education and Training (MOET) and the Ministry o f Health (MOH), among others. Members o f the NSC thus have authority over the entire range o f policy areas covered by the PRSC process. The participation o f the Office o f Government (OOG) and the Party's Economic Commission (PEC) in the NSC also allow for a better coordination o f policy decisions, and to elicit sufficient support for the most critical reforms. SBV i s assigned as the agency responsible, in close collaboration with the World Bank, for preparation and implementatioti o f PRSCs. A Deputy Governor o f SBV acts as Standing Vice Chairman o f the NSC. Representatives f rom a total o f more than 20 l ine ministr ies and government agencies participated in the preparation o f the proposed credit.
86. Given the intensive and complex coordination that i s required to manage this very comprehensive reform program, SBV has created a Program Coordination Unit (PCU) wi th dedicated staff f rom SBV. The PCU has helped facilitate the policy dialogue o f the World Bank and donors with line ministries.
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The Department for International Development o f the United Kingdom (DFID), Switzerland (SECO) and the World Bank have provided financial support for the PCU during the preparation o f PRSCs 4 to 6.
D. ADMINISTRATION
87. Strengthening the management of public expenditures has been a priority of the Government over the last decade and significant progress has been made in this respect. A f i r s t Country Financial Accountability Assessment (CFAA) was undertaken in 2000-0 1 . A Public Expenditure Review-Integrated Fiduciary Assessment (PER-IFA) carried out in 2004 and published in 2005, provided an update and review o f the implementation o f the recommendations o f the 2001-CFAA and also suggested reforms in other areas. The government has made steady progress in implementing the 2004 PER-IFA recommendations. Major developments in public financial management include empowering the National Assembly with increased government accountability for the use o f public resources; increasing transparency for all agencies using budget resources, including SOEs, public investment projects and statutory funds; establishing the S A V as a technically independent unit under the National Assembly; and gradual integration o f capital and recurrent expenditures through forward-looking budgets and resource allocation norms. Twenty-six national private sector accounting and 37 auditing standards, consistent with international practice have been issued. The government i s currently undertaking a major investment in a new and integrated Treasury and Budget Management Information System (TABMIS). Progress i s being made in developing new business processes for TABMIS, including a unified Chart o f Accounts, further integration o f recurrent and capital budget execution processes, clarifying issues related to reporting O D A on budget, and developing standard reports to strengthen budget execution.
88. A CFAA Update has been commenced and will be available later in 2007. The Update will provide an assessment o f the public financial management through examining budget development, budget execution - accounting, internal and external reporting, internal controls, internal and external auditing, monitoring and legislative oversight and scrutiny, financial management capacity and financial accountability risks.
89. Disbursement, reporting and auditing arrangements. The Credit will fo l low the International Development Association (IDA) disbursement procedures for development policy lending operations, and the Credit proceeds wil l be disbursed in compliance with the stipulated release conditions. Various measures have been taken to ensure that the overall fiduciary policies and institutions are adequate to proceed with support from IDA and other development partners. Analytical underpinnings for the operation include the 2002 Country Procurement Assessment Review (CPAR), the 2005 PER-IFA and the C F A A under preparation. Disbursement wi l l not be l inked to any specific purchases and no procurement requirements will have to be satisfied.
90. The fiduciary risks o f the current public financial management systems, (budgeting, accounting, reporting and auditing) are assessed as moderate. Since the International Monetary Fund (IMF) does not currently have a program in Vietnam, it i s not possible to rely on i t s assessment o f the control environment o f the SBV. However, the enactment o f the Audit L a w o f 2005 helps address the issues related to audit and accounting arrangements. The Audit L a w has established the S A V as an independent institution reporting the National Assembly with the Auditor General being appointed and dismissed by the National Assembly. Audit reports were made public for the first t ime in 2006. The SBV will be subject to auditing by S A V on an annual basis.
91. Deposit account. To address fiduciary risks in the foreign exchange control environment, the Borrower wi l l open and maintain a dedicated deposit account (DA) in US dollars for the Borrower's use once the Credit i s approved by the Board. The DA will form part o f the country's of f ic ia l foreign
Fiduciary arrangements.
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reserves. A n equivalent amount wi l l be credited to an account o f the government available to finance budgeted expenditures. If after deposit in the DA the proceeds o f the Credit or any part thereof are used for ineligible purposes, as defined in the Financing Agreement, the Bank will require the Borrower to either return that amount to the DA to be used for eligible purposes, or refund the amount directly t o IDA.
92. Through SBV, the Borrower will report the exact sum received into the DA, ensure that al l withdrawals are for “eligible” expenditures, indicate to IDA details o f the Treasury account to which the Vietnamese Dong equivalent o f the Credit proceeds wil l be credited, and submit a report on receipts and disbursements for the DA. The Government will, if considered necessary b y IDA, al low an independent external audit o f the dedicated foreign currency DA. These processes and controls are intended to provide assurance that IDA funds have arrived at their intended destination to be used for their intended purposes, and are subject to the Borrower’s rules and regulations.
E. BENEFITS AND RISKS
93. The present operation i s a vehicle for the World Bank, and the donor community more broadly, to stay engaged with a client that has delivered an outstanding performance in terms of economic growth and poverty reduction. It also recognizes the commitment o f the government to pursue and deepen i t s reform strategy, as reflected over the last few months in major milestones, including the entry into the WTO, the approval o f an ambitious banking reform roadmap and the adoption o f a determined stance in the fight against corruption. Active engagement should strengthen the coherence o f the program, especially because the effectiveness o f sectoral policy actions hinges o n the success o f more fundamental governance reforms in areas such public financial management, public administration reform and legal and judiciary development. Engagement should also help improve the content o f specific policy actions, to ensure the timeliness o f their adoption, and to monitor the impact o f the overall program on broader development outcomes. The value o f this engagement i s a l l the more important given that th i s would be the last cycle o f general budget support operations in concessional terms, hence providing an exceptional window for high-level policy access i n a country that i s not aid dependent.
94. The reform agenda has not progressed at the same pace across a l l fronts, and private sector response has been much stronger i n some areas than in others. As a result, the country i s facing potentially dangerous imbalances. The biggest risks faced by Vietnam are related to the sustainability o f i t s remarkable performance, economically, socially and institutionally.
95. Three different risks of a diverse nature need to be considered. I n the short term, the biggest vulnerability stems from possible turbulence in the financial sector. The development o f capital markets has vastly outpaced that o f the supervisory and regulatory capacity o f monetary authorities. This calls for a rapid upgrading o f policies related to the banking sector, the securities market and the management o f public debt, all o f which are part o f the proposed reform program. Success i n global integration, resulting i n massive inflows o f FDI to the growth poles o f the country and increased competition in formally protected sectors, may also test the ability o f Vietnam to preserve social inclusion. There i s a risk that some groups could lose in the short term, and a clear prospect o f a widening urban-rural gap. Rapid feedback channels f rom affected stakeholders, inclusive policies in the social sectors, and transparent mechanisms to transfer resources to the poorer regions are among the mitigating measures supported by the proposed series o f operations. Other imbalances are related to rapid urbanization and infrastructure development, in a context where transparency in land zoning and land compensation are s t i l l partial. Cases o f corruption and social s t r i fe are increasingly related to land. Tackling this risk requires rapid progress i n transparency at various levels, from regional planning to infrastructure master plans to land
At the same time, its own success confronts Vietnam with new challenges.
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use to appropriate taxation to the monitoring o f assets o f the relevant c iv i l servants. These are also areas receiving special attention in the proposed series o f operations.
VIII. COORDINATION WITH DONORS AND STAKEHOLDERS
A. THE IMF
96. The IMF has not had a lending arrangement in Vietnam since the expiry o f i ts Poverty Reduction and Growth Facility (PRGF) in April 2004. However, the IMF remains fully committed to continuing an effective partnership with the government o f Vietnam. It maintains a regular policy dialogue with the government through Article IV consultations, interim staff visits, and i t s resident representative office in Hanoi, and seeks to build capacity through training activities in Vietnam and abroad. I t supplements t h i s dialogue with technical assistance in areas o f core Fund expertise, including tax policy and administration, budget management, monetary and financial sector policy, and macroeconomic statistics. The IMF continues to cooperate closely with the World Bank in Vietnam, and to contribute actively to the broader dialogue between the government and i t s development partners. In relation to the proposed credit, the IMF i s expected to provide a Letter o f Assessment before the Board Meeting. A jo in t Bank- Fund D S A was completed i n October 2006.
97. Under the framework o f enhanced collaboration, the staffs o f the two institutions have consulted closely wi th one another across a broad range o f issues, and have sought to maintain appropriately- aligned positions in their areas o f policy engagement. While the Wor ld Bank has taken the lead in supporting the government’s structural and institutional reforms in a number o f sectors, the IMF has taken the lead in the policy dialogue on macroeconomic policies. It has also assumed responsibility for advising on the monetary policy functions o f the SBV.
B. OTHER MULTILATERAL AND BILATERAL DONORS
98. A total o f 11 bilateral and multilateral donors co-financed operations in the previous PRSC cycle, and more are expected to contribute to this and subsequent credits (see Table 8). Apart f rom co-financing PRSC operations, bilateral and multilateral donors have played an important role through their involvement in the policy dialogue with the government. Donors participating in the process contributed human and financial resources to assess the policy challenges, coordinate their approaches, and discuss the options with government, across a range o f policy areas. These were chosen in accordance with their priorities and comparative strengths.
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TABLE 8: DONOR SUPPORT TO PRSC 6
Co-financing amount $15,000,000
€5,000,000
AUDl 0,000,000
Donor Asian Development Bank (ADB)
Main areas o f involvement Global integration, State sector reform, Financial sector reform, Private sector development, Infrastructure, Education, Health, Land and forests, Water, Environment, Planning process, Public administration reform, and Fighting corruption. Education, Social protection, Gender, Land and forest and Planning processes.
Global integration, Health, Gender, Land and forests, Water, and Fighting corruption.
Agencia Espaiiola de Cooperacion Internacional (AECI) Australian Agency for International Development (AusAID) Canadian International Development Agency (CIDA)
CDN7,500,000
Danish International Development Agency (DANIDA)
Financial sector reform, Education, Gender, Environment, Legal development, and Fighting corruption
Department for International Development (DFID, United Kingdom)
€6,000,000
€7,500,000
--
-
European Commission (EC)
Land and forests, Infrastructure, Water, and Environment.
Education, Health, Gender, Financial sector reform, Private sector development, Public financial management, and Fighting corruption.
Germany
Ireland
Japan Bank for International Cooperation (JBIC)
Netherlands Directorate Senera1 for International Zooperation (DGIS)
DKr6 1,000,000
&20,000,000
Global integration, State sector reform, Financial sector reform, Private sector development, Health (HIV/AIDS), Gender, Land and forest, Water, Environment, Public financial management, Legal development, Public administration reform, and Fighting corruption. Global integration, Private sector development, Education, Gender, Social protection, Water and sanitation, Public financial management, Legal development, and Fighting corruption .
€20,000,000 Global integration, Private sector development, Health, Education, Public financial management, Land and forests, and Environment.
TBD
€12,000,000
Global integration, State sector reform, Financial sector reform, Private sector development, Infrastructure, Education, Health, Social protection, Gender, Land and forests, Water, Environment, Planning processes, Public financial management, Legal development, Public administration reform, and Fighting corruption. Health, Gender, Land and forests, Water, Environment, Public financial management, Public administration reform, and Fighting corruption.
Note: Al l amounts are subject to confirmation as the co-financing support i s processed.
99. The preparation o f th i s credit was conducted in a jo in t manner since i ts inception, with regular donor meetings taking place to reach consensus on how to proceed. The initial stage involved the jo in t preparation o f a major piece o f analytical work, the Vietnam Development Report 2007, entitled Aiming High. This report, presented at the CG Meeting o f December 2006, sought to “translate” the SEDP 2006- 2010 into a workable set o f policy actions, with proper prioritization and sequencing. It also led to the
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identification o f a set o f indicators to monitor progress towards development outcomes across al l pillars o f the reform agenda. The preparation o f the Vietnam Development Report was launched shortly after the approval o f PRSC 5, in June 2006. Several donors contributed think pieces and background notes al l over the process, and especially in preparation for a major workshop in October, 2006. In the end, the Vietnam Development Report was co-signed by 16 multilateral and bilateral donors.
100. Preparations for PRSC 6 have built on the foundations o f the existing strong donor commitment to support Vietnam’s reform agenda in a coordinated manner. This commitment was re-asserted in the Hanoi Core Statement on Aid Effectiveness. It i s reflected in the intense meeting frequency o f the different working groups that were established to coordinate the views o f co-financiers and share information pertaining to the PRSC process. Joint working groups o f donors, government and international NGOs that meet on a regular basis have helped carry the discussions on government’s plans for reforms to a wide group o f stakeholders. Wi th the formation o f working groups organized by policy area, donors have had the opportunity to engage in discussions on reform with government counterparts on an ongoing basis. Such an arrangement i s also helping to ensure coherence across donors’ programs o f support, and to mobilize funding for high priority tasks in each policy area.
101. Building on the effective way donors have worked together in the preparation o f PRSCs in Vietnam, and on their analytical underpinnings, a consensus has emerged on the steps to prepare subsequent operations i n the series. This consensus includes an early start o f the policy dialogue, with a roadinap being drawn up at the end o f the summer to set up the various stages and requirements f rom the initial formulation o f the policy matrix to the assessment o f triggers to the policy dialogue on specific actions to the negotiation o f the credit.
C. CIVIL SOCIETY
102. With the support o f the NGO Resource Center, c iv i l society organizations participated actively in the preparation o f the VDR 2007, which served as the analytical foundation for the proposed series o f credits. The VDR 2007 helped “translate” the SEDP 2006-2010 into a set o f prior actions for PRSC 6 and subsequent operations in the series. The NGO contribution focused on infrastructure (especially in the relation to the needs o f PWD), the social sectors and legal development. Substantive inputs were provided on the interpretation o f the key development issues in each area, the identification o f the main strengths and weaknesses o f the government’s strategy to address those issues, the prioritization o f policy actions within the SEDP framework, and the selection o f the most appropriate outcome indicators to measure progress in each area.
103. A well-functioning mechanism i s in place in Vietnam to conduct consultations with business associations. Prior to both the year-end C G meeting between government and donors and the informal mid-year CG meeting, the Vietnam Business Forum (VBF) gathers to discuss the issues o f concern to a range o f chambers and associations representing the interests o f enterprises. The discussion i s organized around topics such as investment promotion, transparency, tax, labor and land. I n each o f these areas, a l i s t o f main concerns i s assembled, and the focus i s on assessing progress towards solving them. Many o f those concerns are addressed through policy actions supported by the PRSC process. At the last VBF, in December 2005, the current cycle o f PRSC operations was discussed, and feedback from the participating chambers and associations was sought.
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VIETNAM
INFORMAL MID-YEAR CONSULTATIVE GROUP MEETING
Statement by the Representative of the International Monetary Fund
Ha Long City, June 1,2007
This statement updates the IMF s t a f s assessment of Vietnam's current economic situation provided to the Consultative Group (CG) Meeting held in Hanoi on December 14-15, 2006.
1. Vietnam's economic performance has remained strong during the first few months of 2007. Exports have continued to grow briskly, investment and consumption growth have remained strong, and industrial production has continued to expand at double-digit rates. With market sentiment bolstered by Vietnam's much-awaited accession to the WTO on January 1 1, foreign direct investment (FDI) and portfolio capital inflows have been particularly buoyant, and the overall balance of payments has recorded a sizable surplus.
2. Growing access to foreign markets and capital has created new opportunities for cost- effective financing of Vietnam's large investment requirements, but has also created new challenges. The Ho Chi Minh City Stock Market Price Index rose by 144.5 percent in 2006, and by another 50 percent in the first two months of 2007, before retreating somewhat in recent months. With the number of listed companies rising fiom 41 at end-2005 to nearly 200, the market's total capitalization soared fiom less that VND 10 trillion (1.2 percent of GDP) at end-2005 to VND 320 trillion (28 '/z percent of GDP) as of mid-May 2007. This unprecedented boom in stock prices has reduced the cost of capital for firms, boosted the wealth and consumption of domestic investors, and increased Vietnam's appeal to foreign investors. At the same time, however, the need to contain the attendant risks to the financial system has heightened the urgency of policy measures to protect macroeconomic stability, enhance financial system surveillance, and improve the governance of state-owned commercial banks (SOCBs) and state-owned enterprises (SOE).
Short-Term Outlook and Risks
3. The prospects for 2007 remain broadly favorable. GDP is projected to continue to expand at an annual rate of around 8 percent, led by sustained export and investment growth. While a pick-up in imports is projected to shift the trade balance back into a deficit, this is likely to be more than financed by continued strong receipts fiom remittances and capital inflows.
4. However, the outlook is not without risks. Inflation remains stubbornly high, with the twelve-month rate estimated to have risen back above 7 percent since April 2007. Welcome adjustments in electricity and petroleum prices, together with a resurfacing of food supply shocks, have contributed to the recent uptick in prices. However, large increases in the prices of major nonfood items also seem to point to growing demand pressures, which may become more difficult to contain as growing capital inflows complicate monetary management. The
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risk of rising inflation could be heightened if a large positive fiscal impulse were to further add to the demand pressures in 2007.
5 . Over the medium term, a slowdown in the global economy or a tightening of global liquidity conditions could expose vulnerabilities in the balance sheets of financial institutions and large SOEs, which may have made sub-optimal investment decisions during the period of booming demand. The resulting contingent government liabilities, together with continued reliance on the state sector to finance the bulk of the country's huge infrastructure needs, could eventually threaten debt sustainability.
Fiscal Policy and Reforms
6. The risk of inflation, and the need to protect medium-term debt sustainability, call for a more cautious fiscal stance. The estimated fiscal deficit recorded a welcome decrease in 2006, but the 2007 Budget appears to be set on an expansionary course. Current expenditure is to be boosted by a sharp increase in social expenditures in 2007, after having been fueled largely by increasing wages and oil subsidies in 2005-06. While a large oil revenue windfall helped to contain the overall deficit (based on the Fund's definition, which includes on- lending through the Vietnam Development Bank (VDB) and off-budget investment) to less than 4 percent of GDP in 2006, full implementation of the investment plans envisaged in the Socio-Economic Development Program (SEDP) for 2006-2010 could raise the deficit to 7 percent of GDP in 2007. The non-oil deficit would rise from 13% percent of GDP in 2006 to 15% percent of GDP in 2007, while the public debt stock would rise from about 44 percent of GDP at end-2006 to around 46 percent of GDP by end-2007. While the concessional terms on most external debt, which still accounts for more than half of total public debt, would help keep the debt service burden manageable, growing recourse to market-based financing through the capital markets could make the fiscal position more vulnerable to changes in market sentiment.
7. Given the projected leveling off of oil receipts, the containment of the fiscal deficit will require a concerted effort to boost non-oil revenues and curb expenditure growth. The reduction in import tariff rates associated with WTO accession, and the constraints posed by planned tax reforms, call for an accelerated effort to improve tax administration. On the expenditure side, we welcome the recent progress toward adjusting domestic oil prices, and support the authorities' decision to remove remaining controls over oil prices by the end of 2008. To curb pressures on the government's wage bill and slow the growth of its pension liabilities, we encourage the authorities to discontinue the indexation of public wages and pensions to the common minimum wage, and adopt instead a more differentiated and merit- based structure of salary increases in the context of civil service reform. Slowing the growth of public investment is likely to be a challenge, given the urgent need to ease the country's serious infrastructure bottlenecks. To ensure continued development of essential public infrastructure, more proactive steps to encourage private participation could be considered. Projects still funded through the issuance of investment bonds or on-lending should be subject to rigorous screening and monitoring, and the credit appraisal and risk management capacities of the Vietnam Development Bank (VDB) strengthened. Effective enforcement of the new laws to curb corruption and prevent the waste of public funds would need to be an integral part of this effort.
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Monetary Policy and Exchange System Reform
8. A more restrained monetary policy will likely be required to contain inflation, and limit the potential expansion of nonperforming loans (NPLs). Credit growth has showed signs of reacceleration in recent months, with the rate of growth of credit to the economy rising from 23 percent in the year to September 2006 to about 29 percent i n the year to February 2007. While the authorities' monetary program for 2007 envisages a slowing of credit growth to 20 percent by year-end, the achievement of this objective is threatened by ample excess bank liquidity. The authorities' recent efforts to introduce prudential restraints on commercial bank lending for stock market purchases are welcome steps, which should help reduce banks' exposure to stock market risks and guard against a potentially costly boom-bust cycle in stock prices. The authorities also need to take more pro-active measures to mop up excess liquidity, including by allowing the State Bank of Vietnam (SBV) to exercise adequate autonomy in the issuance of SBV bills.
9. Vietnam's rapid integration into the global economy calls for continued efforts to increase exchange rate flexibility. The authorities have recently taken welcome steps in this direction. In January 2007, the trading band of the dong vis-a-vis the U.S. dollar was widened from +I-0.25 percent to +/-0.5 percent around the daily reference rate set by the SBV, and the dong temporarily appreciated as the pace of inflows peaked in January- February 2007. In the face of continuing large foreign exchange inflows, further steps to increase exchange rate flexibility would serve to stem inflationary pressures while decreasing the need for sterilization. A more flexible exchange rate policy could also mitigate the potential disruptive effects of a possible future reversal of capital inflows by encouraging economic agents to better hedge exchange rate risks and allowing the exchange rate to play a greater role as a shock absorber.
Bank Reform and Financial Sector Supervision
10. Bank reform remains key to improving the allocation of saving and investment and protecting financial stability. The growing possibilities for financing through the capital market, increasing competition from joint-stock banks, and the new regime of liberal entry of filly foreign-owned banks, have increased the urgency of SOCB reform. In this context, the government's renewed commitment to proceed with the equitization of the main SOCBs is welcome, as is the recent increase in the ceiling for participation by individual strategic investors. We also welcome the recent adoption of an SOCB recapitalization plan, and look forward to the upcoming publication of financial reports of the SOCBs based on International Accounting Standards. These steps need to be backed by timely action to improve the corporate governance of SOCBs, including by providing their managers with adequate autonomy to make lending decisions based on purely commercial criteria.
1 1 . The growing scope for securities market operations and portfolio capital movements also calls for hrther steps to strengthen prudential regulation of bank and nonbank financial institutions. We support the authorities' medium-term plans to convert the SBV into a modern central bank, and to grant it adequate authority and independence to carry out an anti-inflationary monetary policy and effective financial sector supervision. In the meantime, it is important that the SBV, the State Securities Commission (SSC), and the Ministry of
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Finance improve the tracking of vulnerabilities associated with stock market-related risks and capital movements. Given the risks posed by related transactions among banks, their securities company affiliates, and the buyers or issuers of securities, a concerted effort is required to regulate stock market-related credit and discourage insider trading. Controls also need to be put in place to prohibit related-party transactions within economic groups involved in a mix of industrial operations and financial services.
State-Owned Enterprise Reform and Private Sector Development
12. The authorities' plans to restructure and equitize SOEs are welcome. However, it will also be important that SOE managers be granted clear incentives and full autonomy to make their own pricing and investment decisions on commercial principles, and the entry of foreign strategic investors should be encouraged to facilitate the needed improvement in SOE governance. The mandates of economic groups of wholly state-owned enterprises, and their relations with government, should be clearly defined, and regulatory safeguards established, where needed, to ensure that their market power will not be used to undermine competition.
13. A more transparent and market-friendly legal and regulatory framework would be key to enabling Vietnam to capitalize on its growing appeal to foreign investors. We welcome plans to align energy prices with world market conditions, and urge the authorities to also remove other remaining price controls that discourage private investment. To further level the playing field, simpliQ rules and regulations, and improve the business climate, we encourage the authorities to swiftly adopt pending legislation and associated implementing decrees and circulars in full conformity with Vietnam's WTO commitments.
14. The quality, timeliness, and dissemination of macroeconomic statistics and Financial Stability Indicators will also need to be improved to support informed policy decisions and build enduring investor confidence. In this regard, we support the authorities' ongoing efforts to develop better measures of core inflation and look forward to the issuance of the government's first semi-annual Debt Bulletin. More transparent accounting, reporting, and monitoring of the government's extra-budgetary operations and all publicly-funded projects would also be helpkl in reassuring donors that their assistance is being put to the best use.
Concluding Remarks
15. Vietnam's historic accession to the WTO attests to its impressive economic progress since the launching of the policy of Doi Moi some twenty years ago. In the coming years, deepening economic and financial integration should facilitate achievement of the government's ambitious objectives to lift Vietnam from the ranks of low-income countries by 201 0 and join the ranks of industrial countries by 2020. However, growing exposure to global markets has made it all the more important that macroeconomic policies be kept on a sound footing and the pace of market-oriented reforms accelerated. We have no doubt that, with the continued good judgment of its leadership, Vietnam will successfully meet these challenges, and we wish the authorities every success in these endeavors.
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ANNEX 4
STATE BANK OF VIETNAM O f f i c e : 47 - 49 L y T h a i To, H a N o i
Tel : (84-4) 8242.479 F a x : (84-4) 8268.765
May 22,2007
M r . Paul Wolf'owitz President The World Bank Washington, D C
Dear Mr. Wolfowitz:
Over the last five years the World Bank, and the donor community more broadly, supported the economic rcnovation program o f Vietnam through a series o f five Poverty Reduction Support Credits (PRSCs).
During this period, our ccononiy grcw at an annual rate o f 7.8 pcrccnt per year in real terms. exports expanded by roughly 22 percent per year in dollar terms, and the fraction o f the population l iv ing below the international poverty line declined by more than three percentage points per year. This period has also seen considerable progress in social indicators, with Victnam now being on a solid track to attain or exceed most if' not all o f the Millennium Develclpment Goals. Over these five years, considerable progress was made in public financial nianagement, public administration ref'orm and the strengthening o f governance more broadly.
These successes retlect the reform drive o f our government, as expressed among others in thc Comprchcnsive Poverty Rcdiiction and Growth Strategy (CPRGS). The CPRGS, which w a s supported by the World Bank and many other donors, jo int ly wi th other plans and strategic documents o f our government, served as the basis for a contin~ious policy dialogue across a range of' policy areas. PRSC operations provided an effective platform to conduct such dialogue. refine the content and articulation of policy reforms and channel resources to our budget to finance their implementation. The usefulness o f this approach i s confirmed by the increasingly large number o f donors participating in PRSCs. The commitment o f our government to the process i s reflected in the timely completion o f the annual operations in the cycle.
Building on the successes o f economic reforms over the previous five years, Vietnam's Socio-Economic Development Plan (SEDP) for 2006-201 0 was approved by the National Assembly on June 29, 2006. In December 2006, the SEDP was presentcd to the Board o f Executive Directors o f the World Bank.
A key goal or the SEDP i s to sustain rapid economic growth so that Vietnam can move out o f low income status by 2010 and lay the foundations to become an industrial country by 2020. The SEDP aflirms that rapid growth should go hand in hand with improved sustainability, and improved quality and compctitiveness o f the economy. Importance is attached to in-depth development while wider development should not be forgotten. Economic growth should be linked with poverty reduction, cultural development, comprehensive human development, exercise of democracy and social equity. The SEDP also aims to narrow the dcwlopii ient gaps among regions, step by step, while preserving and improving the environment. We would l ike to draw your attention to the Chapter IV of'the SEDP which provides the Development Orientation o f various sectors over the period 2006-20 10.
56
Overall. the objectives, tasks and solutions o f the SEDP can be mapped on to three pillars (a) business development (b) natural resources and the environment and (c) social cquity. Chapter 1V highlights thc goals, tasks, and solutions for achieving agricultural development, industrial modernization, and service sector growth. Chapter VI1 o f the SEDP identifies the roles of various sectors in business development, including the role o f the private sector as a driving force. We aim to create favorable conditions for the development o f the private sector without limiting i ts scales, fields or regions. Chapter 1V.B details the goals, tasks. and solutions for the social sectors, while Chapter 1V.C identifies goals and policies for thc sustainable development of natural resources and protection o f the environinent
In order to achieve the objectives of cconomic growth, business development, environmental sustainability and social equity we need to improve the institutional framework of the socialist oriented market economy in a comprehensive manner. The measures to this effect are especially highlighted in Chapter IX. The chapter emphasizes legal reforms for supporting a market economy, the importance of improving the q~iality o f public administration, and strengthening the fight against corruption.
The government’s resolution No. 3/2007/NQ-CP identifies the tasks of various min is t r ies and agencies for implementing the SEDP and the state budget during this year. This resolution affirms our commitment to successfully achieving the targets identified in the SEDP.
The tasks listed in this resolution bear a close resemblance with the policy actions and triggers identified in the proposed credit, Jointly with the following operations in the series, the proposed series effectively supports the implementation of the reform agenda outlined in the SEDP. The proposed credit also contributes to harmonization, in the spirit o f thc Hanoi Core Statement on Aid Effectiveness. Our government appreciates the technical inputs provided through this process. as well as thc resources to implement policy reforms and the rcduced transaction costs in conducting the policy dialogue with the donor community.
Our government therefore requests the Association’s assistance through this sixth PRSC, in recognition for the progress made in the implementation o f our development strategy. We recognize that many difficult challenges l ie ahead, but we are confident that we wil l be able to overcome them. We hope that we wil l count on the support o f the Association during this five-yex cycle, as we make progress to implement the reform program, with the ambition of becoming a middle-income country by the end o f the decade.
We look forward to y0111‘ continued support 43 Yours sincerely
,/ f
Governor
57
ANNEX 5: SUPPORTING DOCUMENTATION FOR PRIOR ACTIONS IN P R S C 6
Global integration
Pillar I: Business development
Grant trading and distribution rights to all foreign firins in line with internationa commitments
Sector I
State sector reform
Pr ior Action
0 Further restrict list of sectors where 100- percent state ownership i s to be retained
Financial sector reforin
0 Issue regulations to guide the intellectual property law with adequate enforcement mechanisms
SCIC to begin receiving state ownership rights in equitized SOEs from ministries and provinces
0 Require public disclosure o f financial statements of SOCBs in line with internationally accepted standards
Increase equity stake allowed to foreign strategic investors in commercial banks
U s e share auctions as the main mechanism for equitization, and allow foreign strategic investors
Classify all SOEs according to performance and publish the results
Documentation
Decree 23/2007/ND-CP dated February 12,2007
Decree 56/2006/ND-CP, Decree 100/2006/ND-CP. Decree 103/2006/ND- CP, Decree 105/2006/ND-CP, Decree
Decision 69/2006/QD-BNN, Decision 106/2006/ND-CP
3 O/QD-BYT
Decision 38/2007/QD-TTg dated March 20,2007
Decree to be issued before May 3 1, 2007, in replacement o f Decree 187/2004/ND-CP)
0 Decision 224/QD-TTg dated October 6, 2006. Consolidated report on 2005 SOE classification disclosed on MOF website since April 24, 2007.
Up to March 3 1, 2007: Total capital o f 433 equitized SOEs (book value) received by SCIC i s VND 3,411 billion. According to SCIC’s plan, i t i s going to receive state ownership rights from 760 SOEs in 2007 of VND 4,920 billion (book value).
Decision 16/2007/QD-NHNN dated April 18, 2007 Notice 3743mHNN-KTTC o f the SBV o f April 19, 2007 requiring SOCBs to disclose their 2006 financial statements by May 15,2007.
Decree 69/2007/ND-CP dated April 20, 2007
(Continued)
58
ANNEX 5: SUPPORTING DOCUMENTATION FOR PRIOR ACTIONS IN PRSC 6 (CONTINUED)
Sector
Private sector development
Infrastructure
Pillar I: Business development
Prior Action
Introduce investment climate monitoring tool as part o f annual enterprise survey
Reduce processing times and rationalize fee structure for business registration
Clarify authority on investment certificates and conditional sectors, and standardize related documentation
Issue guidelines and options to foreign investors transitioning to new Investment and Enterprise laws
Establish consultative mechanism to streamline licenses and oversee implementation o f new investment- enterprise regime
Establish single-window mechanism for businesses to cover registration, tax, and seal formalities in selected provinces
Decentralize investment ownership to better integrate capital and recurrent budgets in the road transport sector
Clarify contract specifications, investor qualifications and treatment o f unsolicited proposals for BOT projects
Adopt wastewater charges based on cost recovery, with provisions to protect the poor
Documentation
Report on the results o f the Survey on Business Environment 2006
Decree 108/2006/ND-CP dated
Decree 88/2006/ND-TTg dated August September 22, 2006.
29, 2006.
Decree 108/2006/ND-CP dated September 22, 2006.
Decree 10 1 /2006/ND-CP dated September 2 1, 2006.
Decision 1267/2007/QD-TTg dated September 25, 2006. Consolidated report of the Working Group in January 2007.
Circular 02/2007/TTLT/BKH-BTC-BCA dated February 27. 2007. The mechanism has been piloted in Hanoi, Haiphong and Laocai.
Decision 562/QD-BGTVT dated March 16,2007 Decision 748/QD/BGTVT dated April 6, 2007
Decree 78/2007/ND-CP dated May 11, 2007.
Decree to be issued before May 3 1,2007, on wastewater in urban areas and industrial zones, as per minutes o f negotiation.
(Continued)
59
ANNEX 5: SUPPORTING DOCUMENTATION FOR PRIOR ACTIONS IN PRSC 6 (CONTINUED)
Sector Prior Action
Education Extend performance standards for primary teachers nationwide, including evidence-based assessments
Adopt transparent criteria to decide on university admission quotas on a pilot basis
Health Adopt HIV/AIDS law and prepare action plans to scale up harm reduction, fight stigma and discrimination.
Improve budgetary balance between health infrastructure, human resources, subsidies and preventive care
I Gender Unify legal framework to address gender
disparities and increase women’s participation in decision making.
Land and forests
Environment I--
Decision 14/2007/QD-BGDDT dated May 4,2007.
Decision 693/QD-BGDDT dated February 7,2007. Guiding Notice No. 1325/BGDDT dated February 9,2007.
HIV/AIDS Law No. 64/2006/QH11 dated June 29, 2006. effective from January 1, 2007. The action plan for education and communication for behavioral changes, approved in Decision 16/2007/QD-BYT dated February I, 2007. Draft Action plan for harm reduction.
Decision I2007IQD-BTC dated March 7! 2007 approving the Medium Term Expenditure Framework (MTEF) for health sector.
Law on Gender Equality No. 73/2006/QH 1 1 dated November 29, 2006, effective froin July 0 1, 2007.
Pillar 111: Natural resources
Prior Action
Issue strategy to strengthen linkages between protective and economic functions o f forests, and promote local ownership
Clarify resettlement and compensation process in cases without LUCs, and mechanisms for handling complaints
Mandate public consultation on EIAs at commune level with public feedback incorporated in report to relevant authorities
Documentation
Documentation
National Forest Development Strategy 2006-201 0, approved in Decision 18/2007/QD-TTg dated February 5, 2007.
Decree to be issued before May 3 1,2007 on L U C issuance. land acquisition, compensation and resettlement procedures and process, as per minutes o f negotiation.
Decree 80/ND-CP dated August 9,2006. Circular 08/2006/TT-BTNMT dated September 8, 2006.
(Continued)
60
ANNEX 5: SUPPORTING DOCUMENTATION FOR PRIOR ACTIONS IN PRSC 6 (CONTINUED)
1 Sector
Planning processes
L Public financial management
L Legal development
Pillar IV: Modern governance
Pr ior Action
Allocate state capital expenditure transparently, using criteria like population, poverty and ethnicity
Adopt regulations for master and regional plans specifying issues, process, agency responsibility, and require disclosure
Disclose results o f audits conducted by the SAV and its annual audit plan
Publish report on budget execution for current year and budget plan for forthcoming year, on an annual basis
Issue regulations for periodic disclosure o f external public debt and i ts composition
Implement regulation to guide the establishment and issuance o f benchmark government bonds
Consolidate administration procedures for all taxes into a single law, modernizing assessment and enforcement methods
Establish separate legal, judicial, economic, and budget committees to strengthen NA’s supervisory role
Simplify and broaden access to legal aid for marginalized and vulnerable groups
Adopt policies to encourage the participation o f non-state establishments in the delivery o f public services
Documentation
Decision 2 10/2006/QD-TTg dated September 12, 2006.
Decree 92/2206/ND-CP dated Septembei 7,2006.
SAV’s 2005 consolidated audit report on i ts website. Decision 916/2006/QD-KTNN o f the SAV dated December 27, 2006 on i ts 2007 audit plan.
Quarterly and annual reports on budget execution and budget plans disclosed on MOF website.
Regulations issued in attachment to Decision 232/2006/QD-TTg dated October 16, 2006.
Decision 46/2006/QD-BTC dated September 6, 2006.
Law on Tax Management No. 78/2006/QH11 dated November 29, 2006, effective from July 1, 2007.
Law on Organization o f the National Assembly (revised) No. 83/2007/QH11 dated April 2, 2007. effective from July 1,2007
Law on Legal A i d No.69/2006/QH11 dated June 29, 2006, effective from January 1, 2007. Decree 07/2007/ND-CP dated January 12, 2007.
Decree 53/2006/ND-CP dated May 25, 2006. Circular 91/2006/TT-BTC dated October 2,2006.
(Continued)
61
ANNEX 5: SUPPORTING DOCUMENTATION FOR PRIOR ACTIONS IN PRSC 6 (CONTINUED)
j Sector I Prior Action I Documentation I Legal development (continued)
Anti- corruption
Strengthen information disclosure, public participation, and accountability o f officials for commune level policies
Operationalize Steering Committee against corruption with power to suspend high level officials if suspected
Disclose results o f inspections against corruption for cases overseen by the Government Inspectorate
Establish legal framework to protect and reward whistle blowing on corrupt activities
Ordinance No. 34/2007/PL-UBTVQHll dated April 20, 2007, effective from July 1, 2007.
Resolution No. 1039/2006/NQ-
Decision 13/2007/QD-TTg dated U B T V Q H l 1 dated September 21, 2006.
January 24,2007.
Report No. 17/BC-CP dated March 14, 2007 on the implementation o f the Anti- corruption Law
Decree 120/2006/ND-CP dated October 20,2006.
62
ANNEX 6: VIETNAM AT A GLANCE
POVERTY and SOCIAL Vietnam
2005 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)
Average annual growth, 1999-05
Population (%) Labor force (%)
Most recent estimate (latest year available, 1999-05)
Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Literacy (% ofpopulation age IS+) Gross primary enrollment (% of school-age population)
Male Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
GDP (US$ billions) Gross capital formation1GDP Exports of goods and serviceslGDP Gross domestic savingslGDP Gross national savings1GDP
Current account balance1GDP Interest paymentslGDP Total debtiGDP Total debt servicelexports Present value of debt/GDP Present value of debffexports
(average annual growth) GDP GDP per capita Exports of goods and services
1985
14.1
-3.8 0.0 0.4
1985-95 1995-05
6.5 6.9 4.3 5.4
25.2 15.9
83.1 620
51.5
1.4 1.9
20 27 70 18 25 62 96 98
101 94
1995
20.7 27.1 32.8 18.0 19.2
-13.5 0.7
122.6 4.7
2004
7.7 6.2
27.9
East Asia& Low- Pacific income
1,870 2,343 1,420 510 2,647 1,188
0.9 1.9 1.3 2.2
42 31 70 58 29 79 12 43 78 75 91 61
113 100 114 105 112 94
2004 2005
45.4 52.9 35.6 35.4 67.5 70.1 28.3 30.2 32.2 34.5
-3.4 0.4 0.8 0.8
33.8 32.0 2.6
33.9 50.4
2005 2005-09
8.4 7.9 7.0 6.5
16.5 15.0
-~ --
Development diamond'
Life expectancy
Gross primary
+f enrollment
-
I Access to safe water
1 -Vietnam I - - Low-income group
Economic ratios*
Trade
Indebtedness
-Vietnam - - Low-income group
STRUCTURE of the ECONOMY
(% of GDP) Agriculture 4 0 2 2 7 2 21 8 Industry 2 7 4 2 8 8 40 1
Services 3 2 5 44 1 38 2 38 1
6 3 6 Household final consumption expenditure 73 8 65 3 General gov't final consumption expenditure 8 2 6 4 6 2 Imports of goods and services 41 9 7 4 8 7 5 3
Manufacturing 2 0 5 1 5 0 20 3 --- - w ~ * GCF &GDP
Growth of axportsand impofts ( O h ) 1985-95 1995-05 2004
(average annual growth) Agriculture 3 5 4 1 3 5 Industry 7 3 1 0 0 10 2
Manufacturing 4 3 1 1 1 10 1 Services 8 4 5 9 7 5
Household final consumption expenditure 10 2 12 4 General gov't final consumption expenditure 4 3 7 8 7 9 00 01 02 03 04 05 Gross capital formation 2 5 6 1 0 0 10 5 10 7 Exports &Imports Imports of goods and services 2 4 2 1 7 0 25 2 17 6
Note 2005 data are preliminary estimates Group data are to 2004
* The diamonds show four key indicators in the country (in bold) compared with its income-group average If data are missing, the diamond will be incomplete
63
PRICES and GOVERNMENT FINANCE
Domestic pr ices (% change) Consumer prices Implicit GDP deflator
Government finance (% of GDP, includes current grantsj Current revenue Current budget balance Overall surplus/deficit (excl. on-lending)
TRADE
(US$ rn////ons) Total exports (fob)
Rice Fuel Manufactures
Total imports (cif) Food Fuel and energy Capital goods
Export price index (2000=100j Import price index (2000=100) Terms of trade (2000=100)
BALANCE of PAYMENTS
(US$ millions) Exports of goods and services Imports of goods and services Resource balance
Net income Net current transfers
Current account balance
Financing items (net) Changes in net reserves
Memo: Reserves including gold (US$ m l o n s j Conversion rate (DEC, /oca//US$j
EXTERNAL DEBT and RESOURCE FLOWS
(US$ mlions) Total debt outstanding and disbursed
IBRD IDA
Total debt service IBRD IDA
Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)
World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers
Composition of net resource flows
1985
1985
507
930
1985
-496
-90 52
-534
265 269
1995
16.8 17.0
23.3 6.0 0.7
1995
5,489 547
1,063 1,785 8,155
856 2,097
100 100 100
1995
7,607 10,603 -2,996
-279 474
-2,801
3,301 -500
1,376 8.3 11.038.3
1985 1995
61 25,428 0 0
54 231
2 364 0 0 0 2
38 348 7 58 0 356 0 0 0 0
0 265 7 47 0 1 7 46 0 2 7 45
2004
9.5 7.9
26.8 9.8 0.9
2004
26,507 950
5,671 13,928 31,954
3,574 9,208
115 111 103
2004
30,352 33,511 -3,159
-891 2,485
-1,565
2,259 -694
6,314 15,704.3
2004
15,360 0
3,039
780 0
37
387 1,278
10 1,610
0
71 0 444
8 436
29 407
2005
8.4 8.4
25.9 7.4
-1.2
2005
32,442 1,407 7,373
17,519 36,978
5,024 9,688
131 120 109
2005
36,618 38,560 -1,942
-1,218 3,380
220
2,023 -2,243
8,557 15,850.1
2005
16,920
-5 00 01 02 03 04 0
-mwGDP deflator ' 9 - C P I
1 Export and import levels (US$ rnlll.)
40 000 35 000
1 99 00 01 02 03 04 05
v Exports I Imports
1 Current i icountbalance to GDP
1 6 - 1
-2
-6 99 00 01 02 03 04 05 I
~- I Composition of 2004 debt (US$ mill.)
A - IBRD B - IDA D -Other multilateral F - Private C - IMF
E - Bilateral
G - Short-term
64
ANNEX 7: MAP OF VIETNAM
65
1
2
3
45
6
7
89
1010
11111212
13131414
151516161717
18181919 2020
212122222323 2424
2525 26262727
2828
2929
3030
3131
32323333
3434
3535
3636
3737
3838
3939
4040
4242
4343
4141
4444 4545
4646
4747 48484949
5050
51515252
5353
6464
5454
5555
5656
5757
58585959
6060
6161
62626363
LangLangSonSon
Ho Chi Minh CityHo Chi Minh City
Bien HoaBien HoaThu DauThu Dau
MotMot
Phan ThietPhan Thiet
DongDongXoaiXoai
Tan AnTan An
Bac LieuBac Lieu
Vi ThanhVi Thanh
Vung TauVung TauMy ThoMy Tho
Ca MauCa Mau
Rach GiaRach Gia
Long XuyenLong Xuyen
Hai PhongHai Phong
Ha LongHa Long
Phong ThoPhong Tho
DienDienBien PhuBien Phu
Lao CaiLao Cai
Quy NhonQuy NhonPleikuPleiku
Buon MaBuon MaThuotThuot
Gia NghiaGia NghiaDa LatDa Lat
VinhVinh
Vinh YenVinh Yen
Nam DinhNam DinhNinh BinhNinh Binh
Dong HoiDong Hoi
Dong HaDong Ha
Tam KyTam Ky
Nha TrangNha Trang
Tuy HoaTuy Hoa
Kon TumKon Tum
Son LaSon La
Yen BaiYen Bai
HaHaGiangGiang
TuyenTuyenQuangQuang ThaiThai
NguyenNguyen
Cao BangCao Bang
Bac CanBac Can
Soc TrangSoc Trang
Tra VinhTra VinhCan ThoCan Tho
Cao LanhCao Lanh
Ben TreBen TreVinh LongVinh Long
Tay NinhTay Ninh
Quang NgaiQuang Ngai
Da NangDa Nang
Ha TinhHa Tinh
Thanh HoaThanh Hoa
Thai BinhThai Binh
Hung YenHung YenHa DongHa Dong
Ha NamHa Nam
Viet TriViet Tri
Hai DuongHai Duong
Bac GiangBac GiangBac NinhBac Ninh
Hoa BinhHoa Binh
Hue Hue
Phan Rang-Phan Rang-Thap ChamThap Cham
HANOIHANOIHANOIHANOI
An
na
m C
or
di l l e
ra
CentralCentral
HighlandsHighlands
Ngoc LinhNgoc Linh(3143 m) (3143 m)
CHINACHINA
C A M B O D I AC A M B O D I A
THAILANDTHAILAND
LAOLAOPEOPLE'SPEOPLE'SDEM. REP.DEM. REP.
To To NanningNanning
To To HepuHepu
To To TiandongTiandong
To To BabaoBabaoTo To
KunmingKunming To To KaiyuanKaiyuan
To To Muang XaiMuang Xai
To To LuangLuang
PrabangPrabang
To To KhammouanKhammouan
To To SavannakhetSavannakhet
To To Kampong ChamKampong Cham
To To KampongKampongChhnangChhnang
An
na
m C
or
di l l e
ra
Hainan I.Hainan I.(China)(China)
1
2
3
45
6
7
89
10
1112
1314
151617
1819 20
212223 24
25 2627
28
29
30
31
3233
34
35
36
37
38
39
40
42
43
41
44 45
46
47 4849
50
5152
53
64
54
55
56
57
5859
60
61
6263
LangSon
Ho Chi Minh City
Bien HoaThu Dau
Mot
Phan Thiet
DongXoai
Tan An
Bac Lieu
Vi Thanh
Vung TauMy Tho
Ca Mau
Rach Gia
Long Xuyen
Hai Phong
Ha Long
Phong Tho
DienBien Phu
Lao Cai
Quy NhonPleiku
Buon MaThuot
Gia NghiaDa Lat
Vinh
Vinh Yen
Nam DinhNinh Binh
Dong Hoi
Dong Ha
Tam Ky
Nha Trang
Tuy Hoa
Kon Tum
Son La
Yen Bai
HaGiang
TuyenQuang Thai
Nguyen
Cao Bang
Bac Can
Soc Trang
Tra VinhCan Tho
Cao Lanh
Ben TreVinh Long
Tay Ninh
Quang Ngai
Da Nang
Ha Tinh
Thanh Hoa
Thai Binh
Hung YenHa Dong
Ha Nam
Viet Tri
Hai Duong
Bac GiangBac Ninh
Hoa Binh
Hue
Phan Rang-Thap Cham
HANOI
CHINA
C A M B O D I A
THAILAND
LAOPEOPLE'SDEM. REP.
PhuQuoc
Hainan I.(China)
Mekong
Black
Red
Ma
Gul fof
Tonkin
Gulfof
Thai land
M e k o n g De l
t a
To Nanning
To Hepu
To Tiandong
To BabaoTo
Kunming To Kaiyuan
To Muang Xai
To Luang
Prabang
To Khammouan
To Savannakhet
To Kampong Cham
To KampongChhnang
An
na
m C
or
di l l e
ra
Central
Highlands
Ngoc Linh(3143 m)
22°N
20°N
18°N
16°N
14°N
12°N
10°N
22°N
20°N
18°N
16°N
14°N
12°N
10°N
108°E106°E104°E
110°E108°E106°E104°E102°E
VIETNAM
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Lai ChauDien BienLao CaiHa GiangCao BangSon LaYen BaiTu Yen QuangBac CanLang SonPhu ThoVinh PhucThai NguyenBac GiangQuang NinhHa NoiBac NinhHa TayHung YenHai DuongHai PhongHoa BinhHa NamThai BinhNinh BinhNam DinhThanh HoaNghe AnHa TinhQuang BinhQuang Tri
323334353637383940414243444546474849505152535455565758596061626364
Thua Thien HueDa NangQuang NamQuang NgaiKon TumGia LaiBinh DinhPhu YenDac LacDac NongKhanh HoaBinh PhuocLam DongNinh ThuanTay NinhBinh DuongDong NaiBinh ThuanT.P. Ho Chi MinhBa Ria-Vung TauLong AnTien GiangDong ThapBen TreAn GiangVinh LongTra VinhKien GiangCan ThoHau GiangSoc TrangBac LieuCa Mau
PROVINCES:
0 50 100 150
0 50 100 150 Miles
200 Kilometers
IBRD 33511R
JANUARY 2007
V IETNAM
PROVINCE CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
PROVINCE BOUNDARIES
INTERNATIONAL BOUNDARIES
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.