Overhaul in motion for ODA utilisation

Overhaul in motion for ODA utilisation

The North-South high-speed railway line – one of the nine projects prioritised by the Ministry of Transport to be included in the draft railway network plan for the next decade – has a total capital demand of up to VND112.3 trillion (4.89 billion). In which, the two sections Hanoi-Vinh and Nha Trang-Ho Chi Minh City will be built in advance.

Dang Quyet Tien, director of the Corporate Finance Department under the Ministry of Finance, said that using official development assistance (ODA) is one of the ways to ensure capital for the construction of a high-speed railway, a project that promotes growth of many industries.

Vietnam has been considering ODA an important source of capital in building infrastructure, acquiring scientific and technical achievements, and developing human resources. Data from the Ministry of Planning and Investment (MPI) showed that Vietnam accumulated over $85 billion in ODA and concessional loans. Of which, $7 billion were non-refundable aids, and over $70 billion came from loans with interest rates below 2 per cent, while another $1.7 billion were loans with lower interest rates than commercial ones. Total disbursed capital reached nearly $65 billion.

During the last five years, Vietnam received over $12.5 billion in ODA and concessional loans, and about 80 per cent of that was mobilised through the World Bank, the Asian Development Bank (ADB), the Japan International Cooperation Agency, the Export-Import Bank of Korea, the French Development Agency, and the KfW Development Bank.

Low and slow disbursement

Low and slow disbursement rates were the biggest limitation and one of the reasons for reducing the efficiency of ODA attraction into Vietnam. In the 2016-2020 period, ODA loans and foreign concessional loans that were adjusted according to the National Assembly’s resolution amounted to about VND360 trillion ($15.65 billion). By the end of 2019, the total allocated capital in the state budget estimated for the 2016-2019 period was VND244.3 trillion ($10.62 billion), equalling 67.9 per cent of the adjusted plan of the whole period. But the amount disbursed and accumulated until 2019 was just VND133.04 trillion ($5.78 billion), a mere 54.5 per cent of the plan, according to the MPI’s data.

Vietnam is currently implementing five large public investment projects that are using ODA capital and are subject to binding conditions. These projects are three urban railway projects in Hanoi and two metro projects in Ho Chi Minh City. All five projects cost more than expected and are behind schedule.

The total adjusted investment has reached more than VND178 trillion ($7.74 billion), even excluding the Yen Vien-Ngoc Hoi route of Hanoi’s metro as its investment capital has not been approved. If including that, the total investment capital for these six routes would be over VND243.4 trillion ($10.58 billion).

The pandemic has slowed implementation progress because most activities of ODA projects were associated with foreign factors, from importing equipment to mobilising foreign experts.

Some projects also saw slow disbursements due to problems caused by changes in mechanisms and regulations. Last year, the central province of Quang Tri signed no new loan agreements with donors for ODA projects, but there have been 17 ongoing projects with a total capital of over VND919 billion ($39.96 million), of which the counterfunding amounted to VND163.85 billion ($7.12 million) with foreign participation of VND755.96 billion ($32.87 million).

However, the changes and adjustments in Decree No.68/2019/ND-CP from 2019 on management of construction investment costs led to the appraisal of technical design documents and construction drawings taking longer than expected which, in turn, affected the projects’ progress of bidding, awarding, and disbursement.

Reworking the rules

ODA disbursement rates have not been satisfactory partly due to problems with procedures and regulations. Meanwhile, the MPI’s report on the orientation of attracting and managing the use of ODA and concessional loans 2018-2020, also warned that Vietnam has graduated from concessional loans under the World Bank’s International Development Association (IDA) in 2017, as well as of the ADB in 2019. Thus, Vietnam may have to double the principal repayments of the current IDA and ADB loans.

Prof. Dr. Nguyen Mai, chairman of the Vietnam Association of Foreign-Invested Enterprises, said that implementation capacity is one of the reasons leading to slow ODA disbursements. “Commonly, project preparation is sketchy, and many ODA projects have to adjust and extend a project’s loan agreement,” he said.

According to current regulations, project extensions and adjustments are associated with the general investment policy. Mai said that the process of adjusting the investment policy is often complicated and lengthy, leading to the fact that though some projects have been arranged, they could not withdraw as related procedures were incomplete.

According to Mai, it is necessary to review the detailed allocation of each project’s estimate, ensuring its disbursement needs. In case a project’s implementing unit realises that it is not capable of disbursing funds, it is recommended to cancel or transfer the estimate to another project with more availability.

Mai also noted, “The management agency should focus capital on projects with good disbursement progress, and those that need to be completed soon and whose deadlines are about to expire.

The shortcomings in the handling of ODA could be remedied through new legal provisions. The MPI is currently developing a draft decree amending and supplementing Decree No.56/2020/ND-CP from May 2020 on management and use of ODA and concessional loans of foreign donors.

This draft proposes 10 amendments and supplements related to the simplification of documents and procedures in financial management and cost estimates related to construction investment. Along with that, the draft decree contains more regulations on the use of residual capital for ongoing and new projects to increase efficiency and sustainability, as well as the disbursement and payment for projects.

If the decree is adopted, the new regulations could clear out the bottlenecks in the disbursement of public investment capital and avoid wasteful actions like in previous years. The MPI is trying to complete the draft this year, including consulting with ODA donors and promulgating it according to the Ministry of Justice’s regulations.

“It is necessary to amend legal regulations to increase investment efficiency and disbursement rates,” said Dr. Nguyen Xuan Thanh from Vietnam’s Fulbright University. According to Thanh, the delay of key investment projects is a serious problem for medium- and long-term economic growth as they limit the expansion of production capacity. “Economic activities in major economic centres and people’s quality of life are at risk of serious decline if infrastructure bottlenecks are not resolved,” warned Thanh.

To increase investment efficiency, Thanh recommended that the country keeps in mind the lessons of state governance on the use of ODA loans, starting with contractor selection over project preparation to implementation.