|
Price of success
As the Consultative Group 2010 meeting approaches, there are concerns about Vietnam falling into the “MIC trap”.
The $1,000 per capita GDP threshold is generally recognised as a convenient dividing line between low-income countries (LICs) and middle-income countries (MICs). On that basis Vietnam has indeed become an MIC already, an accomplishment that certainly deserves praise. However, because of its success in escaping poverty, the country may become less able to access concessional resources. Bilateral donors and multilateral agencies prefer to channel their support to countries with more urgent needs, or those classified as “fragile states”.
What should Vietnam expect?
On the surface, there are no reasons for concern. “In 2009, official development assistance (ODA) disbursements reached a record high of $4.1 billion, which was an 82 per cent increase over 2008,” said Mr. Ayumi Konishi, Country Director for the Asian Development Bank (ADB) in Vietnam. “However, this was because it included almost $1.9 billion to help the government overcome the adverse impacts of the global economic crisis and to support policy reforMs..” As the worst of the global crisis appears to be behind, donor support is unlikely to remain at the same level.
Concerns looking forward were clearly articulated at a recent workshop on ODA prospects for 2011-2015 by Dr. Ho Quang Minh, Head of the External Relations Department at the Ministry of Planning and Investment. “When Vietnam becomes an MIC there will be a significant change in the aid policies of its development partners in terMs. of ODA scale and structure, as well as in the lending conditions on ODA loans,” he explained. “The amount of ODA grants and concessional loans will see some reduction, whereas the volume of ODA minus concessional loans will see some increase.”
Some bilateral donors providing grants have already communicated their decision to phase out or scale down their support to Vietnam. “This presents a challenge in the future cooperation development that Vietnam and its development partners have to find ways to overcome,” Dr. Minh noted. According to Vietnam’s Public Debt Management Law, which became effective on January 1, 2010, donor support is considered ODA when the grant element is at least 35 per cent in the case of tied loans, or 25 per cent for untied loans. In practice, this means that over time Vietnam will reimburse less than 65 or 75 per cent of the ODA support received. Other forMs. of donor support are considered “concessional loans”. They include so-called IBRD resources in the case of the World Bank and OCR resources in the case of the ADB.
One of the issues discussed in development circles is whether the change in the terMs. of donor support will also affect the areas of donor engagement. The decision in this respect rests with the government of Vietnam. In the words of Dr. Minh, “if we look at the relationship between the donors and the recipient countries at the global and regional level we can recognise a positive change from ‘giving-receiving’ to ‘partnership’ arrangements.” One implication is that “the provision and the use of aid for development should support the government to realise its priorities in development so that it can deal with the challenges in the most appropriate and selective ways.”
So far, with very few exceptions, the government has preferred to use ODA resources for budget support, poverty reduction operations, and projects in social sectors. More expensive concessional loans are reserved for infrastructure projects that can guarantee some degree of cost recovery. If this trend is confirmed, as Vietnam climbs through the ranks of MICs, donors could gradually be less involved in policy reforMs., institutional development and social sectors, and become financiers of large infrastructure projects instead.
“In the new context of Vietnam, reaching the lower MIC status and dealing with global challenges such as climate change, the government and its development partners have to tackle broader needs,” said Mr. Alain Henry, Director of the French Development Agency (AFD) in Vietnam. “It is indeed important to deliver more funding to implement investments. It is also very important to develop at the same time the capacity to absorb and to accurately use growing funds, and to prepare the country to go forward to a new stage of its development.”
France is the second largest bilateral donor to Vietnam and the first European one. Development assistance from France goes through multiple channels. With the AFD’s activities in Vietnam, ODA has surpassed the 1 billion euro commitment in Vietnam since its establishment in 1994. According to Mr. Henry, AFD will commit more than 150 million euro in 2010, primarily in the form of concessionnal loans to the State.
Disbursement views
Using donor support mainly for investment projects also raises probleMs. from a disbursement point of view. Because Vietnamese procedures on public financial management, procurement, resettlement or environmental protection are not considered strong enough, donors prefer to use their own procedures to implement their projects. But this results in considerable delays and slow disbursement rates. “If we exclude budget support, the increase in disbursements in 2009 over 2008 was only about 19 per cent,” said Mr. Konishi. “As for 2010, if we are to exclude disbursement for budget support, the increase in fact is actually much smaller.”
Prospects are not encouraging. “Overall, there have been slight improvements in ODA disbursements, because of improved capacity of counterpart staff and closer collaboration between the government and the donor community,” Mr. Konishi continued. “But then, if we are to consider that ODA commitments have been increasing very rapidly until last year, what we can understand from the statistics is that ODA disbursement in 2010 as compared to the previous years only shows a very slight improvement and it is not keeping pace with the increase in commitments. In other words, there has been a rapid increase in ‘committed but not disbursed’ ODA funds.”
AFD’s disbursement forecast for 2010 is up to 167 million euro, relatively higher than in previous years. “However, if we consider only disbursements for project lending while excluding budget support, we must recognise that we have to strengthen our efforts to accelerate disbursements,” said Mr. Henry. “The low disbursements on project lending are due to start-up delays and procurements procedures.
It is important that ministries and donors, as six development banks group (ADB, AFD, JICA, Kexim, KfW and the World Bank) do, continue their efforts to improve the rate of ODA disbursement. The improvements already made in disbursement over the last couple of years have to be reinforced in order to sustain qualitative growth in Vietnam and have a positive impact on the Vietnamese population.”
According to Mr. Motonori Tsuno, Chief Representative of JICA Vietnam Office, as at the end of October this year Japan had disbursed ¥ 74 billion, much lower than the record level of ¥ 121 billion in 2009. “Even though it is almost the same level as the last year if more than ¥ 50 billion of emergency package is excluded from the last year figure, this is still much bellow our expectation,” Mr. Motonori Tsuno added.
In the portfolio of Japan ODA loan projects, transport and energy account for the largest share, up to 70 per cent for both sectors. “For this year, to now, loan agreements were signed with a total amount of ¥ 54.2 billion, including the road connecting Nhat Tan Bridge and Noi Bai Airport, Noi Bai Airport Terminal 2 Project and a sector programme loan to support climate change. Following a commitment from Prime Minister Naoto Kan during his visit to Vietnam for the ASEAN Summit, nearly ¥ 80 billion will be concluded in due course,” Mr. Tsuno said.
Slow disbursement is less of a concern when resources contain a very strong grant element, as in the case of ODA. But with less concessional resources, a delay of a couple of years in project implementation could more than offset the concessional element, making it preferable for Vietnam to borrow in commercial terMs. to finance its infrastructure development. This is where the concern about the “MIC trap” kicks in.
As they engage in policy reforms and institutional development, many donors hope to help Vietnam escape the MIC trap. Similarly, by relying on more demanding procedures to implement their projects they hope to set higher standards for government systeMs. and encourage their emulation. But the shift to less concessional terMs. may gradually take them out of policy lending. And slow disbursement may also reduce their ability to engage in investment lending. All of which could leave Vietnam to confront the MIC trap on its own.
“The key bottlenecks impeding disbursement flows basically remain the same as those identified in recent years: delays in the procurement process, and slow physical progress due to various reasons including site clearance, complicated requirements of payment documents, lack of capacity in contract management at PMUs, etc. In recent years we have observed better coordination among line ministries in finding solutions to pending issues, but there is still a lot of room to improve the smooth disbursement of ODA-funded projects, which in turn will facilitate the speed of project implementation.”
Mr. Motonori Tsuno, Chief Representative, JICA Vietnam Office
“We can mention five major concerns. First is stakeholder participation during project design, where key stakeholders are not completely on board. Second is the start-up delay to ‘get the projects moving’. In other countries, there are many preparatory activities or ‘advance actions’ prior to the official loan approval, but in Vietnam, often the actions are only ‘sequential’ and not ‘parallel’. Third are issues relating to procurement, particularly on the eligibility of bidders and the differences between government and international practice.
The fourth relates to differences in social and environmental safeguard compliance mechanisMs. between ADB and government funded projects, particularly on resettlement. This last category relates to differences in cost norMs. and market prices, availability of counterpart funds, and the difficulty in handling price escalations.”
Mr. Ayumi Konishi, Country Director, ADB in Vietnam
vneconomy
|
