PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT …

Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 48298-VN

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 127.7 MILLION (US$l90 MILLION EQUIVALENT)

TO THE

SOCIALIST REPUBLIC OF VIETNAM

FOR A

LOCAL DEVELOPMENT INVESTMENT FUNDS

PROJECT

M A Y 22,2009

Urban Development Sector Unit Sustainable Development Department East Asia and Pacific Region

This document has a restricted distribution and maybe used by recipients only in the performance o f their official duties. It contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 30, 2009)

AAA AFD BDIF BOT BW CFAA CPRGS CPS DA DAF DAIF DLIF DNIF DONRE DPI DPL DTIF EIA EMP ES EVN FI FIL FS FSPP GDP GOV HANIF HCMC HDP HIFU ICB

Currency Unit = Vietnamese Dong (VND) 17,785 VND = US$1

1.488 US$ = SDR 1

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

Analytical and Advisory Activities Agence Franqaise de D6veloppement (France Agency for Development) Binh Duong Investment Fund Build Operate Transfer Borrowing Window Country Financial Accountability Assessment Comprehensive Poverty Reduction and Growth Strategy Country Partnership Strategy Designated Account Development Assistance Fund Danang Investment Fund Dak Lak Investment Fund Dong Na i Investment Fund Department o f Natural Resources and Environment Department o f Planning and Investment Development Policy Lending Dong Thap Investment Fund Environmental Impact Assessment Environment Management Plan Environmental Safeguards Electricity o f Vietnam Financial Intermediary Financial Intermediary Loan Feasibility Study Framework for Selecting Private Partners Gross Domestic Product Government o f Vietnam Hanoi Investment Fund Ho Chi Minh City HIFU Development Project Ho Chi Minh City Investment Fund for Urban Development International Competitive Bidding

FOR OFFICIAL USE ONLY

IDA IEE IEG KHIF LDIF LOC MIC MOF MPI NCB NPL ODA OLA PC PER PER-IFA PMO PMU PPA PPC PPI PPP PRSC PSP RAP ROE SIL SOCB SOE SPV TA TAF TGIF TOR USTDA VDB VDIC VND

International Development Association Initial Environment Assessment Independent Evaluation Group Khanh Hoa Investment Fund Local Development Investment Fund Line o f Credit Middle Income Country Ministry o f Finance Ministry o f Planning and Investment National Competitive Bidding Non-Performing Loans Official Development Assistance On-lending Loan Agreement People’s Committee Public Expenditure Review Public Expenditure Review and Integrated Fiduciary Assessment Project Management Office Project Management Unit Project Preparation and Appraisal Provincial People’s Committee Private Participation in Infrastructure Public Private Partnership Poverty Reduction Support Credit Private Sector Partner Resettlement Action Plan Return on Equity Specific Investment Loan State Owned Commercial Bank State-Owned Enterprise Special Purpose Vehicle Technical Assistance Technical Assistance Facility Tien Giang Investment Fund Terms o f Reference Unites States Trade and Development Agency Vietnam Development Bank Vietnam Development Information Center Vietnam Dong

Vice President: James W. Adams Country Director: Victoria Kwakwa Sector Manager: Hoonae Kim

Task Team Leader: Kamran M. Khan / Cuong D. Dang

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.

LIST OF FUNDS

Fully qualified for funding Ho Chi Minh City Investment Fund for Urban Development (HIFU) Hanoi City Development Investment Fund (HANIF) Dong Nai Development Investment Fund (DNIF) Binh Duong Development Investment Fund (BDIF) Tien Giang Development Investment Fund (TGIF)

Conditionally qualified - funding pending fulfillment of outstanding requirements Da Nang Local Investment Fund (DAIF) DakLak Local Investment Fund (DLIF) Dong Thap Local Investment Fund (DTIF) Khanh Hoa Local Investment Fund (KHIF)

VIETNAM Local Development Investment Funds Project

CONTENTS

Page

STRATEGIC CONTEXT AND RATIONALE .............................................................................. 1 Country and Sector Issues ........................................................................................................ 1

Rationale for Bank involvement .............................................................................................. 5

Higher level objectives to which the project contributes ......................................................... 7

PROJECT DESCRIPTION .............................................................................................................. 7

Lending instrument .................................................................................................................. 7

1 . 2 . 3 .

1 . 2 . 3 . 4 . 5 .

Project development objective and key indicators., ................................................................. 8

Project components .................................................................................................................. 8

Alternatives considered and reasons for rejection ................................................................. 11

Partnership arrangements ....................................................................................................... 12

Institutional and implementation arrangements. .................................................................... 12

Monitoring and evaluation o f outcomes/results ..................................................................... 13

4 . Sustainability .......................................................................................................................... 13

Critical risks and possible controversial aspects .................................................................... 14

Loadcredit conditions and covenants.. .................................................................................. 16

Lessons learned and reflected in the Project design .............................................................. 10

IMPLEMENTATION ..................................................................................................................... 12 1 . 2 . 3.

5 . 6 .

APPRAISAL SUMMARY .............................................................................................................. 17 1 . 2 . 3 . 4 . 5 . 6 . 7 .

Economic and financial analyses ........................................................................................... 17

Technical ................................................................................................................................ 18

Fiduciary .............................................................................. ,. ................................................ 18

Social ...................................................................................................................................... 21

Environment. .......................................................................................................................... 21

Safeguard policies ................................................................................................................. -23

Policy Exceptions and Readiness. ......................................................................................... - 2 4

Annex 1: Country and Sector o r Program Background .............................................................. 26

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...................... 36

Annex 3: Results Framework and Monitoring ............................................................................. 37

Annex 4: Detailed Project Description ........................................................................................... 43

Annex 5: Project Costs .................................................................................................................... 55

Annex 6: Implementation Arrangements ...................................................................................... 56

Annex 7: Financial Management and Disbursement Arrangements .......................................... 58

Annex 8: Procurement Arrangements ........................................................................................... 70

Annex 9: Economic and Financial Analysis .................................................................................. 83

Annex 10: Profiles of Qualified and Conditionally Qualified LDIFs ........................................ 113

Annex 11: Safeguards Policy Issues ............................................................................................. 129

Annex 12: Project Preparation and Supervision ........................................................................ 135

Annex 13: Documents in the Project File .................................................................................... 136

Annex 14: Statement o f Loans and Credits ................................................................................. 137

Annex 15: Country at a Glance .................................................................................................... 140

MAP ................................................................................................................................................ 142

VIETNAM

LOCAL DEVELOPMENT INVESTMENT FUNDS PROJECT

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASUR

International Development Association

Private Sector Contribution

Total

Date: May 22,2009 Country Director: Victoria Kwakwa Sector Manager: Hoonae Kim Project ID: PO94055 Lending Instrument: Financial Intermediary

Team Leader: Kamran M. Khan / Cuong D. Dang Sectors: Urban Development, Finance Themes: Municipal Finance Category: FI Safeguard Screening Category: FI

190 190

70 70

280 0 280

[ ] Loan [ X I Credit [ ] Grant [ ] Guarantee[ ] Other:

FY FY 10 FY11 FY 12

For Loans Credits and Others: Total Bank Financing: (US$): 190 mill ion Government/sub borrowers Contribution: US$90 mil l ion

FY 13 FY14 FY15

Annual Cumulative

Responsible Agency: Ministry of Finance

10 30 35 45 50 20 10 40 75 120 170 190

Address: 28 Tran Hung Dao St., Hanoi, Vietnam

Contact Person: Mr. Ngo Tuan Director General, Banking and Financial Institutions Department

Does the project depart from the CAS in content or other significant respects? [ ]Yes [ X 3 No Does the project require any exceptions from Bank policies? [ ] Y e s [ X I N O

I s approval for any policy exception sought from the Board? : ]Yes [ X I N O

Does the project meet the Regional criteria for readiness for implementation? :X]Yes [ ] N o Project development objective: Refer PAD B. 3 The Project aims to improve effectiveness o f Qualified Local Development Investment Funds in leveraging private sector financing for municipal infrastructure, and to strengthen their financial and technical capability, and their capability for social and environmental safeguards management, through the operation o f a credit facility to support the investments o f such Investment Funds in eligible local development subprojects.

Have these been approved by Bank management? [ ] Y e s [ IN0

Project description Refer PAD B. 4 The Project design envisages providing lending support as well as monitoring and implementation support. Both Project components wi l l be managed by the Ministry o f Finance Component 1 : Investment Capital (US$275 million; IDA US$ 185 million) Component 2: Project Implementation Support (US$ 5 million; IDA US$ 5 million) Which safeguard policies are triggered, if any? The Project will have any large scale or irreversible adverse environmental impacts. The Project triggers the World Bank Safeguards Policies on Environmental Assessment (OP/BP 4.01) and Involuntary Resettlement (OPBP 4.12). The Project i s classified as environment Category “FI”. Significant. non-standard conditions. if anv?: None

STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues 1. In the last two years, Vietnam has had to contend with mounting inflation, which then transitioned to the impact o f the current global financial crisis and economic downturn. The Government o f Vietnam and Ministry o f Finance have been quick to realize the critical importance o f swift action to promote policy and initiatives that wi l l provide fast-moving and far-reaching stimulus as well as a foundation for recovery and long-term growth. The Local Development Investment Funds Project (LDIFP) provides a readily prepared opportunity for such GOV action. Specifically, the LDIFP provides an opportunity to scale up the successful lending model currently utilized in the HIFU Development Project (HDP), which involves the Local Development Investment Fund (LDIF) in HCMC - paragraph 2 below provides a summary o f HDP performance. The GOV has also, with World Bank support, implemented key policy reforms to create the necessary enabling environment for the LDIFP. These include the issuance o f a new decree to govern and regulate the LDIFs, development o f key guidelines/regulations to implement the decree, and creation o f comprehensive Guidelines in the Project Manual to guide the investment activity o f IDA recipients. Coupled with Vietnam’s ongoing decentralization, LDIFP would further enable provincial governments to assume a greater role in infrastructure development, which would in turn create employment and spur economic activity. Based on the experience o f HDP, the potential for LDIFP to have a multiplier effect in the economy i s substantial. The confluence o f crisis conditions, urgent government will, and a readily executable Project underscore the immediacy o f LDIFP. All these factors have led the GOV and Bank management to move the delivery o f the Project from FY’10 to Q4 FY’09.

2. The HDP was prepared and delivered in 2007. The LDIF in HCMC - the HCMC Infrastructure Fund for Urban Development or HIFU - was selected as a model due to i ts standing as the most advanced LDIF. The HDP model has since been successfully tested and implemented, and the model i s now ready for replication on a national scale. HDP i s rated “highly satisfactory” based on disbursement (20% o f loan amount disbursed in one year o f operations) as well as development objectives (compliance with all financial covenants, and leveraging private capital in developing municipal infrastructure). The development and implementation o f HDP has also allowed the Bank and MOF to further refine the Project Manual based on lessons learned to ensure that the frameworks, practices, and standards proposed in the Project Manual for the LDIFP are better customized to the capacity and needs o f LDIFs and MOF. These include comprehensive Guidelines on Project Preparation and Appraisal, Private Sector Partnership, Safeguards, Corporate Governance, and Capital Mobilization. In addition, lessons in monitoring and regulation have been applied to the structure and process o f the Project Management Unit at the MOF. The practices and standards developed from the successful model o f HDP, combined with the legal and administrative framework put in place by the GOV, provide an ideal platform to launch LDIFP on a national scale.

3. The demand for municipal infrastructure in Vietnam has increased rapidly as the country copes with rapid urbanization, decentralization and, until recently, high rates o f economic growth. There i s wide agreement that a significant investment gap exists vis-&- vis municipal infrastructure demand. Domestic and international commentary on the

1

investment climate in Vietnam i s beginning to increasingly cite the lack o f infrastructure in general and municipal infrastructure in particular as a key bottleneck to investment and economic growth. The heavy reliance on public budget i s an important reason for the slow pace o f infrastructure development. W h i l e Vietnam has utilized Official Development Assistance (ODA) very effectively over the last decade, the magnitude o f the infrastructure challenge in the fast growing Vietnamese economy makes it unlikely that the traditional approach involving one ODA-fbded infrastructure investment at a time will be sufficient. Vietnam has to consider alternative models for financing infrastructure. Specifically, establishment o f infrastructure finance models that involve local institutions and leverage private capital must be an important element o f Vietnam’s strategy to become a middle- income country.

4. The mismatch between the long-term financing needs o f infrastructure investment and the short-term deposits held by commercial banks means that banks are not the ideal financing institutions for infrastructure. Vietnam’s financial sector i s currently dominated by five major state-owned commercial banks (SOCBs), accounting for about 80% o f the capital, lending and assets o f the banking system. Over the past decade the SOCBs have evolved from specialized policy-lending vehicles to become more commercially oriented financial intermediaries. However, much more needs to be done to reform the banking sector before it can be appropriately utilized to finance urban infrastructure development. Infrastructure enterprises have, in the past, borrowed heavily from the SOCBs; however, the liquidity drained out o f the banking sector during the current financial crisis i s unlikely to be replenished in the near to medium term.

5. Overall, the market for bonds i s poised for significant development, but important institutional reforms, addressing governance and transparency in particular, are required to permit this potential to be realized. The national Government has been working to develop the government bond market. I t plans to raise US$ 4 billion by 2010 to be used mainly to finance infrastructure projects; however, it i s reasonable to assume that the efforts to jump- start the bond market and/or raise significant capital in the domestic market will face serious obstacles in the near to medium term due to the current financial crisis. At the provincial level, the f i rst municipal bonds were issued by the Ho Chi Minh City (HCMC) government in 2003, in the form o f a general obligation bond, raising US$ 127 million. The rules for issuance o f municipal bonds are not yet clear, and they do not always provide the right incentives to the issuers. In particular, there i s a need to further strengthen disclosure rules for the public offerings. The stock o f sub-national government debt in Vietnam i s not currently a threat to fiscal stability, but plans for increased investment are likely to see sub-national debt increase significantly, requiring national oversight.

6. The challenges facing Vietnam vis-a-vis financing o f municipal infrastructure are further complicated by the following two important developments:

Vietnam continues to adjust to a decentralized governance model. The responsibility for municipal infrastructure i s being devolved to the provincial governments, which have limited budgetary resources, and suffer from a combination o f weak institutional capacity and policy uncertainties that will affect the flow o f private CapitaVexpertise into municipal infrastructure development. In the near to medium term the private financial markets in Vietnam are unlikely to become adequately deep or broad to meet the fast-growing municipal infrastructure

2

financing demand. Whi le the acute demand for financing calls for immediate public sector action, measures must be taken to ensure that actions taken in the interim period take into account the risk o f private sector crowding-out in the medium to long-term.

7. The Government of Vietnam (GOV) has actively encouraged the provincial governments to take responsibility for financing municipal infrastructure. The 2001 Public Administration Reform Master Program (for 2001-2010) lays the groundwork for putting in place the regulations on decentralization o f administrative management and fiscal functions. The two most significant components o f the emerging municipal finance framework include permission to the provincial governments to: (i) establish Local Development Investment Funds (LDIFs), and (ii) borrow up to 30% o f their annual state budget for development investments-Ho Chi Minh City (HCMC) and Hanoi are allowed to borrow up to 100% o f annual budget-through revenue or general obligation bonds. LDIFs allow the provincial governments to mobilize capital and enter into contracts with the private sector for the development o f municipal infrastructure. The reliance o f provincial governments on LDIFs i s increasing very substantially as the decentralization process continues in Vietnam. HIFU was the first LDIF established in June 1996; since then, sixteen other provincial governments have established LDIFs with the approval and support o f the GOV. HIFU remains by far the most financially viable and operationally successful LDIF in Vietnam.

8. The LDIFs are expected to operate as commercially oriented entities, raising private capital and investing in municipal infrastructure subprojects that offer cost recovery. In 2004, the total charter capital o f LDIFs in Vietnam was approximately US$ 300 million; in 2006 it was estimated to be approximately $400 million, with the top-seven LDIFs investing approximately US$ 100 million per year, which accounts for an investment increase o f 118% for these funds over the 2002 level. The LDIFs currently also engage in short-term borrowing on a roll-over basis from SOCBs and other SOEs. Hence, possible mismanagement o f LDIFs carries the risk o f decreasing investment efficiency in municipal infrastructure, increasing the contingent liabilities o f the GOV, and undermining financial market development. Under the HIFU Development Project, there was acceptance at the highest levels in the GOV that it was critical that HIFU-the most advanced and leading LDIF-adopt an operational model that could be replicated in the other LDIFs.

9. The LDIFs that have qualified for ODA funding have good financial positions, including very low non-performing loan (NPL) ratios and acceptable profitability and balance sheet strength (see Annex 9 for details). An annual qualification process, approved by MOF, will be carried out to ensure the financial, operation, and institutional soundness o f LDIFs before they can receive ODA funding. The qualified LDIFs have a proven track record o f building major infrastructure, which are currently operating on a financially viable basis and providing infrastructure services to cities’ residents. Specifically, qualified LDIFs:

0 operate under a legally binding Credit Statute o f the Provincial government that mandates investment analysis to ensure cost recovery and provides guidelines for investment monitoring and workouts when necessary.

0 have a well-developed internal appraisal and investment monitoring system, and the decision making authority rests with LDIF staff.

3

0 price their loans at market rates for infrastructure projects, and have excellent track record o f investing in cost-recovery oriented infrastructure subprojects in partnership with the private sector.

0 maintain annual audited financial statements that are based on the accepted accounting standards used by corporations in Vietnam. The financial statements provide reasonably reliable data on the financial performance and portfolio quality.

0 are financially se l f sufficient and do not require any operational budget support from the provincial government.

0 a majority o f LDIF staff are hired on private contracts, Le., they are not provincial government employees.

10. Finally, these LDIFs have been selected based on comprehensive qualification criteria developed by the Ministry o f Finance and World Bank and based on extensive experience with HIFU. The parameters o f the qualification criteria are:

1. LDIFs have charter that i s l ine with the model charter set out by the MOF 2. Charter capital o f LDIF i s at least VND 100 billion 3. Annual financial statements o f LDIF are audited within six months from the end o f

the LDIF fiscal year 4. Ratio o f mobilized capital to charter capital i s less than 6: 1, with commitment o f

PPC to infuse adequate additional capital if the ratio exceeds the limit 5. LDIF has been in operation for at least two years, with at least one year o f

profitability 6. Non-performing loans account for less than five percent o f total assets 7. LDIF has at least two sub rojects in the pipeline, with feasibility study conducted

for at least one subproject 8. LDIF has at least five full-time employees, including at least one financial analyst.

P

In addition to above qualification criteria, disbursement to participating LDIFs can be made only after their subprojects have been fully prepared in accordance with the Project Manual, the LDIFs have received training on financial management provided by the W B FM Specialist, and the LDIFs have demonstrated capability to and experience with implementing safeguards (including having staff to manage safeguards issues).

11. The successful performance o f these provincial LDIFs in financing municipal infrastructure i s also a critical national priority because these provinces contain Vietnam’s major cities and include major industrial and commercial centers with combined populations o f 14.6 million. The areas also include Category 1 cities reporting directly to the Central Government. A few cities have been at the forefront o f the transition initiated by the economic-reform “Open door” and “Renovation” policies that have led to unprecedented growth for the country, particularly in the industrial sector. The annual

This criterion (in addition to others listed above) applies to the qualification o f the LDIF. Fulfillment o f this specific criterion does not automatically mean that these subproject@) for which feasibility study has been conducted wi l l receive IDA funding. The subprojects of Qualified LDIFs to be prepared and in the f r s t year o f implementation wi l l only receive IDA funding after the Bank has conducted prior safeguards review and provided approval, and the MOF PMU has reviewed the subproject for compliance with the Project Manual and all Project agreements.

4

increase in urban population i s 1 to 1.4 million people. By 2020, the urban population i s expected to grow to 45% o f the country’s population, up from today’s 22%. The increase in urban population and continued economic growth i s putting increased pressure on the urban services o f the city.

2. Rationale for Bank involvement

12. The Bank’s infrastructure strategy involves engagements that focus on improvement of sector policies, provision o f public/ODA funds for critically needed municipal infrastructure, and establishment o f models that can support the increase o f private sector participation in infrastructure delivery.

13. The current financial crisis has Mher enhanced the urgency for the Bank to deliver infrastructure projects that can help to stimulate the economy. In this context, the Bank’s ability to deliver well-tested investment models that can disburse funds quickly and can leverage private capital for growth-oriented infrastructure subprojects will provide significant support to the GOV in managing the economy in the challenging months and years to come.

14. The Bank’s response to the GOV request for assistance to LDIFs included AAA and an operational program. The AAA completed in 2005 produced a detailed Briefing Paper that highlighted the relevant policy and operational issues involved in the development o f LDIFs. The AAA established the Bank as the primary advisor to the government and confirmed the commitment o f the GOV and key provincial governments to the reform and development o f LDIFs. The ongoing HCMC Investment Fund for Urban Development Project (HDP) aims to develop HIFU as a model LDIF (in terms o f internal policy and procedures for financial policy, subproject appraisal, social and environmental safeguards, and partnership with the private sector) and increase private sector participation in financing municipal infrastructure in HCMC.

15. The planned sequence o f World Bank Group (WBG) engagement with LDIFs will follow the below described proposed outline for the long-term development o f LDIFs.

Stage I

As reflected in LDIFP, the

Stage II Stage 111

Investment Capital - Demonstration of sound flnandal end corporate management practicas

- Senior debt through market transaction

Standard Setting - Increased syndication - Establishment of stds

in partnership with publidprivate partnets

Investment Track Record

Investment Capital - Injection of pvt. Equity - Increase in senior debt

pvt. Sector Participation In LDIF Management Long-term Role -Transition away from primary market towards narrow market function - Support to market players on benchmark - Maturity extension - Securitization

Bank’s operational engagement regarding the LDIFs involves helping the GOV establish a national policy and regulatory framework to support the development o f LDIFs vis-a-vis operational standards and investment efficiency, and provide credit to Qualified LDIFs. IDA financing will be used in the initial stage o f the

5

engagement because it can contribute to make municipal infrastructure more available and affordable to beneficiaries, Le., IDA financing i s expected to address the failure of the financial market to provide long-term financing for infrastructure investment. With i t s financing IDA also brings technical expertise to support the operational reforms in LDIFs. The Bank’s earlier operational engagement with HIFU (HDP) and now LDIFP provide a platform for other donors interested in scaling-up their financial support to LDIFs based on the lessons learned from the Bank projects.

16. The HIFU Development Project (HDP) was a split operation o f LDIFP and demonstrated as a good model for Bank’s further engagement. The Bank agreed to support the GOV request to proceed in FY07 with a project (HDP) focused exclusively on HIFU because HIFU was ready to start executing a pipeline o f subprojects in 2007, and HIFU Management and the HCMC Peoples’ Committee (HCMC PC) had committed to adopt the LDIF internal policy and operational reform measures that had been prepared under the LDIFP. Proceeding more rapidly with a targeted support to HIFU was in line with the incentive framework envisaged under the LDIFP. At the same time, the GOV, with Bank support, implemented key policy reforms to create the necessary enabling environment for LDIFP. LDIFP i s a high priority for the Bank and the GOV because it scales up the HDP model and provides the policy, institutional, and operational framework that are critical for the long-term development o f LDIFs. The HIFU Development Project has served as a successful model, with lessons and successes extensively applied to LDIFP. HDP has been rated “highly satisfactory” based on disbursement, compliance with all financial and safeguards covenants, as well as development obj ectives-the project i s leveraging private capital in municipal infrastructure subprojects. Frameworks, practices, and standards from HDP are also being applied to LDIFP. HDP’s lessons have been synthesized and adapted to revise the Project Manual and Guidelines on Project Preparation and Appraisal, Private Sector Partnership, Safeguards, Corporate Governance, and Capital Mobilization. In addition, lessons in monitoring and regulation have been applied to the structure and process o f the PMU at the MOF.

17. WBG strategic aim o f operational engagement i s to establish a road map for the LDIFs to become independent, competent and professional infrastructure financing agencies that can leverage private capital in infrastructure without distorting the market or creating contingent liabilities for the provincial and central government. The strategic approach via the IDA credit to LDIFs i s to: (a) alleviate the need for LDIFs to rely upon short-term borrowing to finance long-term inffastructure investments; (b) increase the affordability o f municipal infrastructure to the citizens by providing long-term financing, which i s currently not available in Vietnam; and (c) help LDIFs establish the appropriate systems and procedures to build a track record, including the rules o f the game for partnering with the private sector, which can form the basis for the LDIFs’ future borrowing from the market via bank loans or bonds. The strengthening o f the internal systems and institutional capacity o f LDIFs will also solidify and further expand the corporatization o f LDIFs from the municipal government structure. For example, under the HIFU Development Project, the HCMC PC has confirmed that improvement o f HIFU’s institutional capacity will be the strongest impetus for instituting additional corporate governance reforms, i.e., the level o f independence which HIFU can obtain depends upon continued improvement in HIFU’s professional competence. The operational association with the Bank will further improve LDIFs’ institutional capacity.

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18. The Bank’s technical and operational approach to LDIFs is based on substantial international experience in developing municipal/infrastructure finance systems around the world. The task team has conducted a detailed review o f a l l the relevant and comparable models pursued in the developed and developing countries. These experiences are described in detail in the AAA report o f LDIFs. The task team has worked closely with staff in FSPSD, PREM, and the IFC to explore the avenues for the Bank’s operational engagement with LDIFs before finalizing the approach that i s outlined in this PAD. The task team has also employed the Bank’s knowledge tools to safeguard against possible adverse cross-sector policy impacts, particularly on financial market development. Finally, the task team includes global experts in municipal/infrastructure finance as well as senior staff who fully understand the technical issues and have an excellent understanding o f the Vietnamese context. The Bank has successfully engaged in other financial intermediary projects, and has gained experience from such projects.

3. Higher level objectives to which the project contributes 19. Financially viable and sustainable LDIFs will contribute significantly to reducing the municipal infrastructure financing gap in economically important provinces in Vietnam. Establishment o f these init ial LDIFs as successful models o f financially sound, competent, and professionally independent institutions will also contribute towards the development o f even more LDIFs in the country. Once the LDIFs have gained legitimacy vis-&vis their roles o f efficiently and effectively mobilizing and managing infrastructure financing funds-both public and ODA-they can at a later stage begin to leverage such competence towards mobil izing significant private funds, both at the subproject level (the existing model) and also at the funds’ equity capital and on-balance sheet debt level. This in turn is expected to bring about a significant increase in the current level o f private sector capital leverage, and hence, will contribute significantly to reducing the municipal infrastructure financing gap.

20. The Country Partnership Strategy (CPS) for Vietnam for the period 2007-2011 recognizes the development o f a vibrant capital market to support the financing o f infrastructure in particular as an essential element in the reform o f the financial system under i t s first pillar focused on improving the business environment. Under this pillar, it also emphasizes that making further progress in inpastructure development requires diversihing funding sources and improving transparency in resource mobilization, notably at the local level. In this context, the increase in private share o f total financing of infrastructure is one o f the selected outcomes to which the CPS i s expected to contribute, notably through the development o f municipal financial markets and non-subsidized lending facilities in selected jurisdictions. The LDIFP would be instrumental for such results to be achieved.

PROJECT DESCRIPTION

1. Lending instrument 21. The proposed instrument is a Financial Intermediary Loan (FIL) because it is the most appropriate instrument for addressing the systemic issues associated with the channeling o f funds for municipal infrastructure. The wholesale approach supported under

7

the Project makes the Specific Investment Loan (SIL) instrument less relevant. Similarly, a Development Policy Lending (DPL) would not have provided the appropriate platform for a long-term engagement that is capable o f (a) strengthening the institutional capacity o f LDIFs and MOF; (b) providing adequate supervision to ensure acceptable standards o f the subprojects prepared and financed; and (c) providing the necessary detailed operational advice to LDIFs and MOF.

2. Project development objective and key indicators 22. The Project Development Objective i s to improve effectiveness o f Qualified Local Development Investment Funds in leveraging private sector financing for municipal infrastructure, and to strengthen their financial and technical capability, and their capability for social and environmental safeguards management, through the operation o f a credit facility to support the investments o f such Investment Funds in eligible local development subprojects.

0 Evidence that private sector participation in financing municipal infrastructure in respective provinces i s improving will be measured by the increase in total number and amount o f LDIF investment (debt and equity) per year in municipal infrastructure subprojects with private sector involvement, as wel l as by the increase in total amount invested by the private sector in the LDIF-sponsored subprojects.

0 Evidence that LDIFs improve their effectiveness in above-mentioned dimensions will be measured by their compliance with the Financial Covenants, as well as their compliance with the Project Manual, including Guidelines on Project Preparation and Appraisal, Private Sector Partner (PSP) selection, and Safeguards. The satisfactory adherence and demonstration o f subprojects funded by the l ine o f credit to the Project Manual will be a major institutional development.

3. Project components

Component 1: Investment Capital (IDA US$185 million) 23. A line o f credit will be provided to the Ministry o f Finance for its Project Management Unit to manage and to on-lend to qualified LDIFs for investment in cost- recovery-oriented municipal infrastructure subprojects in partnership with the private sector. The Project Preparation and Appraisal Guidelines in the Project Manual govern how the LDIFs’ investments under the l ine o f credit will be identified, developed and appraised. The Private Sector Partner (PSP) Guidelines describe the way private sector participants will be selected in Project Enterprises financed under the line o f credit. Other Guidelines in the Project Manual provide instruction on Safeguards compliance, Monitoring, and Corporate Governance.

24. LDIFs will use the IDA credit to invest in cost-recovery oriented municipal infrastructure investments in partnership with the private sector. Possible subsectors o f municipal infrastructure include: health; education; water supply distribution & treatment; solid waste management; sewage disposalhreatment; urban tol l roads and bridges; transport logistics; ancillary investments to support ports; fixed infrastructure in support o f telecommunications and datdinformation technology; residential development; municipal

8

infrastructure associated with industrial parks; and other energy and transport related municipal

25. LDIFs will work with the provincial governments to identify investment needs in their respective provinces, as described in their master plans, that can be financed in partnership with the private sector. LDIFs will then work with the city departments to put in place effective subproject structures and then invite private investors to participate in the subprojects.

26. A pipeline o f possible subprojects has been identified and confirms that the qualified LDIFs can absorb the investment capital that i s being made available via the Project. Three possible subprojects have been identified to be prepared during the first year o f implementation under the LDIFP. All necessary safeguards instruments will be prepared and necessary assessments conducted in accordance with the Project Manual before IDA credit i s released for these and any other subprojects in the f i rs t year o f implementation. All subprojects prepared in the f i rs t year o f Project implementation will require review and approval by the Bank.

Component 2: Project Implementation Support (IDA US$5 million) 27. The Project Management Unit (PMU) at the Ministry o f Finance will be the unit responsible for monitoring, regulating, and supervising the LDIFs and the overall implementation o f LDIFP.

28. This Project component will support the PMU in the development o f i t s regulatory and institutional capacity in the following areas: i) establishment, capacity-building, and operational support o f the P M U organization; ii) monitoring and selection o f qualified LDIFs; iii) analysis o f LDIFs’ subprojects; iv) monitoring o f social and environmental safeguards compliance; v) development o f information systems for managing LDIFP; vi) financial audits for consistent application o f international auditing standards (to both P M U and LDIFs) as well as for uniform implementation o f MOF’s new LDIF accounting rules3.

LDIFs wi l l not use the I D A credit to invest in subprojects that wil l trigger Safeguards Policies on Natural Habitats (OP/BP 4.04), Pest Management (OP 4.09), Cultural Resources (OP 4.1 l), Indigenous Peoples (OP 4.10) Forests (OP/BP 4-36), Safety o f Dams (OP/BP 4.37), Projects in Disputed Areas (OP/BP/GP 7-60), Projects on International Waterways (OP/BP/GP 7.50). Subprojects that trigger OP 4.04,4.09,4.10,4.11, or 4.36 wi l l either be excluded or require prior review and approval by the Bank. (Please see Annex 11 for details on these Safeguards Policies). In addition, LDIFs wi l l not use the IDA credit to invest in: Production or trade in any product or activity deemed illegal under host country laws or regulations or international conventions and agreements, or subject to international bans, such as pharmaceuticals, pesticidesherbicides, ozone depleting substances, PCB’s, wildlife or products regulated under CITES; Production or trade in weapons and munitions; Production or trade in alcoholic beverages (excluding beer and wine); Production or trade in tobacco; Gambling, casinos and equivalent enterprises; Production or trade in radioactive materials; Production or trade in unbonded asbestos fibers; Drift net fishing in the marine environment using nets in excess o f 2.5 km. in length; Production or activities involving harmful or exploitative forms o f forced labor2hannful child labor; Commercial logging operations for use in primary tropical moist forest; Production or trade in wood or other forestry products other than from sustainably managed forests.

financed LDIF Technical Assistance Fund to support the development o f LDIFs. According to Decree 13 8, the responsibility o f regulating the LDIFs i s assigned to the MOF; the LDIF TA Fund wi l l support the GOV policy under the mandate given to the MOF. It i s the MOF position that the LDIF TA Fund i s neither

In order to better implement the GOV Decree 138 on LDIFs, the MOF also plans to establish a donor-

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4. Lessons learned and reflected in the Project design 29. Slow Disbursement in infrastructure portfolio. The disbursement level o f ODA- financed investment portfolio in Vietnam, notably vis-a-vis infrastructure projects, has remained slow for many years. In reviewing the problems associated with slow disbursements, the Government and the Bank agreed, inter alia, o n the need to explore new models o f doing business that are in line with the current decentralization process, and involve select local institutions-“islands o f competence”-that are performing in an efficient and professional manner. Under the HIFU Development Project, HIFU has been successful in leveraging private investment in infrastructure in H C M C and building operational infrastructure projects (e.g., to l l roads and water BOTS). Moreover, HIFU involvement has helped to improve the efficiency o f projects implemented through the H C M C line departments. HIFU also has an excellent funds disbursement record, completing projects in significantly shorter time frames than traditional investment projects.

30. Financial Intermediary Lending. The Independent Evaluations Group (IEG) review o f Bank Line o f Credit (LOC) operations under OP 8.30 rules for Financial Intermediary lending identified the need for a sound analysis o f the financial intermediaries by the Bank. International consultants hired by M O F have conducted a detailed due diligence o f the financial operations o f LDIFs. The analysis confirms that the qualified LDIFs have a strong financial position. The Bank has appraised the qualified LDIFs’ financial viability vis-a-vis their investment practices: for example, they prices loans at market rates and invest in cost-recovery oriented infrastructure in partnership with the private sector. Specific Financial Covenants governing their financial pol icy have also been put in place to further strengthen LDIFs’ financial position. Other elements o f project design that address the risks identified by the IEG report include: I LDIFs maintain annual audited financial statements, which provide reasonably reliable

data on financial performance and portfolio quality. The Project Management Unit o f the M O F has agreed to use to International Audit Standards, to be applied by an independent auditor, and the MOF has issued new accounting rules for LDIFs. Strict and comprehensive qualification criteria have been applied to the selection o f LDIFs for funding. A review has been conducted to analyze LDIFs’ subproject pipelines and their implementation track-record to confirm that the LDIFs have the capacity to invest and manage the IDA credit. The M O F will on-lend the funds to LDIFs in Vietnam Dong (VND), which will protect LDIFs against any fluctuation in the VND foreign exchange rate. The foreign-exchange hedging cost as wel l as the IDA commitment fee is fully priced in the on-lending rate charged by the MOF to LDIFs as required under current Vietnamese regulations governing ODA. In addition, the MOF on-lending terms do not present a disadvantageous maturity mismatch for the MOF. LDIFs charge market (positive real) interest rates on their loans.

.

.

.

required for nor should it be tied to the WJ3 loan; however, by supporting the development o f LDIFs, the LDIF TA Fund will improve the capacity o f LDIFs to undertake more innovative projects under the WJ3- financed project(s). The LDIF TA Fund will provide technical assistance to LDIFs in: training and capacity building; preparation o f more sophisticated subprojects; and institutional development.

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Comprehensive operational frameworks have been established in the form o f the LDIFP Project Manual. The framework has been developed in close collaboration with MOF, LDIFs, PPCs, and other experts. The manuals have been reviewed and approved by the MOF. The MOF wi l l hire consultants to monitor compliance with the manual’s guidelines.

31. Link to National Policy. The Bank experience in Vietnam and around the world indicates that the results o f projects can be maximized if they are linked to andor are supported by a broader national policy framework. The LDIFP i s linked to a national program and a Bank strategy for engaging with LDIFs in Vietnam that has been established over a period o f 2-3 years.

32. Government Ownership. Previous Bank-financed infrastructure funds point to the importance o f a strong and consistent government ownership. The LDIFP i s well-anchored because o f the deep history o f government ownership o f the Bank-recommended LDIF reform agenda dating back to 2004. Importantly the Government has expressed very strong institutional commitment though the issuance o f Decree 138 on LDIFs in 2007 and the accounting circular in early 2009. MoF as regulator o f LDIFs and implementing agency for this project has also obtained good experience from excellent implementation o f the HDP, and has further sirnplifiedstreamlined the project manuals for use under the LDIFP. The Project has been endorsed by the MOF, MPI, and other relevant GOV agencies. The commitment o f the Provincial PCs i s also strong in their support o f MOF and W B requirements that their LDIFs must follow.

5. Alternatives considered and reasons for rejection 33. Creating one fund at the national level was initially considered as it was deemed to reinforce the Bank’s focus on the wholesale model. However, there were concerns that a national fund: (i) might not adequately support the decentralization objectives o f the GOV, which has devolved the responsibility o f financing and managing municipal infrastructure to the provincial governments; (ii) would reduce the buy-in from Provincial People’s Committees; (iii) would fail to leverage the operational track record already established by successful LDIFs such as HIFU; (iv) would result in more cumbersome decision making processes involving many central government entities; and (v) would be less effective than decentralized institutions to identify high-quality cost-recovery subprojects.

34. Providing a Wholesale Guarantee Facility. Providing a wholesale guarantee facility aimed at decreasing the cost and extending the maturity o f loans provided for infrastructure projects in Vietnam was considered as an alternative to directly supporting the LDIFs. However, given that the problem in Vietnam i s both one o f access to long-term financing as well as that o f identification and preparation o f financially viable projects, i t was decided that providing long-term financing and detailed technical assistance on operational reforms to qualified LDIFs would help achieve such objective more effectively. Moreover, direct support to the LDIFs would also allow the Bank to pursue other developmental objectives such as corporate governance and social and environmental sustainability, which would be much harder to accomplish under the wholesale guarantee facility model. Accordingly, it was agreed that the wholesale guarantee facility model may be pursued at a future stage as an appropriate extension o f the current operational approach.

Establishing a National Municipal Development Fund.

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35. Relying on the WB-IFC Sub-national Finance Program. This option was initially considered in coordination with IFC and was eventually disregarded because: (i) being exclusively transaction-oriented, it would not provide the right entry point to provide the required long-term policy advice and technical assistance to LDIFs; and (ii) being more expensive, it would most l ikely have affected the affordability o f the municipal infrastructures financed by the Project.

IMPLEMENTATION

1. Partnership arrangements 36. While the Project does not involve any formal co-financing, it i s very central to the engagement o f other donors. Since the LDIFs present a promising approach for financing municipal infrastructure in Vietnam, the donors are a l l very keen to work with LDIFs. The Bank’s AAA on LDIFs i s widely regarded as the most in-depth analytical analysis o f the policy and operational issues associated with the development o f LDIFs, and it has been shared very broadly with al l interested donors. The donors have been very interested in replicating the Project framework (e.g., Project Manual, Financial Covenants, Safeguards standards) under the HDP in their engagements with the LDIFs, and the national framework prepared for the LDIFP under the guidance o f M O F i s expected to form the basis for future O D A engagements involving the LDIFs. The coordination o n capacity- building technical assistance to complement LDIFP has also been very strong. The World Bank has been in discussions with other donors, including the “Group o f 5” banks, regarding their interest in engaging with LDIFs. All o f these donors are well-informed o f LDIFP. Finally, IFC has expressed a very strong interest in financing investments (subprojects) in partnership with LDIFs.

2. Institutional and implementation arrangements 37. The implementing unit for the LDIFP wil l be the PMU within the MOF, as it oversees the LDIFs as they institute key operational reforms and undertake investments in municipal infrastructure with private sector involvement. The P M U will manage the Financial Intermediary Loan, as it on-lends to LDIFs. The PMU will monitor and regulate the activities o f the LDIFs, and also carry out the annual qualification process to select LDIFs that qualify for O D A funding. The qualification criteria and process are designed to ensure the financial, operational, and institutional soundness o f the LDIFs before they can receive ODA funds. M O F will review and provide approval for subprojects o f Qualified LDIFs to receive funding. In addition, M O F will also hire consultants to ensure that subprojects financed by the qualified LDIFs meet WB eligibility criteria. The MOF will also hire auditors to audit the PMU’s and LDIFs financial statements to international standards, as well as to apply the new LDIF accounting rules in a consistent manner. The LDIFs operate as specialized agencies within the municipal governments, working with the Departments o f Planning and Investment (DPI) and other l ine departments in the municipal governments. The D P I as the planning agency for the province identifies the investment needs as wel l as subproject ideas, including those that can be financed with private sector participation. The DPI in collaboration with the Provincial PC then assigns the investment

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targets and subproject ideas to the concerned l ine departments. The line departments prepare the technical details o f the subprojects and consult with the LDIFs on the financial structuring with a view to involve private sector.

38. The IDA credit will be on-lent by the MOF to LDIFs in VND on terms that are stipulated in Decree 134. The equity or paid-in capital o f LDIFs (referred to in Vietnam as charter capital) i s provided by the respective Provincial PC. LDIFs will invest the investment capital provided under the Project according to the loan conditions, which restrict the investment to cost-recovery municipal infrastructure and define the sectors o f focus. The key financial covenants cover the whole financial operation o f the LDIFs (not restricted to IDA credit) to ensure the financial and operational viability o f each LDIF as an institution. The Project conditions will help to further support the LDIFs' qualification under Bank OP 8.30. The disbursements to LDIFs will be through a designated account held by the MOF.

3. Monitoring and evaluation o f outcomeshesults 39. A monitoring systedprocess has been established in collaboration with MOF to monitor and evaluate the project activities and operations leading to the project objectives. The monitoring system has five components: 1. LDIFs will provide data and report on: number and dollar amount o f investments;

total amount o f private capital invested in LDIF-sponsored subprojects. 2. Quarterly un-audited financial statements will be provided by LDIFs to the PMU

and the Bank; Yearly audit report o f the financial statements-prepared by an independent auditor to conduct international standard financial audits-will be provided to the PMU and the Bank after the end o f LDIF fiscal year. MOF will hire independent consultants to monitor the compliance o f subprojects with WB eligibility criteria vis-a-vis the Safeguards Guidelines o f the Project Manual. Bank Supervision Team will conduct periodic reviews o f un-audited quarterly as well as annual audited financial statements to ensure compliance with the Financial Covenants. MOF will require and monitor submission o f reports from LDIFs as stipulated in the Monitoring Guidelines o f the Project Manual.

3.

4.

5.

Project Review. All project information will be compiled by LDIF management and discussed with the MOF, Provincial PCs, and the Bank in a workshop to be held every six months. The workshop will provide an opportunity to discuss project progress and any outstanding issues, including the need to refine or adjust any Project components. More specifically, the operational and institutional framework (Project Manual) will be reviewed at least once every year by LDIFs, their P'Cs, and MOF, and may be amended, provided the written agreement o f the Bank i s obtained before the amendment i s approved by the MOF.

4. Sustainability 40. The development o f LDIFs i s an important priority for the GOV, for which it has consistently sought Bank assistance. LDIFP should therefore be seen as a coherent and phased support to the LDIF framework for which there i s strong commitment at the central

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and provincial government. This series o f projects, including the HIFU Development Project, i s also closely linked to the Bank’s policy dialogue with the GOV in the context o f the Poverty Reduction Support Credit (PRSC) process, and specific central government actions aimed at improving the legal and administrative structure for LDIF operations were included in the conditions o f PRSCS. Furthermore, the Project activities wi l l be closely coordinated with the work o f the Bank’s Financial and Private Sector Development team in Vietnam with regard to the development o f regulatory framework for the domestic debt market and the GOV contingent liability management.

41. The Project i s expected to have negligible fiscal impact on all parties involved, including LDIFs, Provincial governments, and the GOV. The GOV i s undertaking this Project under an on-lending arrangement with terms that cover the foreign exchange hedging cost as well as the cost o f processing the loan. The loan will be repaid by LDIFs. The Provincial PCs do not need to provide any additional capital beyond the existing charter capital to the LDIFs, which are able to cover all their operating expenses with their own income. The financial analysis demonstrates that LDIFs can recover all their operating costs (including staff salaries) and make a profit from their investments. The cost-recovery orientation o f the Project also provides an opportunity to LDIFs to take advantage o f the Project reflows, as loans are repaid and LDIFs exit out o f equity investments. It i s anticipated and expected that LDIFs will continue to use the operational framework that i s being established under LDIFP to invest the reflow proceeds. The capital investment risk will be addressed through the Financial Covenants o f this Project. LDIFP also helps establish a national policy framework to further reduce finance risk.

5. Critical r isks and possible controversial aspects 42. Because o f the innovative nature o f the wholesale approach supported by the Project, the new features introduced in the management o f LDIF and the lack o f operational experience in Vietnam in this regard, the Project inevitably carries substantial risks. B y focusing first on the best performing and most experienced LDIFs, (the qualified LDIFs) the associated risk i s somewhat mitigated. Furthermore, a clear delineation o f Bank responsibility in this Financial Intermediary (FI) operation has been agreed upon, which mitigates the main reputational risks for the Bank.

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Risks

Inadequate Financial Performance of LDIFs

Risk Rating

Mitigation Risk Mitigation Measures after

LDIF i s reluctant to mainstream the Project Manual

LDIF operations

private sector crowding out the

Poor compliance with Environmental and Social Safeguards

0 Private sector participation is a central objective of the project. The risk o f crowding out private funds i s negligible in the short-run, specific limits on LDIF participation have been set. N 0 PSP Guidelines will be implemented to make the private sector participant selection transparent and efficient.

Due diligence o f LDIFs’ financial operations for eligibility under OP8.30 concludes that current financial position of qualified LDIFs i s sound.

Project Manual mandates investment quality control. 0 Financial Covenants in place to manage LDIF performance and ensure LDIF financial viability standards.

International auditing standards mandated by MOF on participating LDIFs. Quarterly un-audited financial statements will be provided by LDIFs to the Bank; Yearly audit report of the financial statements-prepared by an independent auditor to conduct international standard financial audits-will be provided to the Bank after the end of LDIFs’ fiscal year. 0 Qualification criteria for selection of participating LDIFs include demonstration of appropriate fmancial performance. a New accounting ru le for LDIFs ensures better financial management and reporting. 0 Reporting Guidelines part o f Project Manual.

A disbursement program through a designated account held by the PMU will be established.

MOF legally responsible for maintaining compliance with Project Manual Establishment of a PMU, headed by an MOF Director General, with a Deputy

Director General, and three qualified staff with responsibility for procurement, financial management, and safeguards.

Qualification criteria used to select LDIFs that receive IDA. 0 Progress in implementing the Project Manual will be reviewed on a regular basis by LDIFs and the MOF in conjunction with the Bank. 0 The Project Manual prepared with participation of LDIFs and MOF, and based on lessons fiom HIFU. 0 Project Implementation Support under Component 2 i s designed to help MOF monitor LDIFs’ compliance.

0

to follow WB Safeguards standards.

consultants in place to review subprojects and ensure compliance with Project ManuaVWB Safeguards standards.

Compliance with Project Manual (which includes Safeguards Guidelines) mandated by order of MOF (as the regulator of LDIFs). 0 Resettlement Policy Framework approved by Prime Minister, and applicable to al l local governments as well as MOF. 0 WB prior review and approval of category A subprojects i s required.

Project Manual prepared to provide clarity and step-by-step instructions for LDIFs

MOF PMU (with a responsible staff to manage safeguards activity) as well as

M

S

M

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Mismanagement o f LDIFs as a result o f over- capitalization

Slow preparation and implementation of subprojects

Low capacity o f LDIFs to implement the Project Manual

This i s recognized an area o f substantial risk requiring a sound monitoring system, and i s also addressed by requirements o f the Monitoring Guidelines in Project Manual as well as Project Implementation Support for monitoring and regulation by MOF.

MOF. Six-month review to assess and discuss implementation progress with LDIFs and

1 Z3;;ilRisk Risk Rating - H (H

S

M

0 The investment eligibility criteria are provided in the internal investment policy, which i s part o f the operational reform package.

Independent audits and evaluations wi l l monitor LDIF performance. Monitoring Guidelines stipulate regular reporting to MOF. Clear Financial Covenants wi l l be monitored under Bank supervision.

0 LDIFP wi l l support the identification o f a robust subproject pipeline with detailed description o f subprojects. 0 The wholesale approach, combined with disbursement record o f HIFU-the model for LDIFP-in the Project design mitigates the risk o f slow disbursements. 0 Private sector involvement i s expected further to enhance LDIFs’ performance.

S

M

6. Loadcredit conditions and covenants 43. Credit Conditions Project Effectiveness Conditions

0 Approval by MOF o f the Project Manual, including the Safeguards Guidelines, to be used by the qualified LDIFs and MOF

0 Signing o f two satisfactory standard subsidiary loan agreements between MOF and participating LDIFs that have subprojects already identified for appraisal and implementation in Year One o f Project

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44. Financial Covenants The qualified LDIFs have a sound financial position, and maintaining their financial viability i s a critical priority o f LDIFP. The Financial Covenants o f the LDIFP are critical for the future development o f LDIFs, as the record o f financial discipline will allow the LDIFs to raise capital from the market and substantially increase their investment scale. The following Financial Covenants have been agreed upon:

1

2

3

4

5

FINANCIAL COVENANTS APPLICABILITY

Applies to al l LDIF operations

Aggregate equity investments shall not exceed 50 percent o f the total amount o f the Fund’s paid-in equity capital. The Fund’s debt-to-equity capitalization ratio (Le. Leverage) shall not exceed 6: 1, where debt means al l debt liabilities plus contingent liabilities and equity means paid in equity capital plus retained earnings and reserves not allocated to cover specific liabilities. Total investment (debt and/or equity) in a single obligor shall not exceed 20 percent o f total fund capital (including debt and equity). In al l LDIF investments involving LDIFP proceeds, LDIFs will not take greater than 30% ownership (equity/direct investment) in a Project Enterprise. In al l LDIF investments involving LDIFP proceeds, the debt to equity ratio will not exceed 3 : 1. Specifically, debt will not be greater than % o f the total financing o f the subproject.



Applies to the use o f IDA proceeds only


APPRAISAL SUMMARY

1. Economic and financial analyses 45. The detailed due diligence o f financial accounts o f qualified LDIFs was conducted to determine the financial viability o f the LDIFs as a potential Bank partner vis-a-vis a Financial Intermediary Loan. The analysis reviewed the quality o f LDIF loan portfolios, including the level o f non-performing loans and a detailed review o f randomly selected loans to determine loan rates and repayment quality. Equity investments o f LDIFs were also analyzed to determine the LDIFs’ exposure vis-a-vis industry and investment instrument. Equity investments were identified and reviewed to determine asset quality. The Income Statements were analyzed vis-a-vis profitability and operational efficiency. Finally, the investments in portfolio companies (non-infrastructure investments) account for a significantly minor proportion o f total fund assets and therefore present l imited exposure to market fluctuations. The analysis confirmed that the Qualified LDIFs are in a strong financial position (details are in Annex 9).

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46. The project will significantly improve the financial sustainability o f LDIFs and reduce the risk they may present to financial market development due to inappropriate borrowing practices involving short-term roll-over debt. Also, the Project will not add any additional cost to Provincial PCs’ fiscal position, but will help Provincial governments to protect their investments in LDIFs (in the form o f charter capital or equity) by improving the financial sustainability o f LDIF operations, and attracting private capital in the development o f municipal infrastructure.

2. Technical 47. LDIFs will use the IDA credit to invest in cost-recovery oriented municipal infrastructure investments in partnership with the private sector. Possible subsectors o f municipal infrastructure include: health; education; water supply distribution & treatment; solid waste management; sewage disposal/treatment; to l l roads and bridges; transport logistics; ports; f ixed infrastructure in support o f telecommunications and datdinformation technology; residential development, including low-income housing; industrial parks; and energy transport4.

48. A pipeline o f possible subprojects has been identified, and it confirms that the Qualified LDIFs can absorb the investment capital that is being made available v ia the Project. Three subprojects have been identified and will be prepared during the first year o f implementation under the LDIFP. All necessary safeguards instruments will be prepared and necessary assessments conducted in accordance with the Project Manual before IDA credit is released for these and any other subprojects in the f i rst year o f implementation. All subprojects prepared in the f i rst year o f Project implementation will require prior review and approval by the Bank. Details o f the subprojects are in the Project files, and a summary i s provided in Annex 4.

3. Fiduciary

Financial Management 49. An assessment o f the financial management (FM) arrangements for the propose Project was conducted based on the November 3,2005, guidelines issued by the FM Sector

LDIFs wi l l not use the I D A credit to invest in subprojects that wi l l trigger Safeguards Policies on Natural Habitats (OP/BP 4.04), Pest Management (OP 4.09), Cultural Resources (OP 4.1 l), Forests (OP/BP 4.36), Safety o f Dams (OPBP 4.37), Projects in Disputed Areas (OP/BP/GP 7.60), Projects on International Waterways (OP/BP/GP 7.50), Indigenous Peoples (OP/BP 4.10). Subprojects that trigger OP 4.04,4.09, 4.10,4.11, or 4.36 wi l l either be excluded or require prior review and approval by the Bank. In addition, LDIFs wi l l not use the IDA credit to invest in: Production or trade in any product or activity deemed illegal under host country laws or regulations or international conventions and agreements, or subject to international bans, such as pharmaceuticals, pesticidesherbicides, ozone depleting substances, PCB’s, wildlife or products regulated under CITES; Production or trade in weapons and munitions; Production or trade in alcoholic beverages (excluding beer and wine); Production or trade in tobacco; Gambling, casinos and equivalent enterprises; Production or trade in radioactive materials; Production or trade in unbonded asbestos fibers; Drift net fishing in the marine environment using nets in excess o f 2.5 km. in length; Production or activities involving harmful or exploitative forms o f forced labor2/harmful child labor; Commercial logging operations for use in primary tropical moist forest; Production or trade in wood or other forestry products other than from sustainably managed forests.

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Board and included discussions with the financial management personnel o f the P M U and two qualified LDIFs, which have possible subprojects prepared for Year 1: (1) HIFU and (2) BDIF, as well as analysis o f Due Diligence reports on LDIFs (HIFU, HANIF, BDIF and LDIF) in 2007. The assessment has concluded that the project meets the minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the FMS’ opinion, the project will maintain adequate financial management arrangement acceptable to the Bank and, as part o f the overall arrangements that the borrower has in place for implementing the operation, provide reasonable assurance that the proceeds o f the loan will be used for the purposes for which the credit was granted. Financial management risk i s the risk that World Bank loan proceeds will not be used for the purposes intended and i s a combination o f country, sector, and project-specific risk factors. Taking into account the risk-mitigation measures proposed under the project, a “moderate” FM risk rating was assigned to the project at the appraisal stage. The main actions required are (i) Development o f Financial Management Guidelines for the Project, (ii) Training for the FM staff o f the P M U and LDIFs on Bank FM and disbursement requirements and procedures, and (iii) Development o f Accounting Software for the PMU. Requirements (i) and (ii) have been fulfilled, while (iii) will be fulfilled by end o f calendar year 2009.

50. The LDIFs and P M U in MOF will be responsible for project implementation and financial management o f their project component. Whi le the PMU is a new entity established under the MOF for the purpose o f managing the project, at the LDIFs the financial management o f the project will be fully integrated into the FM o f the LDIFs. The P M U and all LDIFs have adequate FM staff capacity, but will require training on Bank FM requirements and disbursement procedures, since they do not have experiences with Bank- financed projects.

51. One Designated Account (DA) will be maintained by P M U in U S dollars at a commercial bank with terms and conditions acceptable to IDA. Traditional disbursement method (with reporting method using SOE/ Summary Sheet) will be applied. Both MOF and the LDIFs have been assessed as having the capability to mobilize the required counterpart funds.

52. The Project Financial Statements and the Financial Statements o f the LDIFs will be audited by independent auditors acceptable to the Bank in accordance with TORS acceptable to the Bank. The cost o f the audit will be funded by the Project. In addition, quarterly Interim Financial Reports (IFRs) will be prepared by P M U using the Aligned Monitoring Tools under Decision 803 o f MPI.

53. Financial management risk i s the risk that World Bank loan proceeds will not be used for the purposes intended and i s a combination o f country, sector, and project-specific risk factors. Taking into account the risk-mitigation measures proposed under the project, a “moderate” FM risk rating was assigned to the project at the appraisal stage. The main actions required are (i) Development o f Financial Management Guidelines for the Project, (ii) Training for the FM staf f o f the P M U and LDIFs on Bank FM and disbursement requirements and procedures, and (iii) Development o f Accounting Software for the PMU. Requirements (i) and (ii) have been fulfilled, while (iii) will be fulfilled by end o f calendar year 2009.

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Procurement 54. Procurement capacity assessment: Procurement under the proposed project would be carried out by the MOF’s P M U (responsible for procurement o f goods and consultants’ services for Project Implementation Support under Component 2) and the private sector enterprises and public sector autonomous commercial enterprises who would re-borrow IDA funds from LDIFs under Component 1 (these sub-borrowers are responsible for procurement o f works, goods and consulting services for their own subprojects). An assessment o f the procurement implementing capacity o f the MOF’s PMU and three typical LDIF borrowers was conducted by the Bank team and it was found that these project implementing agencies are generally qualified to perform procurement under their responsibility. The summary o f this assessment is provided in Annex 8. The procurement risk o f the proposed project is rated ‘moderate’. T o mitigate the risk and strengthen the implementing agency’s procurement capacity, specific actions summarized in Annex 8 are proposed. These actions have been discussed and agreed with the Borrower.

5 5. Procurement Arrangements. Procurement .for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits, ’) dated M a y 2004, revised October 2006 (the Procurement Guidelines); and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers, ” dated M a y 2004, revised October 2006 (the Consultant Guidelines). General arrangements o f the project procurement, Procurement Plan and Bank review are discussed in Annex 8.

Anti-corruption 56. The main corruption risk under the Project stems from the selection by the LDIFs o f their private sector partners. As one o f the key reforms supported by the project, Private Sector Partner (PSP) Guidelines in the Project Manual have been prepared to introduce in a phased manner competitive selection o f private partners, with specific processes to deal with proposals submitted by potential private sector partners. The Project will also allow LDIFs to take important steps towards increased disclosure as the LDIFs’ websites will be used to disclose the summary o f the LDIFs’ audited financial accounts and the l i s t o f subprojects that are being pursued by the LDIFs. The financial management structure provides for improved credit management policies, including requirement that a l l project enterprises involved in LDIFs’ equity investments provide audited financials o f their operations to the LDIFs. Finally, the disbursement through the PMU’s designated account will ensure appropriate use o f IDA proceeds.

57. The Qualified LDIFs are Funds that have been audited every year. The Project introduces international standards for such audits. Furthermore, quarterly un-audited financial statements will be received and reviewed by the Bank. Strict Financial Covenants have been put in place to ensure that LDIF financial performance is further strengthened, and to provide a long-term engagement point for Bank dialogue on the importance o f financial viability and increased disclosure o f financial operations. The Project Implementation Support under LDIFP includes the hiring o f auditor to prepare statements for P M U and LDIFs, in-line with international accounting standards.

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4. Social 58. LDIFP will mostly have positive impacts on society through improving infrastructure and living environment for the respective cities/provinces and their citizens. However, the Project will also potentially have some adverse impacts related to the need for land acquisition and involuntary resettlement. A Resettlement Policy Framework for the Project has been adopted by the MOF and other government agencies and approved by the Prime Minister. All necessary guidelines have been included in the Project Manual’s Safeguards Guidelines to instruct LDIFs and their borrowers/investment partners on how to minimize and mitigate the impacts to the people and how to prepare and implement the safeguards documents to meet the Bank’s requirements. In addition, a component o f LDIFP includes support for the PMU to monitor Safeguards compliance among LDIFs. An independent consultant will be hired to monitor safeguard policies compliance.

59. Two of the three possible subprojects for Year One have no land acquisition issues. The underground power l ine subproject will involve some resettlement and compensation, and a resettlement action plan i s being prepared.

5. Environment 60. The LDIFP i s expected to have mostly positive environmental and public health impacts contributing to improvement o f the cities’ infrastructure, safe water supply, solid waste management, efficient and safer transport systems, healthcare, and on-site sanitation services. Adverse impacts could arise through: (a) temporary pollution (dust, air, noise, vibration, surface run-off), excavation work, and disturbances to local transport, waterways or drainage systems, that could occur during construction; (b) wastewater discharge and disposal o f sludge from the waste treatment plants; (c) disposal o f dredged material; and (d) transportation and disposal o f solid waste in the landfill sites.

61. Environmental screening for three possible subprojects that are proposed for the first year has been conducted and proven to be o f l o w environmental risk. These subprojects are An Tay water supply (Binh Duong), Phan Chu Trinh primary school (Binh Duong), and Underground Power Line (HCMC). Major environmental issues would be related to short- term and site-specific impacts from construction and excavation work, waste generated during the operation o f the water treatment plant and the school, temporary traffic congestion. Labor safety at construction sites will be o f special consideration.

62. Safeguards Guidelines, acceptable to the Bank, have been included in the Project Manual and approved by the M O F and other agencies. The Guidelines will be used by LDIF staff in carrying out environmental safeguard (ES) work to meet the requirements o f G O V and the Bank for the subprojects that would be financed by the l ine o f credit provided to LDIFs through the Project.

63. The Safeguards Guidelines o f the Project Manual include a process with the fol lowing features: (a) screening that could possibly exclude areas and subprojects due to environmental siting and other potential negative impacts by using an exclusion list acceptable to the Bank; (b) EA preparation per the G O V regulations and Bank environmental safeguard policies, including an internal due diligence assessment o f EIA report or Register for Meeting Environmental Safeguard - RMES (if already available),

’

21

followed by a risk management plan (RMP) o f subprojects that pass the screenings and Government environmental approval; and (c) institutional arrangements for LDIF, MOF, and Bank supervision as needed under the LDIFP o f the implementation o f environmental management plan (EMP), RMES, or RMP. As identified from the environmental screening, EA work for subprojects with high environmental risk (Bank’s A-category) will be subject to Bank’s prior review and approval.

64. The Safeguards Guidelines o f the Project Manual are being used by the Qualified LDIFs in preparing three possible subprojects for Year One o f the LDIFP in a manner acceptable to the Bank. The completion o f full EA work, including detailed assessment, will serve as a condition for releasing IDA credit from the LDIFs to the respective sub- borrowers. The Safeguards requirements included in the Project Manual wi l l apply to all subprojects financed with the IDA credit, regardless o f whether they were identified by the LDIFs or proposed by the private sector. The first subproject prepared by each qualified LDIF (regardless o f the year in which subproject i s prepared) wi l l require prior review and approval by the Bank. The review/final decision on the safeguards review wi l l be made by the Hanoi-based safeguards staff, with the exception o f Category A subprojects, which will be provided by the Sector Manager, based on the review and recommendations o f the Hanoi-based Safeguards Specialists. The SM can also opt to request that the RSS review and clearance o f specific Category A subprojects and/or safeguards instruments. All Category A subprojects financed during the Project implementation period will require prior review and approval by the Bank. The PMU and LDIFs will implement and continuously improve the Safeguards Guidelines o f the Project Manual with assistance from consultants to be hired as part o f Component 2 o f the Project, and with guidance from the Bank.

65. For the subprojects that will be developed under LDIFP, potential negative impacts o f subproject activities w i l l be mitigated through environmental management plans (EMPs) prepared for each subproject in accordance with the Safeguards, Guidelines o f the Project Manual and in compliance with OP 4.01 on EA. The EMPs will include mitigation measures, monitoring plans, and institutional responsibilities connected with their implementation. Mitigation measures will be included in construction contracts. For the subprojects that have obtained from DONRE (or delegated district People Committee) an approval to the EIA report, or environmental certificate (known as Register o f Meeting Environmental Safeguards - RMES), due diligence assessment o f the EA work will be conducted and supplemental environmental information or study w i l l be required as necessary. As a result, Risk Management Plans (RMPs) will be prepared if deemed needed.

66. For the subprojects which have recent approval to EA works, due diligence assessment processes and outcomes have been implemented as an approach to ensure subproject safeguards compliance. This includes: (a) assessing the adequacy o f the EA work approved by DONRE in meeting IDA safeguard requirements per OP 4.01; (b) developing risk management plans to remediate the mitigation work defined in the EIA if it i s found insufficient; (c) obtaining borrower’s written commitments to LDIFs to implement the risk management plan; (d) carrying out additional public consultation and disclosure as required by OP 4.01; (e) assessing borrowers’ institutional mechanism and capacity to

22

carry out EIA work for A-category subprojects; and ( f ) testing the Safeguards Guidelines with qualified LDIFs using Year One pilot subprojects

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o

Environmental Assessment (OPBPGP 4.01) [XI [ I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) 11 [XI Physical Cultural Resources (OPBP 4.1 1) [ I [XI Involuntary Resettlement (OPBP 4.12) [XI [I Indigenous Peoples (OPBP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety o f Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OPBP 7.60) [ I [XI < [X

67. The yes/no responses in the above table refer to the safeguards expected to be triggered for most o f the subprojects to be financed under the l ine o f credit. Screening mechanisms as specified in the Safeguards Guidelines o f the Project Manual will be applied to exclude subprojects that will have potential impacts on Natural Habitats, Pest Management, Indigenous Peoples, Physical Cultural Resources, and Forests. Such subprojects would be excluded from LDIFP financing or require prior review and approval by the Bank. 68. The Project i s determined to be an environmental screening category FI. Subprojects’ environmental screening categories will vary.

69. Public consultation. The Safeguards Guidelines o f the Project Manual specify when and how public consultation has to take place for each subproject. If subprojects are found to be o f high risk to the environment, public consultation per Bank’s requirements (OP 4.01) i s conducted in addition to the consultation as required by Government regulations, for which consultation with the local (commune/ward level) authority and the Fatherland Front i s sufficient. Specifically, a consultation mechanism has been developed in the RPF to be applied during RP preparation and implementation to ensure that the needs and wishes o f all related stakeholders, especially potentially affected people, be reflected. The RPs will detail the plan for consultation, including the procedures, methodologies, and subjects o f consultation and information disclosure. The R P s will also describe the grievance redress mechanism with steps and procedures for grievance filing as well as the responsible institutions and timefiame for receiving and addressing the grievances.

70. Public disclosure. The Safeguards Guidelines o f the Project Manual specify when and how the various safeguards documents need to be disclosed. A copy o f the Safeguards Guidelines has been disclosed locally at MOF and each o f the qualified LDIFs. The Guidelines were sent to InfoShop in Washington DC on April 7, 2009 and made available in English and Vietnamese in Hanoi’s Development Information Center (VDIC) on April 14,2009.

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7 1. Assessment o f institutional capacity to implement Safeguards Guidelines. Qualified LDIFs have deployed staff responsible for ensuring that subprojects comply with the Bank’s safeguards requirements5. In order to strengthen the funds’ capacity to implement Bank safeguards requirements, MOF will hire independent monitoring organization consultants (IMO) as part o f Project Implementation Support under LDIFP to conduct monitoring for LDIF compliance with WB requirements. (TOR for these consultants have been prepared and are included in Project Manual). These consultants will monitor the implementation o f EMP, RMES or RMP, RP in each LDIF, and will prepare semi-annual safeguard compliance progress reports submitted to MOF and IDA. The consultants will also provide advice to the LDIFs and borrowers in internal supervision and reporting on the implementation o f mitigation measures as specified in the EMPs, RMESs, RMPs, or RP. In addition, WB specialists will provide safeguards training on an ongoing basis to Qualified LDIFs.

72. Safeguards lessons learned from HDP implementation. The fol lowing safeguards lessons based on the experience with the implementation o f HDP have been incorporated in the Project: 1) The Project Manual, including Safeguards Guidelines, has been clarified, streamlined, and simplified. The Project Manual i s a living document, and will continue to be clarified and simplified based on LDIFP implementation. 2) Requirements and rules for disclosure have been clarified, including matrix detailing safeguards disclosure requirements for subprojects, clarifying what should be disclosed at what location, at what stage, and for what safeguards risk category o f subprojects. 3) Approval procedures for prior review o f subprojects have been clarified.

7. Policy Exceptions and Readiness

Policy Exceptions: N A

Readiness: The fol lowing project elements outline the readiness o f the Project: LDIFs’ subproject pipeline i s ready with 27 possible subprojects identified with subproject descriptions.

Three subprojects have been identified and will be prepared during the first year o f implementation under the LDIFP. All necessary safeguards instruments will be prepared and necessary assessments conducted in accordance with the Project Manual before IDA credit i s released for these and any other subprojects in the first year o f implementation. All subprojects prepared in the first year o f Project implementation will require prior review and approval by the Bank.

Five h l l y qualified LDIFs have been identified and have prepared possible subprojects. In addition, four conditionally qualified LDIFs have been selected, with outstanding requirements to be fulf i l led before receiving funding; these LDIFs also have prepared possible subprojects.

.

Includes full-time and part-time staff, with educational background or relevant training in social and 5

environmental safeguards; LDIFs will also use consultants to supplement their staff when needed.

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TORS package for consultants to monitor safeguards compliance and for independent auditors to be prepared. Project team i s operational. Project Manual for operations, development, and guidance for LDIFs have been prepared with broad participation o f MOF, LDIFs, city departments, experts, and will be formally approved by M O F for implementation by LDIFs. Results framework i s in place. FM arrangements are setup; FM capacity has been analyzed. Audit arrangements have been agreed with client. Counterpart funding has been confirmed with client. Resettlement Policy Framework (RPF) has been approved by the Prime Minister.

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Annex 1: Country and Sector o r Program Background VIETNAM: LOCAL DEVELOPMENT INVESTMENT FUNDS PROJECT

In the last two years, Vietnam has had to contend with mounting inflation, which then transitioned to the impact o f the current global financial crisis and economic downturn. The Government o f Vietnam and Ministry o f Finance have been quick to realize the critical importance o f swift action to promote pol icy and initiatives that will provide fast-moving and far-reaching stimulus as wel l as a foundation for recovery and long-term growth. The Local Development Investment Funds Project (LDIFP) provides a readily prepared opportunity for such G O V action. Specifically, the LDIFP provides an opportunity to scale up the successful lending model currently utilized in the HIFU Development Project (HDP), which involves the Local Development Investment Fund (LDIF) in H C M C - paragraph 2 below provides a summary o f H D P performance. The GOV has also, with World Bank support, implemented key pol icy reforms to create the necessary enabling environment for the LDIFP. These include the issuance o f a new decree to govern and regulate the LDIFs, development o f key guidelineshegulations to implement the decree, and creation o f comprehensive Guidelines in the Project Manual to guide the investment activity o f IDA recipients. Coupled with Vietnam’s ongoing decentralization, LDIFP would further enable provincial governments to assume a greater role in infrastructure development, which would in turn create employment and spur economic activity. Based o n the experience o f HDP, the potential for LDIFP for a multiplier effect in the economy i s substantial. The confluence o f crisis conditions, urgent government will, and a readily executable Project underscore the immediacy o f LDIFP. All these factors have led the G O V and Bank management to move the delivery o f the Project f rom FY’ 10 to Q4 FY’09.

The H D P was prepared and delivered in 2007. The LDIF in H C M C - the H C M C Infrastructure Fund for Urban Development or HIFU - was selected as a model due to its standing as the most advanced LDIF. The H D P model has since been successfully tested and implemented, and the model is n o w ready for replication o n a national scale. H D P is rated “highly satisfactory” based on disbursement (20% o f loan amount disbursed in one year o f operations) as wel l as development objectives (compliance with a l l financial covenants, and leveraging private capital in developing municipal infrastructure). The development and implementation o f HDP has also allowed the Bank and M O F to further refine the Project Manual based on lessons learned to ensure that the frameworks, practices, and standards proposed in the Project Manual for the LDIFP are better customized to the capacity and needs o f LDIFs and MOF. These include comprehensive Guidelines on Project Preparation and Appraisal, Private Sector Partnership, Safeguards, Corporate Governance, and Capital Mobilization. In addition, lessons in monitoring and regulation have been applied to the structure and process o f the Project Management Unit at the MOF. The practices and standards developed from the successful model o f HDP, combined with the legal and administrative framework put in place by the GOV, provide an ideal platform to launch LDIFP on a national scale.

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Municipal Infrastructure in Vietnam. Municipal infrastructure demand i s increasing rapidly in Vietnam as the country copes with rapid urbanization, decentralization and, until recently, high rates o f economic growth. There i s wide agreement that a significant investment gap exists vis-a-vis municipal infkastructure demand. Commentary on the investment climate in Vietnam i s beginning to increasingly cite the lack o f infrastructure in general and municipal infrastructure in particular as a key bottleneck to investment and economic growth. I t i s unlikely that Vietnam can significantly increase public investment in infrastructure from the recent level o f 8.7-10.0% o f GDP, particularly in light o f the prevailing economic crisis and slowdown in the growth rate and tax revenues. In order to meet the increasing demand for municipal infrastructure Vietnam will therefore have to attract private capital and increase the efficiency o f investment, which will require policy reforms and improvement in planning and management o f infrastructure assets. To date, Vietnam has neither established the appropriate investment channels for attracting private financing, nor the institutional and regulatory frameworks to involve private sector in the provision o f infrastructure. Public sector agencies have also been slow in undertaking the necessary sector policy reforms-including tariff increases and cost recovery-to improve the quality and increase the coverage o f infrastructure delivery. The challenges facing Vietnam vis-a-vis financing o f municipal infrastructure are further complicated by the following two developments:

At present, there i s a severe shortage o f long-term capital in the market in general, and for municipal infrastructure in particular, as the risks associated with municipal infrastructure investment remain prohibitively high for the private sector. In the near to medium term, private financial markets in Vietnam-which are currently at the very initial stage o f development-are unlikely to become adequately deep or broad to meet Vietnam’s infrastructure financing needs. It i s therefore critical to devise mechanisms that encourage co-financing o f municipal infrastructure by attracting private capital to leverage public resources.

0 Vietnam continues to adjust to a new decentralized governance model through a process that has very strong political support. The responsibility for municipal infrastructure has already been devolved to the provincial governments. However, provincial governments have limited budgetary resources for municipal infrastructure, and suffer from a combination o f weak institutional capacity and policy uncertainties which will affect the flow o f private capital/expertise into municipal infrastructure development. LDIFs are envisaged to fill this gap by enabling provincial governments to establish a financially sustainable system that institutionalizes the flow o f private capital into municipal infrastructure.

The Decentralization Challenge. Decentralization has increased the spending obligations at sub-national levels. According to the developing decentralization regime in Vietnam, municipal infrastructure i s primarily the responsibility o f the local governments. As decentralization has progressed, the share o f sub-national governments in total government expenditures has risen from 26% in 1992 to 48% in 2002. The estimated annual financing requirement to achieve the government’s targets between 2010 and 2020 will be o f the order o f US$ 377.5 million for urban water supply, U S $ 280 mill ion for wastewater collection and treatment, US$ 239.3 mill ion for drainage (including canal rehabilitation),

0

27

and U S $ 835.4 mi l l ion for l o w income housing in urban areas, a municipal responsibility.6 This gives a total o f US$ 1.7 to 1.8 bi l l ion annually, or between 3.0% and 4.0% o f GDP annually. This estimate excludes required investments in urban transport, which are much harder to quantify but are expected to be significant.

Infrastructure Financing Model. As Vietnam prepares to meet the demand for increased investment, it needs to also undertake measures to start preparing for the transition away from concessional donor financing for urban infrastructure services. The necessary transition strategy must involve diversification o f financing sources for infrastructure development, focusing on increasing the role o f the private sector in financing infrastructure. The strategy must also recognize the new role o f regional governments in infrastructure delivery under the emerging decentralization regime. The increased participation o f the private sector in financing infrastructure in coordination with local governments will support decentralization and improve the efficiency o f infrastructure investments. However, the success o f this new trend rests very critically upon continued improvements in the corporate governance environment at the provincial government level.

State-owned commercial banks

3 yo

iovernment bonds 13%

Users 14%

Infrastructure Investment Financing Mechanisms (YO o f Investment Finance)

K e y reforms related to the planning and management o f infrastructure services can also improve the financing possibilities. In particular, ensuring cost-covering tariffs for infrastructure services, where feasible, can provide infrastructure enterprises with the possibility o f self-financing using retained earnings, and open the possibility for alternative financing sources that rely on future revenue streams. Important reforms to improve the efficiency o f infrastructure procurement and services can also help to defer the need for new investment and reduce the overall financing needs.

Financial Sector Development

The financial crisis has slowed banking sector reform. Vietnam’s banking and financial systems are currently in transition f rom serving a centrally planned economy to one that is becoming increasingly liberalized and market-oriented economy. The Government started accelerating reforms in 2001 which have been instrumental in (i) encouraging the five state-owned commercial banks (SOCBs) to evolve f rom specialized pol icy lending vehicles towards increasingly commercial orientation by improving their credit policies and

Estimates are derived from Vietnam’s Urban Development Strategy (World Bank, 2006).

28

procedures, accounting practices, information systems, products and services; (ii) improving the environment in which banks operate with the removal o f interest rate ceilings, the promulgation o f numerous regulations, gradually leveling the playing f ield for foreign banks; and (iii) setting prudential. The main issues in the banking sector immediately preceding the crisis included l imited loan appraisal capacity, absence o f a risk management framework, and a mismatch between long-term assets and shorter-term liabilities, making the banking sector an inappropriate channel for financing infrastructure.

More recently, the SBV has loosened monetary policy in the wake o f the financial crisis to boost domestic economic activity. Specifically, the SBV has cut the main pol icy rate to 7%, from 8.5%, and has lowered the required ratio o f cash reserves to dong deposits to 3%, f rom 5%, in an effort to encourage banks to increase lending. However, it is unlikely that lower interest rates will prompt banks to lend, due to the renewed emphasis o n policy- directed lending. There i s anecdotal evidence that banks are hoarding capital in anticipation o f a further increase in directed lending associated with the government’s stimulus package. The SBV i s encouraging SOCBs to lend to SMEs and buy U S dollar-denominated government bonds to be floated later this year, raising concerns that tying up capital in government bonds wil l further decrease the amount o f money available to lend to companies. O n a more positive note, the banking sector outlook as the financial crisis eases over the coming months suggests that SOCBs will not be subject to the constraints o f directed policy lending, and this will reduce distortions and increase access to finance for other f i rms, including small and medium-sized enterprises.

After showing impressive growth, the stock market has suffered a massive boom-bust cycle. The market passed a key milestone in 2006, when the number o f companies listed increased by nearly f ivefold while the market capitalization increased by more than tenfold to surpass 22% o f GDP. The number o f securities companies had also doubled, and many were increasing their capital to undertake new business such as underwriting o f public offers. More recently however, the country’s two stock markets (in Ho Chi Minh City and Hanoi) have suffered a massive boom and bust cycle, and this has undermined investor confidence. Foreign-invested enterprises now have the right to transform themselves into local shareholding companies and l i s t o n the local stock markets, but this i s st i l l not an attractive option.

The recent slump in the stock markets in 2008 i s expected to discourage the equitization o f SOCBs and SOEs in the near future. Nevertheless, the regulatory environment for capital markets is expected to improve over the coming months, which taken with greater stability in the stock markets fol lowing the recent boom and bust cycle means that equity finance will become increasingly important.

Developing debt capital markets and making progress on equitization are emerging as key issues. Even before the financial crisis, Vietnam’s capital markets were characterized by an imbalance between underdeveloped bond markets and the highly speculative equity market. The debt capital market infrastructure suffered major deficiencies, including lack o f credible credit-rating system, and fragmented and erratic payment and settlement system. The bond market continues to be plagued by the impediments because o f the small scale o f offers, irregular issuance o f government bonds, and a lack o f quality in non- government bonds on the supply side.

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In addition, the financial sector i s already facing second generation issues as Vietnam moves toward a middle income country status. Uncertainty surrounding NPLs, the practice o f rolling over short-term credits to generate long-term funds, the difficulty in valuation, etc. are further delaying the process of, and compounding concerns with, the restructuring and equitization o f SOCBs and SOEs. Equitization i s considered as essential to enhancing their efficiency and competitiveness amid the growing competition due to the WTO accession and integration into the regional and global economy. The SOCBs are responsible for nearly 70% o f all credits to the economy and are primary creditors to SOEs. Therefore, SOCBs’ restructuring and equitization are linked with those o f SOEs. While a half o f the over 6,000 SOEs have been equitized, largest ones are le f t untouched, leaving the large share (85%) o f the original state enterprise assets s t i l l in the state hands. The equitization o f Vietcombank and Mekong Housing Bank has also been delayed.

The capacity building of the financial sector regulatory and supervisory authorities is also lagging behind the development of their respective sectors. The State Bank o f Vietnam (SBV) i s only in the initial preparatory stage o f fundamental reform to become a full- fledged central bank o f a market economy. Reform and upgrading o f i t s bank supervision capacity can be done only as part o f the process. The Deposit Insurance o f Vietnam (DIV) has been in operation but i s lacks capacity and i ts responsibilities overlap with those o f the bank supervisor. The State Securities Commission (SSC) needs to urgently upgrade i t s capacity to guide the civilized development o f the rapidly growing securities market including the OTC market as well as the Stock Trading Centers. An investor protection fund i s yet to be established. The Insurance Department o f the MOF has a limited number o f staff with only very basic information and communication technology capacity to supervise the growing and diversifying industry.’

Private Investment in Infrastructure. There i s significant potential in Vietnam for increased private investment in infrastructure. However, private investments in Vietnam lag behind those in comparator countries in East Asia. Figure 1 shows the amount o f private investment in infrastructure in Vietnam. O f the 1224 infrastructure projects with private participation that reached financial closure in East Asia over 1990-2006, only 29 were located in Vietnam, compared to 88 in the Philippines, 87 in Indonesia and 782 in China. Similarly, Vietnam accounted for only about US$ 6 billion o f a total o f approximately US$ 190 billion private investments in the region, compared to US$ 42 billion in the Philippines, US$ 40 billion in Indonesia, and US$ 100 billion in China over the same time period.

’ 24 insurance companies (eight l i fes and 16 non-lifes), seven insurance brokers, one reinsurer and 144 agents offering over 900 products which are growing rapidly.

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Figure 1. Total Private Investment in Infrastructure (1990-2007) in Select EAP Countries

1 4000

12000

10000

8000

6000

4000

2000

0

Source: PPI database

As Table 1.2 below indicates, over the period 1994-2007, total private investment in infrastructure stood at around $6 billion, with energy accounting for the most, and urban infrastructure (water, solid waste, and other development infrastructure sectors) for the least, private financing o f all infrastructure sectors.

Table 1.2: Private Investment in Infrastructure by Sector (US% million) Energy Telecoms Water & Sewerage Transport Total

1994 0 0 0 10 10 1995 0 256 0 0 256 1996 205 0 0 15 220 1997 110 0 0 70 180 1998 0 0 39 0 39 1999 121 0 0 0 121 2000 0 130 20 0 150 2001 87 0 154 0 24 1 2002 1,780 0 0 30 1,810 2003 412 230 0 0 642 2004 0 70 0 0 70 2005 82 0 0 0 82 2006 0 682 0 0 682 2007 287 645 0 400 1,332 Total 3,083 2,O 13 213 525 5,834

Source: PPI database. These figures record investments promised at the time o f contracting.

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But involving the private sector in undertaking significant investments in infrastructure i s a complex and difficult task. To attract private finance, investors must expect to earn a return on the capital invested commensurate with the risks undertaken, but these needs must be balanced with the protection o f consumers from the market power o f privatized infrastructure. This balancing act must be implemented in transaction documents (legal contracts, licenses, and laws established to induce the initial investments) and in the ongoing regulatory environment established to govern the infrastructure f i rm’s operations. To get all o f this right i s a highly complex affair, requiring skilled economists, accountants, and lawyers, as well as careful political guidance. The best way o f establishing these ski l ls would be through experience, which suggests that Vietnam should, in addition to the IPP program envisaged for electricity, seek to establish pilot projects with private participation, including management control rights, in a range o f infrastructure sectors.

Policy Framework for FIL Current Framework for Municipal Finance. The Government o f Vietnam (GOV) has actively encouraged the provincial governments to take greater responsibility for financing municipal infrastructure. The 2001 Pubic Administration Reform Master Program (for 2001 - 2010) lays the groundwork for putting in place the regulations on decentralization o f administrative management and fiscal functions. The two most significant components o f the emerging municipal finance framework include permission to the provincial governments to (i) establish Local Development Investment Funds (LDIFs), and (ii) borrow up to 30% o f their annual budget for development investments-HCMC and Hanoi are allowed to borrow up to 100% o f annual state budget through revenue or general obligation bonds. The LDIFs offer an operational and legal structure for the provincial governments to focus on infrastructure, including the ability to mobilize capital and enter into contracts with the private sector.

The HCMC Investment Fund for Urban Development (HIFU) was the f i rs t LDIF established in June 1996, with a view to develop it as a model LDIF (in terms o f internal policy and procedures for financial policy, subproject appraisal, social and environmental safeguards, and partnership with the private sector) and increase private sector participation in financing municipal infrastructure in HCMC. Since then, sixteen other provincial governments have established LDIFs with the approval and support o f the GOV. The increase in the number o f LDIFs i s matched by the increase in the intensity with which provincial governments have pursued the LDIF model, as evidenced by the increase in the charter capital o f the LDIFs which increased by approximately 45% per year from 1997 to 2004 and was estimated to be approximately $400 million by the end o f 2006. The most active LDIFs are making progress in bringing new forms o f public-private partnerships, including the more sophisticated contracting mechanisms (BOO and BOT, etc.) to Vietnam. LDIFs can also become a valuable instrument for instituting provincial policy reforms that support decentralization and increase the efficiency o f public sector management.

Strengthening LDIFs to be Key Players in Municipal Finance. LDIFs can be segmented into three distinct tiers based on their operational performance. HIFU leads the field, followed by the eight middle-tier LDIFs. The remaining eight LDIFs are far behind the top- 9, and will require significant effort to make progress in the near future. The critical

32

capacity building and institutional development needs o f LDIFs are described in the table below.

Relative

Performance Tier

Performance and Institutional Development

TQP Middle

Priorities

6QttQm

LDlFs HIFU

Top 3 Development Corporate governance . Investment policy 1 1 Investment appraisal Investment policy / risk management Investment policy / risk management Investment appraisal risk management Financial structuring Corporate governance 1 Stafting &operattonal

Needs

resources

The most urgent priority for the GOV at this stage i s to ensure that the top-9 LDIFs develop appropriate operational models. HIFU, through the HIFU Development Project, has been in a position to set the standards for other LDIFs, and encourage other provincial governments to use LDIFs in an appropriate fashion. The success o f HIFU has in particular encouraged many provincial governments to establish LDIFs, and i t s focus on cost recovery and partnership with the private sector provides an excellent initial roadmap for other LDIFs.

The capital structure o f LDIFs requires critical attention. LDIFs are currently engaged in short-term borrowing on a roll-over basis. LDIF borrowing should be directly tied to their assets, particularly their Charter Capital. It may be prudent for LDIFs not to increase their commercial borrowing until they have undertaken the necessary reforms. The long-term business model o f LDIFs should involve the use o f equity (Charter Capital) to raise debt for investment purposes. Short-term borrowings - particularly if they are not tied to LDIF credit - can lead to short-term oriented investments which can channel LDIF capital away from long-term infrastructure development subprojects. Preliminary estimates indicate that approximately 80% o f all LDIFs mobilized capital i s short-term (< 12 month tenor) with roll-over features, and approximately 20% i s medium term (>12 <60 month tenor); there i s almost no long-term debt. Inappropriate borrowing by the LDIFs can also have a negative affect on the developing banking sector. It i s essential that in the immediate future the qualified LDIFs utilize technical assistance and long-term debt from the ODA program to establish a good investment and financial management record, before they start raising senior debt from the market.

The development o f LDIFs will require a sustained, long-term effort. In particular, the LDIFs should f i r s t establish a performance record vis-a-vis financial management and execution o f subprojects in partnership with the private sector, and raise debt from the market. In the later phases o f development the goal can be expanded to include raising

33

private equity into the funds. As discussed above, it i s important for the LDIFs to take advantage o f IDA technical assistance and long-term financing to establish sounds systems and processes before they engage in raising debt from the market. The discussions with various private sector parties in Vietnam indicate that while private investors are willing to engage with LDIFs at the subproject level (as partners in project entities), they will be very reluctant to invest directly in the LDIFs in the near-term. The involvement o f the private sector in the financing and management o f LDIFs should be an important long-term objective o f the government. The following diagram provides a possible long-term development model for the LDIFs.

Stage I Stage II Stage 111

0 Investment Capital - Demonstration of sound financial and corporate management practices

- Senior debt through market transaction

Standard Setting - Increased syndication - Establishment of stds

in partnership with publiclprivate partners

Investment Track Record

Investment Capital - Injection of pvt. Equity - Increase in senior debt

Pvt. Sector Participation in LDIF Management Long-term Role - Transition away from primary market towards narrow market function - Support to market players on benchmark - Maturity extension - Securitization

LDIFs and Financial Market. There are four categories o f risk associated with government owned FIs which apply to the LDIFs. The Bank team has worked closely with the GOV and provincial governments to develop a practical risk mitigation approach which can be implemented in Vietnam. 1.

2.

3.

4.

Polic; Capture: Provide appropriate incentives to the LDIFs and the Provincial Governments to highlight the value o f LDIFs as important tools for addressing the growth-oriented infrastructure needs o f the cities, rather than a convenient channel for providing subsidies for politically important projects. Private Sector Crowding-Out / Market Distortion: Incentivise and help develop the LDIFs to work in partnership with the private sector. It i s also very important to ensure that LDIFs do not price their investments below market. This wi l l also require establishment o f the necessary institutional framework within the provincial government to ensure identification o f appropriate subprojects, and development o f LDIF capacity to prepare good, bankable subprojects which allow for market pricing. Mismanagement: Establish clear frameworks for financial management and operations, and ensure that capital provided to the LDIFs i s in l ine with their subproject pipeline. Contingent Liability/Market Risk: Develop models for monitoring the debt service capacity o f LDIFs because LDIF borrowings do carry implied government guarantees. In particular, at a time when the market infrastructure (e.g. rating agencies) i s not in place and banking sector and capital market development i s at an initial stage, inappropriate borrowing practices o f LDIFs can severely impact the financial market.

34

Strategic Framework for World Bank FILs in Municipalhfrastructure Finance. The task team has utilized a framework prepared by the EAP Sustainable Development Department to conduct strategic review o f the appropriateness o f pursuing FILs for municipal/infrastructure finance in Bank operations. The framework i s specifically designed to allow infrastructure task teams to review the cross-sector impact o f the projects, particularly on financial market development. It also facilitates the identification o f the long-term role o f the FI, and the provision o f measures to help manage the transition o f the project entity (FI) towards an appropriate long-term role. The fol lowing table summarizes the results o f the application o f the framework to LDIFP.

Sector Policies

Is the FI approach necessary to achieve program objectives?

Will the FI support market deveiopmen t?

Financial Market

Can the FI structure contribute to sector policy reform?

,artnership ~onditions

Are the appropriate conditions in place to ensure strategic clarity?

'artnership Strategy

ancial Intermediary (FI) Approach in Infrastructure Finance: Application t o LDIFP

FI approach with LDIFP is justif& based on the following considerations: Key Conrlderations

-Traditional engagements (SILs) have had limited suczess in financing infrastructure -There is a lack of long-term capital in the market - Private market is not ready to directly finance pmgram objectives - Public sector -financing is necessary to attract private capital -Credit enhancement is necessary to finance intastructure projects - There is a lack of capacity to prepare finandally viable projects

The risk of private sector crowing-out is lbmited in the short-term but may become significant in l e long-term unless LDlFs transition toward a private market support role Thls risk is mitigated 1y: - Natonal policy/ ,ncentive structuredefining the long-term role of LDlFs - Financial covenants in place to ensure co-finandng with tne prrvate sector - LDlFs on track to develop new market instruments (e.g.. bonds), and improve standards for

ifrastructure financing-appraisal. Ask management, safeguards, etc. LDIFs can continue to support sector policy rebrms - Separation of investments that offer cost movery and can be tnanced by LDlFs from

-As investoo in infrastructure projects, LDlFs support tariff rate increase to ensure

- LDIFs'disclosure practices will set higher standards for SOEs and city departments - Improved standards for safeguards practices

- Int'l Audit Standards; Financial Covenants; and implementation of project manuals

- Market priang, cost-recoveiy. portfolio monitoringlmanagement

those that require budget support

sustainabdity of infrastnrcture assets

Institutional structure in place to minimize the "policy capture" risk

Appropriate financial risk management structure is in place

Institutional capacw and support to manage sociaVenvimnmental safeguards

Is the engagement supporting a transition towards an appropriate long term business model?

h e LDlF model supprots the transition to a long-term business model: - Co-financing/syndication with private sector ensure loan conditions - Financial risk management identified as key prerequisite for gmwth -Capitalization of LDiFs tied to portfolio risk and absorption capacity - Technical assistance pmvided to LDlFs to facilitate transition towards commercialization I

orporate independence - Manuals and conditions designed to help LDlFs set safeguards standards

35

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

VIETNAM: Local Development Investment Funds Project

Sector Issue I Bank financed

roaden access to

Rural finance; promotion o f private sector investment Deterioration of sanitation systems and institutional weakness

Lack o f access to infrastructure and tenure insecurity in urban poor areas (ongoing) Lack o f access to water supplies, deterioration o f water supply systems and institutional weakness

(Board proposed 7/08/08)

Project (Cr. 4028)

rision (ISR)

Development Objective

(DO) N/A

S

NIA

S

MS

36

Annex 3: Results Framework and Monitoring VIETNAM: Local Development Investment Funds Project

PD

To improve effectiveness of Qualified Local Development Investment Funds in leveraging private sector financing for municipal infrastructure.

To strengthen LDIFs’ financial and technical capability, and . their capability for social and environmental safeguards management.

Intermediate Results

Component 1: LDIFs use the line of credit to finance quality municipal investments, and to attract private sector investment

. Increase in total number of LDIF investments (debt and equity) per year in municipal infrastructure subprojects with private sector involvement . Increase in total amount (US$) of LDIF investment (debt and equity) per year in municipal inftastructure subprojects with private sector involvement . Increase in total amount (US$) of private capital leveraged into LDIF sponsored municipal infrastructure subprojects

. Adoption of Bank-advised financial-performance metrics by qualified LDIFs

1. Aggregate equity investments < 50% of total LDIF’s paid-in equity 2. LDIF’s debvequity < 6: 1 3. Total investment (debt and/or equity) in single obligor < 20% total LDIF capital (debt and equity)

e Adoption o f Bank-advised principles contained in Project Manual by qualified LDIFs 1 .Project Preparation & Appraisal Guidelines 2. Reporting and Monitoring Guidelines

Intermediate Results Indicators 0 Total number and dollar amount of LDIF investments (debt and equitycusing LDIFP Line of Credit-per year in municipal inftastructure subprojects with private sector involvement

Total amount (US$) of private capital leveraged into

Information will be used every six months to assess the extent to which LDIFs are able to leverage private capital through their investments.

Wh i le the information will be used to ensure that funded projects are processed according to the Bank-advised guidelines, it will also help assess the extent to which such good practices are adopted by LDIFs for projects financed with non-IDA sources, in adherence to and guided by Project Manual

To establish benchmarks and standards for FI operations of similar nature

37

Component 2: LDIFs’ capacity to implement Project Manual i s strengthened

LDIF sponsored (using LDIFP Line o f Credit) municipal infiastructure subprojects

Compliance with Financial Covenants by a l l qualified LDIFs 1. LDIF ownership in project enterprise < 30% when involving LDIFP proceeds 2. LDIFs’ subprojects’ debdequity < 3: 1 when involving LDIFP proceeds 0 Compliance with Project Manual’s Guidelines on 1 .Safeguards 2.Project Preparation and

Appraisal 3 .Private Sector

Participation 4.Reporting and Monitoring

Information wi l l be used to assess the effectiveness o f the guidance provided through the Project Manual

Annual review of the implementation o f the Guidelines wi l l be an opportunity to improve them

Arrangements for results monitoring

A monitoring systedprocess has been established in collaboration with MOF to monitor and evaluate the Project activities and operations leading to the Project objectives. The monitoring system has five components: 1. LDIFs wi l l provide data and report on: number and dollar amount o f investments;

total amount o f private capital invested in LDIF-sponsored subprojects. 2. Quarterly un-audited financial statements will be provided by LDIFs to P M U and

the Bank; Yearly audit report o f the financial statements-prepared by an independent auditor to conduct international standard financial audits-will be provided to the P M U and the Bank after the end o f LDIF fiscal year. MOF will hire independent consultants to monitor the compliance o f subprojects with WB eligibility criteria vis-a-vis the Safeguards Guidelines o f the Project Manual. Bank Supervision Team wi l l conduct periodic reviews o f un-audited quarterly as well as annual audited financial statements to ensure compliance with the Financial Covenants. MOF will require and monitor submission o f reports from LDIFs as stipulated in the Monitoring Guidelines o f the Project Manual.

3.

4.

5.

Project Review. All project information will be compiled by LDIF management and discussed with the MOF, Provincial PCs, and the Bank in a workshop to be held every six months. The workshop will provide an opportunity to discuss Project progress and any outstanding issues, including the need to refine or adjust any Project components. More specifically, the operational and institutional framework (Project Manual) wi l l be reviewed at least once every year by LDIFs, their PCs, and MOF, and may be amended, provided the written agreement o f the Bank i s obtained before the amendment i s approved by the MOF

38

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Annex 4: Detailed Project Description VIETNAM: Local Development Investment Funds Project

Project Components Component 1: Investment Capital (US$ 275 million; IDA US$ 185 million) (The additional $90 mil l ion provided by borrowerhecipient and private sector contribution)

A line o f credit will be provided to the Ministry o f Finance for its Project Management Unit to manage and to on-lend to LDIFs for investment in cost-recovery-oriented municipal infrastructure subprojects in partnership with the private sector. The Project Preparation and Appraisal Guidelines in the Project Manual govern h o w the LDIFs' investments under the line o f credit will be identified, developed and appraised. The Private Sector Partner (PSP) Guidelines in the ,Project Manual describe the way private sector participants will be selected in project enterprises financed under the l ine o f credit. Other components o f the Project Manual provide guidelines and requirements on Safeguards, Monitoring, and Corporate Governance.

LDIFs will use the IDA credit to invest in cost-recovery oriented municipal infrastructure investments in partnership with the private sector. Possible subsectors o f municipal infrastructure include: health; education; water supply distribution & treatment; solid waste management; sewage disposalhreatment; urban to l l roads and bridges; transport logistics; ancillary investments to support ports; fixed infrastructure in support o f telecommunications and datdinformation technology; residential development; municipal infrastructure associated with industrial parks; and other energy and transport related municipal infrastructure.*

LDIFs will work with the provincial government to identify investment needs in their respective provinces, as described in their master plans, that can be financed in partnership with the private sector. LDIFs will then work with the city departments to put in place effective subproject structures and then invite private investors to participate in the subprojects.

LDIFs wi l l not use the IDA credit to invest in subprojects that wi l l trigger Safeguards Policies on Natural Habitats (OP/BP 4-04), Pest Management (OP 4.09), Cultural Resources (OP 4.1 l), Forests (OP/BP 4.36), Safety of Dams (OP/BP 4.37), Projects in Disputed Areas (OP/BP/GP 7-60), Projects on International Waterways (OP/BP/GP 7.50), Indigenous Peoples (OP/BP 4. lo). Subprojects that trigger OP 4.04,4.09, 4.10,4.11, or 4.36 wi l l either be excluded or require prior review and approval by the Bank. (Please see Annex 11 for details on these Safeguards Policies). In addition, LDIFs will not use the I D A credit to invest in: Production or trade in any product or activity deemed illegal under host country laws or regulations or international conventions and agreements, or subject to international bans, such as pharmaceuticals, pesticidesherbicides, ozone depleting substances, PCB's, wildlife or products regulated under CITES; Production or trade in weapons and munitions; Production or trade in alcoholic beverages (excluding beer and wine); Production or trade in tobacco; Gambling, casinos and equivalent enterprises; Production or trade in radioactive materials; Production or trade in unbonded asbestos fibers; Drift net fishing in the marine environment using nets in excess o f 2.5 km. in length; Production or activities involving harmful or exploitative forms o f forced labor2harmful child labor; Commercial logging operations for use in primary tropical moist forest; Production or trade in wood or other forestry products other than from sustainably managed forests.

43

A pipeline o f subprojects has been identified and confirms that the qualified LDIFs can absorb the investment capital that i s being made available v ia the Project. Three subprojects have been identified and will be prepared during the f i rs t year o f implementation under the LDIFP. All necessary safeguards instruments wil l be prepared and necessary assessments conducted in accordance with the Project Manual before IDA credit is released for these and any other subprojects in the first year o f implementation. All subprojects prepared in the first year o f Project implementation will require prior review and approval by the Bank.

Possible Subproject Pipeline for LDIFP Financing

These subprojects have been reviewed by city departments, and are consistent with the development master plan o f the provinces. Descriptions o f the three possible subprojects to be prepared in the first year o f Project implementation are provided below as an attachment to Annex 4.

The IDA credit will be made available to LDIFs according to the proposed on-lending structure agreed between LDIFs and M o F according to the Decree # 134 o f the central government on O D A management. The Bank team has reviewed the structure and

44

A pipeline o f subprojects has been identified and confirms that the qualified LDIFs can absorb the investment capital that i s being made available via the Project. Three subprojects have been identified and will be prepared during the f i r s t year o f implementation under the LDIFP. All necessary safeguards instruments will be prepared and necessary assessments conducted in accordance with the Project Manual before IDA credit is released for these and any other subprojects in the f i rs t year o f implementation. All subprojects prepared in the first year o f Project implementation will require prior review and approval by the Bank.

Possible Subproject Pipeline f o r LDIFP Financing

Exp. Road 25B Long Thad & Nhon Trach Dinh Hoa - Tan Van Highway Non Nuoc Stone Carving Village Project Estimated total investment

Construction housin

Dong Na i 24.1 Binh Duong 49.4

Da Nang 11.8 30 54.4 173.6

44

confirmed that i t wi l l support the Project objectives and conforms to the stipulations o f the Decree 134. The structure involves the Ministry o f Finance borrowing IDA credit from the Bank and then on-lending the funds to LDIFs under reasonable terms which take into account the cost o f foreign exchange risk and other administrative costs. (Annexes 6 and 7 provide the details o f these implementation and disbursement arrangements respectively).

The Bank has conducted a detailed financial due diligence o f the financial accounts o f Qualified LDIFs through an international consulting firm and confirmed that the LDIFs are in strong financial position. The LDIFs issue audited annual financial statements, and they engage in market-based investment practices. Specifically, LDIF loans are priced at market rate for infrastructure. The Bank can confirm that the LDIFs are ready to carry out the functions o f a financial intermediary as required under Bank OP 8.30. The Financial Covenants o f the credit agreement will further reinforce the financial soundness o f the LDIFs’ operations and contribute to their institutional development as financial intermediaries. (Annex 9 provides the details o f the financial analysis o f the project).

The Bank, LDIFs, and MOF will work in close co-operation in the application, review and amendment o f the LDIFP Project Manual. The implementation o f the Project Manual will be reviewed at least once every year by LDIFs, PPCs, and MOF, and discussed with the Bank during the six monthly reviews. The Project Manual may be amended by resolution o f MOF, provided the written agreement o f the Bank i s obtained before the amendment i s approved. The Bank may also request or suggest amendments to the Project Manual to MOF during the implementation o f the project.

Component 2: Project Implementation Support (IDA U S $ 5 million) The Project Management Unit (PMU) for LDIFP o f the Ministry Finance will be the unit responsible for monitoring, regulating, and supervising the LDIFs and their performance. This Project Component will ensure the development o f institutional capacity o f the P M U and ongoing operational support toward effective implementation o f LDIFP.’

The line o f credit will be used to support the development o f regulatory and institutional capacity at the P M U over the Project period, in the following areas (for which Terms o f Reference have been prepared):

Set-up of and operational support for PMU organization (US$600,000). Consultants will be selected to provide support in the following areas:

Identify internal human resources from the MOF to dedicate to the P M U Define structure, roles, and responsibilities within the P M U Develop processes and systems within P M U

In order to better implement the GOV Decree 138 on LDIFs, the MOF also plans to establish a donor- financed LDIF Technical Assistance Fund to support the development o f LDIFs. According to Decree 138, the responsibility o f regulating the LDIFs i s assigned to the MOF; the LDIF TA Fund will support the GOV policy under the mandate given to the MOF. It i s the MOF position that the LDIF TA Fund i s neither required for nor should it be tied to the WB loan; however, by supporting the development o f LDIFs, the LDIF TA Fund wi l l improve the capacity o f LDIFs to undertake more innovative projects under the WB- financed project(s). The LDIF TA Fund will provide technical assistance to LDIFs in: training and capacity building; preparation o f more sophisticated subprojects; and institutional development.

45

0

0

0

0

Engage with LDIFs and the World Bank to create interface structure and protocol Assistance in obtaining office equipment and vehicle needed Capacity building, including training and workshop activities Provide ongoing operational support on financial management, procurement o f consultants, social and environmental safeguards, and Project management

Support for Information System (US$150,000). The P M U will hire a consultant to provide assistance in developing and procuring an information system that will provide the necessary tools for effective execution o f the PMU’s work and for monitoring o f LDIFs

0

0

0

0

Selecting suitable IT hardware to be used for at least five years Estimating data storage, processing, and bandwith requirements, covering five years, in order to select hardware and systems Procurement o f IT hardware along with requisite software (basic, packaged software) Development o f customized software and processes needed for data management--e.g., for analysis o f LDIF performance

Monitoring and Qualification of LDIFs (US$2.05 million). A key role o f the PMU wi l l be to carry out monitoring o f LDIF activities in accordance with the Project Manual. Such monitoring i s to ensure that the LDIFs are functioning in-line with legal, financial- management, as well as World Bank requirements. A consultant will expertise in regulatory and monitory activities will be appointed to engage in developing this capacity.

0

0

0

0

0

0

Develop LDIF-monitoring system according to Monitoring Guidelines o f Project Manual Establish structure and processes, and training staff responsible for monitoring activities Conduct review o f documents/forms submitted by LDIFs in accordance with the Monitoring Guidelines o f Project Manual Ensure compliance with investment terms Communicate/follow up with LDIFs regarding reports and compliance Review procurement capacity o f LDIFs and provide recommendations for improvement

Qualzpcation of LDIFs: Each year, the PMU wi l l carry out the qualification process to select LDIFs that qualify for ODA funding toward their subprojects. An international consultant will assist in th is annual qualification. The consultant will also interface with the LDIFs to obtain and process information needed for the qualification process.

As part o f preparation for LDIFP, consultants, in collaboration with the Ministry o f Finance, have prepared the Qualification Criteria and related processes, and documented the instructions as well as relevant forms. The criteria and process are designed to ensure the financial, operational, and institutional soundness o f the LDIFs before they can use ODA funds to invest in subprojects. The Qualification Criteria are listed below:

46

1. 2. 3.

4.

5.

6. 7.

8.

LDIFs must have a charter that i s line with the model charter set out by the MOF Charter capital o f LDIF is at least VND 100 bil l ion Annual financial statements o f LDIF are audited within six months from the end o f the LDIF fiscal year Ratio o f mobilized capital to charter capital i s less than 6: 1 , with commitment o f PPC to infuse adequate additional capital if the ratio exceeds the limit LDIF has been in operation for at least two years, with at least one year o f profitability Non-performing loans account for less than five percent o f total assets LDIF has at least two subprojects in the pipeline, with feasibility conducted for at least one subproject" LDIF has at least five full-time employees, including at least one financial analyst.

Detailed analysis o f pre-screened subprojects (US% 700,000). The P M U will select a consultant to review subprojects o f LDIFs that are eligible for investment. The P M U will receive support to oversee the financial and technical assessments o f investments carried out by the LDIFs. Consultants will assess subprojects' alignment with municipal infrastructure priorities, cost-recovery and debt-service outlook, potential for private- sector participation, and risk analysis, in-line with Project Manual. MOF will review and provide approval for subprojects o f Qualified LDIFs to receive funding.

Monitoring of Safeguards compliance of ODA-funded subprojects (US$700,000). Consultants will assist the P M U in the monitoring o f the LDIFs' compliance with environmental and social Safeguards as required by the World Bank. The consultant will provide independent monitoring and evaluation o f results. The consultant will also highlight need for additional mitigation measures, need for capacity development within LDIFs, and to help the P M U advise LDIFs on future improvements. TOR for consultants have been included in the Project Manual.

External auditor for PMU and qualified LDIFs (US$800,000). An external auditor will be hired to review the PMU's and LDIFs' financial statements on an annual basis. The auditor will certify that the financial statements have been audited by independent auditor and are in l ine with international standards. This auditor will also audit the financial statements o f all qualified LDIFs-in order to standardize financial statements (if LDIFs use Vietnamese standards, then auditor will convedprepare statements to international standards) as well as implement the new LDIF accounting rules in a uniform manner across the funds.

lo This criterion (in addition to others listed above) applies to the qualification o f the LDIF. Fulfillment of this specific criterion does not automatically mean that these subproject(s) for which feasibility has been conducted will receive IDA hding. The subprojects o f Qualified LDIFs to be prepared and in the frst year o f implementation will only receive IDA funding after the Bank has conducted safeguards review and provide approval, and the MOF PMU has reviewed the subproject for compliance with the Project Manual and al l Project agreements. .

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Attachment 1 to Annex 4 - Description o f possible Year One pilot subproiects {Total Estimated Investment - US$30 million)

Subproject 1 - Underground Power Line Project

1. Rationale The proposal o f the Underground Power Line subproject responds to requirements o f HCMC on electricity management and urban infrastructure. As the subproject directly supports the development o f urban landscape by removing power cables that are strung on poles in a haphazard way, it receives fully support and approval from not only the People’s Committee (as a high-priority project), but also the Electricity Department o f Ho Chi Minh City. Furthermore, this subproject will make 1.5 ha land available for future school construction.

2. Proposed Subproject Description The subproject will install an underground 220KV power cable as part o f the Tao Dan line. The working area i s in Nha Be District, a fast-developing residential area in the south o f Ho Chi Minh City. Nha Be contains Hiep Phuc Industrial park, Phuc Kien Industrial and Handicraft Zone, and the Nha Be Petroleum Depot. I t i s designed to be the southern hub o f the biggest city in Vietnam. The district population i s expected to reach 100,000 households by 20 10.

The private sector will be involved in project investment and wi l l manage subproject’s implementation and operation. Replacement o f the current power l ine network by underground power l ine along roads wi l l improve the local landscape. The new system also provides electricity along Nguyen Huu Tho road. . 3. Technical Justification The installation o f the 220KV underground power l ine consists o f two lines. The project also includes setting up two new steel power poles for connecting the existing air- suspended 220KV power cable to the Nha Be Transformer Station. 4. Cost Estimate The total cost o f the subproject i s estimated at VND 1,008 billion (approximately US$ 57 million).

5. Financing Plan It i s proposed that the subproject will be financed partly through an equity investment by the private sector owner. The proposed loan f iom HIFU would be in the amount o f VND 390 billion (US$22 million). The remainder would be mobilized from other channels.

6. Implementation Arrangements The implementation o f the subproject wi l l be undertaken under 2 phases over a 5 year period. Phase 2 includes 2 years o f building technical infrastructure.

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7. Operation and Maintenance The private sector project owner will be responsible for the subproject’s implementation. I t will install underground electric cable to replace the current above-ground system.

Safeguards Issues a. Social

Some resettlement will be necessary, and a resettlement plan i s being prepared. I t i s estimated that about 19.7 ha o f land will be acquired, with 74 households to be affected and 16 o f them to be relocated.

b. Environmental

An initial assessment has been undertaken for the subproject that showed that no significant adverse effects are anticipated and that a detailed environmental impact assessment (EIA) i s not required. The subproject would have the potential for short-term and site-specific impacts o f construction work on residential areas around the subproject areas. Key environmental issues during construction work are noise and dust pollution, traffic congestion, transportation and disposal o f construction waste, transportation o f fil l ing soils, temporary disturbance to local traffic and drainage in urban and residential areas.

The subproject would have an overall positive environmental and social impact in meeting requirements o f power supply.

8. Financial and Analysis a. Financial Analysis

The analysis has been undertaken to work out Financial Internal Rate o f Return (FIRR) for the subproject. The two main drivers o f the calculation are the construction costs and revenue from selling land-use rights. Based on the FIRR and FNPV calculations, the project i s financially viable. Sensitivity analysis resulted in FIRR’s o f an acceptable range.

b. Debt Service Capability

The capability for debt repayment o f the Underground Power Line subproject depends on average land price after completion o f area’s infrastructure construction. As Nha Be i s a fast growing area and high urbanization rate o f Ho Chi Minh City, the demand on the subproject land i s high. The DSCR calculations confirm the proponent’s ability to repay the proposed loan.

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Subproject 2 - Binh Duong An Tay Water Supply Project 1. Rationale The project objective i s to develop the water supply system to satisfy the industrial water demands o f the An Tay Industrial Park and adjacent industrial parks o f Viet Huong 2 and Mai Chung, and also to provide safe potable drinking water to the residential areas in An Dien and An Tay communities. The access o f the local community to clean water will also reduce costs for medical services. Furthermore, the availability o f infrastructure such as adequate water supply services in industrial areas will help attract more investment into the region.

The private sector project owner i s a joint stock company with four shareholders, all with experience in this type o f project.

2. Proposed Subproject Works The subproject comprises o f two phases. As planned, the commercial operation after completion o f Phase I will be able to provide a target level o f capacity. Phase I1 will increase total production to another target, starting in 2014. There will be four target user categories: Industry Park, Service Cluster, Residential, and Office.

3. Technical Justification The subproject components have been based on appropriate technologies that are both cost effective and technically feasible. As the private sector owner i s in charge o f staffing, technology, management, the proposed operation and technology are optimized based on the owner’s expertise.

4. Cost Estimate The total cost o f the subproject i s estimated at VND 150 billion (approximately US$ 8.5 million). The investment o f Phase I i s US$6 million.

5. Financing Plan The proposed subproject will be financed by an equity investment from the private owner, and loans, including a proposed loan o f VND 99.83 (US$ 5.9 million) from Binh Duong DIF.

6. Implementation Arrangements It i s estimated that the implementation o f the first phase o f subproject will be undertaken in 2009 and cover a 3-year period. Phase I1 will be completed by 2014.

7. Operation and Maintenance One o f the four shareholders o f the private owner wi l l be in charge o f staffing, technology, and management. The fixed capital includes machinery & equipment costs, construction costs, and preliminary expenses. Machinery and equipment costs w i l l cover all purchases o f machinery and equipment, transportation and installation costs, as well as accessories and spare parts for the first year o f operation.

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8. Safeguards Issues a. Social

There i s no issue o f land acquisition or resettlement; all necessary land for water plan and water intake site either belongs to the subproject proponent or has been bought from several families since 2008. The water pipes will run along the road side, so no private property w i l l be affected.

b. Environmental

An initial assessment has been undertaken for the subproject that showed that no significant adverse effects are anticipated and that a detailed environmental impact assessment (EIA) i s not required. The subproject would have the potential for short-term and site-specific impacts o f construction work on residential areas around the subproject areas. Key environmental issues during construction work are noise and dust pollution, traffic congestion, transportation and disposal o f construction waste, transportation o f fil l ing soils, temporary disturbance to local traffic and drainage in urban and residential areas. Major environmental impacts during the operation phase would include the sludge from the water treatment facility, if not managed properly

The subproject will contribute to a better supply o f clean water to meet industrial and domestic demands.

9. . Financial Analysis a. Financial Analysis

Analysis has been undertaken to work out Financial Internal Rate o f Return (FIRR) for the subproject while analyzing i ts sensitivity to an increase in investment cost, increase in operating expenses, and reduction in business revenue. The analysis assesses the financial viability by comparing (i) the FIRR based on incremental revenue generation with the updated average cost o f capital for each component; and (ii) the average incremental financial revenue with the average incremental financial cost. The sensitivity analysis conducted on the subproject results in acceptable rates o f return.


The calculations o f DSCR at lending terms and sales projections, and under sensitivity analysis, have confirmed the company’s capability to repay the proposed loan.

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Subproject 3 - BDIF Phan Chu Trinh Primary School Project

1. Rationale The Phan Chu Trinh Primary and Secondary School (PCTS) project proposes to build a private school in the Di An district o f Binh Duong. Together with the economic development o f Binh Duong province, one o f industrial centers in the South o f Vietnam, the increase in population raises the demand for education services. Phan Chu Trinh School will provide 24 classes for about 940 students at the primary and secondary levels. The subproject aims to provide higher quality education and a safe environment for youth and families in the area. The establishment and operation o f a new school will contribute to the overall improvement o f the education system in Binh Duong province.

2. Proposed Subproject Description The proposed site for PCTS i s within a fast-growing district o f Binh Duong province. The district i s at the center o f a triangle formed by Binh Duong, Dong Nai, and Ho Chi Minh City. The district i s becoming an urban hub, with a number o f industrial parks in the surrounding areas. As o f 2007, 19 industrial parks were in operation in Binh Duong. While Binh Duong’s GDP was reported to be increasing at an annual rate o f 15.4% annually, i t s population was also rapidly growing. The province had a population o f 964,000 in 2005, and i s estimated to grow to 1.2 million by 2010. As a result, demand for education services has surged in the last few years. The province now has a total o f 26 public secondary schools in 7 districts; the current number o f schools and classrooms i s insufficient to meet the growing demand. On average, the student-teacher ratio in public schools i s 45: 1. The construction o f public schools depends heavily on the provincial budget, which has not been sufficient to keep up with the province’s development.

Aware o f the incremental requirement for high quality education from middle- and high- income households in the province, the project owner, formed by experienced teachers and local businessmen, prepared a project to build a private school named Phan Chu Trinh. Members o f the Board o f Management hold professional degrees in education, training, economics, education and business. Three among four leaders o f the project owner and the proposed school have more than 20 years experience in the education sector.

The PCTS campus would be situated in an area o f 5,646 sqm. Three main buildings o f PCTS would comprise 24 classrooms, a cafeteria, gymnasium, and area for boarding facilities. In the construction plan, there are support facilities, including a guard house, garage for teachers and students, gardens and playground, and fire prevention and fire- fighting system. The site development plan reserves 65% o f the area for trees. Civi l works have been planned to meet general architectural and structural design standards o f a modern school.

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3. Technical Justification All subproject components have been based on appropriate standards that assure feasible operations. . The school facilities, as well as value-added services such as boarding, social activities, and field study trips, aim to provide a high quality o f education. The advanced education program based on the curriculum o f Ministry o f Education and Training ensures that students not only are enabled to participate in normal examinations, but also receive an overall education of a high standard. The model o f education at PCTS will also improve the overall standard o f education in the province.

4. Cost Estimate

The total cost o f the subproject i s estimated at VND 58.2 billion (approximately US$ 3.3 million).

5. Financing Plan

The proposed subproject would be financed partly through an equity investment by the private sector project owner. The subproject proposes a loan from BDIF o f VND 32 billion (US$ 1.9 million).

6. Implementation Arrangements The implementation o f the subproject wi l l be undertaken over 12 month period for construction, procurement o f equipment and occupancy permit.

7. Operation and Maintenance

Responsibility for the operation and maintenance o f the subproject facilities would be assumed by the private sector owner. The education program would be created based on the government curriculum. The PCTS would offer bundled services, including dining, computedIT, transportation, boarding, and field-study services.

8. Safeguards Issues

a. Social

There are no land-acquisition and resettlement issues; the subproject will use the land purchased from four individuals in 2008.

b. Environmental

An initial assessment has been undertaken for the subproject that showed that no significant adverse effects are anticipated and that a detailed environmental impact assessment (EIA) i s not required. The subproject would have the potential for short-term and site-specific impacts o f construction work on residential areas around the subproject areas. Key environmental issues during construction work are noise and dust pollution, traffic congestion, transportation and disposal o f construction waste, transportation o f fil l ing soils, temporary disturbance to local traffic and drainage in urban and residential areas. Major environmental impacts during the operation phase would include waste generated at the school, if not managed properly

The subproject would have an overall positive environmental and social impact in meeting growing demand for education in the area.

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9. Financial Analysis a. Financial Analysis

Analysis has been undertaken to work out Financial Internal Rate o f Return (FIRR) for the subproject while analyzing i t s sensitivity to reduction in business revenue and increase in operating costs. The analysis assesses the financial viability by projecting viable expenses, fixed cost, depreciation, and calculating annual profit and loss on a period o f 20 years. The sensitivity analysis conducted on the subproject indicates acceptable levels o f return and NPV.


The capability for debt repayment o f the project owner on PCTS subproject depends on annual available cash flow for debt service. The calculations o f Debt Service Coverage Ratio (DSCR) have confirmed the company’s capability to repay the proposed loan.

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Annex 5: Project Costs


BorrowerRecipient International Development Association

Private Sector Contribution

Total

, * . * . . *

Source Locat I + Foreign Tatal i

20 20 190 190

J

70 70

280 0 280

FY FY 10 FYl l FY 12 FY 13 FY14 FY15

Annual Cumulative

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10 30 35 45 50 20 10 40 75 120 170 190

Annex 6: Implementation Arrangements VIETNAM: Local Development Investment Funds Project

LDIFP Project Implementation Structure

0 Investment Capital

($185M)

On-lending YND at 4%

25-yr term, 10-yr grace period

I lives ttn eiit Capital (booked as debt on BS)

LDlF repayment of the VND

loon to MOF

Project Implementation Support (S5M) - Monitoring b regulatory capacity - Ongoing operational support - Review of subprojects for investment eligibility

h Private Investors

Implementation Structure The implementing unit for the LDIFP will be the PMU within the MOF, as it oversees the LDIFs as they institute key operational reforms guided by the Project Manual, and undertake investments in municipal infrastructure with private sector involvement. The P M U will manage the Financial Intermediary Loan, as it on-lends to LDIFs. The P M U must review and provide approval for subprojects o f Qualified LDIFs to receive funding. The P M U will monitor and regulate the activities o f the LDIFs, and will receive ongoing operational support from consultants to do so. MOF will also hire consultants to ensure that subprojects financed by the qualified LDIFs meet eligibility criteria. The LDIFs operate as specialized agencies within the municipal governments, working with the Departments o f Planning and Investment (DPI) and other line departments in the municipal governments. The provincial governments identify the investment needs as well as project ideas, including those which can be financed with private sector participation. The DPIs in collaboration with the Provincial PCs then assign the investment targets and subproject ideas to the concerned l ine departments. The l ine

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departments prepare the technical details o f the subprojects and consult with the LDIFs on the financial structuring with a view to involve the private sector.

Provide IDA Credit to GOV On-lend VND to Qualified LDIFs.

The flow o f IDA credit i s described in the preceding illustration. The IDA credit will be on-lent by the MOF to LDIFs in VND on terms that will be negotiated between LDIFs and MOF in consultation with the World Bank. The equity or paid-in capital o f LDIFs (referred to in Vietnam as charter capital) i s provided by the respective Provincial PCs. LDIFs will invest the investment capital provided under the Project according to the loan conditions which restrict the investment to cost-recovery municipal infrastructure and define the sectors o f focus. The key Financial Covenants cover the whole financial operation o f the LDIFs (not restricted to IDA credit) to ensure the financial and operational viability o f each LDIF as an institution. The Project conditions will help to further support the LDIFs’ qualification under Bank OP 8.30. The disbursements to LDIFs will be through a designated account managed by the MOF, with details provided in Annex 7.

1

$190 million 25 yr, 10 yr grace, 4%, denominated in VND

Roles and Responsibilities Role I LDIFP Imnact/Notes

infrastructure subprojects; leverage private capital in subprojects; repay the MOF loan; maintain a sound financial position Approve al l LDIFP documentation; ensure compliance with loan conditions; oversee subproject progress

LDIFs E and provide capital for increased activity, including the ability to proactive prepare subprojects and then invite private investors LDIFP will reduce the risk of contingent liability associated with LDIFs; strategic clarity on investment planning and increasing private

I PPCS

designs and feasibility; consult with LDIFs on relevant subprojects Supervise Project implementation; provide strategic advice to MOF and LDIFs; review Project progress, including

Provincial Depts.

WE3 Task

Auditors

Increased investment capital wil l make it easier and faster for LDIFs to structure and finance subprojects for the departments Demonstrate that Vietnamese institutions can implement subprojects; improve disbursement; establish development models which can help

monitoringlresults indicators Monitor subproject progress; provide reports on subproject indicators; audit financial performance

Project Manual and agreements. Invest in cost recovery oriented municipal I LDIFP will strengthen the financial operations

Vietnam become a MIC Establish a model for transparency in municipal government operations. Develop application of international auditing standards.

I sector investment in municipal infrastructure I LDIFP will allow DPIs to better utilize LDIFs Plan infkastructure investments in

investment Prepare subproject details, e.g., engineering

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Annex 7: Financial Management and Disbursement Arrangements VIETNAM: Local Development Investment Funds Project

Country Issues The 2007 Country Financial Accountability Assessment (CFAA) determined that the financial management r isk o f improper use, control and reporting o f funds that are managed through the Vietnam public financial management systems is Moderate. The public accounting system and financial management arrangements are well-documented and regulated, but financial management risks arise from gaps and overlaps in the systems, and more particularly, risks arise from weaknesses in implementation and compliance gaps. The C F A A found that key challenges in the Public Financial Management (PFM) systems remain in the areas of: (i) expanding budget coverage in l ine with internationally accepted norms; (ii) implementing the new government Chart o f Accounts and the Treasury and Budget Management Information System with strengthened internal controls (including internal audits) and streamlined business processes; (iii) implementing more comprehensive accounting and timely financial reporting based on internationally recognized standards and practices; and (iv) expanding audit coverage and quality, and legislative oversight o f PFM. Strengthening strategies and implementing action plans to enhance capacity and accountability for public financial management in line ministries and agencies at al l levels o f government i s a priority area for action.

Many developments and reforms in PFM such as streamlining o f business processes, strengthening o f expenditure and revenue internal controls, and enhancing monitoring and oversight o f budget development and execution are in progress, and a gradual strengthening o f P F M i s taking place. The implementation o f the 2004 Public Expenditure Review and Integrated Fiduciary Assessment (PER-IFA) and 2007 CFAA recommendations are being supported by the PRSC program and grant funds. The PFM reforms are having a positive impact on the overall P F M environment, but specific improvements in systems have not yet led to full integration o f off icial development assistance (ODA) into the overall PFM framework. The priority i s for substantive implementation o f the improvements and enhancements that have been and are being progressively introduced through legislative reforms and development work in recent years.

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Risk Assessment and Mitigation The overall financial management risk o f the project i s assessed as Moderate both before and after mitigating measures.

Risk

Inherent Risk Country level: Overall Fiscal Environment

Entity and Project level: Funds may not be used efficiently and economically and for purposes intended

Entity and Project level: the LDIFs may not have necessary capacity to implement the project Overall Inherent Risk Control Risk 1. Budgeting

2. Funds Flow

3. Staffing

4. Accounting Policy & Procedures

5. External Audit

Risk Rating

Moderate

Moderate

Moderate

Moderate

Moderate

Moderate

Moderate

Moderate

Low

Risk Mitigation Measures Incorporated into Project Design

Capacity building in MTEF and budgeting, implementation and monitoring, commitment control and debt management; (i) Annual financial audit by independent auditor for Financial Statements o f LDIFs including the notes on Fund and Uses of Fund under LDIFP, (ii) Guidance on Financial Management of LDIFP, and (iii) independent consultant to monitor the compliance of fiduciary requirement. and (iv) technical assistance on accounting and reporting system - - financed by the Project - Only LDIFs which meet qualification criteria (including financial and operation qualifications) will be allowed to participate

Procedures of budgeting are clearly stated in the Financial Management Guidance of the Project including: (i) Budgets are preparedupdated on a quarterly basis based on the progress of contracts of investment (at the LDIF) and other contracts (at the PMU) and; (ii) PMU will consolidate the information on implementation and analyze against budgets. Funds will flows directly from the IDA to the designated account of the PMU maintained at a commercial bank acceptable to the Bank. For the funds to participating Local Development Investment Funds (LDIFs), funds will be disbursed directly to contractors for the payments with material amount. Finance staff to be trained on IDA procedures on financial management and disbursement Audited Vietnamese Accounting Standards (VAS) based Financial Statements of LDIFs will be converted to International Financing Reporting Standards (IFRS) by the Monitoring Consultant (hired by the Project) Annual Project Financial Statements and

-

Financial Statements of all LDIFs will be

Risk After Mitigation Condition o f Negotiation, Board or Effectiveness

Moderate

Moderate

Moderate

Moderate

Moderate

Low

Low

Moderate

Low

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Risk Risk Mitigation Measures Incorporated into Project Design

6. Reporting & Monitoring

Risk After Mitigation Condition of Negotiation, Board or

8. Information Systems

acceptable by the Bank using International Standards on Auditing Financial Reporting forms and templates are set up in the Project FM Guidance. Reporting Templates will be based on the Aligned Monitoring Tools (issued by Decision 83 o f MPI) A computerized accounting system will be procured for PMU

Overall Control Risk

Moderate

Moderate

Moderate

Risk Rating

Training to FM personnel of LDIFs i s conducted

Moderate

Moderate

Moderate

LDIFs Prior to participation in Project

I Effectiveness audited Independent Auditors with TORS

1. Strengths and Weaknesses

Strengths i. Project Management Unit (PMU) and LDIFs’ accountants are competent and have

accounting background; ii. The internal control procedures (existing o f LDIFs) already exist at LDIFs and are

in place, documented and complied with; and iii. The FM guidance has been developed providing additional guidance on the Bank

FM and disbursement procedures and requirements.

Weaknesses i. FM personnel o f PMU and al l LDIFs, except HIFU, do not have experiences with

IDA financed projects; ii. PMU lacks accounting software for monitoring o f activities.

2. FM Action Plan

I - Proiect Financial Manapement puidance Project Financial Management guidance has been developed and adopted by the Project

11- Stafing FM staff with acceptable qualification and experiences have been appointed by PMU

PMU

PMU

Negotiation (Completed)


111- Training Training to FM personnel of PMU i s conducted PMU Negotiation

(Completed)

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IV- Accounting Software for PMU A system o f spreadsheets for PMU to monitor finds received and uses o f funds has been established

Computerized accounting software for PMU to monitor funds received and uses o f finds has been developed

PMU

PMU


Recomendation- for fulfillment by

end 2009

3. Implementation arrangement A Project Management Unit (PMU) has been established under MOF with two main functions (i) to ensure that the projects proposed for financing by Local Development Investment Funds (LDIFs) meet all financing criteria and (ii) to manage all project implementation support activities financed under the project. The PMU, assisted by hired consultants, will be responsible for financial management o f i t s component. Furthermore, in relation to LDIFs, it will:

0

0

Withdraw funds from IDA and disburse to LDIFs; Prepare consolidated quarterly Interim Financial Reports (IFRs) and submit to IDA; and Prepare consolidated annual project financial statements, arrange for the audit o f the project and submit audited financial statements and auditors’ reports to IDA.

Each LDIF will supervise and monitor i t s subproject(s) and be responsible for financial management o f their component. I t i s understood that project financial management (including budgeting, accounting, internal controls, staffing, reporting, auditing, credit appraisals and monitoring o f sub-projects) will be fully integrated in the existing management processes o f the LDIFs. Project Financial Management Guidance that sets principles and procedures, which are additional to the current procedures o f the LDIFs, has been prepared and finalized by the PMU.

4. Staffing PMU P M U has been established and the FM function staffed with a part-time Chief Accountant (who i s an expert from Banking Department) and a full-time externally recruited accountant with adequate accounting background. The accountant has experiences with the PHRD Grant for preparation (TF55144) while the Chief Accountant i s new to Bank projects. Training on the Bank’s FM and disbursement procedures has been provided before the Negotiations.

HIF U HIFU i s implementing the HIFU Development Project (HDP). FM staff o f HIFU has adequate accounting background with comprehensive financial management experience, including accounting, budgeting, auditing, reporting and disbursement. However, due to differences of FM between this project and HDP, HIFU FM staff needs to be updated on the different requirements and procedures prior to participation into the Project.

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Other quali jed funds All other LDIFs were not previously involved with any projects financed by the Bank. They do not have experience with project reporting and processing disbursements with the Bank. Training on Bank requirements conducted by Bank’s specialist therefore i s required for LDIFs’ assigned FM personnel in these funds and should be done by the f i rs t disbursement to those local funds [Disbursement Condition].

5. Budgeting Budgeting procedures have been established at the qualified LDIFs. Financial Plans and budgets are prepared and finalized with the cooperation o f different departments (e.g., Finance and Accounting, Investment, Credit Appraisal, Planning Department) within the Funds. The LDIFs’ planning department i s responsible for preparing the consolidated budget and plan, obtaining approval from the Management o f the Fund, and sending to PC for final approval.

The specific budgeting procedures for this project would fo l low the ones set in the FM Guidance, where (i) the disbursement plan by lod investment should be prepared quarterly by each LDIF and based on the implementation status; (ii) the plan o f each LDIF will be consolidated by the PMU; (iii) the variance analysis will be performed at both LDIF and PMU levels, which will be included in the quarterly financial reporting and progress reports. LDIFs will also keep track o f commitments and PMU will be responsible for the consolidated figures o f the project

6. Accounting system P M U The accounting system including accounting policies and procedures will fo l low the Accounting System for Administrative Entities (based o n the Decision 19 o f MOF). A computerized accounting system will be set up by December 3 1,2009, as an integral part o f the Information System funded under Component 2: Project Implementation Support to record funds received and expenditures (by category, component, contract and local fund). Until the setup o f the computerized system, spreadsheets have been set up at the P M U to record funds and uses o f funds o f the Project. Given the considerably l o w volume o f transactions for the period from Effectiveness to December 31, 2009, the spreadsheet i s considered an adequate tool for the project financial management.

Qualijed funds Within the LDIFs, the accountingheporting arrangement for the project will be fully integrated in the LDIF’s own “entity” accounting system. The details o f the accounting systems and procedures, including document f low and retention, system records, and access are stated in Circular 49/2009/TT-BTC (Circular 49) dated March 12,2009, which (i) i s based on the Decision 19 o f MOF on Accounting System for Enterprises, and (ii) provides some modification in chart o f accounts for LDIFs. The Accounting systems and procedures provided by Circular 49 are considered adequate for the project Financial Reporting.

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For entity Financial Reporting (i.e. Consolidated Reporting for the entire LDIF), the accounting system provided by Circular 49, in particular the chart o f accounts, has been refined to fit the operations o f the LDIFs. The basis for Circular 49 and Decision 15 i s Vietnamese Accounting Standards, which were issued based on International Accounting Standards. However, we noted that (i) there are no equivalent Vietnamese Accounting Standards for financial instruments; (ii) there have been no updates o f VAS since issuance; and (iii) the requirements for risk disclosures on the Notes to the Financial Statements are not adequate. Thus they are not considered to be in line with International Financial Reporting Standards (IFRS). For this reason, for the purpose o f monitoring financial covenants (ratios), a consultant will be hired (under the Component 2- Project Implementation Support) to (i) convert the audited VAS financial statements to IFRS financial statements and (ii) review compliance with Financing Agreement’s covenants using the converted financial statements.

7. Internal Controls The LDIFs’ management are responsible for ensuring that an adequate internal control framework and internal controls are in place and operating. Overall, the current internal control system i s assessed as adequate, as the qualified LDIFs have: (i) established clear defined Financial Management responsibilities, supervision, monitoring and reporting structures; (ii) observed the segregation o f duties; (iii) defined and documented financial processes and procedures; (iv) set up adequate management reporting, including analysis o f variances and findings with monthly and quarterly reporting to the Board o f Management; and (v) set up proper procedures and documentation retention. However, there are certain areas o f the risk management processes where improvements are required: (i) development o f procedures for identification o f r isks o f concentration liquidity and market and; (ii) use o f tools and modules for risk assessment processes such as maturity analysis, re-pricing analysis, interest sensitivity models, etc. For the LDIFP, the internal controls described above would be included in the FM Guidance, which has been prepared and finalized.

8. To continue to strengthen the financial management arrangements for the project (and for the LDIFs) and to help further reduce the risk o f fraud and corruption, particular emphasis during preparation has been given to the financial management arrangements in the following areas. Supervision will also focus on them.

Finan cia1 man agemen t an ti-corr uption measures

Clear FM responsibilities with avoidance o f gaps and overlaps and clearly delineated roles and responsibilities for FM personnel included in the FM guidelines;

Adequate FM capabilities with training in financial management and reporting;

Integration o f financial monitoring within the Refinancing Applications Database; and

Enhanced disclosure and transparency o f financial information.

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9. Disbursement Methods

Category

(1) Investment Capital

Cost Table

Percentage of Expenditures to be

(inclusive of Taxes)

Amount of the Credit Allocated (USD) Financed

185,000,000 100%

TOTAL AMOUNT

(2) Project Implementation Support

190,000,000

5,000,000 100%

Eligible Expenditure Eligible expenditure means equity investment and loan investments for the reasonable costs o f goods, works and services o f sub-projects which meet the criteria agreed with IDA. Retroactive financing o f up to $500,000 equivalent for eligible ’ expenditures incurred under Category (2) will be provided under the credit.

Disbursement Methods

The project will use the fol lowing disbursement methods:

0 Reimbursement. The Bank may reimburse the Borrower for expenditures eligible for financing pursuant to the Credit Agreement (“eligible expenditures”) that the Borrower has pre-financed from i t s own resources;

0 Advance, The Bank may advance loan proceeds into a designated account o f the Borrower to finance eligible expenditures as they are incurred and for which supporting documents will be provided at a later date.

0 Direct Payment - The Bank may make payments, at the borrower’s request, directly to a third party (e.g., supplier, contractor, and consultant) for eligible expenditures.

The Disbursement Deadline Date will be four months after the Closing Date o f the project.

Designated Accounts and Ceiling A Designated Account (DA) in U S dollars will be maintained by the PMU at a commercial bank under terms and conditions acceptable to IDA. The b A ’ s ceiling will be specified in the Disbursement Letter.

64

Reporting. Withdrawal applications (WA) reporting eligible expenditures paid from the designated account will be submitted monthly, with the following documentation:

For the expenditure of Component 2- Project ImplementationSupport of the Project:

o Use of Statement of Expenditures (SOEs). For: (a) goods costing less than $300,000 equivalent per contract; b) for services o f individual consultants costing less than $50,000 equivalent per contract; (d) for services o f consulting f i r m s under contracts costing less than $100,000 equivalent per contract; and (e) workshops, training and incremental operating costs, withdrawals under the Credit Agreement will be made on the basis o f Statements o f Expenditure. The related payment documents will be made available for the required audits, as well as to the Bank supervision missions upon request.

o Other Expenditures. All other expenditure above the SOE thresholds will be submitted on the basis o f full documentation which will include copies o f receipts, supplier invoices and bills o f lading.

For the expenditure of Component 1 - Investment Capital: supporting documentation includes (i) copies o f sub-loan applications; (ii) copies o f sub- loan financing agreements (between LDIF and project owners); (iii) copies o f claims from project owners; (iv) copies bank advices that payments have been made from LDIFs to Project Owners or their contractors; and (v) the confirmation (kh& zedc nh& nq) o f the Project Owners that payments were made in relation to their loans.

Application for Advances. The P M U may apply for an advance in an amount up to the Ceiling less the aggregate amount o f those advances previously received for which it has not yet provided supporting documentation

65

Fund flow diagram for Component 1- Investment Capital

Contractors I i b

Step 1 to Step 3: Fundflow from IDA to PMU 1. PMU prepares the W A and sends to MOF - Debt Management and External

Finance Department for co-signature; 2. PMU submits W A to IDA; 3. IDA disburses monies to the PMU’s DA at a commercial bank.

Step 4 to Step 9: Fund Flow from PMU to Beneficiaries 4. Contractors submit payment requests, invoices and other documentation to

Project owners; 5. Project Owners send requests for payment to LDIFs; 6. LDIFs submit request for disbursement to PMU; 7. PMU instructs Commercial Bank to transfer to beneficiaries (subprojects); 8. Commercial Bank transfers funds to beneficiaries (subprojects) in 2 ways:

8 (a). P M U advances to LDIFs so that LDIFs can make payments to Project Owners (Step 9(a)) or Contractors (Step (9b)). This flow must be applied only for payments for the contracts with the contract value o f less than a Threshold Amount (*);

8 (b). P M U “directly” make payments to contractors. This f low i s only applied for payments for the contract with the contract value o f more than a Threshold Amount (*).

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(*) A Threshold is established in the FM Guidance

Fund flow to Project Management Unit for Component 2- Project Implementation Support of the Project

1. P M U prepares the W A and sends to MOF - Debt Management and External Finance Department for co-signature;

2. PMB submits W A to IDA; 3. IDA disburses monies to the Designated Account o f the PMU at commercial

bank; 4. Contractors submit claim for expenditure to PMU; 5. P M U reviews, certifies and then submit to State Treasury for i t s verification; 6. State Treasury checks, approves and send back to PMU; 7. P M U sends the request for payments to the commercial bank; 8. The commercial bank makes payment to the Contractors.

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10. Financial Reporting Quarterly Interim Financial Reports (IFRs) For this project, each LDIF wi l l be required to submit to P M U a quarterly IFR within 30 days o f the end o f the quarter. The PMU will prepare and submit a consolidated IFR for the project within 45 days o f the end o f the quarter. The IFRs wi l l cover all project activities, including counterpart funding. The IFRs will be based on the Aligned Monitoring Tool (AMT), which i s regulated under the Decision 803 o f the Ministry o f Planning and Investment.

The IFRs include the following forms (with the reference number as indicated in the AMTpackage).

Financial reports (analyzing expenditures against budgets) e

e e

e PMB only).

IFRl : Sources and Uses o f Funds by expenditure category; Form 4: Disbursement o f ODA Fund (by component/loan contracts); Form 6: Disbursement o f Counterpart Fund (by component); and IFR3 : Statement o f Designated Account Reconciliation (for component o f

Contract monitoring reports for component of PMU only) e e

Form 12: Contract Progress; and 11 Forms (Form 7- Form 11): Reports on Procurement Monitoring.

Annual Project Financial Statements Each PMU/LDIF will prepare annual financial statements covering the project components and activities for which they are responsible. The financial statements must be prepared on a modified cash basis in accordance with generally accepted accounting principles. P M U will consolidate the annual financial statements o f the whole project.

The Project Financial Statements will consist of: A Statement o f Sources and Uses o f Funds / Cash Receipts and Payments that recognize all cash receipts, cash payments and cash balances controlled by the entity; and separately identify payments by third parties on behalf o f the entity. The Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presented in a systematic manner with items on the Statement o f Cash Receipts and Payments being cross referenced to any related information in the notes. Examples o f this information include a summary o f fixed assets by category o f assets, and a schedule o f credit / grant withdrawals, listing individual withdrawal applications; and A Management Assertion that Bank funds have been expended in accordance with the intended purposes as specified in the relevant legal agreements (Financing Agreement and Subsidiary Loan Agreement).

The annual project financial statements are required to be audited and submitted to the Bank within 6 months o f the end o f each financial year.

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11. Audit Arrangements

Audit of Project Financial Statements The PMU will appoint independent auditors acceptable to IDA. The project consolidated financial statements will be audited annually in accordance with international auditing standards and acceptable terms o f reference. The auditors’ reports will be made available to IDA within six months o f the close o f the fiscal year. Each audit report will have a single audit , opinion covering Project Accounts and Designated Accounts (including adequacy o f SOEs for disbursement purposes). The auditor will also provide a management letter addressing internal control weaknesses o f the implementing agencies.

Audit of the LDIF Entity Financial Statements LDIFs will be required to submit the auditor reports and audited entity financial statements annually to IDA within six months o f the close o f the fiscal year. The financial statements to be audited will be prepared in accordance with Vietnamese Accounting Standards, and will be audited in accordance with International Standards on Auditing by the independent auditor acceptable to IDA and under similarly acceptable TOR. The PMU will appoint the independent auditors acceptable to IDA and the audit will be funded under Component 2 o f the project.

The annual financial statements and audit reports will be made available to the public through the websites o f the MOF and LDIFs.

12. Supervision Plan The supervision strategy for this project i s based on i t s FM risk rating, which will be evaluated on regular basis by the FMS arid in consultation with relevant task team leader.

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Annex 8: Procurement Arrangements VIETNAM: LOCAL DEVELOPMENT INVESTMENT FUNDS PROJECT

A. General

All goods, works, and consulting services required for the proposed Project and to be financed out o f the IDA Credit shall be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits, ” dated M a y 2004, revised October 1 , 2006 (the Procurement Guidelines); and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers, ” dated M a y 2004, revised October 1 , 2006 (the Consultant Guidelines), and the provisions stipulated in the Financing Agreement. The descriptions o f procurement arrangements (including applicable procurement methods, thresholds, use o f Bank Standard Bidding Documents, special provisions for national competitive bidding, etc.) for each Component o f the proposed project, assessment o f the procurement capacity o f project implementing agencies, requirements on procurement planning, and Bank review procedures are described in the sections below.

B. Procurement Arrangements

B1. firms and/or autonomous commercial firms in public sector)

Procurement under Component 1 (Sub-loans by LDIF loans to private sector

More than 97% o f the IDA Credit funds (US$185 mi l l ion out o f the total US$190 million) will be relent through LDIFs as sub-loans to dozens o f private sector firms and/or autonomous commercial enterprises in public sector financing their municipal infrastructure subprojects. The fol lowing procurement arrangements will apply to these subprojects.

Procurement o f Works:

Works under subprojects by LDIF’s borrowers are municipal infrastructures o f various types such as hospitaldclinics, water supply/wastewater treatment, schools/colleges, pumping stations, residential buildings, underground car parks, etc. LDIF borrowers would be responsible for procurement o f works for their respective subprojects using established private sector or commercial practices in accordance with paragraph 3.12 o f the Bank’s Procurement Guidelines. The private sector and commercial practices being used by those enterprises include (i) open or limited competitive bidding using procedures similar to that described in the national Procurement L a w (normally used for relatively large or technically complex works); (ii) shopping based o n comparison o f a minimum o f 3 quotations; (iii) self-construction using the f irms’ own personnel and equipment capabilities; (iv) direct contracting with a qualified contractor for small or technically specialized works. These commercial practices are found to be generally acceptable. However, it i s recommended that large and complex works that are estimated to cost US$ 7 mil l ion or more per contract shall be procured through I C B method as

70

provided in Section I1 o f the Bank’s Procurement Guidelines, because ICB may be the most appropriate procurement method for such works. For ICB contracts, the Bank’s Standard Bidding Documents will be used.

Procurement o f Goods:

LDIF borrowers would procure various types o f goods and equipment for their subprojects. In procurement o f these goods, they would be allowed to use established private sector or commercial practices in accordance with paragraph 3.12 o f the Bank’s Procurement Guidelines. Shopping i s the prevailing method for procurement o f goods by these enterprises. Before inviting quotations, the f i rms would normally have to check references or carry out a mini market search to identify reputable suppliers or inspect quality o f similar goods. For relatively large goods contracts (normally several hundred thousands U S dollars per contract), they may use competitive bidding using a procedure similar to that specified in the national Procurement Law. For very small or technically specialized goods, or when the need for technical compatibilitykontinuity i s critical, they would use direct contracting with a supplier, whose qualifications and quality o f goods they already know. In general, these commercial practices are assessed as acceptable. However, the Bank team recommends that large goods items estimated to cost U S $ 1 million or more per contract under sub-projects o f LDIF borrowers shall be procured following ICB method as described in Section I1 o f the Bank’s Procurement Guidelines, because ICB may be the most appropriate method for such large valued goods. The Bank’s Standard Bidding Documents for Procurement o f Goods or for Supply and Installation o f Plant and Equipment will be used for those ICB contracts depending on their values and nature.

Selection o f Consultants:

Since the costs o f consultants’ services required for LIDF borrowers’ subprojects account only for a small amount o f their investment, they seem to want to use their own money for consultants’ services. However, in the case they use the borrowed IDA funds for hiring consultants (for preparation o f designs and technical specifications, construction supervision, procurement support, etc), they would select such consultants following established private sector commercial practices in accordance with paragraph 3.14 o f the Bank’s Consultant Guidelines. The following commercial practices to select consultants by the sub-borrowers could also be used for their proposed subprojects. For small contracts (no specific threshold established, but normally less than V N D S O O million- US$30,000--per contract) or downstream assignments, single source selection would be normally used (in practice, before contracting with the selected firm, they usually inspect and consider qualifications, experiences or references o f several candidates; this procedure i s more or less similar to the Bank’s CQS method). For larger contracts, consultants would be selected through a competitive procedure similar to the competitive selection method specified in the national Procurement Law. These commercial practices are found to be generally acceptable. However, the Bank team recommends that large consulting assignments estimated to cost US$1 mill ion or more per contract shall be procured through the QCBS method described in Section I1 o f the Bank’s Consultant Guidelines, because QCBS may be the most appropriate procurement method for such

71

large assignments. For these QCBS contracts, the Bank’s Standard Request for Proposals will be used.

B2. Procurement under Component 2 (Project Implementation Support)

The remaining funds o f the IDA Credit (US$5 million) under Component 2 will be used to support the development o f regulatory and institutional capacity o f the MOF’s PMU. The PMU will be responsible for procurement under this component. The following procurement arrangements apply to this part o f the project.

Procurement o f Works

N o works are required under this Component.

Procurement o f Goods

The PMU would procure some goods and equipment such as IT hardware and software, computers, printers, photocopiers, faxes and phones, office furniture, etc for project implementation and management, and capacity strengthening purposes. Contracts for these goods, if estimated to cost US$300,000 equivalent or more, each w i l l be procured through the ICB method and the Bank’s Standard Bidding Documents for Goods will be used. Goods estimated to cost below US$ 300,000 per contract may be procured through the NCB method. The NCB procedures to be followed shall be those stated in Law on Procurement 61 / 200YQH11, dated November 29, 2005, and Decree 58/2008/ND-CP, Guiding Implementation of Law on Procurement and selection of contractor bidder in accordance with Law on Construction, dated May 5, 2008, and subject further to the provisions stipulated in the Annex to the DCA (see the Attachment to this Annex). Bidding documents for NCB contracts wi l l follow the Model NCB documents for procurement o f goods prepared by the WB Vietnam Office. Readily available off-these l f goods o f small value (less than US$50,000 per contract) may be procured using Shopping procedures.

Selection o f Consultants:

The PMU would need to hire various consultants (individuals and firms) for capacity building, operational support, support for monitoring and qualification o f LDIFs, analysis o f pre-screened sub-projects, monitoring o f environmental and social safeguards implementation under sub-projects, and financial auditing. In selection o f these consultants, QCBS and Selection o f Individual Consultants will be the primary methods. In addition, other methods including QBS, CQS (CQS may only be used for small assignments estimated to cost less than US$lOO,OOO per contract) and SSS may be used depending on the nature, complexity and value o f assignments. The Bank’s Standard Request for Proposals will be used in selection o f consultants (firms). Shortlists shall comprise 6 f i r m s with a wide geographic spread with no more than two f i r m s from any one country and at least one firm fiom a developing country unless qualified f i r m s from developing countries are not identified. The shortlist may comprise entirely national consultants if the estimated cost o f the assignment i s below US$200,000, a sufficient number o f qualified firms i s available for having a shortlist o f f i rms with competitive

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costs, and when competition including foreign consultants i s prima facie not justified or foreign consultants have not expressed interest.

C. Procurement

Assessment of the Proiect Implementing Agencies’ Capacity to Implement

Procurement under the proposed project would be done by dozens o f private sector/public sector autonomous commercial enterprises who re-borrow IDA funds from LDIFs (Component 1) and the MOF’s P M U (Component 2). An assessment o f the procurement implementing capacity o f the MOF’s P M U and three example private sector f i r m s (namely An Dien Environment and Water Joint Stock Company; Khai Minh Joint Stock Company, and Phu Long Real Estate Joint Stock Company) who are potential sub- borrowers o f LDIFs was conducted. It was found that (i) the MOF’s P M U has had considerable experiences with Bank procurement rules and procedures due to i t s implementation o f procurement under a PHRD Grant for preparation o f this project; (ii) the PMU’s organization and staffing (including i ts planned staffing reinforcement for project implementation stage) i s generally adequate and the proposed procurement specialist i s generally qualified; (iii) the PMU i s currently being supported by two international consulting f i r m s for preparation o f procurement plan, technical specifications/terms o f reference, and bidding documents for major contracts. On the three potential borrowers o f the LDIFs, it was found that the firms have had good arrangements for implementation o f procurement work for their proposed subprojects (they already hired consultants for preparation o f design, cost estimates, and are hiring or intended to hire consultants for project management including procurement support, using their own money). These companies had good organizational, staffing and financial capabilities and the commercial practices on procurement being used by them or intended for their subprojects are found generally acceptable. Based on this assessment, the procurement risk for the proposed Project i s rated as ”moderate”.

The Bank team has recommended the following recommendations, which have been agreed with the Borrower, for strengthening the Project procurement implementing capacity and assuring quality o f procurement work:

(i) a procurement session be organized during the Project launching workshop to introduce the Project’s specific procurement requirements with a focus on ICB/QCBS and acceptable commercial practices to be used under the Project. More in-depth training on ICB/QCBS procedures may be conducted for the PMULDIF borrowers during Project implementation upon actual need;

(ii) LDIF borrowers be required to prepare and include in their application for loan a proposed procurement plan for their subproject. The concerned LDIFP should review and ensure reasonableness and appropriateness o f such procurement plan in accordance with the procurement requirements o f the Finan,cing Agreement before approval o f the loan;

(iii) a consultant be hired by the P M U to verify (on sample and periodical basis) the quality o f subprojects completed and the quality o f procurement work done by LDIFs’

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borrowers. The consultant’s verification reports should be submitted for the Bank’s review.

(iv) For large or complex procurement, LDIF borrowers be advised to hire qualified procurement consultants for help. The Bank should conduct prior review al l o f ICB/QCBS contracts implemented by LDIF borrowers to help them properly implement and ensure full compliance with the Bank’s Guidelines.

(v) The Project’s Operational Manual (OM) should include a procurement section describing the specific procurement requirements, procedures, guidance, standard and sample procurement documents/forms applicable to the preparation and implementation o f sub-projects by LDIF borrowers. The O M as well as i t s procurement requirements should be legally enforced by reference in the sub-loan agreements with LDIF borrowers.

D. Procurement Plan

The P M U has prepared a detailed Procurement Plan for i t s Component 2’s activities (see Attachment 2). This Procurement Plan is generally acceptable and it will be made available in the Project’s database and on the Bank’s external website when officially approved by the Bank. The PMU will need to review and update this Procurement Plan annually subject to the Bank’s prior agreement. With regards to subprojects under Component 1, LDIF borrowers shall be required to prepare and include a detailed procurement plan for their subproject as part o f their loan application. The concerned LDIF should review and ensure reasonableness and appropriateness o f such procurement plans in accordance with the procurement requirements o f the Financing Agreement before approval o f the loan.

E. Bank Prior-Review and Frequency o f Procurement Supervision

Based on the result o f the procurement capacity assessment, the fol lowing requirements for Bank procurement prior-review are set up:

All contracts for procurement o f goods and works to be procured under International Competitive Bidding (ICB) and al l contracts for procurement o f consultants’ services to be procured under Quality and Cost Based Selection (QCBS) by LDIF borrowers under Component 1;

The f i rst contracts for goods and consultant’s services, regardless o f value, procured fol lowing each procurement method by the PMU;

Consultant’s contracts with f i r m s estimated to cost US$lOO,OOO or more each and with individuals estimated to cost US$50,000 or more; al l consultant’s contracts to be procured through SSS method by the PMU.

Other contracts than those mentioned above shall be subject to the Bank’s post review procedures. It is recommended that supervision missions are carried out to conduct post review o f contracts every twelve (12) months. Given that the bulk o f the procurement under this operation will not be subject to prior review and will be carried out by LDIF

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borrowers using private sector and commercial practices, the Bank team recommends that the P M U hire an independent verificatiodprocurement auditor. The TOR for this assignment should include a periodic (annual) review o f the procurement carried out by the LDIF borrowers and should mostly focus on physical verification and value for money (reasonableness o f cost). The consultant’s verification reports should be submitted for the Bank’s review. The procurement post-review by the Bank team will mainly focus on the procurement done by the MOF’s PMU.

F. Details of the Procurement Arrangements Involving International Competition

1 2 3 4 5 6

Ref. Description of Assignment Est. Selection Review Expected No. Cost Method by Bank Proposals

(Prior / Submission ($ m) Post) Date

A03 Support for monitoring and 2.05 QCBS Prior Oct. 2009

A04 Detailed analysis o f pre- 0.7 QCBS Prior Oct. 2009

A05 Monitoring o f environmental 0.7 QCBS Prior Aug. 2009

qualification o f LDIFs

screened subprojects

and social safeguards of subprojects finded through ODA

financial audit A06 External assistance for 0.8 QCBS Prior Aug. 2009

1. Goods and Works and non-consulting services.

7

Comments

(a) List o f contract Packages that will be procured following ICB method and direct contracting:

There may be ICB contracts for goods and works by LDIF borrowers, but they are not yet identified at the project appraisal.

(b) All ICB Contracts will be subject to prior review by the Bank.

2. Consulting Services.

(b) Consultancy services by f i r m s estimated to cost (i) above US$l,OOO,OOO equivalent per contract under Component 2 and (ii) above US$l 00,000 equivalent per contract under Component 2 will be subject to prior review by the Bank.

(c) Shortlists may comprise entirely national consultants if the estimated cost o f the assignment i s below US$200,000, a sufficient number o f qualified f i r m s i s available for having a shortlist o f f i r m s with competitive costs, and when

75

competition including foreign consultants i s prima facie not justified or foreign consultants have not expressed interest.

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Attachment 1:

NATIONAL COMPETITIVE BIDDING PROCEDURES

The procedure to be followed for National Competitive Bidding shall be those set forth in Article 18 on Open Bidding o f the Law on Procurement 61 / 2005/QH11 dated November 29, 2005 and Decree 58/2008/ND-CP, Guiding Implementation of Law on Procurement and Selection of Construction Contractors under the Construction Law dated May 5, 2008 (collectively, “National Procurement Laws”) with due consideration to economy, efficiency and transparency as set forth in, and broad consistency with, Section I o f the o f the “Guidelines for Procurement under IBRD Loans and IDA Credits” published by the Association in May 2004 and revised in October 2006 (the Guidelines) and required by paragraphs 3.3 and 3.4 o f the Guidelines. Whenever any procedure in the National Procurement Laws i s inconsistent with the requirements o f said paragraphs 3.3 and 3.4 o f the Guidelines, the latter shall prevail, including the following:

Eligibility

(i) The eligibility o f bidders shall be as defined under Section I of the Guidelines; accordingly, no bidder or potential bidder shall be declared ineligible for contracts financed by the Association for reasons other than those provided in Section I o f the Guidelines. Foreign bidders shall be eligible to participate in bidding under the same conditions as national bidders. In particular, no domestic preference over foreign bidders shall be granted to national bidders in bid evaluation, nor shall foreign bidders be asked or required to form joint ventures with national bidders in order to submit a bid. Bidders located in the same province or city as the procuring entity shall not be given preference over bidders located outside that city or province.

(ii) In addition to the foregoing requirements, equitized Government-owned enterprises in which the Recipient holds less than fifty percent o f the shares are eligible to participate, provided that the procuring entity or investment owner does not own shares (or represent the Government’s shares) in the enterprise and the governing Board and management team are autonomous from the procuring entity and the investment owner. Military or security un i t s or enterprises established under, reporting directly or indirectly to, or owned wholly or partly by, the Ministry o f Defense or the Ministry o f Public Security shall not be permitted to bid.

Registration

(iii) Registration shall not be used to assess bidders’ qualifications. A foreign bidder shall not be required to register as a condition for submitting its bid and, if determined to be the lowest evaluated responsive bidder, shall be given reasonable opportunity o f registering, without any let or hindrance. Bidding shall not be restricted to any particular class o f contractors, and non-classified contractors shall also be eligible to bid.

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Advertising; Time for Bid Preparation

(iv) Invitations to bid shall be advertised in at least one widely circulated national newspaper, allowing a minimum o f thirty (30) days, from the date o f the invitation to bid or the date o f availability o f the bidding documents, whichever i s later, for the preparation and submission o f bids, and potential bidders shall be allowed to purchase bidding documents up to any time prior to the deadline for the submission o f bids. In addition, the Recipient i s encouraged to advertise in the Government Public Procurement Bulletin and on a free and open access website.

Standard Bidding; Documents

(v) Standard Bidding Documents, acceptable to the Association, shall be used.

Qualification Criteria

(vi) Qualification criteria shall be clearly specified in the bidding documents, and all criteria so specified, and only such specified criteria, shall be used to determine whether a bidder i s qualified. Qualification shall be assessed on a pass or fail basis and merits points shall not be used. Such assessment shall only take into account the bidder’s capacity and resources to perform the contract, specifically i t s experience and past performance on similar contracts, capabilities with respect to personnel, equipment and construction and manufacturing facilities, and financial capacity.

Bid Submission, Bid ODening and Bid Evaluation

(vii) Bidders may submit bids, at their option, either in person or by courier service or by mail. Bids shall be opened in public, immediately after the deadline for submission o f bids. Bids received after the deadline for bid submission shall be rejected and returned to the bidders unopened.

(a) Bidding documents shall be sold to anyone who i s willing to pay the required fee o f the bidding documents which shall not exceed the costs o f printing, reproduction and delivery, and no other conditions shall be imposed on the sale o f the bidding documents.

(b) Evaluation o f bids shall be made in strict adherence to the criteria that shall be clearly specified in the bidding documents and quantified in monetary terms for evaluation criteria other than price; merit points shall not be used in bid evaluation.

(c) A contract shall be awarded to the technically responsive bid that offers the lowest evaluated price and no negotiations shall be permitted. A bidder shall not be required, as a condition for award, to undertake obligations not specified in the bidding documents or otherwise to modify the bid as originally submitted.

(d) minor, non-substantial deviations.

A bidder shall not be eliminated from detailed evaluation on the basis o f

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(e) No bidder shall be rejected on the basis o f a comparison with the employer’s estimate and budget ceiling without the Association’s prior concurrence.

(0 A copy o f the minutes o f the public bid opening shall be promptly provided to all bidders who submitted bids, and to the Association with respect to contracts subject to prior review.

Reiection o f All Bids and Re-bidding,

(viii) All bids shall not be rejected or new bids solicited without the Association’s prior written concurrence.

Complaints by Bidders and Handling o f Complaints

(ix) allowing bidders to protest and to have their protests handled in a timely manner.

The Recipient shall implement an effective and independent protest mechanism

Fraud and Corruption

(x) The Association shall declare a firm or individual ineligible, either indefinitely or for a stated period, to be awarded a contract financed by the Association, if it at any time determines that the firm or individual has, directly or through an agent, engaged in corrupt, fraudulent, collusive, coercive or obstructive practices in competing for, or in executing, a contract financed by the Association.

Right to Inspect/Audit

(xi) Each bidding document and contract financed from the proceeds o f a Credit shall include a provision requiring bidders, suppliers, contractors and subcontractors to permit the Association, at i t s request, to inspect their accounts and records relating to the bid submission and performance o f the contract and to have said accounts and records audited by auditors appointed by the Association. The deliberate and material violation by the bidder, supplier, contractor or subcontractor o f such provision may amount to obstructive practice.

License

(xii) obtain work license, which shall not be arbitrarily withheld.

Foreign contractors shall be given a reasonable opportunity to apply for and

Publication o f the Award o f Contract

(xiii) The Recipient shall publish the following information on contract award in the Government Public Procurement Bulletin or on a free and open access website or on another means o f publication acceptable to the Association: (a) name o f each bidder who

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submitted a bid; (b) bid prices as read out at bid opening; (c) name and evaluated price o f each bid that was evaluated; (d) name of bidders whose bids were rejected and the reasons for their rejection; and (e) name o f the winning bidder, price it offered as well as the duration and summary scope o f the contract awarded. This publication shall be updated regularly.

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Attachment 2:

DRAFT PROCUREMENT PLAN (FOR COMPONENT 2 ONLY)

I. GENERAL

Project information:

Country: Vietnam

Borrower: Socialist Republic o f Vietnam

Project Name: Local Development Investment Funds Project (LDIFP)

Loadcredit No.: N/A.

Project Implementing Agencies: MOF’s P M U and LDIF borrowers (private sector f i rms and public sector autonomous commercial enterprises)

Period covered by this procurement plan: only Component 2 (Project Implementation Support, US$5 million) to be executed by MOF’s PMU.

II. Goods and Works and non-consulting services.

1. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines for Procurement: Refer to Section E, Annex 8 o f the PAD.

2. Special Procurement Arrangements: No.

3. Tentative Procurement Packages with Methods and Time Schedule

1 1 2 3 4 1 5 1 6 7 8 9

Ref. No.

A0 1-A

A02-A

Remark Contract Est. Proc. PQ D o m e s t i c Review Expected Descriptions cost Method P r e f e r e n c e by Bank Bid-

Opening Date

Office equipment 100,000 Shopping No No. PriorPost Sept. 2009 and vehicle support IT hardware (for 50,000 Shopping No No. Post Nov. 2009 information system for LDIF

(US$)

A02-B

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monitoring) Various IT 100,000 NCB No No. Prior Nov. 2009 software (for information system for LDIF monitoring)

III. Selection of Consultants

Ref. No.

1. Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines Selection and Employment o f Consultants: Refer to Section E, Annex 8 o f the PAD.

Description of Assignment

2. Shortlists may comprise entirely national consultants if the estimated cost o f the assignment i s below US$200,000, a sufficient number o f qualified f i r m s is available for having a shortlist o f firms with competitive costs, and when competition including foreign consultants is prima facie not justified or foreign consultants have not expressed interest.

3. Special Procurement Arrangements: No.

4.

Short list comprising entirely of national consultants:

Consultancy Assignments with Selection Methods and Time Schedule

cost (US$)

Method by Bank (Prior I Post)

AO1-B

A0 1 -C

A03

A04 I screened subprojects-

A05 I Monitoringof

Capacity building

Operational support

Support for monitoring and qualification o f LDIFs Detailed analysis o f pre-

environmental and social safeguards o f subprojects

External assistance for financial audit

250,000

250,000

2,050,000

700,000

700,000

800,000

EpL Selection Review

Individual PriorPost Consultant Individual PriorPost Consultant

QCBS Prior

QCBS Prior

QCBS Prior

QCBS Prior

6

Expected Proposals

Submission Date

Aug. 2009

Sep. 2009

Nov. 2009

Dec. 2009

Sept. 2009

Oct. 2009

7

Remark

Various contracts Various contracts

Various contracts

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Annex 9: Economic and Financial Analysis VIETNAM: LOCAL DEVELOPMENT INVESTMENT FUNDS PROJECT

FINANCIAL ANALYSIS OF QUALIFIED AND CONDITIONALLY QUALIFIED LDIFs

AND OP 8.30 ANALYSIS

Qualified and conditionally qualified ,LDIFs Through the qualification process to select LDIFs that would be eligible for funding in the first year o f LDIFP, the following funds have qualified:

’

Ho Chi Minh City Investment Fund for-Urban Development (HIFU) Hanoi City Development Investment Fund (HANIF) Dong Nai Development Investment Fund (DNIF) Binh Duong Development Investment Fund (BDIF) Tien Giang Development Investment Fund (TGIF)

In addition, the following funds have been conditionally qualified, with funding pending fulfillment o f outstanding requirements:

0

0

0

Da Nang Local Investment Fund (DAIF) Daklak Local Investment Fund (DLIF) Dong Thap Local Investment Fund (DTIF) Khanh Hoa Local Investment Fund (KHIF)

The qualified LDIFs fulfilled the criteria set forth and approved by MOF (details of the qualification process can be found in Annex 4):

1. 2. 3.

4.

5.

6. 7.

8.

LDIFs have charter that i s line with the model charter set out by MOF Charter capital o f LDIF i s at least VND 100 billion Annual financial statements o f LDIF are audited within six months from the end o f the LDIF fiscal year Ratio o f mobilized capital to charter capital i s less than 6: 1 , with commitment o f PPC to infuse adequate additional capital if the ratio exceeds the limit LDIF has been in operation for at least two years, with at least one year of profitability Non-performing loans account for less than five percent oftotal assets LDIF has at least two subprojects in the pipeline, with feasibility conducted for at least one subproject” LDIF has at least five full-time employees, including at least one financial analyst

This criterion (in addition to others listed above) applies to the qualification o f the LDIF. Fulfillment o f th is specific criterion does not automatically mean that these subproject(s) for which feasibility has been conducted will receive IDA funding. The subprojects o f Qualified LDIFs to be prepared in the first year o f implementation will only receive IDA funding after the Bank has conducted safeguards review and provided approval, a d the MOF PMU has reviewed the subproject for compliance with the Project Manual and all Project agreements. .

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Financial In4ermediary Analysis The detailed due diligence o f qualified LDIFs’ financial accounts was conducted to determine the financial viability o f the LDIFs as potential Bank partners in a financial intermediary loan. The analysis reviewed the quality o f the LDIFs’ loan portfolio, including the level o f non-performing loans and a review of loans to determine loan rates and repayment quality. Finally, the Income Statements were analyzed vis-a-vis profitability and operational efficiency.

The analysis confirmed that the qualified LDIFs are in strong financial position, including solid charter capital, healthy debt-equity ratios, total assets, and net income. The quality o f loan portfolios i s good, with very low non-performing rates. The quality o f investment portfolios i s strong, with heavy concentration in infrastructure related investments. Analysis o f the LDIFs’ positions i s provided below.

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H o Chi Minh City Investment Fund for Urban Development (HIFU)

HIFU i s in a strong financial position with total paid-in capital (charter capital) o f VND 1,985 billion in 2008, and a healthy capital adequacy ratio, as high as 52% in 2007. Total assets have consistently increased over the years, from VND 3,323 billion in 2005 to VND 5,408 billion in 2007. From 2005 to 2008, net income increased from VND 85 billion to VND 175 billion. The quality o f the portfolio i s good, with a very low rate o f non-performing loans. The investment portfolio i s heavily concentrated in infiastructure- related investments.

2007 2006 2005 VND m VND m VND m

ASSETS Cash Accounts receivable Mid and long-term loans Loans from trust knd Other loans Long-term investments Fixed assets Total assets

275,375 283,074 110,978 20,607 4,447 1,040

3,256,7 5 1 2,55 3,875 1,76 1,2 17 294,484 26 4,2 60 676,206 456,298 65 7,022 47 8,6 62

1,040,l 14 478,601 256,292 65,010 , 65,521 39,207

5,408,639 4,30 6,8 00 3,323,602

LIABILITIES AND OWNER'S EQUITY TOTAL LIABILKIES Liabilities 40,465 3 0,496 36,420 Interest payable and interest o f mobilized capital 14,835 4,302 7,369 Interest payable oftrust fund 9,678 8,748 11,664 Deposit interest payables 36,833 49,369 10,795 Total Liabilities 101,8 11 92,915 66,248

OWNERS EQUITY Chartered Capital Foreign exchange difference Lending using ODA fund Mobiliaed capital Credit and deposits Retained earnings Reserves Total owner's equity Total Liabilities and Owner's Equity

Overall loan review

Medium and long-term loans to customers Loans from trust f h d to customers Loans from other trust funds Other loans to customers

1,869,2 84 1,739,212 1,288,223 405 5 40 5 15

267,072 37,535 37,535 1,065,425 382,900 216,100 1,877,145 1,86 6,4 89 1,609,7 70

139,028 100,238 85,371 88,469 86,972 19,840

5,306,828 4,213,886 3,257,354 5,408,639 4,306,800 3,323,602

2007 2006 2005 VND m VND m VND m

3,256,751 2,553,875 1,76 1,2 17 294,484 264,260 676,208

8,750 24,605 29,000 449,660 63 4,5 29 449,660

4,009,645 3,477,269 2,916,085

Non Performing Loans in 2007:

0 Total amount o f non-performing loans: 3,036 million VND

0 As a % of total portfolio: 0.9%

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Investments

Other long term investment Investment in securities

YO oftotal assets

2007 2006 2005 VND m VND m VND m

0 0 38 9 1,040,114 478,601 255,903 1,040,114 478,601 256,292

1 Y ! 11% 8%

Investment portfolio accounts for a significant part o f total assets of HIFU and has increased over the years. The investment portfolio i s diversified in terms o f types o f investment and size.

Areas of investment have been primarily in transportation, residential and industrial infrastructure, followed by water and public health. The majority o f these loans are medium and long-term loans. The composition o f the portfolio o f the HIFU find i s shown below:

Loan porrfolio by industry Indus tri al/Res idential zone infm tructure 3 7% Transportation 33% Public Health 10% Watermlect rici ty supply 9% Education 6% Others 5%

Analysis of income statement 2007 2006 2005

VND m VND m VND m TOTAL INCOME Interest and similar income Interest and similar expenses Net interest margin Other operating income TOTAL OPERATING INCOME

Employee eqnses Depreciation, amortization, maintenance Other operating expenses TOTAL

Profit Before Tax Enterprise income tax Profit Atter Tax

21 0,770 148,138 121,085 (5 7,143) (41,405) (37,701) 153,627 106,733 83,384 283 16 25,682 11,715

182,143 132,4 15 95,099

(4,575) (3,420) (2,807) (1 6,684) (12,507) (9,730)

165,459 119,908 85,369 (26,900) (19,671) 138,559 100,237 85,369

The largest part o f HIFU income comes from interest from lending, with the next significant contribution coming from dividend income. Net interest income i s relatively high-this shows a high margin on the Fund, which i s attributed by the fact significant hnd resources are from owner’s equity and free o f cost.

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Key performance ratios

Net Income /TA = ROA Interest Income /TA Interest Expense / TA Net interest margin / TA

2007 2.5% 3.9% 1.1% 2.8%

2006 2.3% 3.4% 1 .o% 2.5%

2005 2,6% 3.6% 1,1% 2.5%

Hanoi City Development Investment Fund (HANIF)

HANIF i s in a strong financial position with total paid-in capital (charter capital) o f VND 927 billion in 2008, and a healthy capital adequacy ratio. Total assets have increased over the years, from VND 694 billion in 2005 to VND 1,223 billion in 2007. From 2005 to 2008, net income increased from VND 7.9 billion to VND 63 billion. The quality o f the portfolio i s good, with a very low rate o f non-performing loans. The investment portfolio i s heavily concentrated in infrastructure-related investments.

2007 2006 2005 VND m VND m VND m

ASSETS Cash Accounts receivable Other short-term assets Medium and long term loans Other loans Fixed assets Total assets

LIABILITIES AND OWNER'S EQUITY TOTAL LIABILITIES Liabilities Mobilized capital Borrowing fmm domestic organizations Deposit o f Hanoi budget Total Liabilities

OWNWS EQUITY Charter Capital Credit guarantee fund Retained earnings Reserves Other funds Total owner's equity Total Liabilities and Owner's Equity

608,138 32 8,168 308,178 7,932 4,850 12

385,s 03 41 8,967 383,965 220,110 29,550

1,383 1,533 1,653 1,223,117 783,068 693,808

51

102,642 5,735 4,234 165,924 55,977 11,400 50,872 15,960 10,500

115,051 4 0,O 17, 14 1,138 434,489 11 7,689 167,272

715,086 61 1,240 10,261

7,9 77 9,928 7,390 4,970 2,406 1,754

28,968 10,176 507,131

3 1,628 3 1,628

788,629 66,5,378 526,536 1,223,117 783,068 693,808

The quality o f HANIF's loan portfolio i s considered strong, with the majority o f subprojects involving residential infrastructure.

Medium and long-term loans to customers

2007 2006 2005 VND m VND m VND m

385,503 41 8,967 383,965

88

Construction o f high storey apartment block in Nam Trung Yen resettlement area project

06 Storey apartment block, serving for resettlement, land clearance in housing area for

17 storey high building, Hoang Van Thu Ward, Hoang Mai District

High storey apartment block - Housing area project in Xuan La Ward, Tay Ho District.

sale project at M e Tri, Tu Liem, Hanoi

1 30,000

10,000

20,000

20,000

11 storey high building NOCT - Building C - Cau Dien, Tu Liem, Hanoi I 10,000

9 Storey apartment block at M y Dinh, Tu Liem, Hanoi

High storey apartment block lot 26A & lot 27 at 2 1 .NO north o f Dai Kim

9 storey apartment block - CT4 in the project o f housing construction for sale in M e Tri. Tu Liem

1 1 storey high building NOCT - Building C - Cau Dien, Tu Liem, Hanoi 1 13,000

10,000

5,000

5,000

I 179000 Apartment block No. 02A for workers in industrial park in K im Chung Commune, Dong Anh, HN.

High storey apartment block CT14 at the south of Thang Long urban area

02 apartment blocks o f 9 storeys at Me Tri new urban area, Tu Liem

Housing B3 at Cau Dien for low income people. Principal investor: No. 2 Construction Co., Hanoi.

Construction o f housing area for low income people in B4 - Cau Dien, Tu Liem, HN.

15,000

50,000

1,850

3,362

11 storey high building NOCT - Cau Dien, Tu Liem, Hanoi I 10,000

Construction o f housing group (1 1 storeys) in the project of HACINCO Student Village

Construction o f high storey housing group No. 4 (1 7 &2 1 storeys) at HACINCO village (phase 1)

Construction o f high storey housing group No. 4 (17 &21 storeys) at HACINCO village

Examining center of driving aualification - SOC Son. Hanoi

9 storey apartment block at Xuan Dinh Commune, Tu Liem Dist I 12,862

20,000

27,000

15,518

9.406

Construction o f housing area B5 at Cau Dien for low income people I 3,400

High storey auartment block lot 26A & lot 27 at area 21N0 - Bac Dai Kim I 20,000

High storey apartment block, Lot 27, Area 21 .NO,the North of Dai Kim extended area I 10,000

05 - 06 storey apartment block for land clearance, M e Tri, Tu Liem, Hanoi I 7,000

High storey apartment block CT14 at the south of Thang Long urban area I 20,000

Construction of 9 storey building (Building B) in housing project at Sai Dong I 5,000

Construction o f high storey apartment block CT3 in Trung Van new urban area. I 20,000

Construction o f high storey apartment block CT3 in Trung Van new urban area. I 5,000

Housing area at Vinh Hoang, Hoang Mai, Hanoi I 7,800

89

HANIF has no non-performing loans in i ts portfolio.

Analysis of income statement 2007 2006 2005

VND rn VND rn VND rn TOTAL INCOME Interest and similar income Interest and similar expenses Net interest margin Other operating income TOTAL OPERATING INCOME

Employee expenses Other operating expenses TOTAL

Profit Before Tax Enterprise income tax Profit After Tax

5 1,490 25,431 21,149

(10,112) (12,4,97) (7,604) 41,378 12,934 13,545

4 82 .432 6 29 41,860 13,366 14,174

35,603 9,064 11,032 9,9 69 2,538 3,089

25.634 6.5 26 7.943

Interest income from lending accounted for over 40% o f total sources o f income in the year 2007. Operating and administration expenses o f the Fund are low, at around 1/5 o f total income.



2007 3.7% 4,2% 0 IS% 3.4%

2006 1.5% 3.2% 1.6?'0 1.7%

2005 2.00h 3.0048 1.1% 2.0048

Dong Nai Development Investment Fund (DNIF)

DNIF has seen charter capital gradually increase in the last three years, from VND 255 billion in 2005 to VND 333 billion, while mobilized capital has increased from VND 205 billion to VND 506 billion from 2005 to 2007. Nearly half o f the mobilized capital was raised from banks, while the remaining came from a variety o f sources, including lottery companies. The Fund also managed entrusted hnds o f VND 13.19 billion in 2007. Total assets o f the Fund increased from VND 5 18.17 billion at the end o f 2005 to VND 888.05 billion at the end o f 2007. Net income rose from VND 12.1 billion in 2005 to VND 34.4 billion in 2008.

90

2007 2006 2005 VND m VND m VND m

ASSETS Cash Accounts receivable Other shoIt-term assets Medium and long term loans Lending f?om other trusted capital Other lending (short-tam lending) Fixed assets Total assets

LIABILITIES AND OWNER'S EQUITY TOTAL LIABILITIES Mobilized capital Debt due Other payment due Total Liabilities

OWNER'S EQUlTY Charter Capital Reserves Other funds Total owner's equity Total Liabilities and Owner's Equity

56 2,9 37 222,655 15 9,245 2,442 4 54 7,033

23,174 13,749 10,591 20 2,2 9 1 210,823 188,440

13,192 13,267 14,188 80,220 103,661 1343 86

3,797 4,204 4,092 888,053 568,813 51 8,175

506,364 233,561 205,406 38,367 27,590 22,228 44,018 33,953 2 7 3 17

58 8,749 295,104 2551 51

28 6,646 264,6 19 255,346 10,565 7,964 6,862 2,093 1,126 8 16

299,304 273,709 263,024 888,053 568,813 51 8,175

The total investments in portfolio at the end of 2007 were VND 235.52 billion, of which indirect investments amounted to 90% while the remaining was capital contribution into joint stock companies.

Medium and long-term loms to customers Loans from other trust funds Other loans to customers

2007 2006 2005 VND m VND m VND m

202,291 .2 1 0,823 188,440 13,192 13,267 14,188 80,220 103,661 134,586

29 5,703 32 7,7 5 1 337,2 14

Loan portfolio by infrastructure type Industri aVRes idential zone infrastructure 40% Public Health 12% WaterElectricity supply 11% Education 6% Others 31% Currently, the Fund has a good portfolio including projects on resettlement housing, water-supply projects and high-way projects.

91

- Direct investment

Public Health - Direct investment - Indirect investment (LendinP) 6,002 9,185 1,868 Education

, - Indirect investment (Lending) 5,780 8,500 43 0

- Direct investment - Indirect investment (Lending) 3,000 2,200 358 Industrial and Residential Zone Infrastructure - Direct investment 16,061 7,661 7,66 1

Others (Non - Infrastructure) - Direct investment - Indirect investment (LendinP) Loan Portfolio (by type o f business) State Owned Enterprises

- Indirect investment (Lending) 4,492 16,600 Others (Infrastructure) - Direct investment - Indirect investment (Lending) 15,930 16,382 12,616

6,976 6,976 4,236 46,658 49,157 44,978

56,292 72,277 49,597

6,234

6,940

Joint Stock Companies

Private

I 12,396 1 7,443 1 4,904 2,439

800 21,106

3,708 1

8 1,862 - From charter capital 85,424 76,850

I I I

Lending source

13,192

78.03%

- From entrusted funds

- LendindTotal investment

13,627 14,188

86.59% 87.99%

I - From mobilized capital

92

Income statement analysis

TOTAL INCOME Interest and similar income Interest and similar expenses Net interest margin Other operating income TOTAL OPERATING INCOME

Employee expenses Other operating expenses TOTAL

ProfitBehe Tax Taxes ProfitAAer Tax



2007 2006 2005 VND m VND m VND m

63,2 16 34,612 3 1,4 16 (14,320) (8,3 17) (5,631) 48,896 26,295 25,785

1,351 1,853 2,685 50,247 28,148 28,470

(12,394) (9,228) (9,511) (1 8,439) (13,522) (1 3,438)

3 1,808 14,626 15,032 6,384 4,089 2,927

25,424 10.537 12.105

2007 2006 2005 2.9% 1.9% 2.3% 7.1% 6.1% 6.1% 1.6% 1.5% 1,1% 5.5% 4.6% 5.0%

93

Binh Duong Development Investment Fund (BDIF)

BDIF's charter capital has increased from VND 178.5 billion in 2005 to VND 350 billion in 2008. Mobilized capital has seen a decrease from VND 166 billion to VND 85 billion in the same period. The fund has plans to increase total mobilized capital to VND 10 1 billion in 2009.

2007 2006 2005 VND m VND m VND m

ASSETS Cash Accounts receivable Other short-term assets Medium and long term loans Other loans Long-term finanaal investments Fixed assets Total assets

LIABILITIES AND OWNER'S EQUITY TOTAL LIABILITIES Mobilized capital Payables Other liabilities Total Liabilities

OWNERS EQUITY Charter Capital Reserves Other funds Total owner's equity Total Liabilities and Owner's Equity

9,986 5 1,963 159,245 2,8 57 3,105 299 6,s 72 7,849 20,521

202,3 05 15 1,991 108,989 88,8 13 114,647 75,634 33,300 20,850 16,850

118 , 218 344 343,951 350,623 38 1,882

49,500 82,898 166,061 3,395 4,845 3,492

20,436 10,145 5,630 73,331 97,888 17 5,183

208,500 208,500 178,s 00 61,615 43,588 27,2 10

5 05 647 9 89 270,620 252,735 206,699 343,95 1 350,623 381,882

The fund also managed to control i t s debt-equity ratio from 0.85 to 0.27. The fund did not have any non-performing assets on i ts balance sheet as o f end o f 2008.

Areas o f investment have been primarily in residential and industrial infrastructure, followed by transportation, water, and public health. The Binh Duong fund has lent capital to over 30 projects over the period from 2005 to 2008. The tenure o f these loans vary from less than a year to 10 years. About 55% o f portfolio has a maturity less than 5 years while another 45% o f portfolio has a maturity ranging between 5 to 10 years. The composition o f the portfolio o f the Binh Duong fund for the year 2007 i s shown below

Loan portfolio by industry Other non- infrastruct ure 48% Indus tri al/Res idential zone in fm tructure 46% WatedElect r ic i ty supply 3% Transportat ion 1% Education 1% Other inf iastmcture 1%

94

Total lending c

10 yrs < Total lending < 15 yrs

Total lending > 15 yrs

Total lending < 5 yrs I 286,180 I 224,500 I 136,400 I

I

0 0 0

0 0 0


Transport Infrastructure

18,940 I 25,810 1

' 22,840 8 1,960 60,000

111,222 I

- Direct Investments

- Indirect Investments

Water Supply


- Indirect Investments (Lending)

~

0 0 0

22,840 8 1,960 60,000

11,070 11,120

0 0 0

1 1,070 11,120

I Investment (sectors) I I I I

Public health


- Indirect Investments (Lending)

Education


1,710 0 0

0 0 0

1,710 0 0

0 710 3,190

0 0 0

- Direct Investments 0 0 0

I - Indirect Investments (Lending) 200,570 I 91,600 I 31,800 I

95

I Loan Portfolio (by type o f business) I I I I State Owned Enterprises

Limited Liability Companies

249,840 172,770 192,080

32,610 36,180 42,500

I Joint Stock Companies I 20,700 I 35,330 I 8,350 I

Others

Lending source

- From charter capital

I Private

1,970 3,340 3,190

166,940 208,500 208,500

I 2,690 I 1,510 1 O I

- From entrusted funds

- LendindTotal investment

740 70,120

99.80% 97.00% 95.40%

- From mobilized capital 166,OO I 82,800 I 49,500 I I

- Lending (projects)

- Capital contribution (enterprises)

3 12,330 266,340 291,120

14,000 18,000 18,450

I Total Investments I 332,940 I 292,040 I 328,120 I I - Direct investments (projects) 6,610 I 7,700 I 18,500 I I

Net income rose from VND 7.8 billion in 2005 to VND 22 billion in 2008. Net margin o f the fund improved considerably from 14% in 2005 to 58% in 2007.

T O T A L INCOME Interest and similar income Interest and similar expenses Net interest margin Other operating income T O T A L OPERATING INCOME

Employee expenses Depreciation, amortization, maintenance Other operating expenses T O T A L

Profi t Before Tax Taxes Profit Afier Tax

2007 2006 2005 VND m VND m VND m

27,601 34,086 24,835

(6,175) (9,9 49) (1 2,945) 21,426 24,137 11,890

7,405 4,205 4,861 28,831 28,342 16,751

26,485 18,739 10,781 7,4 16 5,247 3,O 19

19,069 13,492 7,762

96


- Retained Earnings


10,000

2007

8.0% 1.8% 6.2%

5.5%

~ ~~~ ~ ~ ~

- Other Source

Entrusted Capital

- From state budget

2006 3.8% 9.7% 2.8% 6.9%

~~

18,000

20,73 1 39,869 4 1,226

20,73 1 39,869 4 1,226

200s 2 . P h 6.5% 3.4% 3.1%

Net Fixed Assets

Loans Portfolio (Indirect investment)

Portfolio of Direct investments

Tien Giang Development Investment Fund (TGIF)

1.440 1.440 1.493

75,829 122,538 116,251

0 0 0

TGIF’s charter capital increased from VND 50 billion in 2001 to nearly VND 172 billion in 2008. The fund has no mobilized capital. The Fund also manages entrusted capital against fees; at the end o f 2007, the Fund had VND 41.2 billion of entrusted funds. The Fund earns fees o f 0.07% per month on the entrusted funds that are actually invested.

Operating Income

Other Income

Net operating income increased from VND 5.6 billion in 2005 to VND 10.5 billion in 2007. Net income increased from VND 1.7 billion in 2005 to VND 6.8 billion in 2008.

5,624 6,727 10,548

8 35 230

fWD million)

Total Income Interest expenses

Employee expenses

Administrative exDenses

1 Charter Capital I 136,058 1 136,058 1 146,058 I

5,632 6,762 10,778 504

559 98 1 418

361 390 3 62

Provisioning for Non-performing loans

Depreciation

1,675 2,480 4,600

135 131 123

I Cash and equivalents I 53,392 I 40,397 I 48,173 I I Accounts receivables I 118 I 533 1 954 I I Total Current Assets I I I I

I Income Statement I I I I

I Total Operating Expenses I 3,258 I 3,965 I 5,517 I

1 Total Expenses I 3,258 1 3,965 I 5,517 I

97

Profit Before Taxes

Taxes

2,375 2,797 5,261 28% 28% 28%

Non-performing loans fin VND million)

Profit After Taxes

1. Lighting equipment 3,500 industrial company investment o f Huhal lighting equipment

investment o f Quoc Vuong

1,724 2,125 1 4,O 15

992 I 593

1, Truong Dinh project 5,000

72,569 2. Long Hung Industrial cluster

Company Limitted. 3. Long Hoa safe vegetables 160 160 32 cooperative- Go Cong

5,000 5,000 0.25% 2

9 14,209 0.6% 4

township 4. M y Thanh cop-operative- 74 I 47 I 47

1. Medium voltage electricity works investment project 13,076 (Stage 11)

1,092 2. Production staff No. 5 expansion investment 3. Plastic and paper packing production investment project- 3,056 Vegetables Oil Company 4. High technology ice water project- Petroleum and Fuel 6,260 Company

Cai Lay town Total 2,664 1,296

1,490 7,974 0.25% 3'

32 486 0.55% 5

649 73 6 0.8% 3

23 1 1,149 0.45% 05

Investment portfolio

180-270 days Provision created




I 3. MyThoMarket construction I 8,997 I 2,027 I 2,850 I 0.6% I 4 I

98

5. Frozen Company expansion- Fruits and I 3,575 1 2,242 1 2,128 1 0.8 1 3 Vegetables Company

I 3,064 1 510 I 978 I 0.55% I 3 6. Girdle cake enterprise construction for exDort

- 1 12,000 1 1,059 I 1,059 I Investment--Cai Be Commercial Joint Stock

I I I

7. M e Kong Tourist Village

4

1 2,224 1 605 I 924 1 0.8% 1 3 construction investment- Construction Joint Stock

04 months - 5 years

I 6,726 I 3,334 1 2,538 I o:i$2- I 14. Loans to cooperative projects

Da Nang Local Investment Fund (DAIF)

2008 was the f i rst full year o f operations for the Da Nang fund. The fund’s beginning-of- year charter capital was VND 186.3 billion, which increased by another VND 50 billion to VND 236.3 billion in 2008. The fund has plans to mobilize capital from the France Development Organization and Japan Investment Fund to support its proposed investment activities. Currently there i s no mobilized capital and the fund has zero debt. All projects have thus been funded through charter capital. The fund also had an entrusted capital o f VND 100 billion at the end o f 2008.

The charter capital i s primarily being used for the indirect investment by way o f term loans to subprojects. As o f 2008, the fund had direct investments as low as VND 3.75 billion (about 3% o f portfolio) as against indirect investment o f VND 130 billion. The total income o f the fund in 2008 was VND 5.2 billion and the net profit was VND 1.8 billion, implying a net profit margin o f 34% and ROE o f 0.76%. The Da Nang Fund lent capital for 11 projects in the infrastructure development sector and 5 projects o f the export assistance sector. The term o f these loans vary from less than one year to 10 years.

99

About 55% o f portfolio has maturity o f less than 5 years while the remaining 45% has maturity between five and 10 years. To-date the fund has not had any non-performing loans.

(WD billion) 2008

Charter Capital 236.3

0

100

Mobilized Capital

Entrusted Capital

77

61.80

Total lending < 5 yrs


0 10 y r s < Total lending < 15 yrs


Investment (sectors)


I 15 - Indirect Investments (Lending)

Water Supply 0.75 - Indirect Investments (Lending)

Urban Environment I 10 - Indirect Investments (Lending)

Public health

- Indirect Investments (Lending) 10

Industrial and Residential zone infrastructure 30 - Indirect Investments (Lending)

Others (Infrastructure) 16.5 - Indirect Investments (Lending)

Others (Non-Infrastructure) 56.55 - Indirect Investments (Lending)

100

I Loan Portfolio (by type o f business) I 138.80 I

Limited Liability Companies

I State Owned Enterprises

3

I 23.75 I

Joint Stock Companies 112.05

- From charter capital

I Lending source 138.80

- Lending (projects)

Total Investments 138.80

- Capital contribution (enterprises)

Total Income

Total Expenses

3.75

5.235

2.673 I

0.748 Taxes

101

Loan portfolio

2. Concrete line investment project

1. Tho Quang sea food processing factory 10 1;062

construction project

5 13,500 63,700

1 j 10,000 3. Residential zone construction No. 6

Nguyen Du project 94,898

~

4. Machine equipment and accessory 2,400

investment project

9. Hoa Phat 3 expanded residential zone 1

infrastructure investment project j 1 10,000

5. West Bach Dang road project ( stage 2) I 1 I 5,000 I 47,241

32,100

6. Road 602 project (from Hoa Khanh to Ha

Son prison) 9 1,000

1 1 5,000 11. GSP medical storehouse construction

investment project

7. Thanh Vinh expanded industrial cluster 106,000

investment project

13,959

8. Agitator and concrete truck investment 2,900 project

10. Taxi run by gas Investment Project I 3 I 10,000 I 27,210

Daklak Local Investment Fund (DLIF)

The charter capital o f the fund has increased 24% from VND 97 billion in 2005 to VND 148 billion in 2008. Similarly, mobilized capital o f the fund has also seen a 15% percent increase form VND 15 billion to VND 17 billion from 2005 to 2007. The PPC has committed to invest up to VND 200 billion as a charter capital by 20 10.

The fund’s total income has increased from VND 4.24 billion in 2005 to VND 8.39 billion in 2008. Net income has remained stable at 55% from 2005 to 2007. Return on

102

equity has similarly increased from 2.4% in 2005 to 3.9% in 2007.. The fund has maintained a stable debt-equity ratio and low non-performing loan ratio.

- PPC Contribution

- Retained Earnings

Mobilized Capital

Income Statement

n/ND million)

~ ~~~ ~~~~~ ~

95,658 107,376 1 18,343

1,373 1,711 2,399

14,765 15,977 17,063

1 Charter Capital I 97,031 1 109,087 1 120,742 I

Employee expenses

Administrative expenses

Total Operating Expenses Any Other Expenses

267 270 412

1,020 1,325 1,876

I Operating Income I 2,447 1 2,828 I 5,630 I

Depreciation

PBT

Taxes ~

PAT

I Other Income I 1,789 I 1,625 I 2,755 I

27 137 148

3,216 3,127 6,509

90 1 870 1,823

2.315 2.251 4.686

1 Total Income I / 4,236 I 4,453 I 8,385 1 I Interest expenses I 461 I 270 I 737 I

I Total Expenses I I I I I Provisioning for Non-performing loans I 121 I 133 I 101 I

The fund has undertaken no direct investments over the period of 2005 to2007. The trend o f investment has been primarily towards urban infrastructure, followed by education and public health. It has also invested into other non-infrastructure based projects. The term of these loans vary in tenure from 5 to 7 years.

The interest rate i s based on interest rates regulated by MOF applicable to VDB; the Fund submits proposals to PPC for a decision on interest rates for lending.

The Fund currently invests in the urban, public health, education and other non- infrastructure based sectors. The fund has also invested in projects promoted by private partners, which include Viet Thang shoe production factory, Phu Xuan Commercial Center, Beer Company Sewage treatment system, and Quan Dien Wood Processing factory.

103

Dong Thap Local Investment Fund (DTIF)

As o f 2008, the charter capital o f the fund was VND 101.6 billion. The Fund also mobilized VND 101.62 billion, mainly from Dong Thap Financial Provision Fund and Dong Thap Lottery Company. The Fund also managed entrusted capital o f VND 158 billion at end o f third quarter o f 2008.

The total income o f the Fund increased from VND 21.86 billion in 2005 to VND 24.98 billion in 2007. The total expenses during the same period declined from VND 17.17 billion to VND 16.86 billion, this improving the net margin o f the Fund.

The entire portfolio o f the Fund includes lending for projects with tenure o f less than five years. Infrastructure investments are largely in the transportation sector followed by industrial and/or residential zones. Going forward, main areas o f investments would include residential zones, water supply projects, roads and bridges, and industrial parks.

NND million)

I Charter Capital I 50,000 I 50,000 I 101,500 I I Mobilized Capital I 125,000 I 125,000 I 113,000 I I Entrusted Capital I 238,000 1 172,000 1 208,000 I

I Total lending 5 yrs I 363,737 I 208,787 I 144,756 I I 5 yrs Total lending 10 yrs I I I I

10 yrs Total lending 15 yrs


Investment (sectors)


I - Indirect Investments (Lending) I 32,000 I 27,000 I 40,000 I Industrial and Residential zone infrastructure

I -Indirect Investments (Lending) 1 35,000 1 42,000 I 20,000 1 I 1 I

Others @on-Infrastructure)

I - Indirect Investments (Lending) I 295,737 I 139,787 I 84,756 I

104

Loan Portfolio (by type o f business)

Total Income

l l

21,856 22,69 1 24,977

I State Owned Enterprises

Taxes

I 1,204 I 4,940 I 0 I

0 0 0

1 Limited Liability Companies 1 11,211 I 4,579 I 18,025 1 I Joint Stock Companies I 3,438 I 614 I 9,574 I Private I 1,870 I 4,100 I 4,000

I Total Expenses I 17,175 I 18,165 I 16,863 I

105

Khanh Hoa Local Investment Fund (KHIF)

The Fund's Charter capital in 2008 was VND 75.4 billion. The Fund had mobilized capital o f VND 18.80 billion. The entrusted capital fund has been declining over the years from VND 550 million in 2005 to VND 350 million in 2007.

As at mid 2008, the Fund provided loans to a total o f 37 projects with total investment approvals o f VND 95 billion and disbursements o f VND 88 billion.

Balance Sheet 2007 2006

VND m VND m Assets Cash in hand Call deposit in credit organizations Fixed time limit deposit inside the country Financial investment Fixed Assets & Other Long Term Assets Tangible fixed assets - Cost Acummulation depreciation Medium & long term loan Other loans Total Assets

Liabilities and Owner's Capital Mobilized capital Borrowing from State Budget Deposit from domestic customers Payable to deposit interest, borrowing interest Payable to State Budget Payable to suppliers Other liabilities Total Llabliltles

OWNER'S EQUITY Charter capital from State Investment development fund Risk handling reserve fund Undistributed profits Other funds Total Owner's Equity Total Liabilities and Owner's Capital

7 27 7,270 6,474

46,000 25,000 7,000

70 72 (2)

36,713 42,838 250 350

90,310 a1,6aa

4,000 4,000 542 46 1

265 15,152 12,995 19,959 17,456

63,598 59,772 2,549 1,166

602 320 3,595 2,968

7 7 70,351 64,232 90,310 a i ,688

106

Income Statement

Interest on medium & long term loans Other loan interest Total interest income Service charges Interest on Deposits Total Income

Call deposit interest of other capitals Fixed time limit deposit interest of mobilized capital Senrice Charges paid Investment credit risk handling reserve fund Salaries and other expense for members of Management Council Uniform & safety working facilities Stationery & other facilities Expense for petroleum ExDense for facilities [machines)

2007 2006 VND m VND m

1,984 180

2,164 2

2,410 4,576

208

320 1

78

227 26 15 3

24 Expense for fixed asset depreciation - machines, computer facilities 2 Expense for telephone 24 Expense for professional training 2 Business travel fees 7 Electricity, office cleaning, health care 12 Other expenses Total expenses Profit before tax

32 981

3,595

107

OP 8.30 Analvsis

Issuer

Government bond

City bond

VDB

SOCBs

HlFU

HCM city bond

Interest Rates

2006 2007 2(1 Term Low High Low High Low

(years) (%) (%) (%) (%) (%) 5 8.20 7.10 8.00 8.5 10 8.96 7.95 7.95 8.7 15 8.40 8.80 8.7 5 8.80 7.80 8.10 8.7 10 9.00 8.60 8.60 8.8 15 8.80 8.80 8.8 5 6.60 7.80 8.40 9.00 10.5 10 6.60 7.80 8.40 9.00 10.7 5 10.40 12.40 10.86 11.72 11.88 10 10.40 12.90 10.86 11.72 11.89 5 10.40 11.40 10.40 11.04 9.51 10 10.40 11.90 10.40 11.28 9.01 5 8.80 9.05 7.80 7.80 10 9.15 9.25 7.90 8.50 NIA 15 9.45 9.55 8.20 8.80

It should be noted that the traditional financing method for municipal infrastructure in Vietnam involves GOV borrowing O D A for projects and providing the proceeds to the municipal government as grants. In the LDIFP, the provincial governments, WB and the GOV are taking the f i rs t step towards rationalizing the use o f GOV subsidies for municipal infrastructure. Specifically, the Project underscores the need to distinguish infrastructure investments which require budget support f rom those which can offer cost recovery and can be financed with market capital under public-private partnership arrangements. As government-owned FIs, the on-lending rate which LDIFs receive from the OOV must be determined by the M O F strictly according to Decree 134, which provides legislated rules for determining the on-lending rates for ODA projects according to sector o f focus and other variables that are important to the government. The on-lending is in VND. The focus o f the Project design has been on the interest rate charged by LDIFs in the subprojects to ensure against market distortions.

LDIFs will price their loans at market rates for infrastructure in Vietnam-the benchmark rate for infrastructure projects is now increasingly been set by the Vietnam Development Bank”. The G O V Decree 138 o n LDIFs stipulates that the loans provided by the LDIFs cannot be lower than the rate o f State investment credit for similar project, i.e. the VDB rate. The M O F and WB have therefore agreed that the interest rates charged by the LDIFs will be set equal to the published VDB rates. The rate will be reviewed every six months by M O F and the WB team. The current interest rate regime in Vietnam i s described in the table below for reference.

18 High (%)

15 15.25

15.3 15.5 15.6 15.5 17.8 17.8

19 19.4 19.6 12.5

NIA

l5 The VDB rate is typically priced at 5-year Treasury Coupon + 1 percent.

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Directed Credit

The IDA credit i s being provided to MOF as a FIL to achieve the following objectives: Finance municipal infrastructure - which i s a key bottleneck to economic growth Develop alternative model for financing municipal infrastructure which do not require 100% GOV grants

m Reduce the risk to financial market development posed by inappropriate borrowing practices o f LDIFs . Implement operational reforms in LDIFs geared towards improvement in subproject appraisal standards, financial management including international standard auditing, and appropriate due diligence for environmental and social safeguards. Ensure the financial sustainability o f LDIFs by establishing clear Financial Covenants, which can be implemented and monitored

It i s understood and anticipated that the LDIFP will allow LDIFs to establish a track record - vis- a-vis clear and consistent investments appraisal standards, good operational practices, and sound financial management. LDIFs wi l l then be able to raise capital from the market via bank borrowing or bonds.

Subsidies

There are no subsidies involved in the LDIFP structure.

Fiscal Sustainability

The LDIFP i s designed to ensure the financial sustainability o f LDIFs by putting in place a Eramework for LDIFs to start operating l ike a “fund” which can utilize their equity (charter capital) to raise investment capital (debt) from the local market. The LDIFP will help establish appropriate project appraisal and financial management practices which will allow LDIFs to safely raise investment capital from the local market. The owners o f the LDIFs - the Provincial Peoples’ Committees - have been investing substantial equity in their respective LDIFs over the years. The PPCs therefore have a very strong incentive to ensure the financial feasibility o f their LDIFs. For example, the HCMC PC has very publicly announced that development o f HIFU as a professional and competent institution capable o f financing municipal infrastructure in HCMC i s an important pillar o f the city’s long-term development strategy. The lack o f long-term capital in the Vietnamese market has resulted in the current inappropriate LDIF practice involving borrowing o f short-term capital on a roll-over basis. The LDIFP allows the PPCs and LDIFs a chance to take advantage o f long-term IDA credit and Bank technical assistance to substantially improve the capacity o f the LDIFs. Specifically, the LDIFP provides an opportunity for the Provincial PCs and LDIFs’ Management to establish, test and perfect the internal LDIF systems for project appraisal and financial management. In short, the Provincial PCs and LDIFs’ Management are well aware o f that value o f the long-term IDA credit and the improved capacity as guided by the Project Manual. The clients also realize that success o f LDIFP will allow LDIFs to raise substantial capital from the local market in the future and finance badly needed municipal infrastructure in their provinces.

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LDIFP will have no fiscal impact on the local governments o f the qualified LDIFs The LDIFP wi l l create no additional fiscal burden on the financial position o f the cities. The Provincial PCs provide no operating budget to LDIFs, and the Project requires no additional equity investment in the qualified LDIFs from the PCs. In particular, the LDIFP will have no affect on the cities’ financial position vis-a-vis the following:

There wi l l be no impact on PPC financial position vis-a-vis incremental taxes; and the Project does not provide any additional subsidies. There wi l l be no increase in recurrent costs for PPCs or LDIFs LDIFP wi l l have no impact on the PPCs’ current fiscal situation, as the Project wi l l not require any additional capital or operating budget from PPCs o f the qualified LDIFs. There wi l l also be no impact on the GOV fiscal position because the Project i s structured as an on- lending arrangement in which the MOF i s able to fully cover not only the cost o f foreign exchange risk, but also the IDA commitment fee and any transaction costs incurred by the MOF. LDIFP wi l l have no negative impact on the overall level o f recurrent costs required to operate the municipal infrastructure sectors adequately and the volume o f financing provided by the Government in the recent past. Indeed, the participation o f private sector and focus on cost recovery subprojects will likely reduce the provincial government outlay in the target sectors.

Eligibility Criteria - Qualification Criteria for LDIFs

The selection o f LDIFs that qualify for IDA funding i s based on the following criteria: 1. LDIFs must have a charter that i s line with the model charter by the MOF 2. Charter capital o f LDIF i s at least VND 100 billion 3. Annual financial statements o f LDIF are audited within six months from the end o f the

LDIF fiscal year 4. Ratio o f mobilized capital to charter capital i s less than 6: 1 , with commitment o f PPC to

infuse adequate additional capital if the ratio exceeds the limit 5. LDIF has been in operation for at least two years, with at least one year o f profitability 6. Non-performing loans accountfor less than five percent o f total assets 7. LDIF has at least two subprojects in the pipeline, with feasibility completed for at least

one subproject16 8. LDIF has at least five full-time employees, including at least one financial analyst.

The Project i s further improving the prudential policies, administrative structure, and business procedures in LDIFs. This includes the implementation o f the Project Manual’s Guidelines for Project Preparation and Appraisal, selection o f Private Sector Participants, social and environmental Safeguards, Corporate Governance, Capital Mobilization, and Monitoring

l6 This criterion (in addition to others listed above) applies to the qualification of the LDIF. Fulfillment of this specific criterion does not automatically mean that these subproject(s) for which feasibility has been conducted will receive IDA funding. The subprojects of Qualified LDIFs to be prepared in the first year of implementation will only receive IDA funding after the Bank has conducted safeguards review and provided approval, and the MOF PMU has reviewed the subproject for compliance with the Project Manual and al l Project agreements. .

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requirements. Finally, the following Financial Covenants have been agreed upon to monitor and manage the financial operations o f Qualified LDIFs.

FINANCIAL COVENANTS Aggregate equity investments shall not exceed 50 percent o f the total amount o f the Fund’s paid in equity capital. The Fund’s debt-to-equity capitalization ratio (Le. Leverage) shall not exceed 6: 1 , where debt means all debt liabilities plus contingent liabilities and equity means paid in equity capital plus retained earnings and reserves not allocated to cover specific liabilities. Total investment (debt and/or equity) in a single obligor shall not exceed 20 percent o f total fund capital (including debt and equity). In all LDIF investments involving LDIFP proceeds, LDIF will not take greater than 30% ownership (equity/direct investment) in a Project Enterprise In all LDIF investments involving LDIFP proceeds, the debt to equity ratio will not exceed 3: 1. Specifically, debt will not be greater than % o f the total financing o f the subproject

APPLICABILITY

Applies to all LDIF operations





The selection criteria for LDIFs ensure that the qualified LDIFs have demonstrated adequate profitability, capital, and portfolio quality and acceptable loan collections. The due diligence o f LDIFs was carried out by an international consulting firm, under contract to the MOF. The financial analysis o f qualified LDIFs i s provided in the preceding section o f the Annex. Qualified LDIFs already provide audited financial statements, and LDIFP will support the standardization o f financial statements across the funds, as well as uniform application o f the new LDIF accounting standards issued by MOF.

The selection criteria for LDIFs also ensure that qualified LDIFs have the appropriate capacity, including staffing, for carrying out subproject appraisal and supervising subprojects. Implementation o f the Project Manual’s Guidelines for Project Preparation and Appraisal, Private Sector Partner selection, social and environment Safeguards, Corporate Governance, and Monitoring will ensure that all relevant Bank policy requirements will be carried out by LDIFs. The LDIFP also includes funding for Project Implementation Support to the MOF.

The current borrowing practice o f LDIFs requires improvement. The project will help LDIFs establish the investment track record and appropriate financial management standard to mobilize capital via bank loans or bonds in the future.

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LDIFs are government-owned FIs. The project i s initiating the process o f developing adequate managerial autonomy and commercially oriented governance in LDIFs. This will require 1) provision o f incentives to the Peoples’ Committees to utilize LDIFs in the appropriate fashion and 2) development o f prerequisite capacity in the LDIFs to carry out their functions and raise capital without undermining financial viability, and without government support.

Coordination with IFC

The Bank and IFC have been coordinating very closely on the engagement with LDIFs. The IFC had attempted to execute transactions with HIFU (senior loan) as well as one o f i t s portfolio companies. However, the transactions did not materialize primarily because o f the lack o f institutional capacity in LDIFs required to do a direct transaction with the IFC. IDA and IFC have therefore decided that the Bank i s better suited to undertake the init ial task o f building institutional capacity o f LDIFs, establishing a supportive national policy and municipal government framework, and providing long-term capital for investment in partnership with private sector. The IFC will play an important role in co-financing LDIF transactions in partnership with the private sector. As discussed and agreed with IFC, the advantages o f getting IFC involved at the transaction or subproject level (as opposed to the LDIF level) are as follows:

IFC’s risk appetite i s better suited to the subprojects financed by LDIFs rather than the financing o f LDIFs themselves. The financing o f LDIFs involves pol icy risk, which is better suited for IDA fimded operations. IFC’s involvement in the LDIFs’ jo int ventures will al low LDIFs to establish good models for corporate governance and other operational functions o f a jo int venture. IFC’s involvement in LDIFs’ jo int ventures will allow LDIFs to learn the principles o f good project structuring, including development o f legal contracts and negotiations with the private sector. IFC can be relatively more competitive in Vietnam with i t s equity products than its debt products. This is because Vietnam i s an IDA country with access to very cheap financing, particularly for infrastructure projects. The Bank is better positioned to invest in LDIFs which will require substantial technical assistance and very close coordination with the G O V and municipal governments.

The above described approach has been developed in consultation with relevant IFC staff based in Hanoi and Hong Kong. The Bank team and IFC have discussed the idea that IFC can review subproject pipelines o f qualified LDIFs and identify subprojects which may be o f interest to IFC; the plan is to have IFC participate in subprojects as a co-investor”. IFC management is also willing to issue an official commitment to co-finance a certain number o f subprojects up to a specified investment limit. The Bank’s strategy to get IFC involved in some subprojects as co- financiers has been discussed with Management o f key LDIFs and their respective PCs.

l7 A subproject currently being developed under HDP (HIFU Development Project) has been identified as a candidate for IFC co-financing.

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Annex 10: Profiles o f Qualified and Conditionally Qualified LDIFs

VIETNAM: LOCAL DEVELOPMENT INVESTMENT FUNDS PROJECT

Qualified LDIFs

H o Chi Minh City Investment Fund for Urban Development (HIFU)

The Ho Chi Minh City Investment Fund for Urban Development (HIFU) was incorporated in 1996 (Decision No. 644/ TTg dated 10/9/1996 by the Prime Minister on HIFU), and i s considered to be the most developed LDIF in the country. The main objective o f the fund i s to raise medium and long te rm capital from domestic and foreign individuals, to sponsor or make investments for strategic sector infrastructure development projects undertaken in Ho Chi Minh City. The fund also invests in the capital market and manages entrusted funds from Government budgets and i t s investors.

HIFU has regulations for lending, disbursement, loan monitoring, debt classification, risk provisioning, reward and investment regulations. These sanctions for loans are given by the director, chairman or PPC depending on the type and amount o f loan. These guidelines are shown below.

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General Director Management Council Provincial Peoples Committee

The loan approval mechanism involves passing the loan proposal from the planning to appraisal department. The application dossier i s checked and wherever necessary i s fulfilled by principal investor with essential details o f the project. I t also includes a risk assessment o f the project. Thereafter, the project will be submitted to and worked on by the appraisal project. The application dossier i s passed onto the credit department where it i s checked and a disbursement letter i s written to the general director or general vice director for approval. The Accounting & Finance department then returns the entire disbursal documents to the credit department together with a copy o f the payment authorization and payment request so that the credit department keeps track o f the transfers. The loan monitoring procedures involve checking the financial status o f the principal investor and the liquidity o f the due debts o f projects and o f the principal investor. The procedure also involves the checking o f collaterals for borrowings.

<2% o f charter capital o f fund 2-1 0% o f charter capital o f fund >, 10% o f charter capital o f fund

HIFU has an exit policy o f reducing i ts stake to less than 10 percent after 3 years o f the implementation o f the project. The long-term investments and exit from projects i s done on the basis o f investment demands in the period.

The fund currently follows the accounting system o f Development Investment Fund (Old Name: National Investment Assistance Fund) pursuant to Document No. 6 13 TC/ TCNH dated 18/01/2005 by MoF and Decision No. 78/2003/QD- BTC dated 01/07/2003 by MoF. The Control Board o f HIFU i s responsible for regularly controlling and monitoring the managerial operations o f General Directors and operations o f accountants, operation departments and agencies directly under HIFU.

Hanoi City Development Investment Fund18 (HANIF)

Hanoi City Development Investment Fund (HANIF) i s one o f the most active Funds operating for over the last three year--prior to which it operated as a housing-development institution. As per i ts re-registered charter (as per Decree 138/2007/ND-CP and Decision 07/2008/QD-BTC) in December 2008, the Fund proposed to increase i t s charter capital to about VND 2000 billion. The contribution for this would primarily come from the PPC in way o f annual contribution o f VND 100 billion until the target amount i s reached. The current level o f charter capital as o f December 2008 was VND 830 billion.

l8 Pursuant to Resolution No. 15/2008/QH12 on May 29*, 2008 promulgated by Parliament on administrative borders adjustment between Hanoi and other neighboring provinces; pursuant to Document No.376/ UBND- KT on August 15", 2008 promulgated by Hanoi Provincial People's Committee on implementation o f socio - economy tasks and income; expense estimation o f Budget in the last 5 months in 2008 and plan in 2009 in Hanoi area, Ha Tay Development Investment Fund i s in the merging process with Hanoi Development Investment Fund.

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In view o f the expansion o f Hanoi ci ty by merging neighboring provinces (including H a Tay province amongst others) into the City, the H a Tay Development Investment Fund would be merged into HANIF and operate as a single entity f rom 2009 onwards.

H a Tay Development Investment Fund (HDIF):

H a Tay Fund was incorporated in June 2002, to contribute for the development o f infrastructure and related areas. The Fund modified i t s charter in M a y 2008 in accordance with the model charter provided by the MoF. However, subsequent to the decision o f expansion o f Hanoi ci ty and merging o f H a Tay province into Hanoi, the operations o f the Fund have been merged with the Hanoi Investment Fund (HANIF).

H a Tay Fund was primarily involved in indirect investments as well as capital contribution in the enterprises.

The board structure at the time o f merging with HANIF was in l ine with the requirements o f Decree 138. After re-registering it in M a y 2008, the Fund created two divisions namely, Administration - Human Resource Management - Accounting Department and Appraisal - Investment - Credit Department for undertaking various operations. At the time o f merger with HANIF, the Fund had 13 full-time employees.

As o f June 2008, the Fund had total charter capital o f VND 93.8 billion, o f which the contribution from the PPC was VND 50 billion, prof i t supplements being VND 6.3 billion, while the remaining VND 37.5 bi l l ion was equivalent value o f land ownership. The Fund had no mobilized capital and the entire investments were therefore made from charter capital.

In 2005 and 2006, the Fund made investments o f VND 24.5 bi l l ion and VND 36 bi l l ion o f which nearly 80% was in infrastructure-related sectors.

The general structure o f the Fund include Management Council, Control Board, Board o f Directors and operations ‘departments for the Funds; project management units (PMUs) for managing specific projects; and joint stock companies where the Fund has made capital contribution and participates in management o f such companies. The board structure o f HANIF i s in line with the requirements o f Decree 138. HANIF has 44 full time employees.

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Organizational Structure of HANIF

Provincial Peoples Committee Board o f Management

General Director

1 1 1 1

> 10% o f owners’ equity

Between 5% to 10% o f owners’ equity owners’ equity

> 15% o f owners’ equity

Between 10% to 15% o f

c 10% o f owners’ equity 5% o f owners’ equity

I c

HANIF also has strong internal processes and procedures for various activities such as project appraisals, approvals, disbursements and monitoring activities. During preparation o f investment projects, HANIF assesses potential risks that could arise in the project and prepares necessary projections and mitigation steps. The projections are assessed by external consultants. In case s where HANIF prepares investment projects by itself, the outsourced consultants assess these risks during the appraisal stage. The approval system for clearing a project i s as below:

Exit policy in case of capital contribution (andor equity investments projects) HANIF makes direct investments and participates in project management o f i ts investment. Exit policy o f HANIF states that once the enterprises have been in operation for around 3-4 years, showing profits and positive market values that are at least twice the level o f original investments, HANIF will request i ts Board o f Management for withdrawal o f finds. The f ind withdrawal happens by way o f selling shares to existing shareholders and / or to outsiders at market prices. In case o f projects o f high importance, it i s possible that HANIF maintains 10% o f share holding or 10% o f investment value o f HANIF until the end o f project operations in order to monitor activities o f projects and make sure that they are development oriented.

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Dong Nai Development Investment Fund (DNIF)

Dong N a i development investment fund was set-up in the year 2000 and has been one o f the active funds operating in Vietnam. The Fund revised its charter and re-registered as per the as per Decree 138/2007/ND-CP and Decision 07/2008/QD-BTC in M a y 2008. The general structure o f the Fund comprises a Management Council o f four members, Board o f Supervision o f three members; and a general director. The rest o f the organization is grouped into four departments: Administration Department; General & Planning Department; Accounting Department; Investment Department. The Fund has 44 full time employees.

Organization structure of Dong Nai

Dong N a i Fund has internal guidelines for lending, disbursement appraisal processes, internal expenditure rules, and purchasing rules. In terms o f investments, typically the Fund has been involved only in lending for projects. The approval guidelines are shown below.

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During 2008, the Fund expected a return (return on equity) o f 20% for direct investments and a return (average rate o f interest) o f 14% (1 1 YO in 2007) for indirect investments

The annual budget draft process o f the Fund i s deployed in the fourth quarter (November) o f every year. The basis o f preparing annual plan i s by evaluating the implementation status o f projects during the year, analyzing and assessing the socio-economic development capability o f the locality and the results o f prior years, analyzing and choosing potential projects, considering factors o f expenditure, and finally the availability o f capital sources. Based on all these factors, the Fund builds targets for the forthcoming year and submits to Board o f Management and PPC for approval & implementation.

The fund also has guidelines in place for monitoring i ts projects. Loans monitoring i s implemented before, during and after the regular investment process or periodically at 3-months and 6-months by credit staff who prepare regular progress reports. The report includes details on the status o f project implementation, the status o f businedoperations, and status o f asset for guarantee before and after the formation o f investment assets.

Binh Duong Development Investment Fund

The Binh Duong Development Investment Fund was incorporated in 1999 (Decision No. 63/1999/QD-UB dated 04/05/1999 and Decision No. 201 8/QD-UBND dated 30/06/2008 by Binh Duong Province’s Peoples Committee) by Binh Duong Provincial Peoples Committee (PPC).

The main objective o f the fund i s to channel budget capital, medium and long term capital from domestic and foreign individuals for the financing o f infrastructural projects for socio-economic development. It also issues municipal bonds as mandated by the PPC to raise capital. The fund carries out direct investments, loan disbursements and contributes capital to the establishment o f local enterprises. The fund also manages the operations o f the fund for Credit guarantee o f Small and Medium enterprises and housing development fund.

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The Binh Duong fund has i t s own lending, disbursement, loan monitoring, debt classification, risk provisioning, reward and investment regulations. These sanctions for loans are given by the director, chairman or PPC depending on the type and amount o f loan. These guidelines are shown below.

Provincial Peoples Committee Management Council Board o f Directors

> 10% o f owners equity o f the fund 5 1 0 % o f owners equity o f the fund < 5% o f owners equity o f the fund eauitv o f the fund o f the fund

> 15% o f owners equity o f the fund 5-1 5% o f the owners equity o f the fund

5% o f the owners

10% o f owners equity o f the fund 2- 10% o f owners equity o f the fund < 2% o f owners equity

The loan approval mechanism for direct investments is facilitated by the research department into investment opportunities. The projects are gauged o n their efficiency and feasibility. The pre-feasibility report i s then sent to the reappraisal council and director for approval. The loan monitoring mechanisms o f the fund are undertaken by the credit departments before and after disbursement. This also involves project site and project implementation monitoring. The frequency o f monitoring depends on the term o f the loan. After operations have commenced, the project i s monitored o n a bi-annual basis.

The Binh Duong fund has a target rate o f return o f 20% on its overall direct investments. The exit pol icy o f the fund is defined in i t s investment regulations and investments have an average tenor o f 5 years.

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The financial plan for the year is made based on the investment demand (lending and direct investment) o f the planning year. The fund will estimate mobilized capital, recovery source o f loan, receipt source o f direct investment, debt payment sources and make i t s investment and finance plans. These are then submitted to the Management board for approval and submitted forward to the PPC for setting targets.

Tien Giang Development Investment Fund

Tien Giang Fund has been operating since June 200 1 (Decision No. 20/200 l /QD-UB dated 08/6/2001) and has been operating in various areas o f infrastructure and related areas o f development. The Tien Giang Fund re-registered itself in line with the regulations o f Decree 138 in M a y 2008 (Decision No. 1426/QD-UBND dated 12/5/2008 by Tien Giang People’s Committee).

The TGIF has a board structure as stipulated by the Decree with five members in Management Council, two members o n the Control Board and one director supported by two deputy directors. The operational apparatus o f the Fund are managed by two departments, Administration & Accounting Department, and Appraisal & Credit Department. The fund has 15 full time employees. In addition, there are four employees who work for the two JSCs that the Fund i s investing in.

Organizational Structure of Tien Giang

The fund has comprehensive pol icy for direct as wel l as indirect investment. To date, the Fund has not ventured into making direct investments into the projects nor has it partnered with private sector participants to co-develop projects.

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Director Management Council

People’s Committee

< 5% o f owners’ capital Between 5% to 10% o f owners’ capital owners’ capital > 10% o f owners’ capital

< 5% o f owners’ capital Between 5% to 15% o f

> 15% o f owners’ capital

The appraisal department undertakes monitoring activities o f the project both during implementation and post-implementation stages. The personnel o f the department prepare minutes o f the meetings during intermittent visits to project sites during construction / implementation. The client sends progress reports while requesting additional disbursements o f funds. During post-construction stage, the fund generally conducts half yearly meetings to understand the health o f the project. All the projects have collaterals in form o f either land, or other property that i s different from project assets. The Fund has a process o f regular monitoring and follow-up o f the overdue loans and has appropriate agreements that will bindrestrict the borrower from using the project assets as well as collaterals without loan repayment.

In terms o f operating capital, the Fund has pre-dominantly depended on utilizing i t s charter capital to provide. On approval o f a project, the Fund submits the project report along with a few proposed interest rate options to the PPC and the PPC takes the final decision on the rate that has to be applied.

O f the investment during years 2005-2007 about 60% o f i t s investments were in infrastructure based projects. Within the infrastructure investments, the Fund has invested heavily in industrial and residential zones followed by transportation and water supply. Going forward, Tien Giang Fund intends to reduce i t s exposure to non-infrastructure segments (in l ine with the Decree) and concentrate on projects in industrial and residential zone and transportation, followed by others segments, Conditionally Qualified LDIFs

Da Nang Local Investment Fund

The Da Nang Local Investment Fund was incorporated at the end o f 2007 by Da Nang Provincial People’s Committee (PPC). The main objective i s to provide financing for implementation o f socio-economic infrastructure development projects for the city. The fund also conducts direct investments and capital contribution to set up Joint Stock Companies (JSCs) in l ine with stated objectives. The fund also proposes to manage domestic and foreign organizations’ funds in accordance with the entrustment contracts and to issue local administration bonds for the city budget.

The general structure o f the fund as depicted below includes the Management Council whose head i s the vice-chairman o f the Da Nang People’s committee (CPC), Control Board, Administration Apparatus (Director, Deputy Director, Chief Accountant, and Functional Departments). The functional departments include planning, research, investment, appraisal, accounting, and administration. The fund has 16 full-time employees, with plans to increase to 25 by 2010.

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The Da Nang fund has a definitive set o f rules and procedures on corporate governance which encompass working, operational, recruitment, lending, project appraisal, capital mobilization, capital contribution and financial management regulations.

Director Management Council People's Committee

These sanctions for loans are given by the director, chairman or PPC depending on the type and amount o f loan. These parameters are illustrated in the table below.

< lo% o f ownership capital 10-1 5% o f ownership capital > 15% o f ownership capital

< 70% o f project cost < 70% o f project cost > 70% o f project capital

The fund also undertakes regular loan monitoring mechanisms like checks on legality of loan documents, project implementation, mortgages and financial conditions. In case o f discrepancies, the same i s taken up with the higher authorities l ike the director for action to be taken. The frequency o f the checks i s based upon the requirements specific to the project. The next fiscal financial plan i s finalized in the last quarter o f the year on the basis o f projects selected by the fund for the financing and an investment plan developed for the same. The projects are selected based on their feasibility, potential for socio-economic development, investment capital capability and availability o f mortgages. These projects must be approved by

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the CPC and Management Council before disbursement. The fund’s account i s audited by the H C M Audit and Informatics Service Company.

Director Fund Chairman Provincial Peoples Committee (President)

Daklak Local Investment Fund

<2% o f charter capital o f find 2-10% o f owners equity o f the fund > 10% o f owners equity o f the fund

The Dak Lak Development Investment Fund was incorporated in 2002 by Dak Lak Provincial People’s Committee (PPC). The objective o f the fund i s to receive budget capital and capital resources from domestic and foreign organizations and individuals to aid socio-economic development in the city. It also issues local administration bonds as mandated by the PPC to raise capital. The fund also carries out direct investments, loan disbursements and contributes capital to the establishment o f local enterprises.

The Dak Lak fund has lending, debt classification, risk provisioning, reward and investment regulations according to i t s charter. The fund follows the procedures o f the Vietnam Development Bank (VDB) for i t s loan monitoring and disbursing mechanisms. The sanctions for loans are given by the director, chairman or PPC depending on the type and amount o f loan. These parameters are shown below.

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Department o f Finance (DoF) for review. After the DoF comments this plan i s sent to the Board o f Management for approval. The projects are selected on the basis o f priority for the province, expected internal rate o f return and return on investments.

The Dak Lak employs officials o f the VDB on% a part-time basis and has 8 full-time employees, and an additional 30 part-time employees. The fund follows the DAF accounting system. The Fund i s monitored by the Ministry o f Finance (MoF) and i s required to submit i ts statements quarterly and annually to the MoF for scrutiny.

Dong Thap Local Investment Fund The Dong Thap fund has been in operation for the last eight years (establishment decision dated Dec, 2000). The Fund re-registered i tse l f pursuant to Decree 138 in 2008, and increased i ts charter capital to just over VND 100 billion.

The operations are undertaken by four departments: investment, accounting, general administration, and human resources.

I I I 1

The Fund i s only involved in the indirect investments and had not conducted any direct investments or capital contribution projects. The typical process involved in providing loans i s as below:

General Department receives the loan application documents from borrowers, which it appraises it and also sends to investment department for financial appraisal.

0 After receiving the result o f appraisal o f both the departments the integrated report i s sent to Board o f Directors for consideration. Based on the size o f the loan, the approvals are made by the respective authorities:

< 5% o f owners’ capital - Director o f Fund

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Between 5% to 10% o f owners’ capital - Management Council 0 > 10% o f owners capital - Dong Thap People’s Committee

0 There are also cases where PPC identifies projects and directs the Fund to find investors. Even in such cases the Fund typically also provides a loan component.

Generally, loans are provided only against collateral in the form o f real estate, third party guarantees or any other assets other than project assets. The Fund monitors the loans by regular checks during the construction stage and also with regular visits to the site during disbursement and implementation stages. During implementation, there are quarterly monitoring reports that are sent by the investor and reviewed by Fund. The provisions are created in line with credit institutions (as also specified in the Decree 138).

Khanh Hoa Local Investment Fund

Khanh Hoa Development Investment Fund (KDIF) was incorporated in 200 1. As per the charter, the Fund provides direct investments, loans to projects, as well as financial advisory services. The organization structure o f the Fund i s shown below. The management council o f the fund consists o f one chairman, two vice-chairmen, and four other members. The control board has two members, while the board consists o f one director and one vice director. There are four departments that comprise the operations o f the fund: the general administration department, credit department, accounting and finance department, and administration and human resources department.

Currently, the Fund follows the rules provided below for various operations. It i s in the process o f adopting regulations stipulated by Decree 138 into i ts operations.

0 Loan investments:

Direct investments: May account for up to 20% o f charter capital

o Khanh Hoa Provincial People’s Committee will decide if loan capital makes up more than 10% o f Charter Capital

o Management Board’s Chairman will decide if loan capital makes up between 2% to 10%

125

o Director o f KDIF will decide if loan capital i s less than 2%

Profit is distributed to various funds, as shown as below. The Fund wil l soon adopt regulations o f Decree 13 8 after constitution o f the new charter.

o The development investment fund used to supplement the charter capital: 15%

o Financial risk provision: 10%

o Fund for professional knowledge development: a minimum o f 50%

o Welfare & reward fund: equal to 3-months’ paid salaries

Interest rate for lending is the same as the rate at which investment & development credit i s provided by Vietnam Development Bank

Assessment of LDIFs’ Capability to Implement Safeguards” The LDIFs that have been Qualified or Conditionally Qualified can be considered reasonably capable for implementing environmental and social safeguards norms. It is understood that while the Qualified LDIFs may have the prerequisite institutional capacity to manage environmental and social safeguards vis-a-vis the national laws and regulations, some o f them may not be fully familiar with the World Bank policies and procedures with respect to safeguards. The Integrated Project Manual will serve a key role in providing clear guidance to the LDIFs to ensure that they are able to fol low the World Bank safeguards guidelines and policies. The LDIF Project will provide a strong incentive as wel l as Technical Assistance to implement environmental and social safeguard at World Bank standards. The MOF P M U will also be staffed with MOF staff and consultants to review the implementation o f the World Bank policies by the LDIFs. Finally, the M O F P M U is planning to provide Technical Assistance to al l LDIFs. A s a result the Qualified LDIFs are sturdily poised to implement / manage subprojects, and should be able to implement environmental and social safeguard norms.

The table below summarizes the results o f the assessment o f the nine LDIFs’ capability to implement safeguards

l9 Assessment o f the financial capacity of the LDIFs’ i s provided in Annex 9.

126

I

8

M >I

P 4

M Y

M Y

v) 8 Y

M Y

v) 8 w 8

3 w

CI

3 3 9 3

(d

3

a B

0 w 0

.-

.f .- E

E .s B

Annex 11: Safeguards Policy Issues

VIETNAM: LOCAL DEVELOPMENT INVESTMENT FUNDS PROJECT

Environmental assessment (OP 4.01) The LDIFP project i s classified as Category FI. The complexity o f subprojects evaluated for investment is varied. All subprojects will pass init ial review and screening against the GOV and WB exclusion lists. Based on the size and the nature o f the potential impact on the environment f rom the subproject activities financed under the LDIFP project, categorization will be determined for each o f the subprojects in the investment pipeline, which has passed the review against the Government and WB exclusion lists.

The Safeguards Guidelines o f the Project Manual contain detailed guidance acceptable to IDA, and have been developed with and approved by the MOF, also based o n the successful model o f the HIFU Development Project and it ’s Manual. The Safeguards Guidelines and annexes: 0 Clearly lay out the steps where environmental assessment and supervision are undertaken

during the project cycle 0 Review Environmental Safeguard (ES) requirements o f G O V and the Bank

Identify the discrepancies ES between GOV and Bank requirements, and when there are discrepancies, identifies proper approaches to best comply with the Bank ES requirements

0 Clarify ES activities, including due diligence assessment for the subprojects with EA government approval prior to the lending from qualified LDIFs

0 Describe when and who has to do what to meet the ES requirements 0 Guide the assessment o f the borrower’s institutional mechanism to carry out EA work for

Category A subprojects.

The Safeguards Guidelines o f the Project Manual clearly define the procedure and responsibility o f the EA work as integrated in the subproject preparation and supervision process. The Safeguards Guidelines specify how to carry out environmental assessment (EA) work at each stage during the project cycle. The approach described in the Safeguards Guidelines of the Project Manual follows a due diligence assessment which includes: carrying out new EA works in accordance with the Safeguards Guidelines, which provides guidance to meet the requirements o f Government regulations and the Bank safeguard policies; assessing the adequacy o f the EA work which have been approved by the respective DONRE and developing a r isk management plan if the EA work i s not sufficient; borrower’s written commitments to LDIFs to implement the r isk management plan; and assessing the borrower’s institutional mechanism to carry out EA work for A-category subprojects.

The Safeguards Guidelines o f the Project Manual will be used by LDIF staff in carrying out environmental safeguard (ES) work to meet the requirements o f GOV and IDA. The Safeguards Guidelines will be used to review the three possible subprojects for Year One as pilots o f the LDIFP, in a manner acceptable to IDA.

The first subproject prepared by any o f qualified LDIF (regardless o f the year in which subproject is prepared) will also require prior review and approval by the Bank. Environmental screening was conducted for the three possible subprojects to be prepared in Year One: An Tay

129

Water Supply (Binh Duong), Phan Chu Trinh Primary School (Binh Duong), and Underground Power Line (HCMC).

For all three subprojects, which are shown in the environmental screening as o f low risk to the environment, LDIFs are advised to obtain Environmental certificate (known as Register for Meeting Environmental Safeguard - RMES) from DONREs or delegated district People Committees. On the IDA side, a detailed assessment wi l l be carried out in accordance with the Safeguard Guidelines o f the Project Manual. Detailed documentation o f the assessments will be prepared by the consultants in due course. At a request from IDA, a risk management plan (RMP) will be developed for each o f the subprojects if the assessment finds it necessary. Those plans will be signed between the qualified LDIFs and the borrowers as a M O U prior to the disbursement o f LDIF funds to the borrower. The MOU clarifies that by receiving the LDIF funds the borrower i s signing on a commitment to implement the Plan.

In addition, as guided by the Safeguards Guidelines o f the Project Manual, LDIFs will arrange independent monitoring o f the implementation o f EMP, RMES, or RMP in each o f the subprojects and will prepare semi-annual environmental compliance progress reports to be submitted to MOF and IDA. An independent environmental safeguard monitoring consultant (IMO) will be hired to assist MOF in this task, and also to provide guidance to the borrowers in internal supervision and reporting on the implementation o f mitigation measures as specified in the EMP, RMES, or RMP.

Summary of major environmental impacts of the three possible subprojects to be prepared during the first year of Project implementation: The three possible subprojects for Year One would have overall positive environmental and social impacts by better supply o f clean water to meet industrial and domestic demands (An Tay Water Supply); meeting the high demand o f education room (Phan Chu Trinh Primary School) and meeting requirements o f power supply (Underground Power Line). The investments in infrastructure would have the potential for short-term and site-specific impacts o f construction work on residential areas around the subproject areas. Key environmental issues during construction work under the three subprojects are noise and dust pollution, traffic congestion, transportation and disposal o f construction waste, transportation o f f i l l ing soils, temporary disturbance to local traffic and drainage in urban and residential areas. Major environmental impacts during the operation phase would include waste generated at the school and the sludge from the water treatment facility, if not managed properly

Physical Cultural Resources (OPBP 4.11) Subprojects that will have adverse impacts on physical cultural resources. Such resources are defined as movable or immovable objects, sites, structures, group o f structures, and natural features and landscapes that have archaeological, paleontological, historical, architectural, religious, aesthetic, or other cultural significance. Physical cultural resources may be located in urban or rural settings, and may be above or below ground, or under water. Their cultural interest may be at the local, provincial or national level, or within the international community. Chance finding procedures, however, are necessary to include in all projects that involve excavation or major civil works. Proposed subprojects that will have potential impacts on Physical Cultural Resources w i l l either be excluded or require prior review and approval by the Bank.

130

Natural Habitats (OPBP 4.04) Subprojects that will significantly damage natural habitats (land and water areas where most o f the native plant and animal species are s t i l l present). Specifically, subprojects cannot lead to significant loss or degradation o f critical natural habitats, which are legally protected, officially proposed for protection, or unprotected but o f known high conservation value. In other (non- critical) natural habitats, subprojects can cause significant loss or degradation only when: (i) there are no feasible alternatives to achieve the project’s substantial overall net benefits; and (ii) acceptable mitigation measures, such as compensatory protected areas, are included within the project. Proposed subprojects that will have potential impacts o n Natural Habitats will either be excluded or require prior review and approval by the Bank.

Pest Management (OP 4.09) Subprojects that will purchase pesticides or result in the excessive use o f harmful pesticides. Proposed subprojects that will have potential impacts on Pest Management will either be excluded or require prior review and approval by the Bank.

Forests (OPBP 4.36) Subprojects that will result in significant conversion or degradation o f critical forest areas. Proposed subprojects that will have potential impacts on Forests will either be excluded or require prior review and approval by the Bank.

Indigenous Peoples (OPBP 4.10) Subprojects that will affect indigenous peoples, including impacts on identity, culture, customary livelihoods, and exposure to disease. Proposed subprojects that will have potential impacts on Indigenous Peoples will either be excluded or require prior review and approval by the Bank.

Involuntary Resettlement (OPBP 4.12) A Resettlement Policy Framework (RPF) has been prepared to ensure that affected people can restore the losses and living standards as pre-project level. This framework has been approved by the Prime Minister. All compensation and resettlement activities occurred under the Project will need to fo l low the RPF to be approved.

The Safeguards Guidelines o f the Project Manual include provisions for LDIFs and their borrowers, investment partners, to minimize and mitigate the impacts to the people and to prepare and implement the safeguards documents to meet the Bank’s requirements. In particular, the respective responsibilities o f the LDIFs and investorshorrowers are spelled-out in the Safeguards Guidelines. Provincial PCs will have to approve prepared Resettlement Plans (RPs) in accordance with the approved RPF for al l subprojects requiring land acquisition and applicable to eminent domain. According to government regulations, the land will be acquired by the government only for defense and security purposes, for national interests, public interests and some specific economic development purposes, such as: projects invested by ODA funds and 100% FDI funds; projects for the infrastructure construction o f industrial zones, economic parks, hi-tech parks, urban development areas, tourism areas, cattle-breeding farms; projects invested by the domestic or jo int venture investment fund for commercial purposes in the group A with big investment budget assigned by the central Government. For the rest o f the subprojects, the borrowershnvestors will have to negotiate with the land users for buying, renting, or obtaining land use right as a capital contribution o f the land users for the proposed

13 1

subproject. In those cases, LDIFs will have to ensure that no compulsory land acquisition has occurred under such subprojects. If the negotiations with the land users fa i l and the subproject proponent can not find any alternative land to be used for the proposed subproject, the subproject will not be considered for using funding from the Project.

For subprojects where the land was cleared beforehand, a confirmation report is required. If there are s t i l l some remaining issues, a due diligence report should be provided to identify the problems and clarify h o w they will be resolved. Satisfactory resolution o f outstanding issues is a condition for the borrower to receive funds from LDIFP.

Supervision framework has also been established to ensure the compliance. Under Component 2 o f the Project, the MOF PMU will hire independent consultants to monitor compensation and resettlement activities to help ensure the project objectives are met.

Possible subprojects to be prepared during the first year of Project implementation The subprojects will be prepared according to the Project Manual, including the Safeguards Guidelines. Binh Duong DIF’s An Tay Water Supply subproject will not have land acquisition issues, as al l necessary land for water plant and water intake site either belongs to subproject proponent or have been bought from several families since 2008. The water pipes will run along the roadside, so no private property will be affected. The Phan Chu Trinh Primary School subproject will use the land bought from four individuals in early 2008. For the construction o f the Underground Power Line, some resettlement will be necessary, and a resettlement plan i s being prepared. It i s estimated that about 19.7 ha o f land will be acquired, with 74 households to be affected and 16 o f them to be relocated.

Safeguard Guidelines implementation advisors with international experience and local social consultants will be hired by LDIFs and MOF to help deal with social safeguard policies compliance and i t s management.

Public consultation The Safeguards Guidelines o f the Project Manual specify when and how public consultations have to take place for each sub-project. If subprojects are found to be o f high risk to the environment, public consultation per Bank’s requirements, specified in OP 4.01, will be conducted in addition to the consultation as required by the Government regulations, for which consultation with the local (commune/ward level) authority and the Fatherland Front is sufficient. LDIFs and local resettlement related agencies have been consulted intensively during preparation o f RPF and Safeguards Guidelines. A consultation mechanism has been developed in the RPF to be applied during resettlement plan (RP) preparation and implementation to ensure the needs and wishes o f a l l related stakeholders, especially potentially affected people be reflected. The RPs will detail the plan for consultation including the procedures, methodologies and subjects o f consultation. The RPs will also describe grievance redress mechanism with the steps and procedures for grievance filing as wel l as the responsible institutions and timeframe for receiving and addressing the grievances.

132

Public disclosure

The Safeguards Guidelines o f the Project Manual specify when and how the various safeguards documents need to be disclosed. A copy o f the Safeguards Guidelines, as well as the WF, has been disclosed locally at MOF and each o f the qualified LDIFs. The Safeguards Guidelines were sent to InfoShop in Washington DC on April 7, 2009 and made available in English and Vietnamese in Hanoi’s Development Information Center (VDIC) on April 1,2009.

Institutional capacitv assessment and strengthening Qualified LDIFs have the institutional arrangement to manage investments, and their departments have a clear understanding o f the requirements for implementing the Government and Bank safeguard policies during a subproject appraisal, investment and monitoring phases, though World Bank policies on involuntary resettlement are quite new for them. LDIFs have staff that have training and work experience in land acquisition and resettlement policies and have gained familiarity with compensation and resettlement tasks through other projects. LDIFs will deploy staff responsible for ensuring that subprojects comply with the Bank’s safeguards requirements2’ In order to strengthen the funds’ capacity to implement Bank safeguards requirements, MOF will hire independent monitoring organization consultants (IMO) as part o f Project Implementation Support under LDIFP to conduct monitoring for LDIF compliance with WB requirements. (TORS for these consultants have been prepared and are included in Project Manual). These consultants will monitor the implementation o f EMP, RMES, or RMP in each LDIF, and will prepare semi-annual safeguard compliance progress reports submitted to MOF and IDA. The consultants will also provide advice to the LDIFs and borrowers in internal supervision and reporting on the implementation o f mitigation measures as specified in the EMPs, RMESs, RMPs, or RP. In addition, WB specialists will provide safeguards training on an ongoing basis to Qualified LDIFs

The Safeguards Guidelines will apply only to subprojects financed with the IDA credit. These Safeguards requirements will apply to all subprojects financed with the IDA credit, regardless o f whether they were identified by the LDIFs or proposed by the private sector. The possible Year One subprojects, as well as the first subproject prepared by each qualified LDIF (regardless o f the year in which subproject i s prepared), will require prior review and approval by the Bank. The reviewha1 decision on the safeguards review will be made by the Hanoi-based safeguards staff to be cleared by the Sector. However, for Category A subprojects, the SM, at his or her discretion, may request the Safeguard Secretariat to review and clear specific subprojects andor safeguard instruments. All Category A subprojects financed during the Project implementation period will require prior review and approval by the Bank.

Safeguards lessons learned from HDP implementation. The following safeguards lessons based on the experience with the implementation o f HDP have been incorporated in the Project: 1) The Project Manual, including Safeguards Guidelines, has been clarified, streamlined, and simplified. The Project Manual i s a living document, and will continue to be clarified and simplified based on LDIFP implementation. 2) Requirements and rules for disclosure have been clarified, including a matrix detailing safeguards disclosure requirements for subprojects,

Includes full-time and part-time staff, wi th educational background or relevant training in social and environmental safeguards; LDIFs w i l l also use consultants to supplement their staff when needed.

133

clarifying what should be disclosed at what location, at what stage, and for what safeguards risk category o f subprojects. 3) Approval procedures for prior review o f subprojects have been clarified.

134

Annex 12: Project Preparation and Supervision VIETNAM: Local Development Investment Funds Project

Planned Actual PCN Date February 2006 February 2006 Initial PID to PIC April 2006 April 2006 Initial ISDS to PIC March 2006 April 2006 Appraisal April 2009 April 2009 Negotiations May 2009 May 2009 Board/RVP approval June 2009 Planned date o f effectiveness Planned date o f mid-term review Planned closing date

October 2009

December 20 14

Key institutions responsible for preparation o f the project: Ministry o f Finance Local Development Investment Funds in HCMC, Hanoi, Dong Nai, Binh Duong and Tien Giang

Bank staff and consultants who worked on the Droiect included: Name Title Unit Kamran Khan Infrastructure Finance Advisor, TTL EAPRF Cuong Duc Dang Senior Operations Officer, Co-TTL EASUR Anne Harrison Program Assistant EASOP Giang Thi Huong Nguyen Program Assistant EACVF William Dachs Senior Infrastructure Specialist FEU Kalpana Seethepalli Infrastructure Economist EASOP Cung Van Pham Financial Management Specialist EAPCO Kien Trung Tran Senior Procurement Specialist EAPCO Hoa Thi Mong Pham Senior Social Development Specialist EASSD Phuong Thi Thanh Tran Senior Environmental Specialist EASEN Hoi-Chan Nguyen Senior Counsel LEGEA Anthony Pellegrini Peer Reviewer Former Dir., FIPSI Tunc Tashin Uyanik Peer Reviewer EASFP Jose Luis Guasch Peer Reviewer FEU Ekapon Nick Jivasantikarn Infrastructure Specialist (Consultant) EASOP Dinh Tran Local Finance Consultant Consultant Todd Hanson International Safeguards Consultant Consultant

135

Annex 13: Documents in the Project File VIETNAM: Local Development Investment Funds Project

1. LDIFP Project Manual

2. Project Concept Note and Minutes o f PCN review meeting

3. QER Minutes

4. Decision Note

5. Qualification Criteria o f LDIFs

6. OP8.30 Analysis

7. Appraisal Completion Note

8. Safeguards Clearance o f Appraisal Completion

9. Integrated Safeguards Data Sheet

10. Approval in principle o f the Prime Minster and Endorsement o f Finance Minster for the

1 1. Decision 986/QD-BTC dated May 13,2009 approving LDIFP Project Document (FS)

12. Decision 978/QD-BTC dated May 12,2009 establishing the LDIFP Project Management

13. Decision 3 127NPCP-KTTH dated May 15,2009 approving onlending mechanism for

14. Decision Ol/BQLDA dated May 14,2009 promulgating Financial Management Guidelines

Project Resettlement Policy Framework

Unit

LDIFP

for the LDIFP PMW

136

Annex 14: Statement o f Loans and Credits VIETNAM: LOCAL DEVELOPMENT INVESTMENT FUNDS PROJECT

Project ID FY Purpose

Difference between expected and actual

disbursements Original Amount in US$ Millions

IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P108885

PO88759

PO82672

PO83 58 1

PO86508

PO95129

PO96418

PO992 1 1

PO99376

P100916

P101608

PO83588

P104848

PO82295

PO79665

PO85071

PO84871

PO73361

PO79663

PO79344

PO75407

PO77287

PO6605 1

PO85260

PO85080

PO73763

PO82627

PO82604

PO74688

PO59663

PO65898

PO70197

PO44803

PO75399

PO66396

PO72601

2009

2009

2008

2008

2008

2008

2008

2008

2008

2008

2007

2007

2007

2007

2007

2006

2006

2006

2006

2006

2006

2006

2005

2005

2005

2005

2005

2005

2005

2004

2004

2004

2003

2003

2002

2002

VN - Agriculture Competitiveness Project

Fin Sector Modern and Info Mgnt System

VN-Northern Upland Health Support Proje

VN-Priority Infra Investment

VN-Northern Delta Transport Dev

VN Land Administration Project

VN-Rural Distribution Project

Tax Administration Modernization Project

VN-Third Rural Finance Project

VN-Avian & Human Influenza Control &Prep

DEV

VN-HANOI URBAN TRANSPORT

VN-MKG DELTA TRANSPORT INFRA

VN-HIFU DEVELOPMENT

VN-COASTAL CITIES ENVMT SANIT.

VN-2ND HIGHER EDUCATION

Customs Modernization

VN-TRANS & DISTRIB 2

VN -Natural Disaster Risk Mngt Project

VN-Mekong Regional Health Support Proj

VN -1CT Development

VN-Rural Transport 3

VN-RRD RWSS

VN - Forest Sector Development Project

VN-EFA Support Program

VN-ROAD SAFETY

VN-WATER SUPPLY DEV.

Payment System and Bank Modernization 2

VN-HIV/AIDS Prevention Project

VN-RURAL ENERGY 2

VN-ROAD NETWORK IMPROVEMT

VIETNAM WATER RESOURCES ASSISTANCE

VN-URBAN UPGRADING

VN-PRIMARY EDUC FOR DISADVANTAGED CHILRE

Public Financial Management Reform Proj .

EQUITIZATION & RENEWAB

VN -Rural Finance I1 Project

VN-SYSTEM ENERGY,

0.00 59.80

0.00 60.00

0.00 60.00

0.00 155.21

0.00 152.44

0.00 170.00

0.00 75.00

0.00 150.00

0.00 80.00

0.00 200.00

0.00 20.00

0.00 207.70

0.00 50.00

0.00 124.70

0.00 59.40

0.00 65.90

0.00 200.00

0.00 86.00

0.00 70.00

0.00 93.72

0.00 106.25

0.00 45.87

0.00 39.50

0.00 50.00

0.00 31.73

0.00 112.64

0.00 105.00

0.00 35.00

0.00 220.00

0.00 225.26

0.00 157.80

0.00 222.47

0.00 138.76

0.00 54.33

0.00 225.00

0.00 200.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 57.74

0.00 56.92

0.00 54.73

0.00 148.57

0.00 141.06

0.00 153.69

0.00 68.08

0.00 135.39

0.00 82.26

0.00 188.00

0.00 18.61

0.00 221.29

0.00 40.77

0.00 115.88

0.00 51.10

0.00 67.36

0.00 165.10

0.00 72.35

0.00 66.02

0.00 85.23

0.00 106.34

0.00 40.30

0.00 30.31

0.00 15.87

0.00 29.36

0.00 99.73

0.00 84.16

0.00 16.24

0.00 143.29

0.00 176.86

0.00 135.28

0.00 175.86

0.00 76.55

0.00 43.70

0.00 82.83

0.00 0.00

0.00

0.00

-2.42

10.50

0.00

0.00

-2.07

0.00

0.00

0.00

5.49

7.86

-5.46

-4.94

2.36

35.28

48.49

4.93

-3.18

23.55

38.51

5.64

19.74

15.00

21.45

28.96

65.34

-1.88

72.96

159.15

66.69

24.12

38.00

38.49

34.70

-40.73

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

-4.01

0.00

0.00

0.00

0.35

0.00

12.04

0.00

0.00

0.00

65.84

0.00

0.00

0.00

0.00

0.00

32.80

13.70

34.70

0.00

137

PO73305 2002 VN-Regional Blood Transhsion Centers 0.00 38.20 0.00 0.00 0.00 27.27 18.35 -5.24 PO62748 2001 VN - COMMUNITY BASED RURAL 0.00 102.78 0.00 0.00 0.00 14.17 -5.60 0.00

PO52037 2001 VN-HCMC ENVMTL SANIT. 0.00 166.34 0.00 0.00 0.00 99.26 74.17 74.17 INFRA.

PO42927 2001 VN-Mkg Transp & Flood Protection 0.00 135.00 0.00 0.00 0.00 5422 9.76 -5.65

Total: 0.00 4,551.80 0.00 0.00 0.00 3,441.75 803.21 218.70

138

VIETNAM STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions o f US Dollars

~ ~~ ~~ ~~

Com m itted Disbursed

IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2003

2002

2002

2002

2005

1998

1997

2004

2005

2001

2006

2003

2004

2005

2006

2002

2003

2007

ACB-Vietnam

CyberSoft

Dragon Capital

F-V Hospital

Khai Vy

MFL Vinh Phat

Nghi Son Cement

Olam

Paul Maitland

RMIT Vietnam

SABCO

Sacombank

Sacombank

Sacombank

Sacombank

VEIL

VEIL

VEIL

0.00

0.00

0.00

5.00

6.00

0.13

10.09

20.00

7.20

7.25

20.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

5.02

0.06

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

2.77

2.3 1

2.05

3.05

0.00

7.41

6.15

0.00 0.00

0.00 0.00

1.05 0.00

3 .OO 0.00

0.00 0.00

0.00 0.00

0.00 1.88

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

2.00 0.00

0.00 0.00

0.00 0.00

0.00 5.02 0.00

0.00 0.06 0.00

0.00 0.00 1 .os 5.00 0.00 3.00

0.00 0.00 0.00

0.13 0.00 0.00

10.09 0.00 0.00

20.00 0.00 0.00

7.20 0.00 0.00

3.50 0.00 0.00

0.00 0.00 0.00

0.00 2.77 0.00

0.00 2.3 1 0.00

0.00 2.05 0.00

0.00 3.05 0.00

0.00 0.00 2.00

0.00 7.41 0.00

0.00 6.15 0.00

0.00

0.00

0.00

0.00

0.00

0.00

1.88

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Total portfolio: 75.67 28.82 6.05 1.88 45.92 28.82 6.05 1.88

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic.

2000 MFL-AA 0.00 0.00 0.00 0.00

2006 CCS-Asia 0.02 0.00 0.00 0.00

2000 Interflour 0.01 0.00 0.00 0.01

2006 CII-Vietnam 0.00 0.00 0.00 0.00

2000 MFL Mondial 0.00 0.00 0.00 0.00

2002 F-V Hospital 0.00 0.00 0.00 0.00

1999 MFL Minh Minh 0.00 0.00 0.00 0.00

1999 MFL Chau Giang 0.00 0.00 0.00 0.00

Total pending commitment: 0.03 0.00 0.00 0.01

139

Annex 15: Country at a Glance VIETNAM: Local Development Investment Funds Project

POVERTY and SOCIAL Vletnam

2007 Population, mld-year (miilions) 65.1 GNi per caplta (Atlas method, US$) 790 GNi (Atlas method, US$ billions) 67.2

Average annual growth, 2001.07

Population (Sy 13 Laborforce (sa) 2.2

M o s t recent eatlmate ( latest year avaliable, Z00+07)

Poverty (%of populatio n beio w natio nai po vedy line) 29 Urban population (%of fotalpopulation) 27 Lifeeqectancyat birth (years) 71 infant mortallty(per1WOiiva births) 15 Chiidmalnutrition (%ofchiidranunder5) 20 Access to an improvedwater source (%ofpopulation) Literacy (%ofpopulation age f55y Gross primary enro llment (%of school-age population)

92

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1987 m 9 7

GDP (US$ billions) 36.7 26.8 Gross capital fonnationlGDP 0.6 28.3 Eqorts of goods and seNicas/GDP 6.0 43.1 Gross domestic savings/GDP 4.6 20.2 Gross national savings/GDP .. 216

Current account baiance/GDP -16 8 . 2

Total debt/GDP 0.5 811

Present valueof debt/GDP Present valueof debt/eports

1987-97 1997-07 2006 (average annual gm wth) GDP 7.7 7.2 6.2 GDP per capita 5.6 5.9 6.9 Exparts of goods and services 27.3 7 . 9 22.7

Interest paymentsIGDP 0.0 10

Total debt servlce/eqorts .. 7.7

East Asia h Low- Paci f ic Income

1914 2.80 4,w4

0.8 12

43 71 24 0

67 91 10

a 9 m

2006

610 35.7 73.5 32.4 36.9

-0.3 0.5

33.1 2.0

27.9 37.3

1298 578 749

2.2 2.7

32 57 85 29 66 61 94 x10 89

2007

712 35.3 75.7 27.4 32.8

. -3.1

2007 2007-11

8.5 6.1 7.2 6.9

7 .9 7 . 9

Javelopment diamond'

Life eqectancy

GNI Gross

capita enrollment per w a r y

Access to improvedwatersource

- Viefnam

-Lo w-income gro up

Economic ratlo..

I Trade

1

Indebtedness

! Vietnam

Low-income group

STRUCTURE o f tho ECONOMY

(%of GDP) Agriculture Industry

Services

Household final consumption eqenditure General gov't final consumption eqenditure imports of goods and services

Manufacturing

(average annual gm wth) Agriculture Industry

Services

Household final consumption eqenditure General gov't final consumption eqenditure Gross capital formation Imports of goods and services

Manufacturing

1987 1997

40.6 25.8 28.4 32.1 22.4 6.5 311 42.2

.. 717

.. 8.1 y1.8 512

1987-97 1897-07

4.0 4.0 9.5 9.9

9, l 6.2

.. x1.8

.. 5.7 23.8 x1.2 29.6 8.1

6.5 n 2

2008

20.4 4 16 213 36.1

617 5.9

76.8

2008

3.4 a . 4 9 . 4 8.3

9 . 9 8.5 9.3

215

2007

67.1 5.5

83.6

2007

20.3 8.5 9.2

22.6

IGrowth o f capi ta l and GDP (K) 1 15

10

5

0 I Growth o f exports and impor t s (Oh)

40 T

I Note 2007 data are preliminaryestimates This tablewas producadfrom the Development Economics LDB database *Thediamonds showfourkey indicators in thecountry(1n bold) comparedmth its Income-groupaverage If data aremissing, thediamondwll

be incomplete

140

Vietnam

P R I C E S and GOVERNMENT F I N A N C E

D o m e s t i c prices (%change) Consumer pnces Implicit GDP deflator

G o v e r n m e n i f inance (%of GDP, fncludes current grants) Current revenue Current budget balance Overall SUrDIUS/defiCit

1967 1997 2006 2007 I n f l a t i on ( O h ) I lo T

~ GDPdeflator -CPI

3 2 6.6

7.5 7.3

7.5 8.2 362.6

0 .2 -0.6

20.9 4.5 -14

27.1 8.5

-0.3

25.5 5.8

-3.4

T R A D E

(US$ millions) Totalexports (fob)

Rice Fuel Manufactures

Totalimports (cif) Food Fuel and energy Capital goods

Export price index (2000=WO) Import pnce index(2OOO-WO) Terms o f trade (ZOOO=WO)

1987

613

1,184

1997

9,185 926

1,443 4,401 11,592

6 1.194 3,59

119 t20 99

2006

39.826 1276

8.265 19.360 44,891

5,970 13,800

130 133 97

2007 Expor t and Import l eve l s (US8 mlll.)

150,000 I 40 000

30,000

20 000

10 000

0

I 01 02 03 04 05 OB 07

0EXports OlmpOrtS I B A L A N C E o f P A Y M E N T S

(US$ millions) Exports of goods and services imports of goods and services Resource balance

Net income Net current transfers

1987 1997

11,678 0.618 -1,940

-6 14 887

-1,667

56 1,611

2006

44,926 47.710 -2,784

-1,430 4,049

- 6 5

3,093 -2.928

2007

52,964 58,502 -5,538

-1,887 5,227

-2,198

Current a c c o u n t ba lance t o GDP ( O h )

-94 27

Current account balance -592

Financing items (net) Changes in net reserves

M 0 m o : Reserves including gold (US$ millions) Conversion rate (DEC, locaVUS$) 78.3

E X T E R N A L D E B T and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

1987

191

186 11,683.3

11,485 15.963.9 6,056.0

1997

21,777 0

569

914 0 4

2 o o s C o m p o s i t i o n o f 2006 deb t (us$ mill.)

20,202 0 0

3,663 4,549

918 0 0

56 64

IBRD IDA

Totaldebt service iBRD IDA

Composition o f net resource flows Official grants Official creditors Pnvate creditors Foreign direct investment (net inflows) Portfolio equity(net inflows)

World Bank program Commitments Disbursements Pnncipal repayments Net flows Interest payments Net transfers

0 60

2 0 0

41 1

0 13 0

254 378 292

2,220 0

543 863 -66

2,315 0 E: 8.071

A . IBRD E. Bilateral 1 8.- IDA D. Other rmltilaterai F . Private I C - I M F 0 - Short-ter

444 181

1 180

3 177

656 973 340 748 23 30

317 718 33 34

284 684

Note:This tablewas produced from the Development Economics LDB database. 9/24/08

141

MAP


Thailand

142

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