SOE Reform and Corporate Governance Facilitation Program ... · Completion Report Project Number:...

Completion Report

Project Number: 39538-023

Loan Numbers: 2613 and 2614

July 2019

Viet Nam: SOE Reform and Corporate Governance

Facilitation Program – Tranche 1

This document is being disclosed to the public in accordance with ADB's Access to Information

Policy.

CURRENCY EQUIVALENTS

Currency unit – dong (D)

At Appraisal At Project Completion (26 October 2009) (31 December 2017) D1.00 = $0.00005540 $0.0000440354 $1.00 = D18,050.4 D22,709

ABBREVIATIONS

ADB – Asian Development Bank

ADF – Asian Development Fund

APFS – audited project financial statements

DATC – Debt Asset Trading Company

DSCR – debt-service coverage ratio

FY – financial year

IT – Information Technology

MFF – Multitranche Financing Facility

MOF – Ministry of Finance

MOC – Ministry of Construction

OCR – ordinary capital resources

PFR1 – first periodic financing request

PMU – Project Management Unit

Song Da – Song Da Corporation

SDR – special drawing rights

SOE – State-owned Enterprise

Sowatco – Southern Waterborne Transport Corporation

UPCM – unlisted public companies market

VDB – Vietnam Development Bank

NOTES

In this report, “$” refers to United States dollars

Vice-President Ahmed M. Saeed, Vice-President, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Directors Eric Sidgwick, Viet Nam Resident Mission, SERD

Sona Shrestha, Public Management, Financial Sector, & Trade Division, SERD

Team leader Dao Viet Dung, Senior Public Management Officer, SERD Team members Phan Thi Lan Phuong, Project Analyst, SERD

Dang Thu Huong, Operations Assistant, SERD

In preparing any country program or strategy, financing any project, or by making any designation

of or reference to a particular territory or geographic area in this document, the Asian

Development Bank does not intend to make any judgments as to the legal or other status of any

territory or area.

https://phonebook.adb.org/directory/getContent.do?handler=101&key=210000&caption=Southeast%20Asia%20Department

CONTENTS

Page

BASIC DATA i

I. PROJECT DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 1

A. Project Design and Formulation 2 B. Project Outputs 3 C. Project Costs and Financing 5 D. Disbursements 6 E. Project Schedule 6 F. Implementation Arrangements 7 G. Consultant Recruitment and Procurement 7 H. Safeguards 8 I. Monitoring and Reporting 8

III. EVALUATION OF PERFORMANCE 9

A. Relevance 9 B. Effectiveness 10 C. Efficiency 10 D. Sustainability 10 E. Development Impact 11 F. Performance of the Borrower and the Executing Agency 12 G. Performance of The Asian Development Bank 12 H. Overall Assessment 13

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 13

A. Issues and Lessons 13 B. Recommendations 14

APPENDIXES

1. Design and Monitoring Framework First Periodic Financing Request 15 2. Aspects of Governance and Transparency Adopted by the General Corporations 18 3. Project Cost at Appraisal and Actual 19 4. Disbursement of ADB Loan and Grant Proceeds 20 5. Contract Awards of ADB Loan and Grant Proceeds 22 6. Chronology of Main Events 24 7. Status of Compliance with Loan Covenants 25 8. Environment and Social Management Systems Implementation 28

BASIC DATA

A. Loan Identification

1. Country Socialist Republic of Viet Nam 2. Loan number and financing source 2613, Ordinary Capital Resources

2614, Asian Development Fund 3. Project title SOE Reform and Corporate Governance

Facilitation Program - Tranche 1 4. Borrower Socialist Republic of Viet Nam 5. Executing agency Ministry of Finance 6. Amount of loan Loan 2613: $120,000,000.00

Loan 2614: SDR 6,267,000.00 ($10,000,000.00 equivalent)

7. Financing modality Multitranche Financing Facility SOE = State-owned Enterprise.

B. Loan Data

1. Appraisal – Date started – Date completed

13 August 2009 17 August 2009

2. Loan negotiations – Date started – Date completed

29 October 2009 30 October 2009

3. Date of Board approval 14 January 2010 4. Date of loan agreement 27 September 2010 5. Date of loan effectiveness – In loan agreement – Actual – Number of extensions

Loan 2613: 26 December 2010 Loan 2614: 26 December 2010 Loan 2613: 11 January 2011 Loan 2614: 11 January 2011 0

6. Project completion date – Appraisal – Actual

Loan 2613: 31 December 2012 Loan 2614: 31 December 2012 Loan 2613: 15 May 2015 Loan 2614: 31 December 2017

7. Loan closing date – In loan agreement

– Actual – Number of extensions

Loan 2613: 30 June 2013 Loan 2614: 30 June 2013 Loan 2613: 15 May 2015 Loan 2614: 31 December 2017 Loan 2613: 2 Loan 2614: 3

8. Financial closing date – Actual

Loan 2613: 15 May 2015 Loan 2614: 28 February 2018

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9. Terms of loan – Interest rate – Maturity (number of years) – Grace period (number of years) – Interest rate

– Maturity (number of years) – Grace period (number of years)

Loan 2613: LIBOR-Based 25 5 Loan 2614: 1.0% per annum during grace period 1.5% per annum thereafter 32 8

9. Disbursements

a. Dates

Initial Disbursement

15 May 2011 (L2613) 27 August 2012 (L2614)

Final Disbursement 15 May 2015

19 December 2017

Time Interval 48.0 months 63.7 months

Effective Date 11 January 2011(L2613) 11 January 2011(L2614)

Actual Closing Date 15 May 2015

31 December 2017

Time Interval 52.1 months 83.7 months

b. Amount ($million)

Category

Original Allocation

(1)

Increased during

Implementation (2)

Cancelled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

ADB OCR Debt Restructuring

Song Da Sowatco

Interest & Commitment Charge

Subtotal

109.59 2.30 8.11

120.00

0.00

109.59 2.30 8.11

120.00

109.59 2.30 1.94

113.83

6.17 6.17

ADB ADF

Equipment Consulting Services Interest Charge

3.94 5.32 0.74

1.57 2.11 0.29

2.37 3.21 0.45

0.26 3.50 0.14

0.45 0.60 0.08

Subtotal 10.00 3.97 6.03 3.90 1.13 Total 130.00 3.97 126.00 117.73 7.30

ADB = Asian Development Bank, ADF = Asian Development Fund, Song Da = Song Da Corporation, Sowatco = Southern Waterborne Transport Corporation.

C. Project Data

1. Financing plan ($million)

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Cost Appraisal Estimate Actual

Implementation cost

Borrower financed 0.93 5.50

ADB financed

Ordinary Capital Resources 111.89 111.89 Asian Development Fund 9.26 3.76

Other external financing

Total implementation cost 122.08 121.15

Interest during construction costs

Borrower financed

ADB financed 8.85 2.08

Other external financing

Total interest during construction cost 8.85 2.08

TOTAL 130.93 123.23

2. Cost breakdown by project component ($million)

Component Appraisal Estimate Actual

Investment Costs Debt Restructuring

Song Da Sowatco

Consulting Services Equipment Taxes and Duties Interest and Commitment Charges

OCR

109.59 2.30 0.00 0.00 0.00 8.11

ADF

5.97 3.29

0.74

OCR

109.59 2.30

1.94

ADF

3.50 0.26

0.14

Total 120.00 10.00 113.83 3.90

ADB = Asian Development Bank, ADF = Asian Development Fund, OCR = Ordinary Capital Resources, Song Da = Song Da Corporation, Sowatco = Southern Waterborne Transport Corporation.

3. Project schedule

Item Actual

Date of contract with consultants

(i) Ernst & Young (ii) Mckinsey and Company (iii) Glenys Taylor (iv) Hoai Minh Do (v) Lauro Vives (vi) Saskatchewan (vii) Accenture Vietnam Co. Ltd.

31 October 2011 9 December 2011 1 July 2013 1 July 2013 1 July 2013 12 May 2014 25 August 2014

Equipment and supplies (i) Vina Telecommunication Trading &Service Co. Ltd (ii) Quyet Thang Trading Informatics Co. Ltd. (iii) Capital Technology Service Joint Stock Co. (iv) Informatic Digital Technology Co. Ltd. (v) 3T Vietnam Trading Joint Stock Co. (vi) Duy Hung Consultant Technology Trading JS Co. (vii) Gia Phuc Trading Investment Co. Ltd (viii) Gia Linh Service and Investment Co. Ltd.

11 July 2017 12 September 2016 12 September 2016 12 September 2016 12 September 2016 12 September 2016 12 September 2016 12 September 2016

Dates (i) First procurement 11 July 2017 (ii) Last procurement 2 November 2017 (iii) Completion of equipment installation 31 December 2017

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4. Project performance report ratings

Implementation Period Ratings

From 1 January 2011 to 31 December 2011 From 1 January 2012 to 31 December 2012 From 1 January 2013 to 31 December 2013 From 1 January 2014 to 31 December 2014 From 1 January 2015 to 31 December 2015 From 1 January 2016 to 31 December 2016

Potential Problem Potential Problem Potential Problem Satisfactory Satisfactory Satisfactory

From 1 January 2017 to 31 December 2017 Satisfactory

C. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons No. of

Person-Days Specialization of Members

Loan Inception 22–27 April 2010 1 5 a, b Loan Review 3–7 March 2011 1 4 a, b Loan Review Loan Review Loan Review

21–22 August 2012 26 Feb–1 Mar 2013

2–9 May 2013

1 3 3

2 4 8

a, b a, b, c a, b, c

Special Loan Administration Loan Review Loan Review

18–21 June 2013 26–28 August 2013 7–9 October 2013

1 4 4

4 3 3

a, b, c a, b, c a, b, c

Loan Review 9–10 December 2013 2 2 a, b, c Loan Review Loan Review

5 February 2015 23–26 March 2015

3 4

1 4

a, b, c a, b, c

Loan Review Loan Review Project completion review

24–27 April 2017 9–16 October 2017

3–10 December 2018

2 4 6

3 3 1

a, b, c a, b, c a, b

a = senior public management specialist, b = senior project officer, c = project analyst.

I. PROJECT DESCRIPTION 1. On 18 November 2009 the Asian Development Bank (ADB) approved a multitranche financing facility (MFF) to implement the State-owned Enterprise (SOE) Reform and Corporate Governance Facilitation Program. The program was to be implemented during 2009–2015 and financed through a $630 million equivalent MFF, comprising $600 million in ordinary capital resources (OCR) and $30 million in Asian Development Fund (ADF) support. Following the Government of Viet Nam’s first periodic financing request (PFR1), a $120 million OCR loan and $10 million special operations loan were signed on 27 September 2010. 2. The intended impact of the project financed by PFR1 was improved profitability and transparency of equitized and restructured SOEs, including large general corporations and their subsidiaries. The outcome was transforming Song Da Corporation and the Southern Waterborne Transport Corporation (Sowatco) into focused, efficient businesses with strong balance sheets and improved corporate governance. 3. The project’s three outputs were:

(i) debt restructuring implemented, combining financial and corporate restructuring; (ii) increased operational efficiency and improved corporate governance of general

corporations and other SOEs; and (iii) institutions supporting key aspects of SOE reform strengthened and their

governance improved.1

Outputs (i) and (ii) specifically targeted Song Da and Sowatco, while output (iii) was specific to the Debt Asset Trading Company (DATC).

4. Rationale. Through the program, ADB introduced a timely catalyst to the SOE reform process by supporting a comprehensive approach to equitizing general corporations and transforming them into globally competitive entities. At project formulation SOE reform was stymied by the lack of viable approaches to equitizing and transforming large general corporations. Equitization is only one step in a successful transformation process for SOEs and needs to be complemented or preceded by numerous other steps, including strategic and business planning, corporate and financial restructuring, attracting investment and corporate financing, forming value-adding business partnerships or alliances, and implementing more transparent governance.

II. DESIGN AND IMPLEMENTATION 5. Apart from the withdrawal of DATC, which necessitated a minor change in scope and implementation arrangements (para. 9), the project was implemented as designed. Appendix 1 compares the design and monitoring framework for PFR1 with project achievements.

1 ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing

Facility Socialist Republic of Viet Nam: SOE reform and Corporate Governance Facilitation Program. Viet Nam

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A. Project Design and Formulation 6. Relevance of the project at appraisal and at completion. The overall design was relevant at appraisal and remained so at completion. ADB’s Viet Nam country program and strategy for 2007–2010 recognized the critical importance of transforming and reforming SOEs to reduce dominant inefficient state production, promote private sector development, and boost economic growth.2 After decades of preferential treatment, incentives, and subsidies, SOEs failed to compete effectively, and their financial problems created significant fiscal risks. General corporations had relied on extensive borrowing from the government and state-owned commercial banks to finance their operations, having virtually no access to p r i v a t e capital markets. Most of the large SOEs and general corporations had very high debt, with debt-to-equity ratios frequently exceeding 100%. This severely constrained their ability to service their debts and contributed to the many nonperforming loans in the banking system. The government's socioeconomic development plan for 2006–2010 called for diversifying ownership to improve the efficiency and competitiveness of SOEs, and for narrowing or eliminating the role of ministries and other state entities in SOE governance and management.3 7. SOE restructuring remained a strategic goal of the government’s socioeconomic development plan for 2011–2015.4 Transforming and reforming the SOE sector continues to be critical to reducing inefficient state production, promoting sound banking operations, encouraging private sector development, and enhancing economic growth in Viet Nam. The Prime Minister’s decision of 19 February 2013 (339/QDD-TTg) made restructuring SOEs one of three pillars of economic restructuring (along with banking sector and public spending restructuring) to transform the economy and improve competitiveness during 2013–2020. 8. Project preparation. Close consultations—with the Ministry of Finance (MOF), which was the executing agency; selected SOEs, which were the implementing agencies; and line ministries— were satisfactorily undertaken during project preparation.

(i) The selection of participating general corporations under tranche 1. Successfully and comprehensively transforming a large SOE is complex, and the pilot stage was kept manageable by focusing on a few SOEs. After consulting with several general corporations, the government proposed an initial list of four general corporations for potential participation in the program, from which Song Da and Sowatco were selected for the first tranche.5 The selection was based on the viability of debt restructuring and readiness, reflected in the expressed commitment to undertake appropriate corporate, financial, and operational

2 ADB. 2006. Country Program and Strategy: Viet Nam, 2007–2010. Manila. 3 Government of Viet Nam, Ministry of Planning and Investment (MPI). 2006. The Five-Year Socio-Economic

Development Plan 2006–2010. Ha Noi. 4 Government of Viet Nam. MPI. 2011. Socio-Economic Development Plan, 2011–2015. Hanoi. 5 Founded in 1995, Song Da reported to the Ministry of Construction. When it joined the project in 2010, Song Da had

a cumbersome structure with many subsidiaries and affiliates that spread investments across five business lines, including (i) engineering, procurement and construction (EPC), (ii) power generation, (iii) housing and urban development, (iv) building materials, and (v) other businesses. Song Da is much leaner than it was before the project, having divested 27 companies and reduced the number of subsidiaries from 24 to 13. Sowatco was established in 1975 and reported to the Ministry of Transport. Before joining the project, Sowatco had seven subsidiary companies, and three joint venture companies operating in diverse sectors, including trading, logistics, shipbuilding and repair, and real estate development. In line with its restructuring plan, Sowatco divested from non-core business, reduced business lines, fully privatized and was merged to form one of the top three logistics providers in Viet Nam.

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restructuring; and approval of the proposed restructuring from each general corporation’s management board and the relevant line ministries.

(ii) The project was formulated by MOF with active engagement of Song Da and Sowatco, the selected general corporations, and a consultancy firm (Ernst & Young) engaged by ADB (from 26 May 2008 to 31 December 2009) to analyze (a) the approach to SOE reform; and (b) the corporate structure, financial performance, and projections of Song Da and Sowatco. The analysis identified the constraints of the then-ongoing SOE reforms, concentrating on individual small SOEs and focusing on equitization. Based on this robust analysis, a comprehensive restructuring approach was proposed to encompass the financial, organizational, and corporate restructuring of large general corporations, while also improving corporate governance, management practices, and business processes. Specifically, the corporate restructuring plan defined the core business segments to be nurtured and developed and the non-core and/or non-strategic businesses to be disposed of, while the debt restructuring identified the constraints and short-term debts that could be refinanced by ADB.

9. There was one minor change in scope and implementation arrangements approved by ADB in September 2013. DATC, a special enterprise responsible for supporting the restructuring, reorganization, and transformation of SOEs, withdrew from the project because there were legal impediments to it participating in the envisaged pilot financing for restructuring selected SOEs. ADB agreed with the government on the withdrawal of DATC with the understanding that the envisaged outputs related to legal, institutional, and capacity development would be implemented outside the scope of ADB support but in parallel with Japan International Cooperation Agency assistance. Appendix 1 assesses the achievements related to DATC. 10. Financing modality. The complexity and difficulty of SOE reform in Viet Nam required flexibility and commitment. In that context the MFF was an appropriate lending modality for the program because of the need to adopt a comprehensive SOE restructuring approach and a long-term commitment to SOE reform. A program loan cluster would have been less appropriate because it would have emphasized policy conditions instead of providing financial resources to support the restructuring of selected SOEs. The transformation of large SOEs and general corporations is challenging and takes time and resources; the MFF modality allowed the government and ADB to support and assess the pilot model for general cooperation restructuring and transformation under the program and modify these if needed before applying the approach to other general corporations and subsequent MFF tranches. B. Project Outputs 11. Output 1 focused on implementing debt restructuring, combining financial and corporate restructuring. It intended to help the participating general corporations to focus on their core business lines, divesting from non-core businesses, and to strengthen their balance sheets by swapping high-cost, short-term loans for less expensive longer-term debts. Three targets each were achieved satisfactorily by Sowatco and Song Da, and there were no changes in scope. Table 1 highlights achievements related to these outputs. The detailed achievements for the output are in Appendix 1.

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12. Output 2 related to the increased operational efficiency and improved corporate governance of the two general corporations. This output contained 5 targets for Sowatco and 6 targets for Song Da: 10 of the 11 targets were achieved. Table 2 highlights achievements related to these outputs. Detailed achievements for the output are included in Appendix 1.

Sowatco = Southern Waterborne Transport Corporation, Song Da = Song Da Corporation, UPCM = Unlisted Public Companies Market. Source: Song Da Corporation and Southern Waterborne Transport Corporation.

13. Output 3 specifically targeted DATC and was achieved. DATC was the institution responsible for guiding SOE reform; through strengthening DATC, this output strengthened SOE

6 Debt service coverage ratio = (accounting profit before tax and interest expense + depreciation)/(interest expense + loan principal payable + finance lease paid), as agreed by the government and ADB, and reflected in MOF’s monitoring and evaluation framework.

Table 1: Output 1 Achievements

Indicators Achievements

Current ratio improved by at least 10% during the 5 years after restructuring.

Sowatco’s current ratio improved by 140%, from 1.27 in 2011 to 3.05 in 2015. Achieved.

Song Da’s ratio improved by 14%, from 0.88 to 1.0, in the same period. Achieved.

DSCR improved by at least 20% during first 5 years after general corporation restructuring.6

Sowatco’s DSCR improved by 61%, from 2.35 in 2011 to 3.78 in 2015. Achieved

Song Da’s DSCR improved by 21.5%, from 1.16 in 2011 to 1.41 in 2015. Achieved.

The number of subsidiaries directly below the general corporation reduced.

Sowatco reduced its subsidiaries by three. Achieved

Song Da’s parent company divested 27 companies and reduced the number of subsidiaries from 24 to 13. In addition, Song Da subsidiaries divested 57 companies by 2017. Achieved.

DSCR = debt-service coverage ratio, Sowatco = Southern Waterborne Transport Corporation. Song Da = Song Da Corporation. Source: Song Da Corporation and Southern Waterborne Transport Corporation.

Table 2: Output 2 Achievements

Indicators Achievements

Song Da creates sub-holding companies and brings remaining subsidiaries under them.

Song Da developed two subsidiary business lines (power and infrastructure) and plans to establish them legally as sub-holding companies by 2021. Not yet achieved.

Song Da and Sowatco refocus operations in core business lines.

Song Da refocused from five business lines to two. Sowatco refocused from four to one. Achieved.

Management practices and business processes are rationalized in Song Da and Sowatco.

Both general corporations introduced revised board structures, board committees, and risk management practices. Achieved.

Budgetary controls and financial planning processes are improved at Song Da and Sowatco.

Both general corporations introduced improved financial and budgeting practices. Song Da resolved its qualified audits. Achieved.

Directors, managers and staff follow a code of ethics at Song Da and Sowatco.

Sowatco introduced a code of governance based on UPCM requirements. Song Da introduced a code of ethics within its governance framework. Achieved.

Surplus employees provided appropriate training for redeployment at Song Da and Sowatco.

Sowatco redeployed all potentially redundant employees within the organization. Song Da retrained and redeployed employees as part of its restructuring. Achieved.

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reform more broadly. With the Japan International Cooperation Agency’s technical assistance support and its own internal resources, DATC achieved all five output performance indicators and made improvements in its organizational structure by clarifying the functions and responsibility of each department. It also strengthened its management by increasing the number of members in its board of directors, separating the board of directors and the board of management, introducing a supervisory board, and developing risk management regulations.

C. Project Costs and Financing 14. At tranche 1 appraisal, the total project cost was estimated at $130.93 million. ADB was to finance $130 million including debt restructuring, consulting services, and equipment through two loans: a SDR6,267,000 ($10.0 million equivalent) ADF loan, and $120.0 million OCR loan. The general corporations were to finance $0.93 million to cover taxes and duties for consulting services and equipment. 15. On the ADB loan closing dates, the actual ADB financing was SDR2.6 million ($3.9 million equivalent) from the ADF and $113.8 million from OCR. Unutilized loan proceeds of $6.2 million from OCR were cancelled in 2015. There were three cancellations of unutilized ADF loan proceeds: SDR0.29 million ($0.4 million equivalent) in April 2015; SDR2.6 million ($3.6 million equivalent) in July 2016; and SDR0.78 ($1.1 million equivalent) in conjunction with financial closure in February 2018.7 16. Actual counterpart funds contributed were D3.2 billion from the government ($0.1 million) for project management unit (PMU) operation costs and D118.9 billion ($5.4 million) from the general corporations for debt restructuring, corporate governance activities, taxes, and duties for consulting services and equipment. The actual ADB financing was lower than estimated mainly because (i) interest and commitment charges were less than appraised; (ii) some funding for

7 Of the $10 million ADF loan, $3.9 million was disbursed, $5.1 million was cancelled, with the $1.0 million difference attributed to currency fluctuation.

Table 3: Output 3 Achievements Indicators Achievements

Improved management systems and processes at DATC.

Procedures for major work functions have been introduced.

Achieved.

Improved internal audit system at DATC.

Established an internal audit unit. MOF appointed the head of the unit. The unit reports to management, the board of directors, and MOF. Achieved.

Strengthened human resource processes at DATC.

Job descriptions for positions have been introduced and the number of employees increased from 150 to 240 as of the end 2018. Achieved.

Improved information management at DATC. Key performance indicators have been developed and applied. Achieved.

Improved legal framework for DATC. The revised legal framework for DATC has clarified its role. Achieved.

DATC = Debt Asset Trading Company, MOF = Ministry of Finance. Source: Debt Asset Trading Company.

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DATC activities was shifted to Song Da;8 and (iii) the two implementing agencies cancelled some consulting services and IT procurement activities, which were no longer required for their restructuring needs. Although the total project cost was lower than envisaged, all original outputs were substantially achieved.

D. Disbursements 17. The initial disbursement for the OCR loan was 11 months after effectiveness. Of the $120.0 million OCR component, the first tranche of $91.0 million was disbursed in December 2011 to replace Song Da and Sowatco’s short-term debts with long-term debts. In March 2014 and February 2015, an additional $21.0 million was disbursed to cover Song Da’s share buy-back. An additional $1.94 million was disbursed to cover interest and commitment charges. In total, $113.83 million out of $120 million available OCR was disbursed. The remainder was cancelled. 18. Disbursement of the ADF loan was low, totaling SDR2.6 million ($3.9 million equivalent), or 39% of the loan. The original disbursement projection was not realistic because it underestimated the time needed to implement complex restructuring processes dependent on government policy and legislation. The government decided to require Song Da to form a pilot economic group, merging five other general corporations under the Ministry of Construction (MOC). It later reversed this decision. This caused a delay in the restructuring of Song Da and in procurement. Song Da had to fund $2.2 million of the project from its own resources to cover additional work of the consultants, who were requested to prepare a restructuring plan for the economic group rather than Song Da as originally planned. Sowatco was also unable to avail itself of the full ADF loan because of difficulty in satisfying Vietnam Development Bank’s (VDB) collateral requirements. This risk was not recognized at appraisal.

E. Project Schedule 19. The project was approved by ADB’s Board of Directors on 14 January 2010, signed with the borrower on 27 September 2010, and declared effective on 11 January 2011. The planned implementation period of the project at MFF appraisal was 3 years, with completion scheduled by 31 December 2012. The project closing date for the OCR loan was extended twice, from 30 June 2013 to 30 June 2014 and then to 30 June 2015. The project closing date for the ADF loan was extended three times, from 30 June 2013 to 30 June 2014, 30 June 2015, and 31 December 2017. The financial closing was 15 May 2015 for the OCR loan and 28 February 2018 for the ADF loan. 20. There were several reasons for the delay:

(i) The government decided that Song Da as a core company would merge five other large general corporations under the MOC into an economic group. This pilot project was initiated in January 2010,9 but was terminated on 2 October 2012 by Prime Minister’s Decision No. 1428/QD-TTg. The MOC subsequently issued Decision 937/QD-BXD regarding the establishment of Song Da Corporation.

8 In 2013, MOF and DATC mutually agreed that DATC would withdraw from PFR1 and $2.7 million originally allocated to DATC was reallocated to Song Da. The reallocated resources were to be used for consulting services to support operational restructuring, managerial and technical capacity strengthening, and equipment purchase.

9 Prime Minister Decision 52/QD-TTg and 53/QD-TTg to merge Lilama, Licogi, Coma, DIC and Song Hong under one umbrella conglomerate of Song Da Holdings.

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During this period Song Da (supported by McKinsey and Company) prepared a restructuring plan for the economic group, followed by a stand-alone plan for Song Da.

(ii) The divestment of Song Da and Sowatco’s subsidiaries took longer than anticipated due to the complexity of restructuring, and the legal impediments relating to divestment and mergers.10

(iii) The equitization process itself is inherently lengthy. In Song Da’s case the

valuation was approved by MOC on 8 July 2016, but it took 11 months (to June 2017) for the Prime Minister to approve the equitization plan and then another 6 months for the initial public offering. The first meeting of the shareholders took place on 26 March 2018, 21 months after the initial valuation.

F. Implementation Arrangements 21. Implementation arrangements were generally adequate. MOF, as the executing agency, was the focal point and driving force behind SOE reform in Viet Nam. MOF developed the roadmap for SOE reform and acted as the core agency to lead the reform process, developing policy and legal instruments to support the objectives of continuing reform.11 As the executing agency it benefited from direct and indirect capacity building and gained insights from the experience, thereby enhancing the likelihood for the sustainability of SOE reforms. 22. The general corporations performed adequately as the implementing agencies. However, decision making in the line ministries was slow, and approvals (of restructuring and equitization plans) were cumbersome, which detracted from the overall success and speed of implementation. 23. Besides the withdrawal of DATC (para. 9), the most problematic issue was related to disbursement. The loan proceeds were on-lent via the VDB, a policy bank under the MOF. Following the government’s regulation on on-lending and VDB’s detailed policy guidelines, the general corporations were to provide collateral. Difficulty in meeting this requirement resulted in Sowatco having to deposit cash as collateral, which undermined the rationale of the loan and delayed disbursement and the achievement of the outputs.

G. Consultant Recruitment and Procurement 24. Overview. Sowatco’s procurement plan included consulting services and goods packages totaling $700,000 for developing restructuring plans and enhanced IT management systems. Song Da’s procurement plan envisaged seven packages totaling $6,109,000, and covering (i) restructuring planning, (ii) corporate brand strategy and brand management, (iii) information systems strategy, (iv) consultants to support procurement, (v) IT software and hardware, (vi) an enterprise resource planning system, and (vii) equipment to support project implementation. 25. The original consultant recruitment plan and contract award projections were realistic, with some limitations.

10 The principle of “preservation of state capital”, Article 12 of the Law on Securities, as well as Articles 59 and 120 of the Law on Enterprise impeded the progress of divestment and restructuring of subsidiaries and enterprises in which the general corporations held equity.

11 Prime Minister’s Decision 929/QD-TTg issued in July 2012 and Decree 71 issued in July 2013.

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(i) The recruitment of the international firms to help Song Da and Sowatco to develop

their restructuring plans took almost a year because the general corporations had to follow both ADB and government recruitment procedures.

(ii) There were delays, changes, and extensions to the procurement plans. For both general corporations the recruitment and implementation of consultants for corporate restructuring and management restructuring was delayed (para. 18). Furthermore, Song Da’s package 2 (development of corporate brand strategy and brand management) and package 3 (information system strategy) were not completed until 2015. Package 5 (procurement and installation of new software and information technology equipment) and package 7 (other equipment to support the project’s implementation) were not completed until 2017.

(iii) The contracts were not fully used. Sowatco used $0.3 million for developing the restructuring plan but management decided to use the company’s own resources for the IT management systems because of difficulty in complying with VDB’s collateral requirements (para. 23). Song Da used $3.5 million but cancelled package 6 (enterprise resource planning system) because of the inefficiencies of introducing an enterprise resource system before all divestments, which are expected to continue until 2021, are completed.

H. Safeguards 26. The two participating general corporations undertook corporate and plant-level audits of their environmental and social management systems, as required under the ADB Safeguard Policy Statement (2009). Song Da’s audit took place in September 2013 and Sowatco’s in June 2014. From the audits it was clear that the project did not have adverse impacts on the environment, indigenous peoples, or involuntary resettlement. Project funds were not used for rehabilitation, modernization, or expansion of existing facilities. PFR1 was assigned category C for all safeguard categories and no safeguards frameworks were required for the MFF. Environmental and social management systems action plans were developed for both general corporations and were fully implemented (Appendix 8). There was no significant direct adverse impact on employment. I. Monitoring and Reporting 27. Covenant compliance. There were financial and nonfinancial covenants. Sowatco and Song Da achieved all the financial covenants except Song Da’s debt service coverage ratio (DSCR), which fell below the minimum because of an increase in the principal payment in 2017 (Table 4).

Table 4: Financial Ratios Compliance by Implementing Agencies

Ratio Target Sowatco 2015 Song Da 2015

Long-term debt-to-equity ratio ≤4 0.06 Achieved 2.05 Achieved

Debt-service coverage ratio ≥1.5 3.78 Achieved 1.41 Not Achieved

Self-financing ratio ≥25% 87% Achieved 25% Achieved

Sowatco = Southern Waterborne Transport Corporation, Song Da = Song Da Corporation. Source: 2015 Audited Reports of Song Da Corporation and Southern Waterborne Transport Corporation.

9

28. There were 26 nonfinancial covenants, 24 of which were met. The partially met covenants relate to Song Da’s formation of sub-holding companies (para. 37), and the non-compliance with the audited project financial statement (APFS) submission requirement under the OCR loan. Appendix 7 shows the status of compliance with the loan covenants. 29. Monitoring and reporting arrangements. As envisaged the project steering committee was established on 11 November 2010 with representatives of relevant ministries and enterprises.12 The committee, led by a vice-minister, was responsible for monitoring. The project generally complied with reporting requirements except for the timely preparation of APFS (paras. 31–32). 30. Financial management. The financial management arrangements were partially satisfactory. On the one hand, the implementing agencies (i) maintained accounting, management information, and financial control systems acceptable to ADB; 13 (ii) used independent auditors from auditing firms licensed to operate in Viet Nam, and acceptable to ADB, and authorized them to submit APFS to ADB at least annually; (iii) gave ADB representatives access to documents and information as required; and (iv) submitted a completion report within 6 months of the first PFR’s completion. 31. On the other hand, the project failed to submit timely APFS per the project agreement. Instead, the implementing agencies submitted procedures reports and audited entity-level financial statements. This occurred for 5 years for the OCR loan and 6 years for the ADF loan, until ADB identified the deficiency while delegating the project to the Viet Nam Resident Mission. The problems resulted because ADB staff, and the executing and implementing agencies were unaware of the APFS requirement, and ADB’s eOps system incorrectly showed APFS as being “not required.”

32. Once identified, ADB and the government developed an action plan to belatedly submit all pending APFS. The action plan was then fully implemented. The APFS of Song Da for the OCR loan and for ADF loan for FY 2014-2017 and APFS of Sowatco for both loans for FY 2014-2016 had been submitted.14

III. EVALUATION OF PERFORMANCE A. Relevance 33. Project design at appraisal was relevant given the need for SOE reform, the weaknesses of SOEs and their high borrowing costs, and the credit limitations in the market at the time of design. The MFF was an innovative and appropriate modality as it provided a long-term commitment to support SOE reform in Viet Nam. The intended project outcome was fully in line with the government’s SOE policy. The project was also the catalyst for MOF to develop its

12 MOF Decision No. 2938/QD-BTC. 13 The final APFS amounts are reconciled to Loan Financial Information System with a small exception ($11,319) due

to interest. 14 ADB waived the submission of Sowatco’s 2017 APFS because there were no financial transactions made in the

advance account and no financial transactions under either ADB or the government’s counterpart funds, except for interest payments between 2014 and 2017.

10

roadmap for reform. Although DATC withdrew from the project, it still implemented the project’s intended reforms. 34. Project design at completion remained relevant. Developments in the legal framework that were a result of the project benefited not only the participating general corporations but the entire SOE sector. In effect the design—which provided a comprehensive restructuring approach— could and should be replicated, as it gives SOEs the tools, techniques, and enhanced capacity to restructure in a planned and controlled manner. 35. The project is rated relevant. SOE reform was and remains an important development issue for Viet Nam (para. 7). The project provides a case study on how SOEs can strengthen management, streamline operations, and grow financially stronger. The project positively shaped the development of the legal framework governing future SOE reforms. B. Effectiveness 36. The project achieved 8 out of 10 outcome performance indicators, with the following 2 indicators partially achieved: (i) Song Da’s debt-to-equity ratio fell 11% by 2015 instead of the targeted 15%, although it reached 15% by 2017; and (ii) Sowatco’s cash flow from operations, which were volatile (para. 54). 37. The project achieved 21 out of 22 output performance indicators. The unachieved output indicator required Song Da to create sub-holding companies to hold their remaining subsidiaries. Song Da has postponed this action until it has completed some additional planned divestments and mergers. 38. The project is rated effective. This was an innovative pilot project that steered the participating general corporations towards new concepts and ideas while expanding SOE reform. The outcome has been substantially achieved, output targets met, and the financial targets and covenants have been achieved. In addition, there has been significant success in restructuring both general corporations into more streamlined entities with a focus on core competencies and business activities.

C. Efficiency 39. The main objective of the project was to support reforms in the SOE sector, and the efficiency assessment relies on return on equity, which fundamentally reflects how well corporate managers are deploying investments. Song Da’s return on equity moved from a negative position in 2011 to 5.9% by 2015 and 6.4% by 2017. Sowatco’s return on equity improved from 5.9% in 2011 to 7.0% in 2015 and 46.6% in 2017. 40. The project is rated efficient. The increases in return on equity are material and attributable to the reforms under the project. There were no cost overruns. Although the project required several extensions, they did not undermine the project’s outputs and outcome.

D. Sustainability 41. The project is likely financially sustainable. Sowatco’s financial position has strengthened. It has a strong capacity to repay its debts, is primarily financed from internal resources (its self-financing ratio has reached 86%) and has steadily increasing profitability. The government is no longer a shareholder as it divested all its equity at a public auction in January 2016 that was

11

oversubscribed by 11.3%. The sale of 44,675,400 shares raised D626,802,600,000 ($27.6 million) at an average price of D14,030 ($0.62) per share (a 40% premium on the par value). The major shareholder is now Sotrans, an experienced logistics group, that has extended and complemented Sowatco’s value chain and has further developed Sowatco’s ports and transport offerings. However, by selling off a noncore investment with a book value of $14.4 million for a realized value of $38 million and investing the proceeds into its port, shipping infrastructure and vessels, Sowatco suffered a short-term decline in cash flow from operating activities in 2017 but recovered in 2018 to a level 480% higher than 2015. This investment is strategically important for the group to deepen and expand its logistics value chain and become one of the top three logistics providers in Viet Nam. The restructuring of Sowatco is a good case of phasing out government control in commercial business areas and crowding in private investments; this benefits economic growth, because logistics is a development bottleneck in Viet Nam. 42. Song Da has also become more profitable and efficient, but its turnaround is more complex and has been slower than that of Sowatco. This is in part due to the years lost as a result of (i) Decisions 52/QD-TTg, 53/QD-TTg, and 1428/QD-TTg (para. 20) to form an economic group; (ii) legal impediments that slowed the divestment and restructuring of its subsidiaries; and (iii) the complexity of restructuring a larger corporation such as Song Da. The DSCR improved during 2011–2015 but deteriorated in 2017–2018, largely because of a major surge of scheduled principal payments made in this period. However, loan principal repayments are projected to fall by around 30% in 2019, and 40%–50% in 2020–2024 (compared to 2018), which will provide a significant boost to the DSCR. On the other hand, return on equity, current ratio, and cash from operations have all registered material improvements, with 2018 having the highest-ever cash flows from operational activities. Song Da is much leaner than before participating in the project—Song Da’s parent company divested 27 companies and reduced the number of subsidiaries from 24 to 13 (para 11, Table 1). The government still owns 99% of the equity and plans to reduce its shareholding to less than 50% by the end of 2020. The restructuring has helped transform Song Da into a more efficient and competitive corporation. Notably, financial improvements have been achieved even though changes in government policy mean Song Da no longer enjoys direct government contracting but has to compete in the market. 43. The project’s outputs and outcome are likely technically and institutionally sustainable. At a wider level the project demonstrated a comprehensive restructuring approach that is more dynamic and focused than the prior piecemeal approach. It has also been a trigger for wider SOE reform, including catalyzing the Prime Minister’s Decision 929 and Decree 71/2013, which mirrored the project’s approach to focus on core businesses and divesting from non-core and non-essential businesses. It has also supported the development of the government’s approach to risk management, internal audit, and corporate governance. 44. The project is rated likely sustainable. The rating is based on the financial performance of the two general corporations since 2011, the commitment of their leadership to further restructuring, the introduction of enhanced management and corporate governance practices, and the companies’ market relevance for the foreseeable future. E. Development Impact 45. The project has had significant positive institutional impacts. It contributed to the increased efficiency and transparency of two large general corporations. As a result, these general corporations achieved the project’s impact performance target of increasing profitability by 15%:

12

Song Da’s net profit margin increasing from –0.11% in 2011 to 5.31% in 2017, and Sowatco’s from 6.11% in 2011 to 61.6% in 2017. 46. Although difficult to assess, the project also likely had important economic impacts. It provided an important case study for implementing institutional reform and equitization that the government has incorporated into subsequent SOE policies. As the SOE sector professionalizes and equitizes, the level of reliance on the state for funding purposes should decline, thus freeing up state capital for other purposes, while the improved performance of the SOEs enhances the quality of public service delivery. 47. The development impact is rated satisfactory because of the institutional impacts; achievement of the impact performance targets; and the demonstration impact, with the project shown to have positively influenced government policy.

F. Performance of the Borrower and the Executing Agency 48. There were several performance concerns: (i) the withdrawal of DATC (para. 9) because of the unanticipated legal difficulties with their participation in the pilot, (ii) the VDB’s collateral requirements that slowed implementation and forced the participating general corporations to post cash collateral against the loan (para. 23), and (iii) the implementation delays caused by the decision (subsequently reversed) for Song Da to pilot an economic group (para. 20). 49. Counterbalancing these concerns, the executing agency and borrower (MOF) had strong ownership, successfully implemented project activities, and took steps to ensure sustainability. Therefore, the performance of the executing agency is rated satisfactory. MOF established a project steering committee in 2010 with representatives of relevant ministries and enterprises that directed project implementation in accordance with national strategic objectives and regulations, including the selection of project components and participating SOEs. A PMU was established under the committee and effectively liaised between the participating implementing agencies, MOF, and ADB. Additionally, the MOF coordinated well with all stakeholders in project implementation, regularly monitored project progress based on the design monitoring framework, made timely decisions, and ensured the project was implemented as planned. 50. Other government agencies were similarly proactive. The general corporations’ line ministries (MOC and the Ministry of Transport) were active in project management. They issued decisions on project components, directed project owners to perform assigned tasks, appraised and approved the project component documents, approved Song Da and Sowatco’s procurement plans, regularly monitored and evaluated the implementation of the project activities, coordinated with MOF during implementation, and participated in the project steering committee. Likewise, MOF’s Agency for Debt Management and External Finance appraised the financial capacity of the implementing agencies to which the loans were being relent. They reported to the Prime Minister on the project’s financial mechanisms and signed a sub-agreement with enterprises on re-lending the ADB loan.

G. Performance of The Asian Development Bank 51. ADB’s performance is rated satisfactory. Although ADB did not initially identify the non-submission of APFSs when it did ADB took effective measures to correct the mistake and to mitigate missing APFS (paras. 31–32). Moreover, ADB fielded regular and timely review missions. ADB provided transaction technical assistance to assist the executing and implementing agencies to prepare the project and develop a road map for SOE reform and legislation. The executing and

13

implementing agencies appreciated ADB’s responsiveness in supporting implementation, particularly the support from the Viet Nam Resident Mission. H. Overall Assessment 52. The project is overall rated successful. It was implemented as designed and met its intended outcome and output targets (Table 5).

Table 5: Overall Ratings Criteria Rating

Relevance Relevant Effectiveness Effective Efficiency Efficient

Sustainability Likely sustainable Overall Assessment Successful Development impact Satisfactory Borrower and executing agency Satisfactory Performance of ADB Satisfactory

ADB = Asian Development Bank.

Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons 53. Issues. The government’s equitization process is complex and lengthy. While the government no longer has any equity in Sowatco, Song Da is still working toward full equitization. The original target of 2015 was extended to 2017, and secondary offerings are planned for 2019 with an eventual divestment of control after 2020. 54. Although there has been material and sustainable improvement in the general corporations’ finances, both have had to make investments as part of their restructurings, and both operate in cyclical sectors. This particularly affects cash from operations, which have been volatile. Sowatco’s cash from operations was negative in 2016 and 2017, due to its investment in the development of Long Binh Port and larger container ships, but recovered in 2018. In 2018 Song Da’s cash flow from operations is at its highest-ever level. Both general corporations will need to emphasize financial discipline, contingent liquidity, and risk management to mitigate this volatility. 55. Lessons learned. The on-lending terms between VDB and the general corporations should have been established at appraisal (para. 23). The general corporations would have had more negotiating leverage over the loan terms prior to project approval and at a minimum would have had more time to plan how to meet the collateral requirement. 56. There was no linking of disbursement to the general corporations’ performance or the meeting of milestones. The full loan value was disbursed at one time. Breaking up the disbursements based on reform milestones would have provided more incentives for the general corporations. ADB recognized this issue and introduced it into the design of the second periodic financing request under the MFF.

14

57. The project failed to submit timely APFSs per the project agreement (paras. 31-32). The implementing agencies submitted procedures reports and audited entity-level financial statements as the APFS requirements were not clearly defined at appraisal. Terms of reference and action plans for audited project and entity-level financial statement submission for similar future projects should be developed and agreed during project formulation to ensure compliance.

58. Pilot testing. The reform of these two general corporations was a pilot that has guided subsequent SOE reform (para. 43). The MFF successfully supported restructuring of multiple SOEs, and the approach could be replicated in countries where state ownership remains high. B. Recommendations 59. Future monitoring. There are no recommended post-completion monitoring requirements. Almost all project outcome and output targets have been achieved. Sowatco is fully privatized. Song Da had an initial public offering, and the state plans to reduce its holdings to less than 50% by end of 2020. As a result, Sowatco no longer reports to MOF, and Song Da will probably not have to report by 2021. 60. Covenants. For future projects, covenants should be clearly defined, and baseline data should be identified. DSCR and profitability can both be variously defined, and assumptions regarding the definitions had to be made for the project completion report. Although the design and monitoring framework referred to average financial performance for 2006–2009 for some of the ratios, these data were either unavailable or unreliable. 61. Further action or follow-up. There are no actions needed to complete project implementation. In principle, there are opportunities to provide additional assistance, but this may be difficult in practice. The government is encouraging SOEs to source their own funding without government support, but many SOEs do not have the financial strength to borrow on a non-sovereign basis. Opportunities to blend sovereign and non-sovereign lending to SOEs are limited by the 2017 Law on Public Debt Management and the 2018 Decree 97 on On-Lending of the Government’s ODA Loans and Foreign Concessional Loans. This is nonetheless an important area because SOEs comprise a large portion of the Viet Nam’s economy, and ADB will need to continue to explore opportunities for both non-sovereign and blended lending to SOEs. 62. Timing of the project performance evaluation report. The project performance evaluation report is recommended for June 2

Appendix 1 15

DESIGN AND MONITORING FRAMEWORK

FIRST PERIODIC FINANCING REQUEST

Design Summary Performance Indicators and Targets

Project Achievements

Impact

Improved profitability and

transparency of equitized

and restructured SOEs,

including large general

corporations and their

subsidiaries

Profitability of restructured Song

Da and Sowatco increases by

15% over average of 2006–2009

Achieved. Profitability of both Song Da and

Sowatco significantly improved. Net profit

margin of Song Da increased from –0.11% in

2011 to 5.31% in 2017. Net profit margin of

Sowatco increased from 6.11% in 2011 to

61.6% in 2017.a

Outcome

Participating general

corporations are

transformed into focused,

efficient businesses with

strong balance

sheets and improved

corporate governance

Debt-to-equity ratios reduced by

at least 15% during first 5 years

after general corporations

restructuring

Cash flows from operations are

enhanced by at least 20% during

first 5 years after general

corporations restructuring

Song Da and Sowatco converted

into pure holding company

Lines of business of Song Da and

Sowatco reduced

Number of principles of good

corporate governance adopted by

Song Da and Sowatco

Bank debt-to-equity ratio

Sowatco: Achieved. Reduced by 77% during

2011–2015 and by 80% by 2017: 2011 = 0.26,

2012 = 0.19, 2013 = 0.22, 2014 = 0.06, 2015 =

0.06, 2016 = 0.07, 2017 = 0.05.

Song Da: Partially achieved. Reduced by

11.25% during 2011–2015 and by 15.6% by

2017: 2011 = 2.31, 2012 = 3.41, 2013 = 3.84,

2014 = 4.0, 2015 = 2.05, 2016 = 2.26, 2017 =

1.95.

Cash flows from operations

Sowatco: Partially achieved. Achieved in 2012

and 2014 but not in other years: 2011 =

D70.482 billion, 2012 = D236.559 billion, 2013 =

–D28.793 billion, 2014 = D108.142 billion, 2015

= D7.887 billion, 2016 = –D2.624 billion, 2017 =

–D136.67 billion.

Song Da: Achieved. Increased by D3.3 trillion

between 2011 and 2015 (percentage not given

because base year was negative). 2011 =

–D2,185.12 billion, 2012 = –D849.185 billion,

2013 = D1,450.68 billion, 2014 = D1,064.34

billion, 2015 = D1,137.8 billion, 2016 = D1,220.9

billion, 2017 = D218.39 billion.

Achieved. Both were converted into holding

companies.

Achieved. Sowatco’s lines of business were

reduced from 5 to 1 and Song Da’s from 5 to 2.

Achieved. Sowatco and Song Da adopted

principles of good corporate governance, such as

introducing board committees on board

strategy/finance, risk management, human

16 Appendix 1

resources, and internal controls and establishing

an internal audit department.

Outputs 1. Debt restructuring

implemented, combining

financial and corporate

restructuring

Current ratio in Song Da and

Sowatco improves by at least

10% during the 5 years after

restructuring

Debt-service coverage ratio for

Song Da and Sowatco improved

by at least 20% during first 5

years after general corporations’

restructuring

Number of subsidiaries directly

below the general corporations

reduced at Song Da and

Sowatco

Current Ratio

Sowatco– Achieved. Increased by 140% during

2011–2015.

2011 = 1.27 2012 = 1.39 2013 = 1.44 2014 = 2.27

2015 = 3.05 2016 = 3.47 2017 = 7.14

Song Da – Achieved. Increased by 14%

between 2011 and 2015.

2011 = 0.88 2012 = 0.71 2013 = 0.77 2014 = 0.77

2015 = 1.0 2016 = 1.01 2017 = 1.08

Debt-service coverage ratio

Sowatco – Achieved. Increased by 61% during

2011–2015.

2011 = 2.35 2012 = 2.1 2013 = 2.61 2014 = 3.22

2015 = 3.78 2016 = 1.47 2017 = 11.43

Song Da – Achieved. Improved by 21% during

2011–2015 but weakened in 2016 and 2017

because of an increase in principal payments.

2011 = 1.16 2012 = 1.05 2013 = 0.83 2014 = 1.07

2015 = 1.41 2016 = 1.40 2017 = 1.04 2018 = 1.07

Achieved. Sowatco reduced subsidiaries from 9

to 6 and Song Da from 24 to 13.

2. Increased operational

efficiency and improved

corporate governance of

general corporations and

other SOEs

Song Da creates sub-holding companies and brings remaining subsidiaries under them

Song Da and Sowatco refocus operations in core business lines

Management practices and business processes are rationalized in Song Da and Sowatco

Budgetary controls and financial

Not achieved. Song Da reduced its business lines, but the two sub-holding companies are not scheduled to be developed until after Song Da completes some planned divestments and mergers.

Achieved. Sowatco refocused operations into a single business line (logistics). Song Da refocused operations into two business lines (power and infrastructure).

Achieved. Management practices and business processes have been rationalized in both general corporations (detailed in Table 2 of the main text).

Achieved. Budgetary controls and financial

Appendix 1 17

planning processes are improved at Song Da and Sowatco

Directors, managers and staff follow a code of ethics and Song Da and Sowatco

Surplus employees provided appropriate training for redeployment at Song Da and Sowatco

planning processes have been improved in both general corporations. Sowatco introduced 5-year planning and budgeting, improved the financial statement closing process, and introduced monthly budget reporting. Song Da rectified qualified audits and introduced monthly budget reporting.

Achieved. Sowatco’s code of governance is based on that of UPCM, and Song Da has introduced a written code of ethics.

Achieved. Both general corporations redeployed all potentially redundant employees within the organization.

3. Institutions supporting key

aspects of SOE reform

strengthened and

governance improved b

Improved management systems

and processes at DATC

Improved internal audit system

at DATC

Strengthened human resource

processes at DATC

Improved information

management at DATC

Improved legal framework for

DATC

Achieved. Procedures for major work

functions have been introduced.

Achieved. Established an internal audit unit.

MOF appointed head of the unit. The unit

reports to management, the board of directors,

and MOF.

Achieved. Job descriptions for positions have

been introduced and the number of employees

increased from 150 to 240 as of the end of

2018.

Achieved. Key performance indicators have

been developed and applied.

Achieved. Revised legal framework for DATC

has clarified its role.

DATC= Debt Asset Trading Company, MOF = Ministry of Finance, Sowatco = Southern Waterborne Transport Corporation, Song Da = Song Da Corporation, SOE = state-owned enterprise, UPCM = unlisted public companies market. a The evaluation used 2011 as the base year because the financial figures from 2006 through 2009 were either not

available or of questionable reliability, and it marked the beginning of the Asian Development Bank’s intervention. b DATC withdrew from the project because there were legal impediments to it participating in the envisaged pilot

financing for restructuring selected SOEs. ADB agreed with the government on the withdrawal of DATC with the understanding that the envisaged DMF outputs would be implemented with JICA support.

Source: Asian Development Bank.

18 Appendix 2

ASPECTS OF GOVERNANCE AND TRANSPARENCY ADOPTED BY THE GENERAL CORPORATIONS

SOWATCO SONG DA CORPORATION

Audited financial accounts (from calendar year 2010)

available at http://sowatco.com.vn


available at http://www.songda.vn

Annual report available (from calendar year 2012)

available on company website


available on the company website

Company Charter (Articles of Association) available on

website

Company Charter (Articles of Association) available on

website

Other legal and corporate / resolutions publicly

available

Other legal and corporate / resolutions publicly

available

Website in Vietnamese and English Separated the board of directors and board of

management

Internal audit manuals and plans produced in 2013 and

being used

Introduced four board committees: strategy/finance, risk

management, human resources, and control

Enterprise risk management commenced

implementation in 2013

Introduced an internal audit department, which is

averaging 12 audits per year

Budget planning and forecasting has been put into

practice. Monthly reporting has been implemented with

reports used by leadership and to inform shareholders

on a monthly basis

Introduced a risk management department. Developed

a framework of policies and processes; produced a

manual and organized appropriate training and capacity

building

Introduced two board committees Improved disclosure and transparency through a

strategy / business plan; corporate performance, wages

and bonuses of board of management are all publicly

available on the website

Introduced non-executive directors Code of ethics and conduct has been developed and

implemented

Separated the board of directors and board of

management

Introduced key performance indicators

Organized training on corporate governance, risk

management and internal audit

SOWATCO = Southern Waterborne Transport Corporation. Source: Song Da and Southern Waterborne Transport Corporation.

http://www.songda.vn/

Appendix 3 19

PROJECT COST AT APPRAISAL AND ACTUAL ($ millions)

Item Appraisal Estimate Actual

Investment Costs Debt Restructuring

Song Da Sowatco

Consulting Services Equipment Taxes and Duties Interest and Commitment Charges

OCR

109.59 2.30 0.00 0.00 0.00 8.11

ADF -

5.97 3.29

0.74

OCR

109.59 2.30

1.94

ADF

3.50 0.26

0.14

Total 120.00 10.00 113.83 3.90

ADF = Asian Development Fund, OCR = ordinary capital resources, Song Da = Song Da Corporation, Sowatco = Southern Waterborne Transport Corporation. Source: Asian Development Bank.

20 Appendix 4

DISBURSEMENT OF ADB LOAN AND GRANT PROCEEDS

Table 4.1: Annual and Cumulative Disbursement of ADB Loan 2613-VIE ($million)

Annual Disbursement Cumulative Disbursement

Year Amount

($ million) % of Total Amount

($ million) % of Total 2011 2012 2013 2014 2015

91.07 0.64

11.49 10.42 0.22

80.00 0.56

10.09 9.15 0.19

91.07 91.71 103.20 113.62 113.84

80.00 80.56 90.65 99.81 100.00

Total 113.83 100.00 113.84 100.00

ADB = Asian Development Bank, VIE = Viet Nam. Source: Asian Development Bank.

Table 4.2: Annual and Cumulative Disbursement of ADB Loan 2614-VIE

($million) Annual Disbursement Cumulative Disbursement

Year Amount


($ million) % of Total

2011 2012 2013 2014 2015 2016 2017

0.00 0.36 2.30 0.15 0.77 0.03 0.29

0.00 9.23

58.97 3.85

19.74 0.77 7.44

0.00 0.36 2.66 2.81 3.58 3.61 3.90

0.00 9.23

68.21 72.05 91.79 92.56 100.00

Total 3.90 100.00 3.90 100.00


Table 4.3: Projection and Cumulative Disbursement of ADB Loan Proceeds – Loan 2613-VIE and Loan 2614-VIE

($million)

Calendar year

Projected Actual

For the year Cumulative For the year Cumulative

2011 2012 2013 2014 2015 2016 2017

91.07 24.42 4.75 1.40

91.07 115.48 120.23 121.63 121.63 121.63 121.63

91.07 1.00

13.79 10.57 0.99 0.03 0.29

91.07 92.07

105.86 116.43 117.42 117.45 117.74

Total 121.63 121.63 117.74 117.74


Appendix 4 21

ADB= Asian Development Bank. Source: Asian Development Bank.

ADB= Asian Development Bank. Source: Asian Development Ba

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

2011 2012 2013 2014 2015 2016 2017

Dis

burs

em

ent in

$ m

illio

n

Calendar Year

Figure 4.1: Annual Disbursement of ADB Loan Proceeds ($ million) - Loans 2613, 2614

Projected Actual

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

2011 2012 2013 2014 2015 2016 2017

Dis

burs

em

ent in

$ m

illio

n

Calendar Year

Figure 4.2: Cummulative Disbursement of ADB Loan Proceeds ($ million) - Loans 2613, 2614

Projected Actual

22 Appendix 5

CONTRACT AWARDS OF ADB LOAN AND GRANT PROCEEDS

Table 5.1: Annual and Cumulative Contract Awards of ADB Loan 2613-VIE ($ million)

Annual Contract Awards Cumulative Contract Awards

Year Amount



2011 2012 2013 2014 2015

90.89 0.00 0.00

21.00

81.23 0.00 0.00

18.77 0.00

90.89 90.89 90.89 111.89 111.89

81.23 81.23 81.23 100.00 100.00

Total 111.89 100.00 111.89 100.00

ADB = Asian Development Bank, VIE= Viet Nam. Source: Asian Development Bank.

Table 5.2: Annual and Cumulative Contract Awards of ADB Loan 2614-VIE

($ million) Annual Contract Awards Cumulative Contract Awards

Year Amount



2011 2012 2013 2014 2015 2016 2017

0.00 2.38 0.31 0.81

0.26

0.00 63.30 8.24

21.54 0.00 0.00 6.91

0.00 2.38 2.69 3.50 3.50 3.50 3.76

0.00 63.30 71.54 93.09 93.09 93.09 100.00

Total 3.76 100.00 3.76 100.00


Table 5.3: Projection and Cumulative Contract Awards of ADB Loan Proceeds Loan 2613-VIE and Loan 2614-VIE

($ million)

Calendar year Projected Actual

For the year Cumulative For the year Cumulative

2011 90.89 90.89 90.89 90.89 2012 22.20 113.09 2.38 93.27 2013 4.70 117.79 0.31 93.58 2014 0.55 118.34 21.81 115.39 2015 118.34 0.00 115.39 2016 118.34 0.00 115.39 2017 118.34 0.26 115.65 Total 118.34 118.34 115.65 115.65


Appendix 5 23



0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

2011 2012 2013 2014 2015 2016 2017

Contr

act

Aw

ard

s in $

mill

ion

Calendar Year

Figure 5.1: Annual Contract Awards of ADB Loan Proceeds ($ million) - Loans 2613, 2614

Projected Actual

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

2011 2012 2013 2014 2015 2016 2017

Contr

act

Aw

ard

s in $

mill

ion

Calendar Year

Figure 5.2: Cummulative Contract Awards of ADB Loan Proceeds ($ million) - Loans 2613, 2614

Projected Actual

24 Appendix 6

CHRONOLOGY OF MAIN EVENTS

Date Event

2009 2–6 March 2009 15 July 2009 09 October 2009 29–30 October 2009 2010 14 January 2010 22–27 April 2010 27 September 2010 2011 11 January 2011 3–7 March 2011 22–30 September 2011 2012 16–20 April 2012 28 May–1 June 2012 9–13 July 2012 15–19 October 2012 27–30 November 2012 2013 26–30 August 2013 7–11 October 2013 9–12 December 2013 2014 13–14 February 2014 30 June 2014 2015 5–9 February 2015 23–26 March 2015 17 March 2015 1 April 2015 15 May 2015 30 June 2015 2016 15 July 2016 2017 24–27 April 2017 9–16 October 2017 31 December 2017 2018 28 February 2018 3–10 December 2018

Fact-Finding mission Management Review Meeting Staff Review Meeting Loan Negotiations Asian Development Bank Board Approval Loan Inception Mission Loan Agreements Signed Loan Effectiveness Review Mission Review Mission Review Mission Consultation Mission Special Administration Mission Review Mission Review Mission Loan Review Loan Review Loan Review Loan and Technical Assistance Review 1st extension (OCR and ADF Loans) Loan Review Loan Review 1st Partial Loan Cancellation (OCR Loan) 1st Partial Loan Cancellation (ADF Loan) 2nd Loan Cancellation and Loan Closure (OCR Loan) 2nd extension (OCR and ADF Loans) 2nd Loan Cancellation (ADF Loan) Loan Review Loan Review 3rd extension (ADF Loan) 3rd Loan Cancellation and Loan Closure (ADF Loan) Project Completion Review Mission

ADF = Asian Development Fund, OCR = ordinary capital resources. Source: Asian Development Bank.

Appendix 7 25

STATUS OF COMPLIANCE WITH LOAN COVENANTS Tranche 1 – L2613-VIE and L2614-VIE

Covenant Reference in Loan Agreement

Status of Compliance

2613-VIE In the carrying out of the Project and operation of the Project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in schedule 5 to this Loan Agreement. The Borrower shall cause Song Da and Sowatco to carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental and SOE reform practices.

Section 4.01 Section 4.01

Complied with Not complied with due to non-submission of APFS during implementation of Loan 2613-VIE.

The Borrower shall enable ADB’s representatives to inspect the Project, the Goods financed out of the proceeds of the Loan and any relevant records and documents.

Section 4.02 Complied with

The Borrower shall take all actions which shall be necessary on its part to enable the Implementing Agencies to perform their obligations under the Project Agreement and shall not take or permit any action which would interfere with the performance of such obligations.


(i) The Borrower shall exercise its rights under the Subsidiary Loan Agreements for the Special Operations Loan in such a manner as to protect the interests of the Borrower and ADB and to accomplish the purposes of the Loan.


(ii) No rights or obligations under the Subsidiary Loan Agreement for the Special Operations Loan shall be assigned, amended or waived without the prior concurrence of ADB.


2613-VIE Schedule 5 MOF shall be the Project Executing Agency. It shall be responsible for the overall supervision and execution of the Investment Program and the Project through its program management unit, including but not limited to, preparation of the PFRs; inter-ministry coordination as needed; monitoring and evaluation of the Investment Program and the Project; and preparation of quarterly and annual progress reports.

Schedule 5 Part A

Complied with

A facility steering committee, comprising the Borrower's relevant agencies and the Implementing Agencies and headed by a Vice Minister in MOF, shall monitor implementation of the Investment Program and the Project.

Schedule 5 Part A Complied with

Component 1 shall be implemented by Song Da and Sowatco for their respective parts, and Component 2 shall be implemented by the respective Implementing Agencies.

Schedule 5 Part A Complied with

By the end of the Project implementation, the Borrower shall undertake a comprehensive review of the existing Master Plan for SOE reform and develop a new plan incorporating all the lessons learnt. Especially, the Borrower shall review and incorporate relevant findings from the implementation of the Project.

Schedule 5 Part B Complied with

26 Appendix 7



By the end of the Project implementation, the Borrower shall develop an enhanced framework for improved management of the Borrower's capital invested in the SOE sector and shall keep ADB informed of any progress. The experience to date with the Borrower’s state capital management shall be reviewed, including regulatory and legal obstacles to effective performance and measures to deal with such obstacles.

Schedule 5 Part C Complied with

Within eighteen (18) months of the Effective Date, the Borrower shall have developed and adopted, in a manner satisfactory to ADB, the legal framework to (a) carry out effective debt resolution through DATC, and (b) enhance DATC’s operational effectiveness.

Schedule 5 Part D Complied with

The Borrower shall ensure that Song Da and Sowatco will maintain prudent (a) maximum long-term debt to equity ratio, (b) minimum debt service coverage ratio, (c) minimum self-financing ratio, and (d) such other financial ratios, as all deemed appropriate and satisfactory to ADB.

Schedule 5 Part E Partly complied with

The Borrower shall ensure that all activities under the Project shall comply with ADB’s Anticorruption Policy (1998, as amended to date) particularly in respect of the sections of the Procurement Guidelines and Consulting Guidelines that relate to fraud and corruption, and where appropriate, ensure that relevant provisions of ADB’s Anticorruption Policy are included in all bidding documents for the Project. The Borrower (i) acknowledges ADB’s right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive and coercive practices relating to the Project, and (ii) agrees to cooperate fully with, and cause the Project Executing Agency and the Implementing Agencies to cooperate fully with, any such investigation and to extend all necessary assistance, including providing access to all relevant books and records, as may be necessary for the satisfactory completion of any such investigation. All external costs related to such investigations shall be met by the Project resources.

Schedule 5 Part F Complied with

The Borrower shall ensure that the Implementing Agencies monitor and inspect all contractors’ activities related to fund withdrawals and settlements. The Borrower shall further ensure that all contracts financed by the Loan proceeds include provisions specifying the ADB’s right to audit and examine the records and accounts of contractors, suppliers, consultants and other service providers as they relate to the Project.

Schedule 5 Part F Complied with

The Borrower shall ensure that Song Da and Sowatco implement the respective corporate and management restructuring measures as approved by the Borrower and ADB, and in particular:

Schedule 5 Part G Complied with

(i) Song Da and Sowatco shall transfer all business activities to their respective subsidiaries operating in the same business or to newly established subsidiaries;


(ii) (a) All subsidiaries operating the same business segment shall be grouped under an appropriate sub-holding company, if there is more than one segment, (b) such sub- holding company shall be a listed company, and (c) management and key execution of the business segment shall be centralized at the respective sub-holding company;

Schedule 5 Part G Part (a) Complied with; part (b) in progress; part (c) dependent on (b)

Appendix 7 27



(iii) Identified non-core businesses shall be divested within the time limit acceptable to ADB; and


(iv) The enhancements to the management and reporting process and practices, approved by the respective Board of Management and agreed by ADB, shall be duly implemented.


2614-VIE

(i) The Borrower shall cause Song Da and Sowatco to carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental and SOE reform practices.

Section 4.01

Complied with

(ii) In the carrying out the Project and operation of the Project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 5 of the Special Operations Loan Agreement.


The Borrower shall make available to Song Da and Sowatco, promptly as needed, the funds, facilities, services and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the project.


The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Project are conducted and coordinated in accordance with sound administrative policies and procedures.


The Borrower shall take all actions which shall be necessary on its part to enable Song da and Sowatco to perform their obligations under the Project Agreement and shall not take or permit any action which would interfere with the performance of such obligations.


(i) The Borrower shall exercise its rights under the Subsidiary Loan Agreements for the Special Operations Loan in such a manner as to protect the interests of the Borrower and ADB and to accomplish the purposes of the Loan.


(ii) No rights or obligations under the Subsidiary Loan Agreement for the Special Operations Loan shall be assigned, amended or waived without the prior concurrence of ADB.


ADB = Asian Development Bank, APFS = Audited Project Financial Statements, DATC = Debt Asset Trading Company, MoF = Ministry of Finance, PFR = periodic financing request, Sowatco = Southern Waterborne Transport Corporation. Source: Song Da and Southern Waterborne Transport Corporation.

28 Appendix 8

ENVIRONMENT AND SOCIAL MANAGEMENT SYSTEMS IMPLEMENTATION

I. SONG DA CORPORATION

Content Completed works Implementing works

Social environmental management system

Developing the

Environmental

Management System

according to ISO

14001:2004 for SDC’s

entire range of activities

Completed development and

was certified by Directorate for

Standards, Metrology and

Quality at the Decision No.

3175/QD-QUACERT dated

June 17, 2014

Developing the

Occupational Health

Management System

according to OSHAS

18001 for SDC’s entire

range of activities


was granted the Certificate

number OHS 630298 on May 6,

2015. SDC applied this system

when constructing the following

hydropower projects: Dong Nai

5 in Jun 2015; Xekaman 1 in

July 2015; Huoi Quang; Lai

Chau in Oct 2015.

BSI Vietnam Institute evaluated

the maintenance of this system

at the parent company and

Package 4 of Danang-Quang

Ngai Highway from 6-7 January

2016.

Developing the process

and procedures for

community consultation


was approved at the Decision

No. 365/TCT-HĐTV dated

October 22, 2014.

Developing policies,

processes and procedures

for social impact

assessment, making

resettlement plan, plan of

ethnic development,

gender action plan,

environmental

management plans and

mechanisms to resolve

complaints at the phase of

project preparation and

then carrying out these

plans during project

implementation


approval of processes for

environmental impact

assessment (at the Decision


October 22, 2014) and

compensation, support and

resettlement (at the Decision


October 22, 2014) when

investing and implementing

projects for the purpose of:

i. Management of environmental impact assessment activities

ii. Management of compensation, support and resettlement activities

iii. Mechanisms to settle grievance about

Appendix 8 29


compensation, support and resettlement


approval of Gender Action Plan

at the Decision No. 364/TCT-

HĐTV dated January 23, 2014.

SDC has performed survey,

assessment and developed

resettlement plans and ethnic

minority development plans for

its projects with involuntary

resettlement and/or ethnic

minority impacts.

Improving the

management apparatus to

implement the social and

environmental policies

from the corporation to the

unit members

Assigned to Deputy General

Director in charge of directing

and responsible for the work of

social safeguard and

environment, Decision No.

173/TCT-VP dated Sep 9,

2015.

Approved and issued functions

to SDC's Departments which

including the social safeguard

function of Technique &

Technology Department,

Decision No. 274/TCT-HĐTV

dated Aug 06, 2015.

Training / retraining on

requirements of social

environmental safeguard

policies, social and

environmental standards

for SDC staff

SDC still maintains training/

retraining annually for staff

about social environmental

safeguard policies, social and

environmental standards.

Organized training activities in

2014 (in January, April and

June) and in 2015 (in March,

May and September).

Organized training

activities in the first and

second quarter of

2016.

Improving the environmental and social activities in the ongoing projects

Developing the

environmental

management plan for each

project in each period

Developed and issued report

templates of social and

environmental management for

the projects with SDC as an

investor, general contractor and

for member companies,

Document No. 2664/TCT-

QLKTCN dated December 9,

2014.

SDC assessed social and

environmental works in Dong

Nai 5 Hydropower, Xekaman 1,

Huoi Quang, Lai Chau.

Supervising Project

Management

Departments and

member companies

implementing social

and environmental

works as planned and

gathering periodic

reports of these units

on the implementation

status.

30 Appendix 8


Requiring member companies

to assess environmental impact

in the construction, and

manufacturing facilities which

the company manages

(gathered reports in 2015).

Gathered reports of social and

environmental management of

the particular projects that SDC

are general contractor and

investor in 2013, 2014 and

2015.

Surveying, assessing and

developing mitigation

plans for involuntary

resettlement and ethnic

minority impacts.

For implementing projects that

have impact on the life of local

people, especially of ethnic

minority, SDC always have

independent consultant to

perform survey, assessment

and provide appropriate

solutions (Xekaman 1 Hydro

Power, Can Don Hydropower,

Viet-Italy Steel).

Activities for social protection, workers, gender development and community consultation

Prepare a gender action

plan.

Approved Decision No.

364/TCT-HĐTV dated January

23, 2014. ADB accepted the

plan.

SDC has implemented

in accordance with the

approved plan.

Completing the grievance

mechanisms

Grievance mechanism was

included in the process of

compensation, support and

resettlement when investing

and implementing projects that

SDC developed at the Decision


October 22, 2014.

Grievance settling currently

being implemented under the

regulations of the law of Viet

Nam.

ISO = International Organization for Standardization, BSI = British Standards Institution, OHS = Occupational safety and health, OSHAS = Occupational Health and Safety Assessment Series; SDC = Song Da Corporation. Source: Song Da Corporation.

Appendix 8 31

II. SOUTHERN WATERBORNE TRANSPORT CORPORATION

PwC consultant’s recommendations Sowatco’s implementation

Social management

Obtain certificate on Port Environmental

Management.

Sowatco has obtained the certificate from the Ho Chi

Minh City Department of Natural Resources and

Environment in recognition of its compliance with

environmental requirements.

Collect, transport and disposal of hazardous waste. Sowatco has signed a contract with hazardous waste

management company for its ports, shipyard, and

maintenance facilities.

Prepare operating procedures and equipment for

handling the oil spills.

Sowatco has signed the contract with oil spill response

company and prepared response plans for oil spills at

its ports.

Implement regulations on reporting regime for

environmental protection.

Periodically report on hazardous waste management

and environmental monitoring to the concerned state

agencies.

Social activities

Provide social welfare for workers Sowatco has complied with the labor law, social

insurance.

Environmental activities

Build tire wash station at the entry of Long Binh Port. The tire wash station was built in 2015 and in

operation since then.

Construct and equip the mist cooling system in Long

Binh Port.

The mist cooling system was built in 2015 and is in

operation since then.

PwC = Price Waterhouse Coopers Company, ISO = International Organization for Standardization, Sowatco = Southern Waterborne Transport Corporation. Source: Southern Waterborne Transport Corporation.

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